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© Lloyd Kurtz, 1999-2006.
Abowd, John M. "The Effect of Wage Bargains on the Stock Market Value of the Firm." American Economic Review, September 1989.
Tests whether unexpected increases in labor costs (as defined by an econometric model) result in corresponding declines in stock price. Using NYSE data from 1976 - 1982, finds an inverse relationship between shareholder wealth and union members' wealth.
Abramson, Lorne, and Dan Chung. "Socially Responsible Investing: Viable for Value Investors?" Journal of Investing, Fall 2000.
Tests two value strategies on the Domini Social Index list, using Compustat price-only data. Finds that a rebalancing strategy of ranking DSI stocks by valuation each quarter yielded and 18.9% average annualized return vs. an average of 16.7% for three value benchmarks for the time period Q4:90-Q1:99. Sharpe ratio was 0.99 vs. benchmark average of 0.93. A buy and hold strategy, in which a group of stocks was purchased in Q4:90 and held through Q1:99 had good nominal returns (17.5%), but a below-benchmark Sharpe ratio of 0.85. For both tests, results were measured on a capitalization-weighted basis, and both tests assumed no transaction costs. A good summary of this study appeared in the May 2001 CFA Digest.
Alexander, G. and R. Buchholtz. "Corporate Social Responsibility and Stock Market Performance." Academy of Management Journal, 22, 1982.
Angel, James, and Pietra Rivoli. "Does Ethical Investing Impose a Cost Upon the Firm? A Theoretical Examination." Journal of Investing, Winter, 1997.
Uses a framework from Merton [1987] to estimate the impact of a boycott on a firm's cost of capital. Argues that the impact will be small (< 0.5% per year) if as many as 65% of all investors boycott the shares, but that the cost will rise precipitously if additional investors boycott. Estimates a 3% cost if 90% of investors boycott. Argues that the impact of a boycott will be greatest on fast-growing firms.
Ashenfelter, Orley, and Timothy Hannan. "Sex Discrimination and Product Market Competition: The Case of the Banking Industry." Quarterly Journal of Economics, February 1986.
Reviews 120 banks in the Philadelphia region for the year 1976 (selected because it was pre-Affirmative Action), and finds a statistically significant relationship between market concentration and employment of women. Lengthy review of the literature cites numerous other studies indicating the same relationship.
Austin, Duncan, and Amanda Sauer. "Changing Oil: Emerging Environmental Risks and Shareholder Value in the Oil and Gas Industry." World Resources Institute, June 2002.
Use scenario and DCF analysis to examine the potential impact of climate policies and restricted access to reserve on global oil and gas companies. Finds that shareholder value could be impacted by 10% or more for some companies, although potential impact varies widely. Notes that "few companies have disclosed the degree to which they are financially exposed to these issues, and no company has attempted to quantify the implications for its shareholders." (The methodology of this paper is quite similar to Repetto and Austin (2000), which won the 2000 Moskowitz Prize).
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Bagnoli, Marc and Susan Watts. "Selling to socially responsible consumers: Competition and the private provision of public goods." Journal of Economics and Management Strategy (12). 2003.
An econometric study cited by Siegel and Vitaliano (2006), who say "a key finding...is that when the market for the private good is more competitive, firms are more likely to be socially responsible."
Banz, R.W. "The Relationship Between Return and Market Value of Common Stocks." Journal of Financial Economics, March 1981.
One of the first studies to document the size effect.
Barber, Brad M. "Monitoring the Monitor: Evaluating CalPERS' Shareholder Activism." Working Paper, Graduate School of Management, UC Davis. March, 2006.
Evaluates the shareholder activism programs of CalPERS, the California Public Employees' Retirement System. Since 1992 CalPERS has published an annual focus list of companies it views as having remediable governance shortcomings. An account of how these companies are identified can be found here (http://www.calpers-governance.org/alert/selection/default.asp).
The study evaluates the returns to CalPERS' activism using two techniques.
First, an event study analysis of 115 firms targeted by CalPERS from 1992 to 2005 finds that that CalPERS' activism "has resulted in total wealth creation of $3.1 billion between 1992 and 2005" on the day their membership on the Focus List was announced. Average returns were negative in only four of the 14 years studied. The mean equal-weighted return over the period was 23 bps (t-stat 2.09), and the value-weighted return was 35 bps (t-stat 1.51).
Second, a long-run analysis using a Carhart-type risk model (returns are explained by market risk, size, valuation, and momentum) "yields intriguing, but inconclusive results. Portfolios of focus list firms earn annualized abnormal returns ranging from 2.4 to 4.8 percentage points annually at holding periods ranging from 6 months to 5 years. If these abnormal returns are causally linked to the activism of CalPERS, the wealth creation is enormous -- as much as 20 time greater than the short-run benefits and as large as $89.5 billion through December 2005." The author notes, however, that the returns series is "simply too volatile" to draw the firm conclusion that the CalPERS governance program generates reliably positive long-term returns, and cites failure to adjust for this fact as a shortcoming of prior literature in the field.
The study also includes strong introductory material on the nature of shareholder relationships with corporate managements. It is a must-read for those who wish to learn more about the impact of corporate governance initiatives on firm valuation.
Barnett, Michael L. "Stakeholder influence capacity and the variability of financial returns to corporate social responsibility." Academy of Management Review, forthcoming (October 2005 version).
This thoughtful theoretical paper addresses several open questions in the dialogue around corporate social responsibility and stakeholder relations. Barnett succinctly summarizes the view of many management researchers: "A large and ever-growing body of literature has investigated whether the financial benefits to the corporation can meet or exceed the costs of its contributions to social welfare. If so, [corporate social responsibility] can be justified as a wise investment; if not, [it] can be condemned as an agency problem. The result: after more than 30 years of research, we cannot clearly conclude whether a one-dollar investment in social initiatives returns more or less than one dollar in benefit to the shareholder."
A more nuanced approach is required to make sense of this, he argues, and in particular it would be helpful to better understand "the underlying drivers of whether and when particular firms may earn positive returns from CSR; in short, to make the business case firm-specific, not universal."
To help address this challenge, Barnett introduces the concept of 'stakeholder influence capacity' (SIC) to help explain variation in the relationship between corporate social responsibility and corporate financial performance. SIC is and "an overall assessment of 'the soul of a business'," or, more formally: "the ability of the firm to identify, act upon, and profit from opportunities to improve stakeholder relationships through CSR."
In this view, corporate social responsibility influences corporate financial performance indirectly through the intangible asset of SIC. SIC acts as a kind of account of cumulative goodwill from all stakeholders - "a record of social performance...accrues, forging a firm's SIC stock..."
One implication of this line of thought is that the financial impact of a particular CSR project may be large or small, depending not only the characteristics of that particular project, but on the firm's cumulative track record of social responsibility. Barnett also notes that "trust is an asset that is built slowly, but destroyed quickly. If it is revealed that a CSR activity was insincere or fraudulent, any trust gained from the CSR act will be lost, and the firm's stakeholder relations may be seriously degraded."
This is an interesting 'think piece' - highly recommended.
Barnett, Michael L. and Robert M. Salomon. "Porous, Pious, and Prosperous: The Curvilinear Relationship Between Social Responsibility and Financial Performance." Working Paper, November 2003.
Examines the relationship between the returns of 61 screened mutual funds and the stringency of their social screens. The time period studied is from the funds' inception date (earliest is 1972) through 2000. Returns data are from CRSP, with additional data from Weisenberger and ICDI. Includes control variables for fund age and asset allocations (stocks vs. bonds), but not for price/book, market cap, or price momentum. KLD social factors are then used to help explain risk-adjusted (beta) monthly returns, as well as a measure of screening intensity derived from data provided by the Social Investment Forum.
There are several interesting findings: 1) The screened funds underperformed the S&P on a nominal basis, but outperformed on a risk-adjusted basis. 2) The best performers were those with the strongest and weakest social screens - funds with moderately stringent screens lagged. 3) Some social screens, notably Equal Employment, Community Relations, and Environment, had a statistically significant (P<0.05) impact on returns. By contrast, Labor Relations and Community investment variables did not have a significant impact.
"Our findings suggest that the relationship between relationship between financial and social performance is neither strictly negative nor strictly positive. Rather, it is curvilinear, with the strongest financial returns to low and high levels of social responsibility, and significantly lower returns to moderate levels of social responsibility."
Bassi, Laurie, Paul Harrison, Jens Ludwig, and Daniel McMurrer. "The Impact of U.S. Firms' Investments in Human Capital on Stock Prices." Working Paper, June 2004.
This study relates training expenditures to subsequent-year stock returns for 388 U.S. companies for the 1997-1999 time period. Training data were taking from the American Society for Training and Development's Benchmarking Service. Financial and returns data came from Compustat.
Finds that expenditures on training have a statistically significant positive effect on returns, even after adjusting for variables such as ROA, industry, and price momentum. Findings were most dramatic for technical training (p<0.01), though fundamental skills (such as interpersonal communication, basic skills, and safety compliance) and firm-specific skills also were significant.
The direction of causality is explored in several ways, most notably by searching for predictors of above-average training expenditures. Surprisingly, the study finds little or no correlation between past profitability and subsequent training expenditures. Financial leverage is shown to have a statistically significant (p<0.05) negative impact on training. Membership in the chemical, telecommunications, and technology industries had a statistically significant positive impact. The authors conclude that training precedes outperformance, not vice-versa.
The paper also describes the performance of portfolios managed by Bassi Asset Management (the first was started in December 2001, additional portfolios were launched in Jnuary 2003), which are managed with a view toward capturing the returns from this effect. The authors note that all of these portfolios have outperformed the S&P 500 since inception.
Bauer, Rob, Kees Koedijk, and Roger Otten. "International Evidence on Ethical Mutual Fund Performance and Investment Style." Working Paper, January 2002.
Uses multi-factor attribution models to examine the performance of 103 German, UK, and US screened mutual funds for the 1990-2001 time period. After adjusting for investment style, finds no difference in risk-adjusted performance (Jensen's alpha) between screened and unscreened funds. However, the authors note a "learning effect" where older screened funds appear to outperform younger ones [an asset size variable would have been informative here]. Also finds that screened social indexes "are less powerful in explaining fund performance compared to standard, non-ethical indexes." This study won the 2002 Moskowitz Prize competition for the best quantitative study of socially responsible investing.
This study won the 2002 Moskowitz Prize competition for the best quantitative study of socially responsible investing.
Beal, Diana and Michelle Goyen. "Are Ethical Investors Real?" The Investment Research Guide to Socially Responsible Investing, The Colloquium on Socially Responsible Investing, 1998.
Surveys 689 shareholders in Earth Sanctuaries Limited, "Australia's only public land conservation company." Finds that shareholders own the stock primarily for social reasons, with 97% stating that "Conservation of endangered animals" was considered important in purchasing the shares. By contrast, only 20% stated that "Share price (capital) growth" was considered important in their decision.
Becker, Brian E. and Mark A. Huselid. "Human Resources Strategies, Complementarities, and Firm Performance." Presentation to the Academy of Management Annual Meeting, 1997.
Surveys 533 U.S. corporations on their human resource practices, then regresses the findings against a variety of financial metrics as reported by Compustat. Finds that firms with "high performance" HR systems (as defined by the authors) had higher price/book ratios, even after adjusting for other factors such as beta, sales growth, and R&D intensity).
A subsequent working paper dated July 1998 expands on this work, and can be downloaded at:
http://www.mgt.buffalo.edu/departments/ohr/becker/publications/HumanResourcesStrategies.pdf
Becker, Brian E., Mark A. Huselid, Peter S. Pickus, Michael F. Spratt. "HR as a Source of Shareholder Value: Research and Recommendations."
This study is available online at: http://www.mgt.buffalo.edu/departments/ohr/becker/publications/hrmj97.pdf
Bello, Zakri. "Socially Responsible Investing and Portfolio Diversification." The Journal of Financial Research. Spring 2005.
Compares the performance of 42 U.S. socially responsible equity mutual funds with a matched sample of 84 non-SRI funds for the January 1994 - March 2001 time period. SRI funds were identified using the Morningstar Principia database. Each SRI fund is matched with two randomly selected U.S. equity funds of approximately equal size.
Although it reviews performance, this study differs from most others in explicitly studying the relationship between social screens and other characteristics such as beta and diversification. The author tests Rudd's (1981) prediction that social screening will introduce a size bias, but finds no evidence of such a bias in this dataset.
Comparing the SRI funds with their non-SRI counterparts using a Wilcoxon two-sample rank-sum test, the author finds that "not a single characteristic of socially responsible mutual funds is significantly different from that of conventional funds." Characteristics reviewed include beta, portfolio concentration, total portfolio holdings, and the size of companies in the portfolio.
Although risk-adjusted performance, as measured by Jensen's alpha, was slightly higher for the SRI funds, this difference was not statistically significant.
Benson, Karen L., Timothy J. Brailsford, Jacquelyn E. Humphrey. "Do Socially Responsible Fund Managers Really Invest Differently?" Working Paper, University of Queensland Business School, May 2005.
This interesting and well-done study examines differences between socially screened and conventional mutual funds (all open-ended funds in the U.S.) using two different analytical approaches.
First, the authors compare funds using a variety of characteristics, including nominal returns (Morningstar data, 1994-2003), Sharpe ratios, industry exposure, and fees. This analysis replicates earlier work showing that "the performance of SRI funds is not distinguishable from conventional funds," but that there are differences in portfolio composition (industry weightings).
Second, the authors conduct a more formal returns-based regression analysis using 12 Morningstar industries as explanatory variables. This analysis shows that "the estimated industry betas...are significantly different for the telecommunications [Z=3.97, p<0.05], healthcare [Z=2.01, p<0.05], and utilities [Z=2.85, p<0.05] industries... Despite exhibiting similar performance, the returns of SRI funds are generated through different industry exposures when compared to conventional funds, which is consistent with SRI managers holding different positions."
Building further on the regression analysis, the study finds that SRI managers have somewhat lower alphas (i.e., more of their return is explained by industry bets) than their unconstrained counterparts.
Berman, Shawn L., Andrew C. Wicks, Suresh Kotha, and Thomas M. Jones. "Does Stakeholder Orientation Matter? An Empirical Examination of the Relationship Between Stakeholder Management Models and Firm Financial Performance." Working Paper, 2004.
Investigates the impact of stakeholder relationships (using data from the KLD Socrates database) on the financial performance (return on assets, from the Compact Disclosure 1997 database) of 81 publicly traded members of the Fortune 100 for the 1991-1996 time period.
The social factors used as independent variables are Community, Diversity, Employees, Natural Environment, and Product Safety. Several financial variables (termed "strategy variables" are use. These include selling intensity (SG&A / Sales), capital expenditures (capex/sales), efficiency (cost of goods sold / sales), and capital intensity (assets / number of employees). In addition, three operating environment variables are employed - "dynamism" (an industry sales variability measure), "munificence" (industry sales growth), and "power" (a measure of market concentration).
The authors studied the impacts of these variables using a variety of regressions, some of which tested for interaction relationships. In the direct effects model, only two of the social factors, Employees (p<0.01) and Product Safety (p<0.05), had a statistically significant impact on return on assets. The other three social factors had insignificant direct effects on ROA, but were important in a "moderation" model (i.e., influenced other independent variables), suggesting that "the relationship between stakeholder relationships, strategy, and financial performance is more complex than suggested by the direct effects model."
Black, Fischer. "Estimating Expected Return." Financial Analysts Journal, September/October 1993.
The author asserts that "just after the small-firm effect was announced, it seems to have vanished." He is also critical of the use of historical price/book ratio data as a predictor of relative performance.
Blackwell, David, M. Wayne Marr, and Michael F. Spivey, "Plant Closing Decisions and the Market Value of the Firm." Journal of Financial Economics, August 1990.
This event study finds negative stock market reaction to plant closing announcements (two-day window). Cumulative abnormal return for sample is -0.72%. Takeover influences did not affect outcome. Results are not significant for firms that had already closed plants in the recent past.
Blanchflower, David, Neil Millward, and Andrew Oswald. "Unionism and Employment Behavior." The Economic Journal, July 1991.
Uses British manufacturing employment growth to show that, between 1981 and 1984, unionized firms in the U.K. grew 3% slower than non-union firms. A review of an alternate data set finds that unionized firms grew faster between 1977 and 1978. The Thatcher government cited a predecessor study by the same authors as justification for anti-union policies. The authors argue, however, that "there is no systematic link between unions and employment growth."
Blank, Herbert D. and C. Michael Carty. "The Eco-Efficiency Anomaly." Innovest Working Paper, June 2002.
Reviews the performance of stocks ranked highly by the environmental research service Innovest for the 1997-2000 time period. Finds that an equal-weighted portfolio of the highest-rated companies outperformed an equal-weighted portfolio of all rated companies. This portfolio also had a higher Sharpe ratio than the S&P 500 in three of the four years.
The authors then use an APT model to create an "Innovest Enhanced S&P 500" for the time period, which also outperformed the S&P 500. The effect was also observable within industries, as highly-rated stocks outperformed low-rated ones in environmentally sensitive industries such as chemicals, forest products, mining, and steel.
Available at: http://www.innovestgroup.com/pdfs/Eco_Anomaly_7_02.pdf
Blasi, Joseph, Douglas Kruse, and Aaron Bernstein. In the Company of Owners: The Truth About Stock Options (And Why Every Employee Should Have Them). Basic Books, 2003.
This book reviews the rationale and impact of stock options grants and profit sharing with a particular focus on the technology industry, concluding that extensive stock option grants are a potential positive for both employees and shareholders. Although it contains little empirical analysis, it includes the most comprehensive bibliography of empirical studies on employee relations that I have seen. Authors Blasi and Kruse are researchers at Rutgers, Bernstein is a journalist at Business Week.
Bollen, Nicolas P.B. and Mark A. Cohen. "Mutual Fund Attributes and Investor Behavior." Working Paper, May 24, 2004.
This strong study reviews investments and redemptions in a matched sample of socially screened and unscreened U.S. mutual funds. The study uses CRSP data for the 1980-2002 time period for conventional funds (N=348 in 1980 rising to 8,009 in 2002) and social funds as identified by the Social Investment Forum (N=7 in 1980 rising to 185 in 2002). Social funds are matched to conventional funds on the basis of their risk exposures, as measured by a Carhart model (risk metrics are Beta, Market Capitalization, Price/Book ratio, and a Momentum factor). After adjusting for these factors, the alphas of the social funds were higher than those of the conventional funds, although alphas were negative in both cases (p<0.0383 - Table 3).
Finds that "the monthly volatility of investor cash flows in SR funds is significantly lower than conventional flow volatility. This result suggests that the non-financial SR attribute regulates the speed with which investors reallocate capital among their investments."
Also finds, counterintuitively, that cash flows of SR funds are more sensitive to lagged performance than those of conventional funds, i.e. that social investors are more likely to react to recent performance than other investors. The authors offer two possible explanations. First, socially responsible investing might be viewed as a luxury good: citing work by Ait-Sahalia (2004), they note that consumption of luxury goods tends to rise as wealth rises and fall as wealth falls. Second, as a relatively new investment approach, investor beliefs about SRI are likely to be more diffuse than for conventional investments - as a result, newinformation is likely to be given more weight as investors learn and update their beliefs. This second explanation appears better supported by the data, given that younger funds exhibit the highest sensitivity. Performance sensitivity is also observed in older funds, however, leading the authors to comment that "at least some SR investors view their investment as consumption of a luxury good."
The authors conclude that "our results suggest that SR investors are just as concerned about the performance of their investment as investors in conventional funds, if not more so. Nonetheless, mutual funds companies, which continually compete to offer new funds in an effort to attract investor capital, can expect SR investors to be more loyal than investors in ordinary funds."
This study received an honorable mention in the 2004 Moskowitz Prize competition.
Boutin-Dufresne, Francois and Patrick Savaria. "Corporate Social Responsibility and Financial Risk." The Journal of Investing, 13 (Spring 2004), pp. 57-66.
Uses two methods to analyze the risk profiles of 277 Canadian companies for the 1995-1999 time period. The first method, based on CAPM, looks for a correlation between beta and social responsibility (as estimated by the Canadian social investment research service Michael Jantzi Research Associates). The second compares the residual risk of a "responsible portfolio" (the top quartile of the sample as ranked by Jantzi) and a "non-responsible portfolio" (the bottom quartile). Both methods indicate that less-responsible stocks tend to have higher levels of risk than more responsible ones.
Brammer, Stephen, Chris Brooks, and Stephen Pavelin. "Corporate Social Performance and Stock Returns: UK evidence from Disaggregate Measures." Working Paper, Case Business School, City University of London, January 2006.
Examines the social records and returns of 451 U.K. companies included in the FTSE All Share Index as of July 2002.
The companies were scored on social characteristics using social data from the Ethical Investment Research Service (EIRIS) 2002 database. The authors construct four social metrics - Community performance, Environmental performance, Employee performance, and a composite measure, and include interesting analysis of the correlation among these variables.
Performance is evaluated using a Carhart model over one- and two-year periods, although during the short time period studied only the momentum variable was statistically significant (financial data came from Datastream). The authors find statistically significant underperformance by strong social performers, even after adjusting for the Carhart variables: "our main finding is that firms with higher social performance scores tend to achieve lower returns, while firms with the lowest possible CSP scores of zero considerably outperformed the market." Finds that "the environmental and employment indicators are negatively correlated with returns while the community indicator is weakly positively related."
Finds that "all of the performance attribution variables (beta, price-to-book, market capitalisation, the previous year's return) have negligible correlations with the CSP variables except for market capitalisation...all else being equal, large firms are likely to achieve higher CSR scores than small firms, although the association is not very strong."
Bronars, Stephen. "Unionization, Incomplete Contracting, and Capital Investment." The Journal of Business, January 1993.
This review of the literature on the financial impact of unionization cites 15 studies associating reduced investment with unions. Analyzes Compustat data on 667 firms and finds substantially lower investment and employment growth in unionized firms.
Brown, Lawrence D. and Marcus L. Caylor. "The Correlation between Corporate Governance and Company Performance." Institutional Shareholder Services, 2004.
A very detailed study of the impact of corporate governance practices on equity performance and other firm characteristics. The study includes two separate statistical analyses, both cross-sectional regressions with data current as of 9/26/03:
First, using the ISS industry-adjusted corporate governance ratings the independent variable and 35 fundamental indicators as dependent variables, the authors analyzed the 5,460 companies in the ISS database. This analysis showed that companies with top-decile corporate governance scores had higher trailing 3-, 5-, and 10-year returns than those in the bottom decile (my calculator says this is also true of the top three minus the bottom three deciles -LK), as well as higher profitability, returns on assets, and solvency (as measured by Z-score). Most correlations were significant at the 1% level. The authors contend that companies with lower corporate governance scores are riskier, although this point may be debated given that top-decile companies had higher betas than bottom decile ones.
Second, the authors regressed each of the four ISS governance subcategory ratings (board composition, compensation, takeover defenses, and audit) against the 35 fundamental variables. This analysis finds that "board composition is the most important factor," with 13 of 15 key variables having the expected sign. "Compensation the next most important factor (a distant second), audit is the third most important factor, and takeover [defenses are] unimportant or (at worst) perverse."
The cross-sectional nature of the study means that it does not include time-series or formal attribution analysis of returns, but the authors indicate that they are "in the process of verifying that our results are robust to other time periods."
This study was commissioned by Institutional Shareholder Services, a corporate governance research vendor.
Burke, Paul. "Sustainability Pays." CIS Cooperative Insurance, June 2002.
An overview of social investing that includes a proprietary survey of 250 retail investors in the UK about their attitudes toward SRI. The survey, conducted by a Warwick University psychologist, finds that 48% "believed that SRI could have an impact on how businesses behaved. 75% of those questioned felt that any influence of SRI on business would do more good than harm [and] the environment was most often mentionedΓas an issue to be taken into account in managing an SRI fund, although ethical issues (tobacco, terrorism, oppression, arms, war) were also frequently mentioned." The survey responses were "largely unaffected" by demographic factors such as age and sex.
Butz, Christopher. "Decomposing SRI Performance - Extracting Value Through Factor Analysis." Pictet Quants, September 2003.
Studies the influence of sustainability factors on the performance of 288 listed European companies (90% of the MCSI Europe index) for the January 1999 - July 2003 time period. Weekly returns were obtained from Datastream. The sustainability factors used were derived from the proprietary Pictet Sustainable Value Chain (February 2002 scores), which breaks sustainability scores into "environmental" and "social" components. Mergers and bankruptcies were discarded from the data set, which authors acknowledge introduces some survivorship bias, although the impact of this is not quantified.
Using the sustainability scores as active weights, the authors construct hypothetical zero-cost long-short portfolios and compare them with the underlying universe. They do this in three ways: First, using an equal-weighting scheme, they find that the sustainable portfolio underperforms its benchmark by -11% over the observation period. Second, they use a "fundamentally correct weighting and aggregation strategy" (optimization on fundamental factors), finding underperformance through the review period of -3%. The authors note that "this is a rather surprising result, since the majority of empirical studies conducted over the past years suggest that there is in fact a rather positive correlation between sustainable behaviour and financial performance." Finally, they compute information ratios for each of the social factors and optimize to increase exposure to these higher return factors. This yields outperformance of 1.6%. The authors acknowledge that the performance tilt, although positive, was "based on knowledge accumulated over the entire observation period," i.e., in-sample, diminishing the conclusiveness of this finding.
The authors repeat their analysis using only environmental and only social factors. They find that social factors had a notably greater positive impact on returns than environmental factors, which they note "sharply contradicts the findings of other studies."
Butz, Christopher, and Andreas Plattner. "Socially Responsible Investment: A statistical analysis of returns." Basel: Sarasin Sustainable Investment, January 2000.
Analyzes the impact of Sarasin & Cie environmental and social variables on the performance (Jensen's alpha) of 60 European stocks for the mid-May 1997 - mid-May 1999 time period. Finds a statistically significant positive correlation between high environmental score and strong stock performance (p<0.05), this was particularly true when the dataset was limited to environmentally sensitive industries. Finds no significant relationship between social variable and stock performance.
See Ziegler, Rennings, and Schroder (2002), which did a more extensive analysis over a longer time period and had the same conclusion.
Cairncross, Frances. Costing the Earth. Boston: Harvard Business School Press, 1993.
As environmental editor for The Economist, Cairncross authored numerous anonymous essays on the microeconomic and macroeconomic impact of environmental regulation. Her book provides minimal quantitative analysis, but asserts that companies appear reluctant to invest in conservation projects with internal rates of return exceeding 30%, while they are willing to invest in mines or power stations with returns of 5%-10%.
Calvert Group. Calvert Social Index. Calvert Online, 2001-2005.
http://www.calvert.com/sri_calvertindex.asp
Calvert publishes the names of companies in its Calvert Social Index (cuurent as of Spring 2005). This is a good publicly available list of companies passing typical social screens. Also see Domini [2002].
Calvert Group and Yankelovich Partners Inc. "Survey of Investors' Attitudes Toward Socially Responsible Investing," October 1996.
Carter, David A., Betty J. Simkins, and W. Gary Simpson. "Corporate Governance, Board Diversity, and Firm Value." The Financial Review, February 2003.
Studies the effects of board diversity on firm valuation, focusing on 638 publicly traded members of the Fortune 1000. Finds that diversity (representation of women and/or minorities on the board) is a positive factor in Price/Book ratio. Board data is from 1997. Regressions use Compustat data (presumably also from 1997, though this is not stated) and adjust for industry, total assets, board size, return on assets, and insider ownership %. No control for R&D intensity, however. Finds that woman/minority representation (as a % of board) rises as firm size rises, but decreases as insider board membership increases. Also finds statistically significant negative impact on firm value when CEO and board chairman are the same person.
Chen, Larry. "Sustainability Investment: The Merits of Socially Responsible Investing." UBS Warburg, August 2001.
Overview of SRI with a European focus. Includes review of the literature and discussion of arguments for and against SRI, and a basic sector analysis of the FTSE4Good Indices vs. a variety of broader unscreened market benchmarks. Provides charts for performance, volatility and tracking error of the Dow Jones Sustainable Group index for the January 1995-July 2001 time period, although the data through December 1998 is backtested. Also provides a scattergram of local currency historical returns vs. volatility for many U.S. and U.K. social investment vehicles (July 1996-July 2001).
Chong, James, Monica Her, and G. Michael Phillips. "When It's 'Good', It's Good; When It's 'Bad', It's Better." Working Paper, May 2005.
Compares returns for the Domini Social Equity Fund and the S&P 500 for the 6/4/91 - 9/24/04 time period, and finds that the Domini underperformed on both a nominal and risk-adjusted basis (not surprising, giving that the Domini Fund has fees and the index does not). In additional to traditional risk-adjustment metrics such as Jensen's alpha and Sharpe ratio, the authors introduce conditional risk measures using an ARCH model.
Also, for the 9/17/02-9/24/04 time period, the authors compare the Domini Social Equity Fund and the S&P 500 with the Vice Fund, which focuses it investments in aerospace/defense, alcoholic beverages, tobacco, and gambling. Over this time period both the Domini and Vice Fund outperformed the market after fees, but the magnitude of the Vice Fund's outperformance was greater.
The ARCH analysis suggests that the risks of all three investment vehicles are lower than standard risk metrics would suggest, and that the Sharpe ratios are therefore higher.
Clare, Andrew, Richard Priestley, and Stephen Thomas. "Is Beta Dead? The Role of Alternative Estimation Methods." Applied Economics Letters, vol. 4, issue 9, 1997.
Clayman, Michelle. "One-Time Charges: Never Having to Say You're Sorry?" Financial Analysts Journal, September/October 1995.
Finds that companies reporting frequent "one-time" charges between 1989 and 1994 had lower returns than other companies. The author comments that "the charges that appear most problematic are restructuring charges and those taken for discontinued operations."
Clayman, Michelle. "Excellence Revisited." Financial Analysts Journal, May/June 1994.
Repeats the methodology of Clayman [1987] and finds that "excellent" companies again outperformed as a group during 1988-1992, with a monthly alpha of 0.38%. Financial ratios of both "excellent" and "unexcellent" companies are again found to regress toward the mean.
Clayman, Michelle. "In Search of Excellence: The Investor's Viewpoint." Financial Analysts Journal, May/June 1987.
The metrics used here to select "excellent" companies are: asset growth, equity growth, high price/book ratio, return on capital, return on equity, and return on sales. The author reviews 29 such companies and finds that 16 underperformed the S&P 500 during 1981-1985. But, a portfolio of these stocks would have outperformed, with an alpha of 0.16% per month. The financial ratios of both "excellent" and "unexcellent" companies are found to regress toward the mean.
Clinebell, S. and J. Clinebell. "The Effect of Advanced Notice of Plant Closings on Firm Value." Journal of Management, 20(3), 1994.
Cohen, Mark, Scott A. Fenn, Shameek Konar. "Environmental and Financial Performance: Are They Related?" Working paper, May 1997.
Reviews the relationship between environmental data compiled by the Investor Responsibility Research Center (IRRC) and the performance of S&P 500 companies for the 1987-91 time period. Constructs industry-balanced "high polluter" and "low polluter" portfolios, and finds that risk-adjusted returns of the low polluter portfolio were better than those of the high polluter (reported as 18.1% vs. 16.0%, although risk adjustment methodology is not described). The differences were not statistically significant. Concludes that "investors who choose the environmental leaders in an industry-balanced portfolio were found to do as well (or better) than choosing the environmental laggards in each industry."
Cohen, Mark A., Scott Fenn, and Jonathon S. Naimon. "Environmental and Financial Performance: Are They Related?" Investor Responsibility Research Center Working Paper, April 1995.
Compares the performance of "high pollution" and "low pollution" firms in the S&P 500. High- and low-pollution firms are identified using the IRRC Corporate Environmental Profiles Directory (1992). Pollution levels are defined within industry and normalized using revenues.
The authors then create industry-matched portfolios of high- and low-pollution firms, and compare their financial performance using ROA,, ROE, Total Return, and Risk-Adjusted Total Return (Change in Stock Price + Dividends / Initial Stock Price * Beta). Comparisons are made using the following environmental criteria: environmental litigation; number of Superfund sites, fines, oil spill volume, chemical spill volume, and toxic releases. The time period used for all financial measures was 1987-1991.
Finds that total return is, in most comparisons, statistically indistinguishable for high- vs. low-pollution portfolios on both a nominal and risk-adjusted basis. Also finds that Return on Assets (excluding interest expense) is significantly higher in the environmental litigation, oil spill volume, and chemical spill volume comparisons.
The authors conclude that "investors who choose the environmental leaders in an industry-balanced portfolio were found to do as well, and sometimes better than those choosing environmental laggards..."
Columbia/HCA. Presentation to investors, Goldman Sachs Healthcare Conference, June 10, 1997.
Management representative Tom May stated that "employee morale is a key driver" of customer satisfaction, and assured investors that the firm's San Jose hospital would "work to improve it."
Coulson, Andrea, and ISIS Asset Management. "A Benchmarking Study: Environmental Credit Risk Factors in the Pan-European Banking Sector." ISIS Asset Management (London), September 2002.
Reviews the environmental risk controls of 10 European banks in which ISIS holds shares. Includes considerable detail on the banks' approach to environmental risk, probably more detail than has ever been published for a group of financial institutions prior to this. Comments that "the overwhelming consensus [of the banks] was that sound environmental credit risk assessment was a fundamental constituent of thorough overall credit risk assessment, and, all other things being equal, environmental risk factors played a potentially material role in financial outcomes," but no empirical evidence is provided for this assertion.
Cropper, Maureen, and Wallace Oates. "Environmental Economics: A Survey." Journal of Economic Literature, June 1992.
Policy-oriented survey of environmental economics, but includes some microeconomic studies. The authors comment: "Why have domestic [pollution control] measures not induced 'industrial flight,' and the development of pollution havens? The primary reason seems to be that the costs of pollution control have not, in fact, been very large even in heavily polluting industries. Existing estimates suggest that control costs have run on the order of only 1% to 2 % of total costs in most pollution-intensive industries."
Crystal, Graef. "The Crystal 300 Report." The Crystal Report on Executive Compensation, 1989-1999.
Graef Crystal is a well-regarded executive pay consultant who currently (2005) is a columnist for Bloomberg business news. Through 1999 he published an independent newsletter and maintained a website. He annually regresses executive pay against stock market performance in order to identify executives whose compensation plans appear overly generous or frugal - for many years this information was available via a newsletter and online at www.crystalreport.com. Crystal has consistently found a positive but extremely variable relationship between stock price performance and CEO compensation.
Crystal, Graef. "Knowing How Much, and How, a CEO is Paid Can Improve the Returns On a Portfolio - And By a Significant Margin." The Crystal Report, December 11, 1998.
For the 1994-97 time period, identifies companies with "good" and "bad" executive compensation, using the following criteria: pay level (adjusted for industry and company size), sensitivity of total compensation to share price, level of management share ownership, and willingness to accept pay cuts during periods of adversity. Finds that "bad" compensation companies had significantly (p<.001) below-average stock returns (the "bad" companies had an average beta of 1.2, suggesting their risk-adjusted performance was worse than their nominal returns). "Good" compensation companies performed only marginally better than average, however. This finding was not statistically significant. Crystal did a small test of industry impacts for the six months ended November 30, 1998, and found that industry adjustments reduced the "bad" compensation companies' underperformance by 1/3.
D'Antonio, Louis, Tommie Johnsen, and R. Bruce Hutton. "Socially Responsible Investing in the Context of Asset Allocation." The Investment Research Guide to Socially Responsible Investing, The Colloquium on Socially Responsible Investing, 1998.
Reviews the ex-post efficient frontier for a socially responsible investor using the Domini Social Index and the socially responsible bond portfolio described in the authors' 1997 study. The authors find that the SRI efficient frontier dominates the unscreened frontier for all asset allocations for the 1990-1996 time period. This result is consistent across concave, neutral, and convex asset allocation strategies.
A later version of this article appeared in the Fall 2000 issue of The Journal of Investing, and good summary appears in the May 2001 CFA Digest.
D'Antonio, Louis, Tommie Johnsen, and R. Bruce Hutton. "Expanding Socially Screened Portfolios: An Attribution Analysis of Bond Performance." Journal of Investing, Winter 1997.
Compares a socially screened portfolio of 140 bond issues with the Lehman Brothers Corporate Bond Index for the 1990-1996 time period and finds no material difference in returns. "There was no significant difference between the portfolios even when the term structure was decomposed and examined related to its shift, twist, and butterfly movements."
Dasgupta, Susmita , Benoit Laplante, Nlandu Mamingi. "Capital Market Responses to Environmental Performance in Developing Countries." The World Bank Development Research Group, 1998.
Uses event study methodology to evaluate reactions of individual stocks to environmental news in the Argentina (20 events, 11 firms), Chile (53 events, 17 firms), Mexico (35 events, 10 firms), and Philippines (18 events, 10 firms) stock markets for the 1990-1994 time period. Finds that the stocks tended to react positively to positive government actions on the day after the announcement (t-stat 1.8), but not to other positive environmental news. Negative news events involving government and/or citizen complaints reduced stock values on the day after the announcement (t-stat -1.7), but other negative environmental news appeared not to be meaningful. The authors report that "reductions in market values range on average from 4% to 15%."
Concludes that "these results suggest that in numerous circumstances market forces...have not remained idle upon receiving signals of the environmental performance of firms."
Davidson, Wallace N. III and Dan Worrell. "The Effect of Product Recall Announcements on Shareholder Wealth." Strategic Management Journal, 13, 1992.
Davidson, Wallace N. III, and Dan Worrell. "A Comparison and Test of the Use of Accounting and Stock Market Data in Relating Corporate Social Responsibility and Financial Performance." Akron Business and Economic Review, Fall 1990.
Davidson, Wallace N. III, and Dan Worrell. "The Impact of the Announcement of Corporate Illegalities on Shareholder Returns." Academy of Management Journal, 31(1), 1988.
Davis, James. "Explaining Stock Returns: A Literature Survey." Dimensional Fund Advisors, December 2001.
This article is available online here.
Delmas, Magali, Michael V. Russo, and Maria J. Montes-Sancho. "Deregulation and Evironmental Differentiation in the Electric Utility Industry." Strategic Management Journal, forthcoming.
Examines the impact of deregulation on the electric utility industry, and the emergence of 'green power' utilities, arguing that deregulation "has stimulated environmental differentiation."
This is accomplished using a regression analysis in which the dependent variable is the change in percentage of generation from renewables. Independent variables include measures of deregulation, regional environmental sensitivity (using League of Conservation Voters scores), percentage of generation from coal, and efficiency (based on a linear programming analysis). The regressions also include many control variables for factors such as prior investments in renewables, new entrants, and state environmental conditions (based on EPA Toxic Release Inventory data).
The data sample is composed of data from 114 investor-owned U.S. electric utilities, representing 61% of U.S. electricity production. The time period covered is 1998-2000 time period, although, since some variables are lagged, the analysis focuses on 1999 and 2000. The authors combine data from numerous sources, including the Federal Energy Regulatory Commission, EPA, and company filings with regulators.
Finds that "utilities were more likely to take strategic actions to support an environmental differentiation strategy following deregulation in states where citizens display higher degrees of environmental sensitivity." Firms that were heavily reliant on coal power or were notably efficient were less likely to pursue such strategies.
The authors argue that deregulation was a key catalyst in the development of green power offerings. "It was not that utilities were prevented from developing green power resources (and of course, several of them did so). Rather, it was their monopoly status and the nature of utility regulation that blocked incentives for offering green power as a new retail product, in turn biasing downward opportunities for utilities to promote renewable generation."
Derwall, Jeroen, and Kees Koedijk. "Socially Responsible Fixed-Income Funds." Working Paper, Erasmus University, May 2006.
This strong study analyzes the returns of U.S. SRI fixed income and balanced mutual funds for the 1987-2003 time period. Each SRI fund is matched to five non-SRI funds selected for similarity in fund age, fund size, and 'investment scope.'
Returns are evaluated using a 4-factor model which takes into consideration broad market sensitivity, quality spreads, optionality, and an equity return measure (this last factor is important primarily for the balanced funds). Additional, more complex models are also used.
Results are presented separately for high-quality bond funds, high-yield funds, and balanced funds. Finds that alphas for both high-quality and high-yield SRI bond funds were statistically indistinguishable from those of their unscreened counterparts.
Balanced fund performance was notably superior for the SRI products, however, as they had an annual alpha of +1.36% better than that of the unscreened funds. This difference was significant at the 5% level.
Concludes that "as we do not find any indication that socially motivated constraints are binding on fund performance, our evidence supports the idea that SRI in the fixed-income industry is a financially viable approach."
Derwall, Jeroen, Nadja Guenster, Rob Bauer, and Kees Koedijk. "The Eco-Efficiency Premium Puzzle." Financial Analysts Journal, March/April 2005.
This study examines the performance impact of using environmental ratings (from the research firm Innovest) as part of an active management strategy. The authors construct two matched value-weighted portfolios of U.S. equities, one consisting of firms with high environmental ratings, the other consisting firms with low ones. Portfolios are constructed using a "best-in-class" approach - unlike most currently marketed social investment portfolios, the basis for inclusion/exclusion is relative standing within the industry, not a fixed statistical test or exclusion criteria.
Returns were computed for the 1995-2003 time period (the Innovest data starts in July 1997 - the authors acknowledge that look-ahead bias is possible, but note that shortening the time period to 1997-2003 does not affect the results of the paper). Annualized mean return for the high-ranked portfolio was 12.2% vs. 8.9% for the low-ranked portfolio. CAPM alpha was computed as 1.29 (p<0.01) for the high-ranked vs. -1.76 (p<0.01) for the low-ranked. After adjusting for industry, the difference in these alphas grew from 3.05 to 3.82. The authors also use a Carhart-type model and find that the high-ranked portfolio's alpha of 3.98 (p<0.10) was dramatically higher than the low-ranked portfolio's -1.08. The industry-adjusted difference is again larger, rising from 5.06 to 6.04. The authors employ a variety of tests of robustness to demonstrate that the effect persists despite changes in regression variables or imposition of transaction costs.
Although this study is a backtest, the magnitude of the reported alphas are so large, even after adjusting for risk using a variety of models, that the findings deserve further attention.
This study can be downloaded here.
Dess, G. and J. Picken. Beyond Productivity: How Leading Companies Achieve Superior Performance by Leveraging their Human Capital. New York: American Management Association, 1999.
Cited by Thomson and Wheeler (2004).
Dhrymes, Phoebus J. "Socially Responsible Investment: Is It Profitable?" The Investment Research Guide to Socially Responsible Investing, The Colloquium on Socially Responsible Investing, 1998.
Reviewed the impact of 17 social indicators provided by KLD on the returns of 464 stocks from 1991-1996, using cross-sectional regression analysis for each year studied. Finds that "in the aggregate there are not perceptible and consistent differences in the (expected or mean) rates of return between firms which are deemed to be socially responsible vis-a-vis the entire universe investigated." This study also provides a particularly clear discussion of the theoretical impact of SRI from both CAPM and APT perspectives.
DiBartolomeo, Dan. "A View of Tobacco Divestiture by CalSTRS." Working Paper, Northfield Information Services, April 2000.
Reviews the investment implications of tobacco divestiture in five areas - past performance (index level), potential future returns (index level), past risk and return, tracking error, and transaction costs.
Past Performance: "One dollar invested in tobacco stocks at the beginning of 1989 would be worth $4.84, while the same dollar invested in the broad S&P 500 would now be worth $7.01," although the authors note that the tobacco index reached a peak value of $9 in late 1998.
Possible Future Performance: Uses Bayes-Stein analysis to forecast future returns from past patterns - "when we applied these statistical techniques, the difference in the annual arithmetic returns shrank from the 3.19% in favor of the S&P 500...to just 16 basis points. Also sums analysts' growth estimates and adds dividend yield to obtain an alternate estimate of 18.27%, 2.22% greater than for the S&P 500.
Past Risk and Return: Backtested the S&P 500 for the 1989-1999 time period vs. a tobacco-free S&P 500 portfolio. Returns and risk for the two portfolios were virtually identical.
Tracking Error: Tracking error in the backtest was 42 basis points per annum. The authors argue that this is not material, given that the discrepancy is not as large as between the S&P500 and other broad market indexes from Russell and Wilshire.
Concludes that "there is no compelling reason to believe that the divestiture of tobacco stocks would have any negative impact on the future investment performance of CalSTRS."
DiBartolomeo, Dan and Lloyd Kurtz. "Managing Risk Exposures of Socially Screened Accounts." Northfield Working Paper, 1999.
Reviews the performance of the Domini Social Index May 1990 - March 1999 using a fundamental factor model. This model finds that the DSI's industry exposures explain much of its relative performance, and has a non-significant residual, suggesting the absence of a social factor. Using an APT optimization model, finds that the risk profile of the DSI can be matched prospectively to that of the S&P 500. A backtest indicates that the performance of the risk-matched social portfolio indicated returns of 1.49% per month for the period under review, similar to the S&P's 1.55% per month.
DiBartolomeo, Dan. "Explaining and Controlling the Returns of Socially Screened Portfolios." speech to New York Society of Security Analysts, September 10, 1996.
An earlier version of DiBartolomeo and Kurtz (1999) using data from May 1990-April 1995. Study design and conclusions were identical.
Diltz, J. David. "Does Social Screening Affect Portfolio Performance?" Journal of Investing, Spring 1995a.
Reviews 159 securities using social data provided by the Council on Economic Priorities. Finds that environmental and military screens had a significant (p<0.05) positive impact on portfolio performance.
Diltz, J. David. "The Private Cost of Socially Responsible Investing." Applied Financial Economics, #5, 1995b.
Dimtcheva, Ludmila, Gordon Morrison, and John Marsland. "Boxing against Green Shadows." Commerzbank Securities. July 19, 2002.
Uses proprietary risk tools to study and optimize the DJ Stoxx Sustainability Index (DJSI). Finds DJSI tracking error of 2.75% vs. the broader DJ STOXX 600 (56% of this is attributable to common factors, the remainder to stock-specific effects). Beta is measured at 1.08, "correlation" (presumably r-squared) at 99%. Then, using proprietary portfolio management tools, creates a "shadow benchmark" based on the DJSI with tracking error of just 1.45%. Factor risk is virtually eliminated in the shadow benchmark.
Argues that optimizing screened benchmarks to broader benchmarks fills an important need. "Very few SRI investors use the corresponding SRI index as a benchmark," preferring broad market benchmarks instead. Given the relatively high tracking error of the unadjusted DJSI, "the SRI manager is placed at an immediate disadvantage since the tracking error (2.75%) is already significant," and warns that "risk taken without the expectation of incremental return is a bad idea."
Dimtcheva, Ludmila, Gordon Morrison, and John Marsland. "Green with Envy." Commerzbank Securities, March 18, 2002.
Uses proprietary risk assessment tools to analyze the FTSE4Good Index. This estimates tracking error of the screened index vs. the FTSE Europe at 2.58%. "In our view the magnitude of this expected tracking error is quite surprising" and is "higher than many institutions would be comfortable with." Most of this is driven by "styles and themes" (such as higher valuaion ratios) as opposed to industries. Only about 1/3 of the effect was attributable to stock-specific risk. The authors argue that investors should be compensated for this tracking error via higher expected return for the FTSE4Good index.
Dixon, Frank. "Financial Markets and Corporate Environmental Results." Innovest Working Paper, 2002.
Reviews the literature of environmental and stock price performance in the 1990s, and finds that "most studies of links between corporate environmental and financial performance found positive correlations." Argues that Koehler's (2002) negative view of this literature is "probably too aggressive." Also see Koehler (2002).
Domini Social Investments. The Domini 400 Social Index, 2002-2004. http://www.domini.com .
Domini Social Investments provides a list of companies in the Domini Social Index on its website, along with brief summaries of the social records of member companies. This provides researchers with a good list of companies passing commonly-applied social screens. Also see Calvert [2002].
Dowdell, Thomas, Suresh Govindaraj, and Prem Jain. "The Tylenol Incident, Ensuing Regulation, and Stock Prices." Journal of Financial and Quantitative Analysis, June 1992.
This event study reviews daily stock returns for Johnson & Johnson and 28 other healthcare firms for 28 days (2 prior to the Tylenol incident, 25 after). During the first nine days, only Johnson & Johnson had abnormal returns (-29%, t = -3.5). In the following 19 days, regulations were imposed. Other drug stocks were then affected (-12%, t = -4.0).
Dowell, Glen, Stuart Hart, and Bernard Yeung. "Do Corporate Environmental Standards Create or Destroy Market Value?" Management Science, August 2000.
Examines the market valuations and environmental policies of S&P 500 manufacturing and mining companies from 1994 to 1997. The list was narrowed by including only companies with operations in countries with per capita GDP below $8,000 (1985 dollars), on the grounds that "evidence suggests that concern for and activity in environmental regulation decreases dramatically for countries with per capita income below $8,000."
Finds that company with the highest stated environmental standards (as reported by IRRC) also tended to have significantly higher price/book ratios (p<.05). Adjustments were made for industry membership, R&D intensity, advertising intensity, financial leverage, asset size, and foreign sales.
Concludes that there is "a significant and positive relationship between the market value of a company (as measured by Tobin's q [price/book ratio -LK]) and the level of environmental standard it uses... Furthermore, our results suggest that a firm's market value appreciates quickly once a firm adopts a higher environmental standard."
This study won the 2001 Moskowitz Prize competition for the best quantitative study of socially responsible investing.
Dreman, David. The New Contrarian Investment Strategy. New York: Random House, 1982.
Includes an extensive discussion of the low P/E effect up to that time.
Dreman, David, and Michael Berry, "Overreaction, Underreaction, and the Low P/E Effect." Financial Analysts Journal, July/August 1995.
Edelen, Roger. "Benchmarking an Environmentally Responsible Investment (ERI) Portfolio." Sierra Club Funds presentation at SRI in the Rockies conference, October, 2004.
Shows that the value-weighted Sierra Club universe, a very restrictive environmental benchmark, outperformed the S&P 500 from Q1:2003 to Q3:2004. This was true even after the universe's risk factors were optimized against the S&P's.
Ellis, Charles, ed. Classics II: Another Investor's Anthology. Homewood, IL: Richard D. 1991, pp. 604-609.
Book containing a speech by Burton Malkiel on the investment implications of South Africa divestment. See Malkiel [1971].
Elton, Edwin J., and M.J. Tamarkin. "Risk Reduction and Portfolio Size: An Analytical Solution." Journal of Business, October 1977.
Espahbodi, Reza, Teresa A. John, and Gopala Vasudevan. "The Effects of Downsizing on Operating Performance." Review of Quantitative Finance and Accounting, September 2000.
Studies the operating performance of 118 companies that downsized (reduced headcount or assets by at least 2%) between 1989 and 1993. Each company was studied for an eight-year period (the three years prior, the year of the downsizing, and the four years after). Found that the companies that downsized improved their operating performance relative to their industry and to a control group. This appears attributable to a lower cost of sales, although lower R&D and capital investment were also reported.
Fama, Eugene F. and Kenneth R. French., "The Cross-Section of Expected Stock Returns." Journal of Financial Studies, 47, 1992.
Divides stocks into 10 groups, ranked by price/book ratio, and reviews their returns from July 1963 through December 1990. The group with the lowest price/book ratio had an average monthly return of 1.65%, while the group with the highest had a 0.72% return. This effect was consistent across all deciles.
Feldman, Stanley, Peter Soyka, and Paul Ameer. "Does Improving a Firm's Environmental Management System and Environmental Performance Result in a Higher Stock Price?" Journal of Investing, Winter 1997.
Argues that superior environmental management should reduce financial risk and firm risk. Estimates betas for 330 of the firms in the S&P 500 stock index for 1980-1987 and 1988-1994. Finds that in a CAPM regression where the assumption of uncorrelated residuals has been relaxed, the firm's proprietary environmental rating models have explanatory power (p < 0.01).
Ferrari, Mark. "Historical Risk and Return of the Tobacco Industry" in Cogan, Douglas G. (ed.), Tobacco divestment and Fiduciary Responsibility: A Legal and Financial Analysis, Investor Responsibility Research Center, January 2000.
Using data from Investor Responsibility Research Center, the authors analyze the risk/return profile of seven major tobacco companies for the 1987-1998 time period. Constructing a capitalization-weighted composite, the authors find that tobacco companies outperformed the S&P 500 (19.6% annualized mean return vs. 17.7%), but note that the outperformance was concentrated in the 1987-1991 time period, and that Philip Morris accounted for most of the variation. The authors report that the Tobacco composite had a standard deviation of monthly returns of 22.5% vs. 15.1% over this time period [editor's note: although no Sharpe ratios are presented, it appears the tobacco composite would have underperformed the S&P 500 on a risk-adjusted basis using this metric]. Reports tracking error of the S&P 500 excluding tobacco stocks at 43 basis points.
Fields, M. Andrew and Phyllis Y. Keys. "The Emergence of Corporate Governance from Wall St. to Main St.: Outside Directors, Board Diversity, Earnings Management, and Managerial Incentives to Bear Risk" The Financial Review, February 2003.
Includes a review of the literature on board diversity and shareholder value through 2002. See also Carter, Simkins, and Simpson (2003).
"Recent corporate events have brought a heightened public awareness to corporate governance issues. Much work has been accomplished to date, but it is clear that much more remains to be done. This paper provides a review of empirical research in four relevant areas of corporate governance. Specifically, the paper provides an overview of (a) the role that outside directors play in monitoring managers, (b) the emerging literature on the impact of board diversity, (c) the existence of and incentives for corporate executives to manage firm earnings, and (d) managerial incentives to bear risk."
Fisher, Lawrence. "Some Studies of the Variability of Returns on Investments in Common Stocks." Journal of Business, 43, April 1970.
Freeman, John D. and Winchester, John. "How to Do the Right Thing: Lessons in Pension Fund Management and Socially Responsible Investing." Journal of Investing, Winter 1994.
Fridson, Martin S. "Early Signs of Trouble: Shareholder Responsibility." Financial Analysts Journal, May/June 1997.
The author, chief high-yield strategist at Merrill-Lynch, comments on institutional biases that may prevent dissemination of relevant quality-of-earnings information, particularly on the sell side, including:
"- [threat of] cutoff of access to management,
- accusations of colluding with short-sellers to trash the company's stock,
- ridicule by sales people whose competitors are racking up commissions in the supposedly tainted shares, and
- screaming fits by investment bankers who hope to be included in the company's next underwriting."
Friedman, Milton. "The Social Responsibility of Business is to Increase its Profits" New York Times Magazine, September 13, 1970.
Garz, Hendriz, Claudia Volk, and Martin Gilles. "More gain than pain - SRI: Sustainability pays off." WestLB Panmure, November 2002.
Analyzes the risk/return profile of the DJ STOXX Sustainability Index for the January 1999-October 2002 time period. "A deviation analysis shows that the portfolio has a large-cap, high-beta and contrarian bias." Concludes that even after adjusting for these and other factors, "it was possible to increase the average total return of the investment styles studied (or the negative reduced) by using an additional sustainability filter." Estimates risk-adjusted excess return (after adjusting for style, size, and market impacts) at an annualized 2.1%. However, the authors acknowledge the possibility of "classic ex-post selection bias" as the DJ STOXX Sustainability Index was only introduced in 2001.
Garz, Hendriz, Claudia Volk, and Martin Gilles. "From Economics to Sustainomics: SRI - Investment style with a future." WestLB Panmure, May 2002.
Strong overview piece on SRI also includes definitions and discussion of the relationship of social variables to financial performance, reviews the progress of SRI in Europe, and briefly analyzes the tracking error of the DJ STOXX Sustainability Index. The tracking error analysis uses BARRA tools and demonstrates that the tracking error of the DJ STOXX Sustainability Index vs. the DJ STOXX 50 (measured at 2.53%) can be reduced to 1.44% through optimization (see Dimtcheva et al (2002) for a similar analysis). Replicates the analysis for each of the 18 sector indices of the DJ STOXX600, finding particularly large gains from optimization in the Bank (3.7% to 2.7%), Media (11.8% to 10.3%), Telecom (10.3% to 6.8%), and Technology (8.5% to 6.5%) sectors. Very little improvement was achieved in other groups, however, notably Retail (9.5% to 9.3%), Autos (6.3% to 6.1%), and Food/Beverage (7.4% to 7.2%).
Geczy, Christopher C., Robert F. Stambaugh, and David Levin. "Investing in Socially Responsible Mutual Funds." Wharton School, Working Paper, May 2003.
Compares the performance of 35 socially screened U.S. equity funds (those with 3-years' performance history through 12/01) with 859 unscreened funds for the 1963-2001 time period.
Finds important differences between the screened and unscreened funds:
- Screened funds had an average expense ratio of 1.3% vs. 1.1% for unscreened ones.
- Screened funds had lower turnover, 81.5% average vs. 175.4%.
- Screened funds tended to be smaller, $150 mm average assets vs. $260 mm.
Uses a Bayesian approach to estimate performance impact under multiple performance attribution models and investor behavior assumptions. Finds that "that the costs of the SRI constraint can be as little as 1 or 2 basis points per month in certainty equivalent terms, but only when investors adhere rather strongly to a belief in the CAPM and maintain complete disbelief in manager skill [an indexing scenario - LK], or when their minimum allocation to SRI funds is small." Reports performance differences between optimized screened vs. optimized unscreened portfolios, with screened strategies underperforming unscreened ones "typically...at least 30 bps/month," under more aggressive strategies, e.g., when investors try to select outperforming managers on the basis of past risk-adjusted performance.
Does not provide a breakdown of performance differences over sub-periods (there were very few screened funds prior to 1985) or quantify the impact of differences in fund size. Much or all of the reported screened fund underperformance in the indexed scenario appears to be attributable to the screened funds' higher expense ratios.
This study received an Honorable Mention in the 2003 Moskowitz Prize competition.
Giles, Jennifer. "Does it pay to be green? An in depth examination of the correlation between environmental performance and economic benefits in three industry sectors." London School of Economics and Political Science, August 2003.
Gill, Amar. "Saints and Sinners: Who's Got Religion?" CLSA Emerging Markets report, April 2001.
Ranks 495 companies in 25 emerging markets based on corporate governance practices, using data from a questionnaire sent to CLSA (a Pac Rim brokerage firm) analysts. Finds that "corporate governance pays. For the 100 largest emerging markets companies, average US$ return over three years has been 127%, while the top [corporate governance] quartile more than doubled." This was supported by similar correlations in companies' reported financial results and balance sheet ratios.
Corporate governance rankings were "closely" correlated with price/book ratio. No formal statistics are given and academic risk adjustments (size, advertising intensity, R&D intensity) are not made, although some confirming sector analysis is presented.
Also notes that "in the top 100 of our universe for [corporate governance], South Africa, Hong Kong, Singapore, Mexico, and Brazil companies are well-represented - none came from Eastern Europe, Pakistan, Indonesia and Korea."
...
Godfrey, Paul C., Craig B. Merrill, and Jared M. Hansen. "Philanthropy, Corporate Social Responsibility and the Risk Management Perspective: An Empirical Test and Theoretical Extension." Working Paper, Brigham Young University. 2006.
This event study tests the following hypotheses, which are derived from theoretical work done by Godfrey (2005):
"H1. In the context of a negative event, declines in shareholder value will be smaller for firms with noteworthy engagement in philanthropy than for firms without such noteworthy engagement.
"H2. In the context of a negative event, declines in shareholder value will be smaller for firms with noteworthy engagement in other discretionary CSR activities than firms without such noteworthy engagement.
"H3a. Broader philanthropic participation will be associated with less negative abnormal returns.
"H3b. Broader participation in other CSRs will be associated with less negative abnormal returns."
The study examines the impact of 185 negative legal or regulatory actions on the stock prices of 160 U.S. firms covered in the KLD social research database. Rather than aggregate KLD scores as many researcher have done, the authors use the sub-components of the KLD Community Relations category, which are 1) cash giving in excess of 1.5% of trailing 3-year pretax earnings, 2) innovative giving programs, 3) support for education, and 4) support for affordable housing. These scores were lagged by one year to ensure that their publication pre-dated the events studied.
The event study analysis is conducted with a full awareness of the issues raised in McWilliams and Siegel (1997) - the original sample of 254 was reduced to 185 because of potential confounding events. All events occurred during the 1991-2002 time period. Control variables include economic sector (4 broad classifications developed for this study), firm size, and valuation (price/book ratio), all sourced from Compustat.
Finds that H1 is supported as philanthropic firms (those with high cash giving as a percentage of earnings) experienced significantly smaller price declines than their less-philanthropic counterparts, although the introduction of the size control variable pushed statistical significance above the 5% level. H2 appear "is not supported."
Moreover, "both H3a and H3b are rejected and the rejection of these two hypotheses represents an important finding. While noteworthy engagement in philanthropy provides firms with some measure of protection, noteworthy engagement in a broader range of philanthropic activities yields no additional benefit, at least among investors making judgments about the impact of negative events." [authors' emphasis]
...
Godfrey, Paul C. "The Relationship between Corporate Philanthropy and Shareholder Wealth: A risk management perspective." Academy of Management Review, 30(4). 2005.
This study provides supporting theoretical work for Godfrey, Merrill, and Hansen's (2006) event study of the impact of community involvement on market price reactions to negative events.
Gompers, Paul, Joy L. Ishii, Andrew Metrick. "Corporate Governance and Equity Prices." National Bureau of Economic Research, Working Paper 8449, 2001.
Examines the relationship between 24 corporate governance practices (such as cumulative voting and poison pill provisions) and stock price for 1,500 U.S. companies in the 1990s. The authors develop a variable, G, that measures the degree to which a firm's corporate governance policies favor management or shareholders (this is based on governance data compiled by the Investor Responsibility Research Center). Finds that firms with corporate governance practices favoring management tend to have lower price/book ratios. Also finds that firms in the bottom decile on this measure had statistically significant (p<.05) negative alphas when performance was explained used a four-factor attribution model - firms in the top decile had statistically significant positive alphas. Time period was September 1990 - December 1999.
Goodmacher, Chris. "The Effects of Ethical Screens on Socially Responsible Fund Performance." Working Paper, Oxford University, 2006.
Compares the monthly returns of 17 socially screened U.S. mutual funds. with a matched group of unscreened funds for the March 1997 - March 2006 time period. Funds were matched by category (Morningstar style classification), start date, and asset size. The social funds selected represented a diverse group of screening strategies, including the Amana Islamic funds and the Aquinas Funds, which invest according to Catholic Principles.
Finds that "the mean raw [excess] returns for the group of SRI funds are actually superior to those of the group of non-SRI funds," although this difference was not statistically significant.
On a risk-adjusted basis, both the SRI funds and non-SRI funds had negative Jensen's alphas (using the S&P 500 as the benchmark). The SRI funds performed slightly better, although the difference again was not statistically significant.
The non-SRI funds had higher Sharpe and Treynor ratios than the SRI funds, however.
Concludes that "if anything is remarkable, it is how little a difference the ethical restriction seems to make on a fund's performance. None of the characteristics of category, inception date, or asset size appear to make any difference in determining how an SRI fund does compared to its non-ethical peer."
Goodpaster, Kenneth. Dayton Hudson Corporation: Conscience and Control, Harvard Case Study, Harvard Business School Publishing Division, 1991.
Gorton, Gary, and Frank Schmid. "Class Struggle Inside the Firm: A Study of German Codetermination." Working Paper, Wharton School Center for Financial Institutions, University of Pennsylvania, August 2000.
Finds that returns on assets and price/book ratio were lower for German firms where employees had a relatively higher degree of influence in management of the firm during the 1989-1993 time period. This is a very large and carefully-prepared study, which can be downloaded from:
http://fic.wharton.upenn.edu/fic/papers/00/0036.pdf
Graves, Samuel B., and Sandra A. Waddock. "Beyond Built-to-Last... Stakeholder Relations in 'Built to Last' Companies. Working paper, 1999.
Analyzes the social records of companies featured in the book Built to Last. Finds that the 'Built to Last' companies had significantly better (p<.0001) employee relations and diversity ratings than a group of comparable non-'Built to Last' firms. The 'Built to Last' firms also had significantly higher stock returns (p<.0001, Compustat data).
Greeves, Lucy, and David Ladipo. "Added Values? Measuring the 'Value Relevance' of Sustainability Reporting." London: Imagination (GIC) and Lintstock, May 10, 2004.
The report compares the financial characteristics of 178 companies reporting under the Global Reporting Initiative (GRI) with 798 non-reporters. Finds that early adopters of the GRI had statistically significantly higher operating margins, lower betas, and slower revenue growth. In his Foreword to the report, GRI CEO Ernst Ligteringen comments that these findings "provide a solid analytical validation of a business case for non-financial reporting that has hitherto been necessarily anecdotal or intuitive."
Also includes four interesting case studies on companies participating in the GRI. One memorable quote: "We know what it can cost if we get it wrong; not in specific monetary terms but in the sense of...I remember there used to be a firm called Arthur Andersen."
Griffin and Mahon. "The Corporate Social Performance and Corporate Financial Performance Debate: Twenty-Five Years of Incomparable Research." Business & Society, March 1997.
Grinold, Richard. "Is Beta Dead Again?" Barra Newsletter, March/April 1992.
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