The Relationship between Social Rating Factors and Stock Returns

Abstract:     
This paper examines the relationship between social rating factors and stock returns of US listed companies. We extend previous research by utilising stock level data to consider the relationship between social ratings and financial performance. This study provides evidence of a positive relationship between a range of social rating criteria and financial performance measures. Using a multifactor framework, a positive relationship with stock return is apparent for total ratings, environmental ratings, employment conditions and community relations. A generally positive relationship is found between higher social ratings and other measures of financial performance, namely market to book value, return on assets and return on equity. In comparison to the Brammer et al. 2006 findings, this study shows that higher stakeholder ratings on the whole are positively related to stock return particularly for overall ratings and environmental ratings. The results are consistent with the findings of Derwall et al. (2005).

JEL Classifications: G11, G34

Working Paper Series