Stakeholder Relations and Stock Returns: On Errors in Expectations and Learning
Arian C.T. Borgers
Maastricht University - European Centre for Corporate Engagement; Tilburg University - School of Economics; Maastricht University - Department of Finance
Kees C. G. Koedijk
Tilburg University - Department of Finance
Jenke ter Horst
Tilburg University - Center for Economic Research (CentER)
March 1, 2013
UCD & CalPERS Sustainability & Finance Symposium 2013
A significant number of institutional investors publicly state the belief that corporate stakeholder relations are associated with firm value in a manner that the financial market fails to understand. We investigate whether stakeholder information predicted risk-adjusted returns due to errors in investors’ expectations and ultimately ceased to do so as attention for such information increased. We build a stakeholder-relations index (SI) for a wide range of U.S. firms over the period 1992-2009 and provide evidence that the SI explained errors in investors’ expectations about firms’ future earnings. The SI was positively associated with long-term risk-adjusted returns, earnings announcement returns, and errors in analysts’ earnings forecasts over the period 1992-2004. However, as attention for stakeholder issues became more widespread, subsequently, these relationships diminished considerably. The results are consistent with the idea that increased investor attention for stakeholder issues eventually eliminates mispricing.
Number of Pages in PDF File: 49
Keywords: Socially Responsible Investing, ESG, Stakeholders, Stock Return, Errors in Expectations, Learning
JEL Classification: G10, G12, G14
Date posted: February 23, 2013 ; Last revised: October 19, 2014
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