Patience Pays Off - Financial Long-Term Benefits of Sustainable Management Decisions

Abstract

This paper quantifies the long-term financial effects of strong (weak) corporate social performance (CSP). We contribute to the literature by seeking such effects on a broad range, i.e. different CSP dimensions which are depicted by so-called ESGEc scores - an acronym for environment, social, governance, and economic - and for 18 sub-scores of these four dimensions. Our central strategy is to analyze the time structure of abnormal firm returns dependent on CSP rating data. We find positive mid- and long-term effects in all four dimensions of up to 6.82% abnormal return with respect to a change from the lowest to the highest possible ESGEc score. These effects are robust to controlling for common risk factors, accounting data, and industry fixed effects. We identify market inefficiencies for certain sub-scores and verify that the economic channel for the appreciation of strong CSP stocks are both additional cash flows and additional demand during our sample period. Thus, investments in firms with a high CSP are profitable in the long run.

Keywords: Investment, Corporate Social Performance, BHAR, Abnormal Returns, Market Efficiency

JEL Classification: G14, G30, G11, Q56