How Much Does It Pay to Be Socially Responsible?

Abstract

How much does it pay to be socially responsible? In order to answer this question, we combined two components from two different streams of business scholarship. We employed the KLD SOCRATES Social Ratings database as our measure of corporate social performance (CSP), and we applied Carhart’s four-factor model, a standard extension of the Fama-French 3-factor model in the field of finance, to quantify the relationship between CSP and financial performance. Our results show that, for large US corporations belonging to the S&P 500 Index, the stocks of companies in the top CSP quantile outperform those of companies in the bottom CSP quantile by as much as 6.24 percentage points annually for years 1991 through 2006, after adjusting for standard risk factors such as market risk, size, book to market ratio, and stock momentum. For a company in the S&P 500 Index with average market capitalization, this translates to $1.28 billion in additional shareholder wealth.