49 Pages Posted: 23 Feb 2013 Last revised: 19 Oct 2014
Date Written: March 1, 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.
Keywords: Socially Responsible Investing, ESG, Stakeholders, Stock Return, Errors in Expectations, Learning
JEL Classification: G10, G12, G14
Suggested Citation: Suggested Citation
Borgers, Arian C.T. and Derwall, Jeroen and Koedijk, Kees C. G. and ter Horst, Jenke, Stakeholder Relations and Stock Returns: On Errors in Expectations and Learning (March 1, 2013). UCD & CalPERS Sustainability & Finance Symposium 2013. Available at SSRN: https://ssrn.com/abstract=2222897 or http://dx.doi.org/10.2139/ssrn.2222897