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Stakeholder Relations and Stock Returns: On Errors in Expectations and Learning

49 Pages Posted: 23 Feb 2013 Last revised: 19 Oct 2014

Arian C.T. Borgers

Maastricht University

Jeroen Derwall

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

TIAS School for Business and Society

Date Written: March 1, 2013

Abstract

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

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

Arian Borgers

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

Jeroen Derwall (Contact Author)

Maastricht University - European Centre for Corporate Engagement ( email )

FEBA
Tongersestraat 53
Maastricht, Limburg 6200MD
Netherlands

HOME PAGE: http://www.corporate-engagement.com/

Tilburg University - School of Economics ( email )

P.O. Box 90153
NL-5000 LE Tilburg, Brabant
Netherlands

HOME PAGE: http://www.tilburguniversity.nl/webwijs/show/?uid=j.m.m.derwall

Maastricht University - Department of Finance ( email )

Maastricht, 6200 MD
Netherlands

HOME PAGE: http://www.fdewb.unimaas.nl/finance/?page=member&id=175

Kees Koedijk

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

Jenke Ter Horst

TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

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