Does the Indian Stock Market Encourage Socially Responsible Companies?

Abstract

The primary purpose of this paper is to examine whether socially responsible companies are performing better than general companies in terms of price discovery and returns in the stock markets. Paradigm shift has taken place over time which has led to the emergence of conceptual framework of Corporate Responsibility which provides holistic approach towards Governance, Corporate Social Responsibility and Environmental Accountability. We expect that social responsibility has a distinct and positive effect on the security prices in the stock market.

We have taken ESG index as proxy of socially responsible companies whereas NIFTY index has been taken as the proxy of general companies to examine the price discovery process in both the indices in terms of growth rate as a whole and during breaks. For this we have conducted semi-log regression analysis. We also conducted paired samples t-test to check whether there is significant difference between the returns of two indices or not.

We observed that price discovery process is better in ESG index than NIFTY index. The returns of ESG index are also more. This implies that socially responsible companies are outperforming general companies both in terms of price discovery and returns for the whole period and for crisis and post-crisis period. We arrived at conclusion that due to crisis the investors have become sensitised to social responsibility and have begun to absorb and internalise the behaviour of socially responsible companies.

Keywords: Business Ethics, Corporate Responsibility, Corporate Social Responsibility, Efficient Market Hypothesis, ESG Index, NIFTY Index, Price Discovery Process

JEL Classification: D02, D21, D64, G14, M14