A Learning Curve of the Market: Chasing Alpha of Socially Responsible Firms

37 Pages Posted: 16 Aug 2018 Last revised: 22 Oct 2018

See all articles by Zhichuan Frank Li

Zhichuan Frank Li

University of Western Ontario - Ivey School of Business

Dylan Minor

Anderson School of Management (UCLA)

Jun Wang

University of Western Ontario - DAN Department of Management and Organizational Studies

Chong Yu

University of Western Ontario - Department of Economics

Date Written: October 21, 2018

Abstract

This paper explores stock market reactions to corporate social performance. We find that a value-weighted portfolio based on the list of “100 Best CSR companies in the world” published by Reputation Institute yields annual abnormal returns of 2.74% and 1.98%, by controlling for Carhart four factors and Fama French five factors, respectively. Moreover, such abnormal returns decrease as time goes, especially after the CSR lists were first published in 2013. The paper also indicates that companies with better social performance are more likely to have positive earnings surprises, and their returns are sensitive to earnings surprises. The results of this paper have three implications. First, CSR reputation can positively contribute to a firm’s short-term superior equity performance (i.e., factor-adjusted abnormal returns). Second, the CSR lists help the market correct mispricing of intangibles such as CSR reputation; the abnormal returns decrease as the market gradually learns about the value of firms’ social performance. Lastly, this paper contributes to the socially responsible investing (SRI) screens, a guide for investors who would like to do well by doing good.

Keywords: Corporate Social Responsibility, Intangibles, Market Efficiency, Earnings Surprises, Abnormal Returns

JEL Classification: G1, M1, E2

Suggested Citation

Li, Zhichuan Frank and Minor, Dylan and Wang, Jun and Yu, Chong, A Learning Curve of the Market: Chasing Alpha of Socially Responsible Firms (October 21, 2018). Available at SSRN: https://ssrn.com/abstract=3224796 or http://dx.doi.org/10.2139/ssrn.3224796

Zhichuan Frank Li (Contact Author)

University of Western Ontario - Ivey School of Business ( email )

1151 Richmond Street North
London Ontario, Ontario N6A 3K7
Canada

Dylan Minor

Anderson School of Management (UCLA) ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Jun Wang

University of Western Ontario - DAN Department of Management and Organizational Studies ( email )

Social Science Centre
London, Ontario N6A 5C2
Canada

Chong Yu

University of Western Ontario - Department of Economics ( email )

Social Science Centre, Room 4071
London, Ontario N6A 5C2
Canada

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