Market reaction to firms' investments in CSR projects.
| Autor | Cherkasova, Victoria |
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Introduction
The relevance of the research subject is determined by the paradigm of new socially responsible investment, which has been evolving in recent decades (Aouadi and Marsat, 2018; Galema et al., 2008). This means that investors expect not only profitability but also suggest some positive social changes. Now socially responsible investment is no longer only in some single cases, but a steadily growing market segment (Quazi and O'Brien, 2000; Graafland et al., 2012).
Nowadays, the integrated report, which discloses non-financial information, including CSR initiatives, shows how well firms operate in their institutional environment. This reporting is an additional source of information for investors and can help them to make a final decision (Biddle et al., 2009). Companies which do not invest in CSR projects might lose benefits related to CSR practice. While awareness of CSR performance is growing yearly, it should be examined whether it can generate a greater value than traditional expenditures of companies operating in innovative industries (Mithani, 2017; Chang et al., 2015).
The goal of the paper is to evaluate the influence of investments in CSR on the stock excess return over a defined benchmark.
This issue is widely studied in the literature. Specifically, the relationship between CSR success and firm valuation is intensely discussed (Auer and Schuhmacher, 2016; Di Giuli and Kostovetsky, 2014; Dimson et al., 2015; Edmans, 2011; Nollet et al., 2016; Lins et al., 2017; Torre et al., 2020). Investments in CSR can be motivated by the ability to compete in the industry where a firm operates. On the one hand, when peer companies actively address any kinds of CSR concerns, investors can conclude that they have lower risks and hence should be priced higher than companies non-involved in CSR. Onthe other hand, CSR entails the redistribution of wealth from shareholders to stakeholders which in turn can be the source of lower equity returns and make a firm an acquisition target (Deng et al., 2013; Margolis and Walsh, 2003). There is no single explanation of whether CSR-related activities are significant in the deviation of stock return from a benchmark. Although some research gives evidence of a positive association between CSR ratings and firm valuation, there is a debate on how this value is expressed in share prices even if researchers agree that CSR success induces large value (Margolis and Walsh, 2003; Moore, 2001). As a result, reconciling the conflicting results on CSR characteristics and value measures remains a central topic for the research and creates a new branch of empirical studies (Gillan et al., 2021).
This study contributes to the existing literature in several respects. First, it estimates an additive value of CSR which is practiced by companies for many years and is well-understood by investors (Nollet et al., 2016). Secondly, we examine companies from different markets (Asia, European Union and North America). The empirical base of the study includes 951 firms listed in Asia, North America and Europe. Innovative industries are chosen because ESG investment is a particularly relevant factor for them. Thirdly, we use a more advanced methodology: we estimate not only linear but also non-linear dependence by adding a U-curve for each region. Fourth, we evaluate lagged CSR performance (d.ESG) based on the methodology of Zhang and Rajagopalan (2010) calculating each year's industry average metrics in each considered region and further calculating adjusted terms and their difference.
Our research and improved methodology provide both theoretical and practical implications for investing in CSR (Akisik and Gal, 2014). First, it extends the study of agency and reputation theory in terms of the impact ofCSR investment on the firm's financial performance. Second, from a practical point of view, our findings can help investors to choose the most appropriate investment strategy, considering the added value of CSR.
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Literature review
2.1 Theoretical background of CSR investments
The introduction of socially oriented practices into the corporate culture of a firm is quite expensive, complicated and time-consuming. There are several corporate finance theories that explain the impact of CSR investment on the financial performance of companies (Cronqvist et al., 2009; Kim et al., 2017).
Relying on the agency theory, a firm's insiders, such as executives and stockholders, may tend to heavily invest in CSR to benefit from their image at the expense of outside stockholders. Insiders' improved prestige does not increase the capital of other shareholders. As a result, CSR can be a point of controversy of interest for different shareholders (Barnea and Rubin, 2010; Cronqvist et al., 2009). CSR activities might be the cause of increased costs because of agency issues and inadequate capital distribution, putting the business in jeopardy. Although CSR may help to resolve possible disputes among different stakeholders, it also might cause tensions among them (Barnea and Rubin, 2010).
Financial theory regards value maximization which results in wealth for shareholders to be the firm's aim (Bouteska and Regaieg, 2018). As a result, CSR practices that favour stakeholders and raise shareholder capital are in line with a firm's mission. If a firm invests in the main types of CSR (environmental, social and government), most often this is a signal of a stable firm's financial condition, but further efforts are needed to reduce information asymmetry (Conte et al, 2022).
Publication of non-financial statements has a positive effect on the firm's transparency. Such informational openness simplifies for the firm the process of finding additional investments and entering new markets (Akisik and Gal, 2014).
Another theory explaining the impact of CSR investment on the firm's financial performance is the theory of reputation, according to which companies integrate social and environmental strategies into the firm's business operations (commercial and business aspects) and form a higher firm's reputation in the market (Garcia, 2021). According to the findings of Xu et al. (2014), CSR has a strong beneficial impact on corporate reputation and brand credibility. This theory has been tested empirically several times, for example, in a study (Song et al., 2020; Mongrut et al, 2021) which reveals the positive impact of information disclosure about corporate social responsibility (CSR) on the reputation of a firm, which, in its turn, significantly contributes to a firm's financial performance. Madden et al. (2012) suggest that the disclosure of socially responsible information about the firm may provoke the "halo effect", which means that people are willing to pay more for a well-known brand.
The conceptual analysis shows that most studies focus on empirical results. The theories described above are among the fundamental ones in explaining the impact of ESG investing and the firm's financial performance.
2.2 Market valuation of CSR investments
Most scholars show that CSR is net beneficial for businesses (Deng etal, 2013; Margolis etal, 2009). Some researchers find a negative association between CSR and corporate financial performance (Margolis and Walsh, 2003), while there is also evidence of a neutral relationship between them (Moore, 2001).
We limited the firm's financial performance to the profitability of shares. In the literature, firm's market value is assessed using an excess stock return dependent variable. According to a large body of research, CSR investing provides firms engaged in such practices with a positive stock return. Di Giuli and Kostovetsky (2014) discovered a strong negative association between variations in firms' ESG ratings and variations in stock return. The authors argue that if companies extend their CSR practices, their future stock performance suffers. Stock undervaluation is a clear market response to CSR with a lag arising from investor delays in studying CSR policy modifications.
Masulis and Reza (2015) argue that the equity market responds badly to the news of corporate donations initiatives, implying that investors do not support CSR. Servaes and Tamayo (2013) discover a relationship between CSR characteristics and firm's valuation that is dependent on the amount of marketing. Researchers suggest that if companies do not advertise, CSR investments have either a negative or insignificant effect on their valuation. Other researchers provide evidence of a positive correlation between stock returns to make inferences about the beneficial effects of CSR. Dimson et al. (2015), for instance, find that effective shareholder collaboration resolves CSR-related issues results in positive returns.
Edmans (2011) claims that CSR activities generate value as the relationship between returns and CSR output is positive. The benefit of introducing the CSR practices is the increase in firm's intangible assets, which is due to a positive image, customer loyalty and popularization of a firm's brand (Pagin et al, 2021).
Lins et al. (2017) explored the success of CSR companies, notably during a crisis and low confidence in businesses. During times of low confidence, they find that companies with CSR scores have better operational results and obtain greater yields on stock than other companies.
There is no consensus in the literature on whether CSR investments payoff in a certain region or not. For instance, Auer and Schuhmacher (2016) suggest that the selection of stocks with high or low CSR scores does not significantly improve or diminish the investment efficiency relative to the benchmarks in North America and Europe. The same result refers to Asian equities. Using a fixed-effect model for analyzing panel data, Torre et al. (2020) show that the CSR scores of companies listed on the European exchange are significant in terms of their returns. Also, greater CSR policies are not rewarded in developing...
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