Skip to main content
SpringerLink
Log in

Corporate sustainability in asset pricing models and mutual funds performance measurement

  • Published:
Financial Markets and Portfolio Management Aims and scope Submit manuscript

Abstract

This study explores whether corporate sustainability is a relevant factor in multifactor asset pricing models. It contributes to the literature on asset pricing, as well as to the literature that examines how sustainability impacts capital markets, by constructing a new factor that captures differences in the returns of sustainable and non-sustainable firms. Specifically, it examines whether an additional sustainability factor has explanatory power in asset pricing models that include size, book-to-market equity, and momentum factors. This research has practical implications for the performance measurement of portfolios and mutual funds that are managed in accordance with sustainability criteria in that it disentangles general stock-picking skills from the differences in returns between sustainable and non-sustainable stocks.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4

Similar content being viewed by others

Notes

  1. The portfolio return of the fourth quintile of GOV cannot be calculated due to the aforementioned lack of past variability in this score (seepage 9).

References

  • Areal, N., Cortez, M., Silva, F.: The conditional performance of US mutual funds over different market regimes: do different types of ethical screens matter? Financ. Markets Portf. Manag. 27(4), 397–429 (2013)

    Article  Google Scholar 

  • Arx, U. van., Ziegler, A.: The effect of CSR on stock performance: New evidence for the USA and Europe (2008). Accessed 08 Sept 2013. https://doi.org/10.2139/ssrn.1102528

  • Banz, R.W.: The relationship between return and market value of common stocks. J. Financ. Econ. 9(1), 3–18 (1981)

    Article  Google Scholar 

  • Baron, D.P., Harjoto, M.A., Jo, H.: The economics and politics of corporate social performance. Bus. Politics 13(2), 1–48 (2011)

    Article  Google Scholar 

  • Bauer, R., Koedijk, K., Otten, R.: International evidence on ethical mutual fund performance and investment style. J. Bank. Financ. 29(7), 1751–1767 (2005)

    Article  Google Scholar 

  • Capelle-Blancard, G., Monjon, S.: The performance of socially responsible funds: Does the screening process matter? European Financial Management (online first) (2012). https://doi.org/10.1111/j.1468-036X.2012.00643.x

    Article  Google Scholar 

  • Carhart, M.M.: On persistence in mutual fund performance. J. Financ. 52(1), 57–82 (1997)

    Article  Google Scholar 

  • Chegut, A., Schenk, H., Scholtens, B.: Assessing SRI fund performance research: Best practices in empirical research. Sustain. Dev. 19(2), 77–94 (2011)

    Article  Google Scholar 

  • Del Guercio, D., Reuter, J.: Mutual fund performance and the incentive to generate alpha. Accessed 12 March 2013 (Journal of Finance, forthcoming). https://doi.org/papers.ssrn.com/sol3/papers.cfm?abstract_id=1935109

  • Derwall, J., Guenster, N., Bauer, R., Koedijk, K.: The eco-efficiency premium puzzle. Financ. Anal. J. 61(2), 51–63 (2005)

    Article  Google Scholar 

  • Derwall, J., Koedijk, K., ter Horst, J.R.: A tale of values-driven and profit-seeking social investors. J. Bank. Financ. 35(8), 2137–2147 (2011)

    Article  Google Scholar 

  • Dhaliwal, D.S., Li, O.Z., Tsang, A., Yang, G.Y.: Voluntary nonfinancial disclosure and the cost of equity capital: the initiation of corporate social responsibility reporting. Account. Rev. 86(1), 59–100 (2011)

    Article  Google Scholar 

  • van Dijk, M.A.: Is size dead? A review of the size effect in equity returns. J. Bank. Financ. 35(12), 3263–3274 (2011)

    Article  Google Scholar 

  • Eccles, R., Iannou, I., Serafeim, G.: The impact of corporate culture of sustainability on corporate behavior and performance (2012). Accessed 18 Sept 2012. https://doi.org/www.hbs.edu/faculty/Publication%20Files/12-035.pdf

  • El Ghoul, S., Guedhami, O., Kwok, C.C.Y., Mishra, D.R.: Does corporate social responsibility affect the cost of capital? J. Bank. Financ. 35(9), 2388–2406 (2011)

    Article  Google Scholar 

  • Elton, E.J.: Presidential address: expected return, realized return, and asset pricing tests. J. Financ. 54(4), 1199–1220 (1999)

    Article  Google Scholar 

  • Fama, E.F., French, K.R.: The cross-section of expected stock returns. J. Financ. 47(2), 427–465 (1992)

    Article  Google Scholar 

  • Fama, E.F., French, K.R.: Common risk factors in the returns on stocks and bonds. J. Financ. Econ. 33(1), (1993).

    Article  Google Scholar 

  • Fama, E.F., French, K.R.: Multifactor explanations of asset pricing anomalies. J. Financ. 51(1), 55–84 (1996)

    Article  Google Scholar 

  • Fama, E.F., French, K.R.: Value versus growth: the international evidence. J. Financ. 53(6), 1975–1999 (1998)

    Article  Google Scholar 

  • Fama, E.F., French, K.R.: Luck versus skill in the cross-section of mutual fund returns. J. Financ. 65(5), 1915–1947 (2010)

    Article  Google Scholar 

  • Fama, E.F., MacBeth, J.D.: Risk, return, and equilibrium: empirical tests. J. Polit. Econ. 81(3), 607–636 (1973)

    Article  Google Scholar 

  • Forum for Sustainable and Responsible Investment, 2013a. SRI basics (2013a). Accessed 17 Decem 2013. https://doi.org/www.ussif.org/sribasics

  • Forum for Sustainable and Responsible Investment. Sustainable & responsible mutual fund chart (2013b). Accessed 25 Decem 2013. https://doi.org/charts.ussif.org/mfpc/?

  • French, K.R.: Current research returns (2013a). Accessed 18 Feb 2013. https://doi.org/mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

  • French, K.R.: Detail for monthly momentum factor (2013b). Accessed 18 Feb 2013. https://doi.org/mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/det_mom_factor.html

  • Galema, R., Plantinga, A., Scholtens, B.: The stocks at stake: return and risk in socially responsible investment. J. Bank. Financ. 32(12), 2646–2654 (2008)

    Article  Google Scholar 

  • Gibbons, M.R., Ross, S.A., Shanken, J.: A test of the efficiency of a given portfolio. Econometrica 57(5), 1121–1152 (1989)

    Article  Google Scholar 

  • Godfrey, P.C.: The relationship between corporate philanthropy and shareholder wealth: a risk management perspective. Acad. Manag. Rev. 30(4), 777–798 (2005)

    Article  Google Scholar 

  • Hong, H., Kacperczyk, M.: The price of sin: the effects of social norms on markets. J. Financ. Econ. 93(1), 15–36 (2009)

    Article  Google Scholar 

  • Hou, K., Dijk, M., Zhang, Y.: The implied cost of capital: a new approach. J. Account. Econ. 53(3), 504–526 (2012)

    Article  Google Scholar 

  • Jegadeesh, N., Titman, S.: Returns to buying winners and selling losers: implications for stock market efficiency. J. Financ. 48(1), 65–91 (1993)

    Article  Google Scholar 

  • Kempf, A., Osthoff, P.: The effect of socially responsible investing on portfolio performance. Eur. Financ. Manag. 13(5), 908–922 (2007)

    Article  Google Scholar 

  • Kempf, A., Osthoff, P.: SRI funds: Nomen est omen. J. Bus. Financ. Account. 35(9–10), 1276–1294 (2008)

    Article  Google Scholar 

  • Klein, C., Stellner, C.: The systematic risk of corporate bonds: default risk, term risk, and index choice. Financ. Mark. Portf. Manag. 28(1), 29–61 (2014)

    Article  Google Scholar 

  • Kotchen, M., Moon, J.J.: Corporate social responsibility for irresponsibility. B.E. J. Econ. Anal. Policy 12 (1) (2012). https://doi.org/10.1515/1935-1682.3308

  • Lintner, J.: Security prices, risk, and maximal gains from diversification. J. Financ. 20(4), 587–615 (1965)

    Google Scholar 

  • Liu, M., Liu, Q., Ma, T.: The 52-week high momentum strategy in international stock markets. J. Int. Money Financ. 30(1), 180–204 (2011)

    Article  Google Scholar 

  • Lundblad, C.: The risk return tradeoff in the long run: 1836–2003. J. Financ. Econ. 85(1), 123–150 (2007)

    Article  Google Scholar 

  • Luo, X., Bhattacharya, C.B.: The debate over doing good: corporate social performance, strategic marketing levers, and firm-idiosyncratic risk. J. Mark. 73(6), 198–213 (2009)

    Article  Google Scholar 

  • Margolis, J.D., Elfenbein, H.A., Walsh, J.P.: Does it pay to be good...and does it matter? A meta-analysis of the relationship between corporate social and financial performance (2009). Accessed 10 March 2013. https://doi.org/papers.ssrn.com/sol3/papers.cfm?abstract_id=1866371

  • Mattingly, J.E., Berman, S.L.: Measurement of corporate social action. Bus. Soc. 45(1), 20–46 (2006)

    Article  Google Scholar 

  • Mossin, J.: Equilibrium in a capital asset market. Econometrica 34(4), 768–783 (1966)

    Article  Google Scholar 

  • Orlitzky, M., Benjamin, J.D.: Corporate social performance and firm risk: a meta-analytic review. Bus. Soc. 40(4), 369–396 (2001)

    Article  Google Scholar 

  • Orlitzky, M., Schmidt, F.L., Rynes, S.L.: Corporate social and financial performance: a meta-analysis. Org. Stud. 24(3), 403–441 (2003)

    Article  Google Scholar 

  • Petkova, R.: Do the Fama-French factors proxy for innovations in predictive variables? J. Financ. 61(2), 581–612 (2006)

    Article  Google Scholar 

  • Ramasamy, B., Ting, H., Yeung, M.: Does it pay to be good in developing countries? The relationship between CSR and financial performance in Malaysia. Asi. Acad. Manag. J. Account. Financ. 3(1), 21–36 (2007)

    Google Scholar 

  • Reinganum, M.R.: Misspecification of capital asset pricing: empirical anomalies based on earnings yields and market values. J. Financ. Econ. 9(1), 19–46 (1981)

    Article  Google Scholar 

  • Reinganum, M.R.: The anomalous stock market behavior of small firms in January: empirical tests for tax-loss selling effects. J. Financ. Econ. 12(1), 89–104 (1983)

    Article  Google Scholar 

  • Renneboog, L., Ter Horst, J., Zhang, C.: The price of ethics and stakeholder governance: the performance of socially responsible mutual funds. J. Corpor. Financ. 14(3), 302–322 (2008)

    Article  Google Scholar 

  • Roll, R.: A possible explanation of the small firm effect. J. Financ. 36(4), 879–888 (1981a)

    Article  Google Scholar 

  • Roll, R.: Was ist das? The turn of the year effect and the return premium of small firms. J. Portf. Manag. 9(2), 18–28 (1981b)

    Article  Google Scholar 

  • Schröder, M.: The performance of socially responsible investments: investment funds and indices. Financ. Mark. Portf. Manag. 18(2), 122–142 (2004)

    Article  Google Scholar 

  • Sharpe, W.F.: A simplified model for portfolio analysis. Manag. Sci. 9(2), 277–293 (1963)

    Article  Google Scholar 

  • Sharpe, W.F.: Capital asset prices: a theory of market equilibrium under conditions of risk. J. Financ. 19(3), 425–442 (1964)

    Google Scholar 

  • Wallmeier, M., Tauscher, K.: A note on the impact of portfolio overlapping in test of the Fama and French three-factor model (2012). Accessed 10 March 2013. https://doi.org/papers.ssrn.com/sol3/papers.cfm?abstract_id=2169398

  • Xiao, Y., Faff, R., Gharghori, P., Lee, D.: An empirical study of the world price of sustainability. J. Bus. Ethics 114(2), 297–310 (2013)

    Article  Google Scholar 

  • Ziegler, A., Rennings, K., Schroder, M.: The effect of environmental and social performance on the stock. Environ. Resour. Econ. 37, 661–680 (2007)

    Article  Google Scholar 

Download references

Acknowledgments

We thank the anonymous referee for his/her positive appreciation of our work and very useful comments. We gratefully acknowledge the financial assistance provided by the David O’Brien Centre for Sustainable Enterprise at Concordia University and the German Academic Exchange Service (DAAD).

Author information

Authors and Affiliations

  1. Department of Finance, John Molson School of Business (Concordia University), Montreal, QC, Canada

    Thomas J. Walker

  2. Department Business Administration, Economics and Law (Accounting and Corporate Governance), University of Oldenburg, Oldenburg, Germany

    Kerstin Lopatta & Thomas Kaspereit

Authors
  1. Thomas J. Walker
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Kerstin Lopatta
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Thomas Kaspereit
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding authors

Correspondence to Thomas J. Walker or Thomas Kaspereit.

Appendix

Appendix

Table 10 Categories of strengths and concerns in the qualitative MSCI KLD rating
Full size table
Table 11 Results of the one-sample tests (sustainability scores based on strengths only)
Full size table
Table 12 Results of the one-sample tests (Sustainability Scores based on concerns only)
Full size table
Table 13 Results of the split-sample tests (sustainability scores based on strengths only)
Full size table
Table 14 Results of the split-sample tests (sustainability scores based on concerns only)
Full size table
Table 15 Names of mutual funds with sustainability screens: names and tickers (continued on next page)
Full size table
Fig. 5
figure 5

Scatter diagrams for SUS score and firm size/book-to-market equity

Full size image

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Walker, T.J., Lopatta, K. & Kaspereit, T. Corporate sustainability in asset pricing models and mutual funds performance measurement. Financ Mark Portf Manag 28, 363–407 (2014). https://doi.org/10.1007/s11408-014-0237-x

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11408-014-0237-x

Keywords

JEL Classification

Search

Navigation