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Market Reactions to Increased Reliability of Sustainability Information

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Abstract

This article investigates whether investors consider the reliability of companies’ sustainability information when determining the companies’ market value. Specifically, we examine market reactions (in terms of abnormal returns) to events that increase the reliability of companies’ sustainability information but do not provide markets with additional sustainability information. Controlling for competing effects, we regard companies’ additions to an internationally important sustainability index as such events and consider possible determinants for market reactions. Our results suggest that first, investors take into account the reliability of sustainability information when determining the market value of a company and second, the benefits of increased reliability of sustainability information vary cross-sectionally. More specifically, companies that carry higher risks for investors (e.g., higher systematic investment risk, higher financial leverage, and higher levels of opportunistic management behavior) react more strongly to an increase in the reliability of sustainability information. Finally, we show that the benefits of an increase in the reliability of sustainability information are higher in times of economic uncertainty (e.g., during economic downturns and generally high stock price volatilities).

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Notes

  1. On August 18, 2010, the DJSI STOXX was renamed the “Dow Jones Sustainability Europe Index” (DJSI Europe).

  2. Please note that our arguments and empirical analyses refer to investors’ behavior, which is influenced by the investors’ perceptions of the reliability of sustainability information and not directly by the characteristics of the sustainability information itself.

  3. In detail: 151 companies were listed when the DJSI STOXX was launched on October 15, 2001. In annual reviews of the DJSI STOXX composition, the following numbers of companies were added to the index: 2002: 57, 2003: 25, 2004: 26, 2005: 25, 2006: 26, 2007: 17, and 2008: 30. In total, 168 companies were deleted from the index over the examination period (2001–2008).

  4. In addition to these data requirements, we assume zero daily abnormal returns when no data are available in the event window.

  5. To avoid further eliminations for our regression analyses, we collect by hand single missing data items to directly calculate discretionary accruals for 59 companies from the annual consolidated reports in accordance with the definition of the Thomson Financial Worldscope database.

  6. We also consider two modifications of this event-study approach. First, we allow for a gap of 10 trading days between the estimation window and the respective event window. Second, we re-perform our analyses using a two-split event window (50 trading days before and after the event window). Both modifications lead to quite identical findings, for the overall market reaction as well as for the cross-sectional analyses.

  7. Unlike Consolandi et al. (2009), we do not analyze the effects on and after the day of the effective change of the index composition.

  8. For an alternative interpretation of the R 2 measure, see Morck et al. (2000) and Durnev et al. (2003, 2004).

  9. The event study-specific test statistics developed by Brown and Warner (1980) as well as by Corrado (1989) explicitly take stock returns over the estimation period into account. While the metric proposed by Brown and Warner (1985) is a parametric test statistic, the metric developed by Corrado (1989) is a rank-based non-parametric test statistic. For a discussion of the statistical advantages and attributes of these specific test statistics, see Brown and Warner (1980, 1985) and Corrado and Zivney (1992), Corrado and Truong (2008).

  10. In this paragraph: ***p < 0.01, **p < 0.05, and *p < 0.1.

  11. We note that CAR i and the interaction term BETA i  · MKTVOLA i is related by construction. Thus, we cannot ultimately rule out that these findings are technically driven by the definition of variables.

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  1. Ruhr-University Bochum, Universitätsstraße 150, 44801, Bochum, Germany

    Julia Lackmann, Jürgen Ernstberger & Michael Stich

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  1. Julia Lackmann
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  2. Jürgen Ernstberger
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Correspondence to Jürgen Ernstberger.

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Lackmann, J., Ernstberger, J. & Stich, M. Market Reactions to Increased Reliability of Sustainability Information. J Bus Ethics 107, 111–128 (2012). https://doi.org/10.1007/s10551-011-1026-3

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