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Do Announcements About Corporate Social Responsibility Create or Destroy Shareholder Wealth? Evidence from the UK

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Abstract

This paper investigates the stock market reaction to the announcement that a firm has been included in the UK FTSE4Good index of socially responsible firms. We use the announcement of firm inclusion in the index to estimate the stock market reaction to a firm being classified as socially responsible. This is an important test of whether investors view the undertaking of socially responsible activities by firms as a value increasing or value decreasing initiative by management. We do not find strong evidence in favour of a positive market reaction. However, there is a large cross-sectional variation in the market reaction to this announcement. Investors appear to be reacting to this event and there are a number of firm characteristics that are well-established proxies for CSR that can explain the market reaction.

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Notes

  1. See Margolis and Walsh 2003 for a comprehensive review of the literature on the market based and accounting based performance of socially responsible firms.

  2. While Curran and Moran (2007) have also analysed the stock market reaction to inclusion in FTSE4Good, our analysis is much more extensive, because it considers a substantially larger number of events and because we also analyse the determinants of the market reaction. Curran and Moran report the market reaction to a sample of 50 inclusions.

  3. Recent work has also considered whether the CSR activity of corporations is reflected in corporate bond yields (Menz 2010).

  4. The following section is a summary of the inclusion criteria of the FTSE4Good index. Source: www.ftse.com.

  5. The FTSE Developed Index is a global index and is used for international FTSE4Good indexes. Our analysis only considers the UK FTSE4Good index as this is the longest lived index.

  6. Source: BAE Systems handed £286 m criminal fines in UK and US, http://news.bbc.co.uk, 5th February, 2010.

  7. A full explanation of the content and nature of Regulatory News Service disclosures and the rational for these disclosures being unaffected by the corporate communication expertise of the firm is provided in the “Data and Methodology” section.

  8. For instance, a typical RNS announcement simply states that “FTSE advises that COMPANIES X Y Z are to be included in the FTSE4Good UK index. The change is effective after close of business on dd/mm/year.”

  9. An obvious extension to this analysis is to examine deletions from the FTSE4Good index. However, very few firms are deleted over our sample period and so it is not possible to undertake meaningful statistical analysis of the firm characteristics and the market reaction to deletion.

  10. This is also the case for the average value of total asset with the exception being in March 2007. However, this was caused by the addition of Standard Life a large insurer (with total assets worth £130 billion) which skewed the average value of the total assets.

  11. The results for all of the univariate tests are robust to employing different FTSE equity benchmarks.

  12. Meznar and Nigh (1995) use this measure for US firms as a proxy for communications expertise arguing that more visible firms are under pressure to engage in public relations and to manage the public perception of their activities.

  13. Conducting this analysis with any of the other event windows under examination does not alter the results.

  14. This variable is collected from the Office of National Statistics, www.ons.gov.uk.

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Authors and Affiliations

  1. University of Leeds, Leeds University Business School, Maurice Keyworth Building, Leeds, LS2 9JT, UK

    Iain Clacher

  2. University of Edinburgh Business School, Edinburgh, UK

    Jens Hagendorff

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  1. Iain Clacher
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  2. Jens Hagendorff
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Correspondence to Jens Hagendorff.

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Clacher, I., Hagendorff, J. Do Announcements About Corporate Social Responsibility Create or Destroy Shareholder Wealth? Evidence from the UK. J Bus Ethics 106, 253–266 (2012). https://doi.org/10.1007/s10551-011-1004-9

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