Stock Market Reaction to the Global Financial Crisis: The Role of Corporate Governance and Product Quality Ratings in the Lehman Brothers' Event

Sustainable Investment and Corporate Governance Working Papers

23rd Australasian Finance and Banking Conference 2010 Paper

42 Pages Posted: 26 Jul 2010

See all articles by Leonardo Becchetti

Leonardo Becchetti

University of Rome Tor Vergata - Faculty of Economics

Claudia Ceniccola

University of Leicester - School of Management

Rocco Ciciretti

Tor Vergata University of Rome - Department of Economics and Finance

Date Written: January 28, 2010

Abstract

We analyse with an event study approach the stock market reaction to one of the most important episodes in the global financial crisis (Lehman Brothers filing for chapter 11). Our inquiry on abnormal returns of about 2,700 stocks around the event date documents that the shock induces investors to incorporate insights from (or re-adjust the pre-event expected impact of) corporate social responsibility (CSR) ratings in stock evaluation in a sort of "flight to CSR quality". The main CSR domains with significant effects on abnormal returns (corporate governance and product quality) are exactly those in which the defaulted company presented weaknesses according to its ex-ante CSR ratings. We also document that the reaction to the Lehman event extends beyond the event date and that investors rationally attribute more value to the direct information on strengths and weaknesses in each CSR rating domain than to affiliation/non affiliation to the CSR stock market index (FTSE KLD 400 Social Index). A more general result of our paper is that investors seem to discover, after the event, that CSR ratings provide original information which is not captured by traditional financial rating indicators.

Keywords: Global Financial Crisis, Event Study, Corporate Governance, Product Quality, Ratings

JEL Classification: G14, G24, G01

Suggested Citation

Becchetti, Leonardo and Ceniccola, Claudia and Ciciretti, Rocco, Stock Market Reaction to the Global Financial Crisis: The Role of Corporate Governance and Product Quality Ratings in the Lehman Brothers' Event (January 28, 2010). Sustainable Investment and Corporate Governance Working Papers, 23rd Australasian Finance and Banking Conference 2010 Paper, Available at SSRN: https://ssrn.com/abstract=1648778 or http://dx.doi.org/10.2139/ssrn.1648778

Leonardo Becchetti

University of Rome Tor Vergata - Faculty of Economics ( email )

Via Columbia, 2
I-00133 Rome
Italy

Claudia Ceniccola

University of Leicester - School of Management ( email )

Leicester
Leicester, AK LE1 4AY
United Kingdom

Rocco Ciciretti (Contact Author)

Tor Vergata University of Rome - Department of Economics and Finance ( email )

Via Columbia, 2
Roma, 00133
Italy
+39 06 72595925 (Phone)

HOME PAGE: http://www.roccociciretti.com/

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