A Learning Curve of the Market: Chasing Alpha of Socially Responsible Firms

Abstract

This paper explores stock market reactions to corporate social performance. We find that a value-weighted portfolio based on the list of “100 Best CSR companies in the world” published by Reputation Institute yields annual abnormal returns of 2.74% and 1.98%, by controlling for Carhart four factors and Fama French five factors, respectively. Moreover, such abnormal returns decrease as time goes, especially after the CSR lists were first published in 2013. The paper also indicates that companies with better social performance are more likely to have positive earnings surprises, and their returns are sensitive to earnings surprises. The results of this paper have three implications. First, CSR reputation can positively contribute to a firm’s short-term superior equity performance (i.e., factor-adjusted abnormal returns). Second, the CSR lists help the market correct mispricing of intangibles such as CSR reputation; the abnormal returns decrease as the market gradually learns about the value of firms’ social performance. Lastly, this paper contributes to the socially responsible investing (SRI) screens, a guide for investors who would like to do well by doing good.

Keywords: Corporate Social Responsibility, Intangibles, Market Efficiency, Earnings Surprises, Abnormal Returns

JEL Classification: G1, M1, E2