- Email: [email protected]
Does CSR have different value implications for different shareholders?
Finance Research Letters 14 (2015) 29–35
Contents lists available at ScienceDirect
Finance Research Letters journal homepage: www.elsevier.com/locate/frl
Does CSR have different value implications for different shareholders? Ester Chen, Ilanit Gavious ⇑ The Peres Academic Center, Israel Ben-Gurion University, Israel
a r t i c l e
i n f o
Article history: Received 10 March 2015 Accepted 7 July 2015 Available online 13 July 2015 JEL classification: G1 G2 G3 M14 Keywords: Corporate social responsibility Mergers and acquisitions Informed investors Institutional investors Value implications Shareholders
a b s t r a c t We investigate whether adoption of a corporate social responsibility (CSR) policy has different value implications for different types of shareholders: (1) the marginal investor trading shares on the exchange, (2) an investor buying shares in large transactions outside the exchange (M&A), and (3) the institutional investor. These investors differ in two primary aspects—the degree to which they are informed, and the stakes they hold in the firm. We find that the marginal investor on the exchange values a firm’s commitment to social responsibility positively, whereas the M&A and the long-term institutional investor are unaffected by the firm’s being CSR. Our findings reveal that informed investors do not believe that CSR has a real profit potential for the firm. Another possible inference from our results is that the superior ability of these sophisticated investors to gain access to information about the firm allows them to uncover behaviors of the CSR firm that contradict the CSR doctrine. We further present results suggesting that the positive value implications of CSR on the exchange reflect investors sentimentally pricing their expectations for the long-term welfare for society as if it were long-term wealth for shareholders. Ó 2015 Elsevier Inc. All rights reserved.
⇑ Corresponding author at: Guilford Glazer Faculty of Business and Management, Department of Business Administration, Ben-Gurion University, PO Box 653, Beer-Sheva 84105, Israel. Tel.: +972 8 6477538; fax: +972 8 6477691. E-mail address: [email protected] (I. Gavious). http://dx.doi.org/10.1016/j.frl.2015.07.001 1544-6123/Ó 2015 Elsevier Inc. All rights reserved.
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E. Chen, I. Gavious / Finance Research Letters 14 (2015) 29–35
1. Introduction Corporate social responsibility (CSR) requires managers to make multiple trade-offs between shareholders and other stakeholders in the firm, such as employees, customers, and communities. As such, CSR contrasts with the classic injunction that the only social responsibility of a business is to make a profit for its shareholders. Accounting advocates contend that creating long-term value for shareholders may be at odds with the ‘softer’ objectives of CSR (Lev, 2012; Lev et al., 2010). A key question is, thus, how do shareholders—traditionally the number one concern of a business—view CSR? More specifically, do different types of shareholders have different views about CSR? The extant literature focuses on the impact of CSR on stock market returns, i.e., on investors trading shares on the exchange. The evidence presented reveals positive excess returns among companies with better CSR performance (e.g., Kempf and Osthoff, 2007; Statman and Glushkov, 2009; Flammer, 2013). This study differentiates between the valuation implications of CSR for investors trading shares on the exchange versus investors buying shares in large transactions outside the exchange (mergers and acquisitions, henceforth, M&A). These two types of investors differ in the degree to which they are informed. Compared to the investor buying shares on the exchange, there is less information asymmetry between an M&A investor and the management of the firm that is selling the stock. In such transactions, the buyer can obtain a great deal of information about the acquired firm that is inaccessible to the public through the pre-transaction negotiations, the due diligence process, and the expert valuation commissioned especially for the transaction. A second difference between the two types of investors is in the stakes they hold in the firm. In contrast to the investor on the exchange, M&A investors have much larger investments in the firm and, therefore, have much more to gain or lose in absolute dollar terms from their investment decisions (De Franco et al., 2011). Based on these differences, an M&A investor should be better able to assess the implications of CSR adoption for a firm’s intrinsic value. We acknowledge that investors on the exchange differ in terms of (not) being informed. Compared to private investors on the exchange, institutional investors1 have better access to, and superior abilities to analyze, private information. They learn better from experience and are thus able to devise more adaptive strategies (e.g., Callen et al., 2010). This is particularly true for long-term institutional investors, namely ‘‘dedicated’’ and ‘‘quasi-indexers’’, but less so for ‘‘transient’’ institutional investors, whose investments are based on the likelihood of short-term trading profits. To the best of our knowledge, no study thus far has differentiated between the institutional investor and the ‘marginal’ investor on the exchange, or between the investor on versus outside the exchange, in the context of CSR. In this study, we disentangle the value implications of CSR for each type of investor. The paper proceeds as follows. Section 2 describes our data, while Section 3 presents our tests and results. Section 4 discusses the results and concludes. 2. Data The database includes non-financial companies listed on the Tel Aviv Stock Exchange (TASE) that were included in the annual ‘‘Maala Ranking of Corporate Social Responsibility’’2 reports for the years 2007–2012 (our ‘‘CSR firms’’). We use a control sample of Israeli public companies that were not included in the Maala report (hence, our ‘‘non-CSR firms’’). To facilitate a comparison between CSR and non-CSR firms, we match each CSR firm with a corresponding non-CSR firm in the same industry and year based on the closest size (total assets), total number of employees, profitability (ROA), growth (annual sales growth3) and firm age. Overall, our sample consists of 226 CSR and 226 non-CSR firm-years. Financial data for our sample firms is extracted from the Bloomberg Professional database. CSR information was collected manually from the Maala website.4 We also manually gathered information on the 134 M&A 1 2 3 4
Institutional investors consist of banks, insurance companies, investment companies, independent advisors, etc. See Appendix A. Similar qualitative results are obtained when we use market-to-book ratio to proxy for the firm’s growth. http://maala.org.il/he/company/ranking/faq/Default.aspx?ContentID=168.
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transactions in which our sample firms were involved from the TASE.5 We deal with outliers by winsorizing the top and bottom 1% of continuous variables. 3. Tests and results 3.1. Investors on the exchange Using an event study methodology, we examine the cumulative abnormal returns (CARs) around the announcement of the identity of the firms that were first included in the annual Maala report (38 firms throughout the sample period). The CARs are computed by summing the size-adjusted abnormal returns around the announcement date. We find significantly positive CARs of 1.5% (median and average, p-value < 1%) in the three and seven days centered on the announcement. We supplement the event study with a price regression analysis. Consistent with previous research, we estimate specifications of:
Priceit ¼ b0 þ b1 CSRit þ b2 BV it þ b3 Eit þ b4 Lossit Eit þ b5 DSalesit þ b6 R&Dit þ b7 CAPEX it þ v it
ð1Þ
Price is the market price per share on the trading day following the date of the Maala ranking announcement. Similar qualitative results are obtained using the prices during other short-term windows following the announcement. CSR is an indicator variable equal to 1 for CSR firms, 0 for non-CSR. BV is the book value of equity per share; E is earnings per share before extraordinary items; Loss is a dummy that takes the value 1 if E is negative and zero otherwise; Loss E is the product of E and Loss; DSales is annual sales less previous year’s sales per share; R&D is annual R&D expenditures per share; CAPEX is capital expenditures per share.6 All financial statement data are from the firm’s most recent annual fiscal period ending prior to the date of the Maala ranking announcement.7 The regressions are estimated using panel data with fixed time and firm effects. We use heteroskedasticity-robust standard errors. The results, displayed in Table 1 column 1, show that investors on the exchange pay a significant price premium due to the firm’s being CSR, as captured by the significantly positive coefficient on the CSR indicator variable. We now focus on the value implications of CSR for institutional investors. Consistent with previous literature (e.g., Callen et al., 2010), we run regressions of the level of institutional ownership on various control variables:
yit ¼ b0 þ b1 CSRit þ b2 Sizeit þ b3 Marketit þ b4 RDSit þ b5 Lev erageit þ b6 Betait þ b7 Liquidityit þ b8 BookValueEquityit þ b9 Earningsit þ v it
ð2Þ
Size is the natural log of the market value of equity at fiscal year-end; Market is the market–adjusted returns for the previous year; RDS is R&D expenditures scaled by total sales; Leverage is total debt divided by total assets; Beta is the market-model beta, estimated from up to 36 prior monthly returns; Liquidity is the log of average monthly trading volume divided by the average number of shares outstanding over the prior year; BookValueEquity is the book value and Earnings is earnings before extraordinary items, both scaled by beginning-of-year market value of equity. The two columns in Table 2 show the regressions of two different proxies for institutional ownership—the number of institutions holding the firm’s shares (Ins_Num) and the proportion of shares held by institutional investors (Ins_Hold). The inferences are robust to the measure used to proxy for institutional ownership. The results reveal that a firm’s choice to commit to social responsibility does not have a significant effect on the investment decision of institutional investors in general. Running the regressions separately for ‘‘transient’’, ‘‘dedicated’’ and ‘‘quasi-indexers’’ (not tabulated for parsimony), we find that the insignificant effect of CSR pertains to ‘‘dedicated’’ and ‘‘quasi-indexers’’. Like the marginal investor on the exchange, ‘‘transient’’ institutionals are positively affected by CSR. The coefficients on the control variables are consistent with prior research. 5 6 7
http://maya.tase.co.il/bursa/indeximptoday.htm. Our results are robust to other model specifications (e.g., market-to-book regressions). The Maala announcement generally takes place in the beginning of June.
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E. Chen, I. Gavious / Finance Research Letters 14 (2015) 29–35 Table 1 Price regressions.
Intercept CSR BV E Loss E DSales R&D CAPEX Adj. R2
Market price (1)
M&A price (2)
0.853 1.722⁄⁄⁄ 0.637⁄⁄⁄ 3.325⁄⁄ 4.592⁄⁄ 0.370⁄⁄⁄ 5.778⁄⁄⁄ 1.535⁄⁄⁄ 0.402
0.523 0.016 0.221 4.325⁄⁄⁄ 6.785⁄⁄ 2.340⁄⁄ 7.461⁄⁄⁄ 2.313⁄⁄ 0.247
⁄⁄⁄ ⁄⁄
, , and ⁄ refer to significance at the 1%, 5%, and 10% confidence levels, respectively.
Table 2 Regressions of institutional investors. Ins_Num (1) Ins_Hold (2) Intercept 3.509 CSR 0.105 Size 0.184⁄⁄⁄ Market 0.510 RDS 0.054 Leverage 0.233 Beta 0.294⁄⁄⁄ Liquidity 48.532⁄⁄⁄ BookValueEquity 0.336⁄⁄⁄ Earnings 0.511⁄⁄⁄ Adj. R2 0.511
0.265 0.001 0.049⁄⁄⁄ 0.003 0.052 0.003 0.031⁄⁄⁄ 14.980⁄⁄⁄ 0.020⁄⁄ 0.063⁄ 0.305
3.2. M&A investors We now run Eq. (1), where we replace the dependent variable with the sale price of the firm’s share in an M&A transaction. The sale price represents the equity value of the firm’s share, excluding a control premium, if such was paid.8 To be included in the analysis, we require that the M&A transaction took place during the period starting one day following the Maala announcement date and ending one day before the next annual Maala announcement. This requirement results in a total of 134 M&A transactions over the sample period: 67 acquisitions of CSR firms for which we identified an acquisition of a comparable non-CSR firm at the same year. Limiting the analysis to transactions that took place either immediately or a short period of time after the Maala announcement day further reduces the number of observations. In our analyses, we test and find that our results are robust to the timing of the transaction within the period of one day following the Maala announcement date up until one day before the next annual Maala announcement. The regression’s results, presented in column 2 of Table 1, show that, in contrast to the marginal investor on the exchange, the impact of a firm’s being socially responsible on an M&A investor is insignificant. 3.3. Additional analyses Table 3 displays the results of models (1) and (2) augmented to control for the CSR firms’ scores in each category of social responsibility.9 The results of the price regressions (panel A) show that the 8 9
We extracted the control premium paid from the transaction documents submitted to the Israeli Securities Authority. See Appendix A for a description of Maala’s six primary categories of CSR.
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marginal investor on the exchange accords a positive and significant value to the firm’s performance only for categories associated directly with benefits to humankind—community relations, working environment and environmental protection. In contrast, the results for M&A investors and for (long-term) institutional investors (panel B) show that none of the six CSR categories affects the investment decisions made by these sophisticated investors. Finally, in an additional analysis, we examine the impact of CSR on financial analysts’ valuations. Given that the analysts’ profession is to value firms, they are presumed to be more informed and sophisticated than the marginal investor on the exchange (De Franco et al., 2011). We find that the analysts’ valuations are unaffected by the firm’s being CSR (results not tabulated for parsimony). This result constitutes triangulating evidence in support of our inferences. 4. Discussion and concluding remarks The results of our study reveal that while private and transient investors on the exchange price a firm’s commitment to social responsibility positively, M&A investors and long-term institutional investors seem to believe that CSR does not offer a firm any real profit potential. An alternative inference from our findings is that more informed investors regard firms that adopt a CSR policy as just good actors. According to organizational behavior theories, establishing moral credentials by adopting a CSR policy may license asocial and unethical behavior (e.g., Bolino, 1999). There is empirical evidence for such contradictory behavior in CSR firms (e.g., Prior et al., 2008). Finally, we suggest that the positive pricing of a firm’s being CSR by investors on the exchange, which is shown to be associated with those aspects of social responsibility that are directly beneficial to humankind, but are not associated with those that are directly beneficial to the firm, reflect sentimental utility rather than real economic value. Acknowledgments We have benefited from the comments of Eli Bartov, Jacob Boudoukh, Avi Wohl, Ron Kaniel, Maria Blekher, Uriel Haran, Galit Meisler, Adi Scoop, Diane Romm, Ilana Landa, Tamir Masuri, Nir Ehud, workshop participants at the annual conference on the Israeli Capital Market, the International Conference ‘Beyond Business as Usual. CSR Trends’, and workshop participants at Ben-Gurion University. We gratefully acknowledge the financial support of the The Rothschild Caesarea Center for Capital Markets and Risk Management as well as the Guilford Glazer School of Business and Management at Ben-Gurion University. All errors remain our responsibility. Appendix A CSR in Israel In 1998, a non-profit organization called ‘‘Maala’’ was founded in Israel. The Maala (‘virtue’ in Hebrew) organization seeks to promote the application of corporate social responsibility in Israel. Specifically, the organization helps corporations in Israel develop and implement a strategic business approach of social responsibility by increasing awareness of and disseminating information on CSR, educating and training businesses about CSR, and creating new models of corporate responsibility. Since 2003, Maala has issued an annual ‘‘Maala Ranking of Corporate Social Responsibility’’ report. The ranking reflects the degree of firms’ social responsibility through a comprehensive and in-depth examination of various parameters and their implementations by the companies participating in the ranking. The Maala ranking includes six primary categories of CSR as follows: community relations, working environment, environmental protection, business ethics, corporate governance, and management and reporting. For each category, a firm can receive a total score of 1–10. Community relations. Planning and implementing a strategy for the relationship between the corporation and its surrounding community—a relationship that is reflected, among things, by the contribution of funds or donations in kind and employee volunteering.
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E. Chen, I. Gavious / Finance Research Letters 14 (2015) 29–35 Table 3 Regressions including CSR indicators: only CSR firms.
Panel A: price regressions Intercept BV E Loss E DSales R&D CAPEX Community relations Working environment Environmental protection Business ethics Corporate governance Management and reporting Adj. R2
Market price (1)
M&A price (2)
1.914⁄⁄⁄ 0.501⁄⁄⁄ 2.197⁄⁄ 3.001⁄⁄ 0.244⁄⁄⁄ 5.885⁄⁄⁄ 1.026⁄⁄⁄ 0.128⁄⁄⁄ 0.130⁄⁄⁄ 0.159⁄⁄⁄ 0.062 0.039 0.093 0.391
1.283 0.213 4.337⁄⁄⁄ 6.897⁄⁄ 2.330⁄⁄ 8.316⁄⁄⁄ 2.381⁄⁄ 0.176 0.116 0.151 0.049 0.030 0.001 0.183
Ins_Num (1)
Ins_Hold (2)
Panel B: institutional investor holdings regressions Intercept 3.204 Size 0.180⁄⁄⁄ Market 0.488 RDS 0.059 Leverage 0.226 Beta 0.301⁄⁄⁄ Liquidity 49.125⁄⁄⁄ Earnings 0.340⁄⁄⁄ Earnings 0.517⁄⁄⁄ Community relations 0.082 Working environment 0.061 Environmental protection 0.085 Business ethics 0.023 Corporate governance 0.089 and reporting 0.170 Adj. R2 0.508
0.192 0.041⁄⁄⁄ 0.001 0.049 0.005 0.034⁄⁄⁄ 14.989⁄⁄⁄ 0.016⁄⁄ 0.072⁄ 0.008 0.007 0.008 0.001 0.010 0.011 0.299
Working environment. Ensuring an appropriate working environment in the company and employee rights. An appropriate working environment and employee rights include, inter alia, appropriate employee compensation, professional advancement, safety, and work hours; concern for the welfare of the employees and their families; the fair treatment of employees who have been laid off as well as corporate retirees; and increasing the diversity of the firm’s workforce. Environmental protection. Protecting and conserving the physical environment of the corporation including air, ground and natural resources; recycling; and refraining from water pollution, airborne emissions that promote global warming, wasteful use of resources and deforestation. Business ethics. This CSR category involves the adherence to and implementation of the principles of honesty, fairness, transparency, loyalty, responsibility, integrity, and respect for others. Corporate governance. An advanced management philosophy that integrates social values and considerations in corporate decision-making and actual business activities. Corporate governance includes a collection of rules for corporate prudence in terms of audits and controls, and relates primarily to the manner in which the senior management and board of directors independently oversee and manage the company’s affairs. Management and reporting includes identifying and considering the needs and desires of all of the groups of stakeholders in the organization, formulating values and objectives accordingly, setting defined targets for their performance and measurement, and reporting to the various direct and indirect stakeholders.
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Maala’s ranking includes companies on the TA-100 Index or companies with revenues of no less than $100 million. The ranking started in 2003 with only publicly traded companies, but in 2004, it was expanded to include private companies, government companies as well as companies traded on other exchanges (abroad). Since the launch of the ranking, there has been an increase of 86% in the number of companies participating in the ranking, indicating the increasing importance of CSR standardization and rankings. The ranking of 2012 included 91 firms, of which 52 are firms publicly traded on the TASE (including financial institutions). References Bolino, M.C., 1999. Citizenship and impression management: good soldiers or good actors? Acad. Manage. Rev. 24 (1), 82–98. Callen, J.L., Gavious, I., Segal, D., 2010. The complementary relationship between financial and non-financial information in the biotechnology industry and the degree of investor sophistication. J. Contemp. Account. Econ. 6 (2), 61–76. De Franco, G., Gavious, I., Jin, J., Richardson, G.D., 2011. Do private company targets that hire Big4 auditors receive higher proceeds? Contemp. Account. Res. 28 (1), 215–262. Flammer, C., 2013. Corporate social responsibility and shareholder reaction: the environmental awareness of investors. Acad. Manage. J. 56 (3), 758. Kempf, A., Osthoff, P., 2007. The effect of socially responsible investing on portfolio performance. Eur. Financ. Manage. 13 (5), 908–922. Lev, B., 2012. Winning Investors Over: Surprising Truths About Honesty, Earnings Guidance, and Other Ways To Boost Your Stock Price. Harvard Business Review Press. Lev, B., Petrovits, C., Radhakrishnan, S., 2010. Is doing good good for you? How corporate charitable contributions enhance revenue growth. Strateg. Manage. J. 31, 182–200. Prior, D., Surroca, J., Tribo, J.A., 2008. Are socially responsible managers really ethical? Exploring the relationship between earnings management and corporate social responsibility. Corp. Gov.: Int. Rev. 16 (3), 160–177. Statman, M., Glushkov, D., 2009. The wages of social responsibility. Financ. Anal. J. 65 (4), 33–46.
Contents lists available at ScienceDirect
Finance Research Letters journal homepage: www.elsevier.com/locate/frl
Does CSR have different value implications for different shareholders? Ester Chen, Ilanit Gavious ⇑ The Peres Academic Center, Israel Ben-Gurion University, Israel
a r t i c l e
i n f o
Article history: Received 10 March 2015 Accepted 7 July 2015 Available online 13 July 2015 JEL classification: G1 G2 G3 M14 Keywords: Corporate social responsibility Mergers and acquisitions Informed investors Institutional investors Value implications Shareholders
a b s t r a c t We investigate whether adoption of a corporate social responsibility (CSR) policy has different value implications for different types of shareholders: (1) the marginal investor trading shares on the exchange, (2) an investor buying shares in large transactions outside the exchange (M&A), and (3) the institutional investor. These investors differ in two primary aspects—the degree to which they are informed, and the stakes they hold in the firm. We find that the marginal investor on the exchange values a firm’s commitment to social responsibility positively, whereas the M&A and the long-term institutional investor are unaffected by the firm’s being CSR. Our findings reveal that informed investors do not believe that CSR has a real profit potential for the firm. Another possible inference from our results is that the superior ability of these sophisticated investors to gain access to information about the firm allows them to uncover behaviors of the CSR firm that contradict the CSR doctrine. We further present results suggesting that the positive value implications of CSR on the exchange reflect investors sentimentally pricing their expectations for the long-term welfare for society as if it were long-term wealth for shareholders. Ó 2015 Elsevier Inc. All rights reserved.
⇑ Corresponding author at: Guilford Glazer Faculty of Business and Management, Department of Business Administration, Ben-Gurion University, PO Box 653, Beer-Sheva 84105, Israel. Tel.: +972 8 6477538; fax: +972 8 6477691. E-mail address: [email protected] (I. Gavious). http://dx.doi.org/10.1016/j.frl.2015.07.001 1544-6123/Ó 2015 Elsevier Inc. All rights reserved.
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E. Chen, I. Gavious / Finance Research Letters 14 (2015) 29–35
1. Introduction Corporate social responsibility (CSR) requires managers to make multiple trade-offs between shareholders and other stakeholders in the firm, such as employees, customers, and communities. As such, CSR contrasts with the classic injunction that the only social responsibility of a business is to make a profit for its shareholders. Accounting advocates contend that creating long-term value for shareholders may be at odds with the ‘softer’ objectives of CSR (Lev, 2012; Lev et al., 2010). A key question is, thus, how do shareholders—traditionally the number one concern of a business—view CSR? More specifically, do different types of shareholders have different views about CSR? The extant literature focuses on the impact of CSR on stock market returns, i.e., on investors trading shares on the exchange. The evidence presented reveals positive excess returns among companies with better CSR performance (e.g., Kempf and Osthoff, 2007; Statman and Glushkov, 2009; Flammer, 2013). This study differentiates between the valuation implications of CSR for investors trading shares on the exchange versus investors buying shares in large transactions outside the exchange (mergers and acquisitions, henceforth, M&A). These two types of investors differ in the degree to which they are informed. Compared to the investor buying shares on the exchange, there is less information asymmetry between an M&A investor and the management of the firm that is selling the stock. In such transactions, the buyer can obtain a great deal of information about the acquired firm that is inaccessible to the public through the pre-transaction negotiations, the due diligence process, and the expert valuation commissioned especially for the transaction. A second difference between the two types of investors is in the stakes they hold in the firm. In contrast to the investor on the exchange, M&A investors have much larger investments in the firm and, therefore, have much more to gain or lose in absolute dollar terms from their investment decisions (De Franco et al., 2011). Based on these differences, an M&A investor should be better able to assess the implications of CSR adoption for a firm’s intrinsic value. We acknowledge that investors on the exchange differ in terms of (not) being informed. Compared to private investors on the exchange, institutional investors1 have better access to, and superior abilities to analyze, private information. They learn better from experience and are thus able to devise more adaptive strategies (e.g., Callen et al., 2010). This is particularly true for long-term institutional investors, namely ‘‘dedicated’’ and ‘‘quasi-indexers’’, but less so for ‘‘transient’’ institutional investors, whose investments are based on the likelihood of short-term trading profits. To the best of our knowledge, no study thus far has differentiated between the institutional investor and the ‘marginal’ investor on the exchange, or between the investor on versus outside the exchange, in the context of CSR. In this study, we disentangle the value implications of CSR for each type of investor. The paper proceeds as follows. Section 2 describes our data, while Section 3 presents our tests and results. Section 4 discusses the results and concludes. 2. Data The database includes non-financial companies listed on the Tel Aviv Stock Exchange (TASE) that were included in the annual ‘‘Maala Ranking of Corporate Social Responsibility’’2 reports for the years 2007–2012 (our ‘‘CSR firms’’). We use a control sample of Israeli public companies that were not included in the Maala report (hence, our ‘‘non-CSR firms’’). To facilitate a comparison between CSR and non-CSR firms, we match each CSR firm with a corresponding non-CSR firm in the same industry and year based on the closest size (total assets), total number of employees, profitability (ROA), growth (annual sales growth3) and firm age. Overall, our sample consists of 226 CSR and 226 non-CSR firm-years. Financial data for our sample firms is extracted from the Bloomberg Professional database. CSR information was collected manually from the Maala website.4 We also manually gathered information on the 134 M&A 1 2 3 4
Institutional investors consist of banks, insurance companies, investment companies, independent advisors, etc. See Appendix A. Similar qualitative results are obtained when we use market-to-book ratio to proxy for the firm’s growth. http://maala.org.il/he/company/ranking/faq/Default.aspx?ContentID=168.
E. Chen, I. Gavious / Finance Research Letters 14 (2015) 29–35
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transactions in which our sample firms were involved from the TASE.5 We deal with outliers by winsorizing the top and bottom 1% of continuous variables. 3. Tests and results 3.1. Investors on the exchange Using an event study methodology, we examine the cumulative abnormal returns (CARs) around the announcement of the identity of the firms that were first included in the annual Maala report (38 firms throughout the sample period). The CARs are computed by summing the size-adjusted abnormal returns around the announcement date. We find significantly positive CARs of 1.5% (median and average, p-value < 1%) in the three and seven days centered on the announcement. We supplement the event study with a price regression analysis. Consistent with previous research, we estimate specifications of:
Priceit ¼ b0 þ b1 CSRit þ b2 BV it þ b3 Eit þ b4 Lossit Eit þ b5 DSalesit þ b6 R&Dit þ b7 CAPEX it þ v it
ð1Þ
Price is the market price per share on the trading day following the date of the Maala ranking announcement. Similar qualitative results are obtained using the prices during other short-term windows following the announcement. CSR is an indicator variable equal to 1 for CSR firms, 0 for non-CSR. BV is the book value of equity per share; E is earnings per share before extraordinary items; Loss is a dummy that takes the value 1 if E is negative and zero otherwise; Loss E is the product of E and Loss; DSales is annual sales less previous year’s sales per share; R&D is annual R&D expenditures per share; CAPEX is capital expenditures per share.6 All financial statement data are from the firm’s most recent annual fiscal period ending prior to the date of the Maala ranking announcement.7 The regressions are estimated using panel data with fixed time and firm effects. We use heteroskedasticity-robust standard errors. The results, displayed in Table 1 column 1, show that investors on the exchange pay a significant price premium due to the firm’s being CSR, as captured by the significantly positive coefficient on the CSR indicator variable. We now focus on the value implications of CSR for institutional investors. Consistent with previous literature (e.g., Callen et al., 2010), we run regressions of the level of institutional ownership on various control variables:
yit ¼ b0 þ b1 CSRit þ b2 Sizeit þ b3 Marketit þ b4 RDSit þ b5 Lev erageit þ b6 Betait þ b7 Liquidityit þ b8 BookValueEquityit þ b9 Earningsit þ v it
ð2Þ
Size is the natural log of the market value of equity at fiscal year-end; Market is the market–adjusted returns for the previous year; RDS is R&D expenditures scaled by total sales; Leverage is total debt divided by total assets; Beta is the market-model beta, estimated from up to 36 prior monthly returns; Liquidity is the log of average monthly trading volume divided by the average number of shares outstanding over the prior year; BookValueEquity is the book value and Earnings is earnings before extraordinary items, both scaled by beginning-of-year market value of equity. The two columns in Table 2 show the regressions of two different proxies for institutional ownership—the number of institutions holding the firm’s shares (Ins_Num) and the proportion of shares held by institutional investors (Ins_Hold). The inferences are robust to the measure used to proxy for institutional ownership. The results reveal that a firm’s choice to commit to social responsibility does not have a significant effect on the investment decision of institutional investors in general. Running the regressions separately for ‘‘transient’’, ‘‘dedicated’’ and ‘‘quasi-indexers’’ (not tabulated for parsimony), we find that the insignificant effect of CSR pertains to ‘‘dedicated’’ and ‘‘quasi-indexers’’. Like the marginal investor on the exchange, ‘‘transient’’ institutionals are positively affected by CSR. The coefficients on the control variables are consistent with prior research. 5 6 7
http://maya.tase.co.il/bursa/indeximptoday.htm. Our results are robust to other model specifications (e.g., market-to-book regressions). The Maala announcement generally takes place in the beginning of June.
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E. Chen, I. Gavious / Finance Research Letters 14 (2015) 29–35 Table 1 Price regressions.
Intercept CSR BV E Loss E DSales R&D CAPEX Adj. R2
Market price (1)
M&A price (2)
0.853 1.722⁄⁄⁄ 0.637⁄⁄⁄ 3.325⁄⁄ 4.592⁄⁄ 0.370⁄⁄⁄ 5.778⁄⁄⁄ 1.535⁄⁄⁄ 0.402
0.523 0.016 0.221 4.325⁄⁄⁄ 6.785⁄⁄ 2.340⁄⁄ 7.461⁄⁄⁄ 2.313⁄⁄ 0.247
⁄⁄⁄ ⁄⁄
, , and ⁄ refer to significance at the 1%, 5%, and 10% confidence levels, respectively.
Table 2 Regressions of institutional investors. Ins_Num (1) Ins_Hold (2) Intercept 3.509 CSR 0.105 Size 0.184⁄⁄⁄ Market 0.510 RDS 0.054 Leverage 0.233 Beta 0.294⁄⁄⁄ Liquidity 48.532⁄⁄⁄ BookValueEquity 0.336⁄⁄⁄ Earnings 0.511⁄⁄⁄ Adj. R2 0.511
0.265 0.001 0.049⁄⁄⁄ 0.003 0.052 0.003 0.031⁄⁄⁄ 14.980⁄⁄⁄ 0.020⁄⁄ 0.063⁄ 0.305
3.2. M&A investors We now run Eq. (1), where we replace the dependent variable with the sale price of the firm’s share in an M&A transaction. The sale price represents the equity value of the firm’s share, excluding a control premium, if such was paid.8 To be included in the analysis, we require that the M&A transaction took place during the period starting one day following the Maala announcement date and ending one day before the next annual Maala announcement. This requirement results in a total of 134 M&A transactions over the sample period: 67 acquisitions of CSR firms for which we identified an acquisition of a comparable non-CSR firm at the same year. Limiting the analysis to transactions that took place either immediately or a short period of time after the Maala announcement day further reduces the number of observations. In our analyses, we test and find that our results are robust to the timing of the transaction within the period of one day following the Maala announcement date up until one day before the next annual Maala announcement. The regression’s results, presented in column 2 of Table 1, show that, in contrast to the marginal investor on the exchange, the impact of a firm’s being socially responsible on an M&A investor is insignificant. 3.3. Additional analyses Table 3 displays the results of models (1) and (2) augmented to control for the CSR firms’ scores in each category of social responsibility.9 The results of the price regressions (panel A) show that the 8 9
We extracted the control premium paid from the transaction documents submitted to the Israeli Securities Authority. See Appendix A for a description of Maala’s six primary categories of CSR.
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marginal investor on the exchange accords a positive and significant value to the firm’s performance only for categories associated directly with benefits to humankind—community relations, working environment and environmental protection. In contrast, the results for M&A investors and for (long-term) institutional investors (panel B) show that none of the six CSR categories affects the investment decisions made by these sophisticated investors. Finally, in an additional analysis, we examine the impact of CSR on financial analysts’ valuations. Given that the analysts’ profession is to value firms, they are presumed to be more informed and sophisticated than the marginal investor on the exchange (De Franco et al., 2011). We find that the analysts’ valuations are unaffected by the firm’s being CSR (results not tabulated for parsimony). This result constitutes triangulating evidence in support of our inferences. 4. Discussion and concluding remarks The results of our study reveal that while private and transient investors on the exchange price a firm’s commitment to social responsibility positively, M&A investors and long-term institutional investors seem to believe that CSR does not offer a firm any real profit potential. An alternative inference from our findings is that more informed investors regard firms that adopt a CSR policy as just good actors. According to organizational behavior theories, establishing moral credentials by adopting a CSR policy may license asocial and unethical behavior (e.g., Bolino, 1999). There is empirical evidence for such contradictory behavior in CSR firms (e.g., Prior et al., 2008). Finally, we suggest that the positive pricing of a firm’s being CSR by investors on the exchange, which is shown to be associated with those aspects of social responsibility that are directly beneficial to humankind, but are not associated with those that are directly beneficial to the firm, reflect sentimental utility rather than real economic value. Acknowledgments We have benefited from the comments of Eli Bartov, Jacob Boudoukh, Avi Wohl, Ron Kaniel, Maria Blekher, Uriel Haran, Galit Meisler, Adi Scoop, Diane Romm, Ilana Landa, Tamir Masuri, Nir Ehud, workshop participants at the annual conference on the Israeli Capital Market, the International Conference ‘Beyond Business as Usual. CSR Trends’, and workshop participants at Ben-Gurion University. We gratefully acknowledge the financial support of the The Rothschild Caesarea Center for Capital Markets and Risk Management as well as the Guilford Glazer School of Business and Management at Ben-Gurion University. All errors remain our responsibility. Appendix A CSR in Israel In 1998, a non-profit organization called ‘‘Maala’’ was founded in Israel. The Maala (‘virtue’ in Hebrew) organization seeks to promote the application of corporate social responsibility in Israel. Specifically, the organization helps corporations in Israel develop and implement a strategic business approach of social responsibility by increasing awareness of and disseminating information on CSR, educating and training businesses about CSR, and creating new models of corporate responsibility. Since 2003, Maala has issued an annual ‘‘Maala Ranking of Corporate Social Responsibility’’ report. The ranking reflects the degree of firms’ social responsibility through a comprehensive and in-depth examination of various parameters and their implementations by the companies participating in the ranking. The Maala ranking includes six primary categories of CSR as follows: community relations, working environment, environmental protection, business ethics, corporate governance, and management and reporting. For each category, a firm can receive a total score of 1–10. Community relations. Planning and implementing a strategy for the relationship between the corporation and its surrounding community—a relationship that is reflected, among things, by the contribution of funds or donations in kind and employee volunteering.
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E. Chen, I. Gavious / Finance Research Letters 14 (2015) 29–35 Table 3 Regressions including CSR indicators: only CSR firms.
Panel A: price regressions Intercept BV E Loss E DSales R&D CAPEX Community relations Working environment Environmental protection Business ethics Corporate governance Management and reporting Adj. R2
Market price (1)
M&A price (2)
1.914⁄⁄⁄ 0.501⁄⁄⁄ 2.197⁄⁄ 3.001⁄⁄ 0.244⁄⁄⁄ 5.885⁄⁄⁄ 1.026⁄⁄⁄ 0.128⁄⁄⁄ 0.130⁄⁄⁄ 0.159⁄⁄⁄ 0.062 0.039 0.093 0.391
1.283 0.213 4.337⁄⁄⁄ 6.897⁄⁄ 2.330⁄⁄ 8.316⁄⁄⁄ 2.381⁄⁄ 0.176 0.116 0.151 0.049 0.030 0.001 0.183
Ins_Num (1)
Ins_Hold (2)
Panel B: institutional investor holdings regressions Intercept 3.204 Size 0.180⁄⁄⁄ Market 0.488 RDS 0.059 Leverage 0.226 Beta 0.301⁄⁄⁄ Liquidity 49.125⁄⁄⁄ Earnings 0.340⁄⁄⁄ Earnings 0.517⁄⁄⁄ Community relations 0.082 Working environment 0.061 Environmental protection 0.085 Business ethics 0.023 Corporate governance 0.089 and reporting 0.170 Adj. R2 0.508
0.192 0.041⁄⁄⁄ 0.001 0.049 0.005 0.034⁄⁄⁄ 14.989⁄⁄⁄ 0.016⁄⁄ 0.072⁄ 0.008 0.007 0.008 0.001 0.010 0.011 0.299
Working environment. Ensuring an appropriate working environment in the company and employee rights. An appropriate working environment and employee rights include, inter alia, appropriate employee compensation, professional advancement, safety, and work hours; concern for the welfare of the employees and their families; the fair treatment of employees who have been laid off as well as corporate retirees; and increasing the diversity of the firm’s workforce. Environmental protection. Protecting and conserving the physical environment of the corporation including air, ground and natural resources; recycling; and refraining from water pollution, airborne emissions that promote global warming, wasteful use of resources and deforestation. Business ethics. This CSR category involves the adherence to and implementation of the principles of honesty, fairness, transparency, loyalty, responsibility, integrity, and respect for others. Corporate governance. An advanced management philosophy that integrates social values and considerations in corporate decision-making and actual business activities. Corporate governance includes a collection of rules for corporate prudence in terms of audits and controls, and relates primarily to the manner in which the senior management and board of directors independently oversee and manage the company’s affairs. Management and reporting includes identifying and considering the needs and desires of all of the groups of stakeholders in the organization, formulating values and objectives accordingly, setting defined targets for their performance and measurement, and reporting to the various direct and indirect stakeholders.
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Maala’s ranking includes companies on the TA-100 Index or companies with revenues of no less than $100 million. The ranking started in 2003 with only publicly traded companies, but in 2004, it was expanded to include private companies, government companies as well as companies traded on other exchanges (abroad). Since the launch of the ranking, there has been an increase of 86% in the number of companies participating in the ranking, indicating the increasing importance of CSR standardization and rankings. The ranking of 2012 included 91 firms, of which 52 are firms publicly traded on the TASE (including financial institutions). References Bolino, M.C., 1999. Citizenship and impression management: good soldiers or good actors? Acad. Manage. Rev. 24 (1), 82–98. Callen, J.L., Gavious, I., Segal, D., 2010. The complementary relationship between financial and non-financial information in the biotechnology industry and the degree of investor sophistication. J. Contemp. Account. Econ. 6 (2), 61–76. De Franco, G., Gavious, I., Jin, J., Richardson, G.D., 2011. Do private company targets that hire Big4 auditors receive higher proceeds? Contemp. Account. Res. 28 (1), 215–262. Flammer, C., 2013. Corporate social responsibility and shareholder reaction: the environmental awareness of investors. Acad. Manage. J. 56 (3), 758. Kempf, A., Osthoff, P., 2007. The effect of socially responsible investing on portfolio performance. Eur. Financ. Manage. 13 (5), 908–922. Lev, B., 2012. Winning Investors Over: Surprising Truths About Honesty, Earnings Guidance, and Other Ways To Boost Your Stock Price. Harvard Business Review Press. Lev, B., Petrovits, C., Radhakrishnan, S., 2010. Is doing good good for you? How corporate charitable contributions enhance revenue growth. Strateg. Manage. J. 31, 182–200. Prior, D., Surroca, J., Tribo, J.A., 2008. Are socially responsible managers really ethical? Exploring the relationship between earnings management and corporate social responsibility. Corp. Gov.: Int. Rev. 16 (3), 160–177. Statman, M., Glushkov, D., 2009. The wages of social responsibility. Financ. Anal. J. 65 (4), 33–46.