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How to measure Corporate Social Responsibility

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  • Marco Nicolosi
  • Stefano Grassi
  • Elena Stanghellini

Abstract

Compliance with Corporate Social Responsibility (CSR) standards may require capacity that varies from one aspect to the other and companies in different industries may encounter different difficulties. Since CSR is a multidimensional concept, latent variable models may be usefully employed to provide a unidimensional measure of the ability of a firm to fulfil CSR standards. A methodology based on Item Response Theory has been implemented on the KLD sustainability dataset. Results show that companies in the industries Oil & Gas, Industrials, Basic Materials and Telecommunications have a higher difficulty to meet the CSR standards. Criteria based on Environment, Community relations and Product quality have a large capacity to select the firms with the best CSR performance, while Governance does not exhibit similar behavior. A stock selection based on the ranking of the firms according to our CSR measure outperforms, in terms of risk-adjusted returns, stock selection based on other criteria.

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Bibliographic Info

Paper provided by Università di Perugia, Dipartimento Economia, Finanza e Statistica in its series Quaderni del Dipartimento di Economia, Finanza e Statistica with number 96/2011.

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Length: 22 pages
Date of creation: 15 Oct 2011
Date of revision:
Handle: RePEc:pia:wpaper:96/2011

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Keywords: Socially Responsible Investment; CSR ability; latent variable model; item response theory;

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  1. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  2. Bauer, Rob & Koedijk, Kees & Otten, Roger, 2005. "International evidence on ethical mutual fund performance and investment style," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1751-1767, July.
  3. Stefano Herzel, Stefano & Marco Nicolosi, Marco & Starica, Catalin, 2010. "The cost of sustainability on optimal portfolio choices," Sustainable Investment and Corporate Governance Working Papers 2010/15, Sustainable Investment Research Platform.
  4. Stephen Brammer & Chris Brooks & Stephen Pavelin, 2006. "Corporate Social Performance and Stock Returns: UK Evidence from Disaggregate Measures," Financial Management, Financial Management Association, vol. 35(3), Autumn.
  5. Karen Benson & Timothy Brailsford & Jacquelyn Humphrey, 2006. "Do Socially Responsible Fund Managers Really Invest Differently?," Journal of Business Ethics, Springer, vol. 65(4), pages 337-357, 06.
  6. Manescu, Cristiana, 2009. "Stock returns in relation to environmental, social and governance performance: mispricing or compensation for risk?," Working Papers in Economics 376, University of Gothenburg, Department of Economics, revised 01 Mar 2010.
  7. Becchetti, Leonardo & Ciciretti, Rocco, 2011. "Stock Market Reaction to the Global Financial Crisis: testing for the Lehman Brothers' Event," Sustainable Investment and Corporate Governance Working Papers 2011/3, Sustainable Investment Research Platform.
  8. Derwall, Jeroen & Koedijk, Kees & Ter Horst, Jenke, 2011. "A tale of values-driven and profit-seeking social investors," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2137-2147, August.
  9. Huij, Joop & Derwall, Jeroen, 2011. "Global equity fund performance, portfolio concentration, and the fundamental law of active management," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 155-165, January.
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