Stock returns in relation to environmental, social and governance performance: Mispricing or compensation for risk?
Using detailed data on seven environmental, social and governance (ESG) attributes for a long panel of large publicly traded US firms during July 1992–June 2008, only community relations were found to have had a positive effect on risk-adjusted stock returns, which effect was not compensation for risk but could be due to mispricing. Additionally, a changing effect of employee relations was found, from positive during July 1992–June 2003 to negative during July 2003–June 2008. The positive effect could be due to mispricing, whereas there is some evidence that the negative effect was compensation for low non‐sustainability risk. A weak negative effect of human rights and product safety indicators on risk‐adjusted stock returns in the more recent period was also found to be likely due to mispricing. The implications are that certain ESG attributes might be value relevant but they are not efficiently incorporated into stock prices. Copyright (C) 2011 John Wiley & Sons, Ltd and ERP Environment.
Volume (Year): 19 (2011)
Issue (Month): 2 (March/April)
|Contact details of provider:|| Web page: http://onlinelibrary.wiley.com/journal/10.1002/(ISSN)1099-1719|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
- Leonardo Becchetti & Rocco Ciciretti, 2009.
"Corporate social responsibility and stock market performance,"
Applied Financial Economics,
Taylor & Francis Journals, vol. 19(16), pages 1283-1293.
- Leonardo Becchetti & Rocco Ciciretti, 2006. "Corporate Social Responsibility and Stock Market Performance," CEIS Research Paper 79, Tor Vergata University, CEIS, revised 22 Mar 2006.
- Larry D. Wall, 1995. "Some lessons from basic finance for effective socially responsible investing," Economic Review, Federal Reserve Bank of Atlanta, issue Jan, pages 1-12.
- Jensen, Michael C, 1969. "Risk, The Pricing of Capital Assets, and the Evaluation of Investment Portfolios," The Journal of Business, University of Chicago Press, vol. 42(2), pages 167-247, April.
- Heinkel, Robert & Kraus, Alan & Zechner, Josef, 2001. "The Effect of Green Investment on Corporate Behavior," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(04), pages 431-449, December.
- Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
- 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.
- Merton, Robert C, 1987. " A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July.
- Merton, Robert C., 1987. "A simple model of capital market equilibrium with incomplete information," Working papers 1869-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Galema, Rients & Plantinga, Auke & Scholtens, Bert, 2008. "The stocks at stake: Return and risk in socially responsible investment," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2646-2654, December.
- Alexander Kempf & Peer Osthoff, 2007. "The Effect of Socially Responsible Investing on Portfolio Performance," European Financial Management, European Financial Management Association, vol. 13(5), pages 908-922.
- Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
- Glen Dowell & Stuart Hart & Bernard Yeung, 2000. "Do Corporate Global Environmental Standards Create or Destroy Market Value?," Management Science, INFORMS, vol. 46(8), pages 1059-1074, August.
- Hong, Harrison & Kacperczyk, Marcin, 2009. "The price of sin: The effects of social norms on markets," Journal of Financial Economics, Elsevier, vol. 93(1), pages 15-36, July.
- Friend, Irwin & Blume, Marshall E, 1970. "Measurement of Portfolio Performance Under Uncertainty," American Economic Review, American Economic Association, vol. 60(4), pages 561-575, September.
- Patten, Dennis M., 1990. "The market reaction to social responsibility disclosures: The case of the Sullivan principles signings," Accounting, Organizations and Society, Elsevier, vol. 15(6), pages 575-587.
- Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
- Renneboog, Luc & Ter Horst, Jenke & Zhang, Chendi, 2008. "Socially responsible investments: Institutional aspects, performance, and investor behavior," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1723-1742, September.
- Kempf, Alexander & Osthoff, Peer, 2007. "The effect of socially responsible investing on portfolio performance," CFR Working Papers 06-10, University of Cologne, Centre for Financial Research (CFR). Full references (including those not matched with items on IDEAS)