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Is it Beneficial to be Included in a Sustainability Stock Index? A Panel Data Study for European Firms

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  • Andreas Ziegler

    () (University of Zurich, Center for Corporate Responsibility and Sustainability, and ETH Zurich, Center of Economic Research)

Abstract

This paper empirically examines the effect of the inclusion in one of the most prominent sustainability stock indexes, namely the Dow Jones Sustainability World Index (DJSI World), on corporate financial performance. On the basis of panel data for European firms that were included in the Dow Jones Stoxx 600 Index over time, our micro-econometric analysis confirms the relevance of unobserved firm heterogeneity since the validity of restricted pooled regression models is statistically rejected in favor of random or fixed effects models. As a consequence, the strong positive impacts of the inclusion in the DJSI World on return on assets and Tobin’s Q in pooled regression models become weaker and less robust in the case of return on assets and even insignificant for Tobin’s Q in the flexible panel data models that include unobserved firm heterogeneity. Therefore, we conclude that the application of misspecified panel data approaches, similar to cross-sectional models, can lead to biased parameter estimates and thus to premature conclusions with respect to the impact of corporate sustainability performance on financial performance. Our estimation results can be explained by the high number of confounding financial effects of corporate environmental or social activities. Another explanation for the predominant weak or neutral impacts of the inclusion in the DJSI World could be the composition of this stock index, which is influenced by factors that need not necessarily be directly connected to corporate environmental or social activities.

Suggested Citation

  • Andreas Ziegler, 2009. "Is it Beneficial to be Included in a Sustainability Stock Index? A Panel Data Study for European Firms," CER-ETH Economics working paper series 09/121, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  • Handle: RePEc:eth:wpswif:09-121
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    Cited by:

    1. Nakai, Miwa & Yamaguchi, Keiko & Takeuchi, Kenji, 2016. "Can SRI funds better resist global financial crisis? Evidence from Japan," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 12-20.
    2. Miwa Nakai & Tomonori Honda & Nariaki Nishino & Kenji Takeuchi, 2013. "An Experimental Study on Motivations for Socially Responsible Investment," Discussion Papers 1314, Graduate School of Economics, Kobe University.
    3. Mollet, Janick Christian & Ziegler, Andreas, 2014. "Socially responsible investing and stock performance: New empirical evidence for the US and European stock markets," Review of Financial Economics, Elsevier, pages 208-216.
    4. Oberndorfer, Ulrich & Schmidt, Peter & Wagner, Marcus & Ziegler, Andreas, 2013. "Does the stock market value the inclusion in a sustainability stock index? An event study analysis for German firms," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 497-509.
    5. Janick Christian Mollet & Andreas Ziegler, 2012. "Is Socially Responsible Investing Really Beneficial? New Empirical Evidence for the US and European Stock Markets," MAGKS Papers on Economics 201228, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

    More about this item

    Keywords

    Sustainability stock index; Corporate environmental and social activities; Corporate financial performance; Panel data models;

    JEL classification:

    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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