IDEAS home Printed from https://ideas.repec.org/p/rdg/icmadp/icma-dp2012-10.html
   My bibliography  Save this paper

Is there a Gold Social Seal? The Financial Effects of Additions to and Deletions from Social Stock Indices

Author

Listed:
  • Konstantina Kappou

    (ICMA Centre, Henley Business School, University of Reading)

  • Ioannis Oikonomou

    (ICMA Centre, Henley Business School, University of Reading)

Abstract

This study investigates the financial effects of additions to and deletions from two of the most well-known social stock indices: the Calvert social index and the MSCI KLD 400 index. By examining not only short-term abnormal returns but also trading activity, earnings per share and long-term performance of stocks that are involved in these events, we are able to shed new light on the characteristics of the 'social index effect'. We find that the addition of a stock to either index does not lead to material changes in its market price, whereas deletions are accompanied by negative cumulative abnormal returns of approximately -1.5% in the short run that can reach -14% six months after the event. Trading volumes for deleted stocks are significantly increased on the event date and operational performance of the respective firms deteriorates after their deletion from the social index. These findings are consistent with the asymmetric financial effects of corporate social performance that are connected to social index re-compositions.

Suggested Citation

  • Konstantina Kappou & Ioannis Oikonomou, 2012. "Is there a Gold Social Seal? The Financial Effects of Additions to and Deletions from Social Stock Indices," ICMA Centre Discussion Papers in Finance icma-dp2012-10, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:icmadp:icma-dp2012-10
    as

    Download full text from publisher

    File URL: http://www.icmacentre.ac.uk/files/discussion-papers/DP2012-10.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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.
    2. Honghui Chen & Gregory Noronha & Vijay Singal, 2004. "The Price Response to S&P 500 Index Additions and Deletions: Evidence of Asymmetry and a New Explanation," Journal of Finance, American Finance Association, vol. 59(4), pages 1901-1930, August.
    3. Jie Cai, 2007. "What's in the News? Information Content of S&P 500 Additions," Financial Management, Financial Management Association International, vol. 36(3), pages 113-124, September.
    4. Ernest N. Biktimirov & Arnold R. Cowan & Bradford D. Jordan, 2004. "Do Demand Curves for Small Stocks Slope Down?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 27(2), pages 161-178, June.
    5. Becchetti, Leonardo & Ciciretti, Rocco & Hasan, Iftekhar & Kobeissi, Nada, 2012. "Corporate social responsibility and shareholder's value," Journal of Business Research, Elsevier, vol. 65(11), pages 1628-1635.
    6. Copeland, Thomas E. & Mayers, David, 1982. "The value line enigma (1965-1978) : A case study of performance evaluation issues," Journal of Financial Economics, Elsevier, vol. 10(3), pages 289-321, November.
    7. Ioannis Oikonomou & Chris Brooks & Stephen Pavelin, 2012. "The Impact of Corporate Social Performance on Financial Risk and Utility: A Longitudinal Analysis," Financial Management, Financial Management Association International, vol. 41(2), pages 483-515, June.
    8. Kappou, Konstantina & Brooks, Chris & Ward, Charles W.R., 2008. "A re-examination of the index effect: Gambling on additions to and deletions from the S&P 500's [`]gold seal'," Research in International Business and Finance, Elsevier, vol. 22(3), pages 325-350, September.
    9. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1039-1061.
    10. Jeffrey Wurgler & Ekaterina Zhuravskaya, 2002. "Does Arbitrage Flatten Demand Curves for Stocks?," The Journal of Business, University of Chicago Press, vol. 75(4), pages 583-608, October.
    11. Michael Schröder, 2007. "Is there a Difference? The Performance Characteristics of SRI Equity Indices," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1‐2), pages 331-348, January.
    12. Julia Lackmann & Jürgen Ernstberger & Michael Stich, 2012. "Market Reactions to Increased Reliability of Sustainability Information," Journal of Business Ethics, Springer, vol. 107(2), pages 111-128, May.
    13. Peter Rodriguez & Donald S Siegel & Amy Hillman & Lorraine Eden, 2006. "Three lenses on the multinational enterprise: politics, corruption, and corporate social responsibility," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 37(6), pages 733-746, November.
    14. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    15. Robert O. Edmister & A. Steven Graham & Wendy L. Pirie, 1994. "Excess Returns Of Index Replacement Stocks: Evidence Of Liquidity And Substitutability," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(3), pages 333-346, September.
    16. Edward Nelling & Elizabeth Webb, 2009. "Corporate social responsibility and financial performance: the “virtuous circle” revisited," Review of Quantitative Finance and Accounting, Springer, vol. 32(2), pages 197-209, February.
    17. Edmans, Alex, 2011. "Does the stock market fully value intangibles? Employee satisfaction and equity prices," Journal of Financial Economics, Elsevier, vol. 101(3), pages 621-640, September.
    18. Scholes, Myron S, 1972. "The Market for Securities: Substitution versus Price Pressure and the Effects of Information on Share Prices," The Journal of Business, University of Chicago Press, vol. 45(2), pages 179-211, April.
    19. Edmister, Robert O & Graham, A Steven & Pirie, Wendy L, 1994. "Excess Returns of Index Replacement Stocks: Evidence of Liquidity and Substitutability," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(3), pages 333-346, Fall.
    20. Harris, Lawrence E & Gurel, Eitan, 1986. "Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures," Journal of Finance, American Finance Association, vol. 41(4), pages 815-829, September.
    21. 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.
    22. 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.
    23. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
    24. Kappou, Konstantina & Brooks, Chris & Ward, Charles, 2010. "The S&P500 index effect reconsidered: Evidence from overnight and intraday stock price performance and volume," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 116-126, January.
    25. Amir Rubin, 2008. "Political Views and Corporate Decision Making: The Case of Corporate Social Responsibility," The Financial Review, Eastern Finance Association, vol. 43(3), pages 337-360, August.
    26. Yuri Mishina & Emily S. Block & Michael J. Mannor, 2012. "The path dependence of organizational reputation: how social judgment influences assessments of capability and character," Strategic Management Journal, Wiley Blackwell, vol. 33(5), pages 459-477, May.
    27. Michael Schröder, 2007. "Is there a Difference? The Performance Characteristics of SRI Equity Indices," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1‐2), pages 331-348, January.
    28. Sanjay Ramchander & Robert G. Schwebach & KIM Staking, 2012. "The informational relevance of corporate social responsibility: evidence from DS400 index reconstitutions," Strategic Management Journal, Wiley Blackwell, vol. 33(3), pages 303-314, March.
    29. Saurabh Mishra & Sachin Modi, 2013. "Positive and Negative Corporate Social Responsibility, Financial Leverage, and Idiosyncratic Risk," Journal of Business Ethics, Springer, vol. 117(2), pages 431-448, October.
    30. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    31. Stephen Pavelin & Lynda Porter, 2008. "The Corporate Social Performance Content of Innovation in the U.K," Journal of Business Ethics, Springer, vol. 80(4), pages 711-725, July.
    32. J. Randall Woolridge & Chinmoy Ghosh, 1986. "Institutional Trading And Security Prices: The Case Of Changes In The Composition Of The S&P 500 Index," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 9(1), pages 13-24, March.
    33. Dhillon, Upinder & Johnson, Herb, 1991. "Changes in the Standard and Poor's 500 List," The Journal of Business, University of Chicago Press, vol. 64(1), pages 75-85, January.
    34. Diane K. Denis & John J. McConnell & Alexei V. Ovtchinnikov & Yun Yu, 2003. "S&P 500 Index Additions and Earnings Expectations," Journal of Finance, American Finance Association, vol. 58(5), pages 1821-1840, October.
    35. Shleifer, Andrei, 1986. "Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, vol. 41(3), pages 579-590, July.
    36. Amy J. Hillman & Gerald D. Keim, 2001. "Shareholder value, stakeholder management, and social issues: what's the bottom line?," Strategic Management Journal, Wiley Blackwell, vol. 22(2), pages 125-139, February.
    37. Paul C. Godfrey & Craig B. Merrill & Jared M. Hansen, 2009. "The relationship between corporate social responsibility and shareholder value: an empirical test of the risk management hypothesis," Strategic Management Journal, Wiley Blackwell, vol. 30(4), pages 425-445, April.
    38. Beneish, Messod D & Whaley, Robert E, 1996. "An Anatomy of the "S&P Game": The Effects of Changing the Rules," Journal of Finance, American Finance Association, vol. 51(5), pages 1909-1930, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jaballah, Jamil & Peillex, Jonathan & Weill, Laurent, 2018. "Is Being Sharia compliant worth it?," Economic Modelling, Elsevier, vol. 72(C), pages 353-362.
    2. Ioannis Oikonomou & Chao Yin & Lei Zhao, 2020. "Investment horizon and corporate social performance: the virtuous circle of long-term institutional ownership and responsible firm conduct," The European Journal of Finance, Taylor & Francis Journals, vol. 26(1), pages 14-40, January.
    3. Juan Pineiro-Chousa & Noelia Romero-Castro & Marcos Vizcaíno-González, 2019. "Inclusions in and Exclusions from the S&P 500 Environmental and Socially Responsible Index: A Fuzzy-Set Qualitative Comparative Analysis," Sustainability, MDPI, vol. 11(4), pages 1-31, February.
    4. Adamska Agata & Dąbrowski Tomasz J. & Homa Magdalena & Mościbrodzka Monika & Tomaszewski Jacek, 2022. "Demutualization, Corporatization, and Sustainability Initiatives: Evidence from the European Stock Exchange Industry," Journal of Management and Business Administration. Central Europe, Sciendo, vol. 30(3), pages 2-35, September.
    5. Olivian Bîltac, 2019. "Company's Social Performance Reporting Based on International Standards: A Comparative Analysis Across Central and Eastern Europe," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 149-167.
    6. Pablo Vilas & Laura Andreu & José Luis Sarto, 2021. "The Convergence between Sustainability and Conventional Stock Indices. Are We on the Right Track?," Sustainability, MDPI, vol. 13(14), pages 1-11, July.
    7. Luluk Widyawati, 2020. "A systematic literature review of socially responsible investment and environmental social governance metrics," Business Strategy and the Environment, Wiley Blackwell, vol. 29(2), pages 619-637, February.
    8. Takashi Kanamura, 2023. "Clean energy and (E)SG investing from energy and environmental linkages," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 25(9), pages 9779-9819, September.
    9. Selena Aureli & Sabrina Gigli & Renato Medei & Enrico Supino, 2020. "The value relevance of environmental, social, and governance disclosure: Evidence from Dow Jones Sustainability World Index listed companies," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(1), pages 43-52, January.
    10. Konstantina Kappou, 2018. "The diminished effect of index rebalances," Journal of Asset Management, Palgrave Macmillan, vol. 19(4), pages 235-244, July.
    11. Rudkin, Wanling & Cai, Charlie X., 2023. "Information content of sustainability index recomposition: A synthetic portfolio approach," International Review of Financial Analysis, Elsevier, vol. 88(C).
    12. Kais Bouslah & Lawrence Kryzanowski & Bouchra M’Zali, 2018. "Social Performance and Firm Risk: Impact of the Financial Crisis," Journal of Business Ethics, Springer, vol. 149(3), pages 643-669, May.
    13. Sarah Tiba & Frank J. van Rijnsoever & Marko P. Hekkert, 2019. "Firms with benefits: A systematic review of responsible entrepreneurship and corporate social responsibility literature," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 26(2), pages 265-284, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Afego, Pyemo N., 2017. "Effects of changes in stock index compositions: A literature survey," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 228-239.
    2. Alexis Cellier & Pierre Chollet & Souad Lajili Jarjir, 2013. "New empirical evidence on market reactions to changes in Socially Responsible Investment indexes," Post-Print hal-01367120, HAL.
    3. Wang, Chuan & Murgulov, Zoltan & Haman, Janto, 2015. "Impact of changes in the CSI 300 Index constituents," Emerging Markets Review, Elsevier, vol. 24(C), pages 13-33.
    4. Kappou, Konstantina & Brooks, Chris & Ward, Charles W.R., 2008. "A re-examination of the index effect: Gambling on additions to and deletions from the S&P 500's [`]gold seal'," Research in International Business and Finance, Elsevier, vol. 22(3), pages 325-350, September.
    5. Ernest N. Biktimirov & Yuanbin Xu, 2019. "Market reactions to changes in the Dow Jones industrial average index," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 15(5), pages 792-812, May.
    6. Brooks, Chris & Kappou, Konstantina & Stevenson, Simon & Ward, Charles, 2013. "The performance effects of composition changes on sector specific stock indices: The case of European listed real estate," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 132-142.
    7. Fernandes, Marcelo & Mergulhão, João, 2016. "Anticipatory effects in the FTSE 100 index revisions," Journal of Empirical Finance, Elsevier, vol. 37(C), pages 79-90.
    8. Hacıbedel, Burcu, 2014. "Does investor recognition matter for asset pricing?," Emerging Markets Review, Elsevier, vol. 21(C), pages 1-20.
    9. Konstantina Kappou, 2018. "The diminished effect of index rebalances," Journal of Asset Management, Palgrave Macmillan, vol. 19(4), pages 235-244, July.
    10. Yun, Jooyoung & Kim, Tong S., 2010. "The effect of changes in index constitution: Evidence from the Korean stock market," International Review of Financial Analysis, Elsevier, vol. 19(4), pages 258-269, September.
    11. Kot, Hung Wan & Leung, Harry K.M. & Tang, Gordon Y.N., 2015. "The long-term performance of index additions and deletions: Evidence from the Hang Seng Index," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 407-420.
    12. Ernest Biktimirov & Boya Li, 2014. "Asymmetric stock price and liquidity responses to changes in the FTSE SmallCap index," Review of Quantitative Finance and Accounting, Springer, vol. 42(1), pages 95-122, January.
    13. Akhigbe, Aigbe & Martin, Anna D. & Newman, Melinda & de Souza, Andre, 2022. "Russell index reconstitutions and short interest," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 577-588.
    14. Azevedo, Alcino & Karim, Mohamad & Gregoriou, Andros & Rhodes, Mark, 2014. "Stock price and volume effects associated with changes in the composition of the FTSE Bursa Malaysian KLCI," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 20-35.
    15. Houdou Basse Mama & Stefan Mueller & Ulrich Pape, 2017. "What’s in the news? The ambiguity of the information content of index reconstitutions in Germany," Review of Quantitative Finance and Accounting, Springer, vol. 49(4), pages 1087-1119, November.
    16. Kashyap, Anil K & Kovrijnykh, Natalia & Li, Jian & Pavlova, Anna, 2021. "The benchmark inclusion subsidy," Journal of Financial Economics, Elsevier, vol. 142(2), pages 756-774.
    17. Osman, Khairul Nizam & Masih, Mansur, 2018. "Granger-causality of selective Dow Jones islamic and sustainability regional equity indices," MPRA Paper 104185, University Library of Munich, Germany.
    18. M. Cary Collins & James W. Wansley & Breck Robinson, 1995. "Price And Volume Effects Associated With The Creation Of Standard & Poor'S Midcap Index," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 18(3), pages 329-350, September.
    19. Chen, Yangyang & Koutsantony, Constantine & Truong, Cameron & Veeraraghavan, Madhu, 2013. "Stock price response to S&P 500 index inclusions: Do options listings and options trading volume matter?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 379-401.
    20. Doeswijk, Ronald Q., 2005. "The index revision party," International Review of Financial Analysis, Elsevier, vol. 14(1), pages 93-112.

    More about this item

    Keywords

    Social Index; Index Effect; Corporate Social Responsibility; CSR; CSP; Market Efficiency; Information Content Hypothesis; Exchange Traded Funds; Mutual Funds.;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rdg:icmadp:icma-dp2012-10. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Marie Pearson (email available below). General contact details of provider: https://edirc.repec.org/data/bsrdguk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.