The Moskowitz Prize

Stefano Giglio (Yale School of Management), Theresa Kuchler (NYU Stern School of Business), Johannes Stroebel (NYU Stern School of Business), and Xuran Zeng (NYU Stern School of Business).

Biodiversity risk has been challenging to measure, making its impacts on firms and financial markets difficult to evaluate. This study quantifies biodiversity risks and its exposures on multiple dimensions, highlighting its effects on equities prices and documenting its differences from climate risks. The authors find evidence that biodiversity risks already affect equity prices. However, their survey indicates that market participants do not perceive the current pricing of biodiversity risks to be adequate.

Read Biodiversity Risk

Lubos Pastor, University of Chicago Booth School of Business; Robert Stambaugh, University of Pennsylvania Wharton School; Lucian Taylor, University of Pennsylvania Wharton School

Green assets delivered high returns in recent years. This performance reflects unexpectedly strong increases in environmental concerns, not high expected returns. German green bonds outperformed their higher-yielding non-green twins as the "greenium" widened, and U.S. green stocks outperformed brown as climate concerns strengthened. Despite that outperformance, we estimate lower expected returns for green stocks than for brown, consistent with theory. We estimate expected returns in two ways: ex ante, using implied costs of capital, and ex post, using realized returns purged of shocks from climate concerns and earnings. A theoretically motivated green factor explains much of value stocks' recent underperformance.

Read Dissecting Green Returns

Laura Starks, University of Texas McCombs School of Business; Parth Venkat, University of Alabama Culverhouse School of Business; Qifei Zhu, Nanyang Business School

Theories of Environmental, Social and Governance (ESG) investment assume groupings of investors who differ in their preferences or beliefs about ESG. We examine whether investor horizon serves as a basis for these ESG groupings and find that longer horizon investors tilt their portfolios towards firms with high-ESG profiles. We provide evidence that these results are plausibly causal through difference-in-differences tests of shocks to firms’ ESG reputations. Further, consistent with implications of the importance of investor horizon, long-term investors behave more patiently toward the high-ESG firms in their portfolios, selling relatively less after negative earnings surprises or poor stock returns.

Read Corporate ESG Profiles and Investor Horizons

S Lakshmi Naaraayanan, London Business School; Kunal Sachdeva, Rice University - Jesse H. Jones Graduate School of Business; Varun Sharma, London Business School

We study the real effects of environmental activist investing. Using plant-level data, we find that targeted firms reduce their toxic releases, greenhouse gas emissions, and cancer-causing pollution. Improvements in air quality within a one-mile radius of targeted plants suggest potentially important externalities to local economies. These improvements come through increased capital expenditures on new abatement initiatives.  We rule out alternative explanations of decline in production, reporting biases, and forms of selection, while also providing evidence supporting the external validity of environmental activism. Overall, our study suggests that engagements are an effective tool for long-term shareholders to address climate change risks.

Read The Real Effects of Environmental Activist Investing

Rui Dai, Wharton Research Data Services, Hao Liang, Singapore Management University, and Lilian K. Ng, York University

Corporate customers are an important stakeholder in global supply chains. We employ several unique international databases to test whether socially responsible corporate customers can infuse similar socially responsible business behavior in suppliers. Our findings suggest a unilateral effect on CSR only from customers to suppliers, an evidence further supported by exogenous variation in customers' close-call CSR proposals and by product scandals. Customers exert influence on suppliers' CSR through positive assortative matching and their decision making process. Enhanced collaborative CSR efforts help improve operational efficiency and firm valuation of both customers and suppliers but increase only the customers' future sales growth.

Read Socially Responsible Corporate Customers

Abigail B. Sussman, University of Chicago – Booth School of Business, and Samuel M. Hartzmark, University of Chicago – Booth School of Business

Examining a shock to the salience of the sustainability of the US mutual fund market, we present causal evidence that investors marketwide value sustainability. Being categorized as low sustainability resulted in net outflows of more than $12 billion while being categorized as high sustainability led to net inflows of more than $24 billion. Experimental evidence suggests that sustainability is viewed as positively predicting future performance, but we do not find evidence that high sustainability funds outperform low sustainability funds. The evidence is consistent with positive affect influencing expectations of sustainable fund performance and non-pecuniary motives influencing investment decisions.

Read Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows

Caroline Flammer, Boston University, Bryan Hong,Western University, and Dylan Minor, Northwestern University

This study examines the integration of corporate social responsibility (CSR) criteria in executive compensation, a relatively recent practice in corporate governance. We construct a novel database of CSR contracting and document that CSR contracting has become more prevalent over time. We further find that the adoption of CSR contracting leads to i) an increase in long-term orientation; ii) an increase in firm value; iii) an increase in social and environmental initiatives; iv) a reduction in emissions; and v) an increase in green innovations. These findings are consistent with our theoretical arguments predicting that CSR contracting helps direct management’s attention to stakeholders that are less salient but financially material to the firm in the long run, thereby enhancing corporate governance.

Read Corporate Governance and the Rise of Integrating Corporate Social Responsibility Criteria in Executive Compensation

Brad M. Barber, University of California, Davis, Adair Morse,University of California, Berkeley – Haas School of Business; National Bureau of Economic Research (NBER), and Ayako Yasuda, University of California, Davis – Graduate School of Management

We document that investors derive nonpecuniary utility from investing in dual-objective VC funds, thus sacrificing returns. Impact funds earn 4.7 percentage points (ppts) lower IRRs ex post than traditional VC funds. In random utility/willingness-to-pay (WTP) models investors accept 2.5-3.7 ppts lower IRRs ex ante for impact funds. The positive WTP result is robust to fund access rationing and investor heterogeneity in fund expected returns. Development organizations, foundations, financial institutions, public pensions, Europeans, and UNPRI signatories have high WTP. Investors with mission objectives and/or facing political pressure exhibit high WTP; those subject to legal restrictions (e.g., ERISA) exhibit low WTP.

Read Impact Investing

Honorable Mention: Caroline Flammer, Boston University, for “Does a Long-Term Orientation Create Value? Evidence from a Regression Discontinuity“

Philipp Krüger, University of Geneva

In this paper, I estimate the effect of mandatory greenhouse gas (GHG) emissions disclosure on corporate value. Using the introduction of mandatory GHG emissions reporting for firms listed on the Main Market of the London Stock Exchange as a source of exogenous variation, I find that firms most heavily affected by the regulation experience significantly positive valuation effects. Increases in value are strongest for large firms and for firms from carbon intensive industries (e.g., oil and gas). Valuation increases are driven by capital market effects such as higher liquidity and lower bid -- ask spreads for the most affected firms.

Read Climate Change and Firm Valuation: Evidence From a Quasi-Natural Experiment

Allen Ferrell, Harvard Law School, Hao Liang, Tilburg University, Luc Renneboog, Tilburg University

In the corporate finance tradition, starting with Berle and Means (1932), corporations should generally be run to maximize shareholder value. The agency view of corporate social responsibility (CSR) considers CSR an agency problem and a waste of corporate resources. Given our identification strategy by means of an instrumental variable approach, we find that well-governed firms that suffer less from agency concerns (less cash abundance, positive pay-for-performance, small control wedge, strong minority protection) engage more in CSR. We also find that a positive relation exists between CSR and value and that CSR attenuates the negative relation between managerial entrenchment and value.

Read Socially Responsible Firms

Honorable Mention: Alex Edmans, Lucius Li, and Chendi Zhang, National Bureau of Economic Research, for “Employee Satisfaction, Labor Market Flexibility, and Stock Returns Around the World“

Honorable Mention: Yongtae Kim, Haidan Li, and Sigi Li, Santa Clara University, Leavey School of Business, for “Corporate Social Responsibility and Stock Price Crash Risk“

Caroline Flammer, Ivey Business School

This study examines the effect of corporate social responsibility (CSR) on financial performance. Specifically, I analyze the effect of CSR-related shareholder proposals that pass or fail by a small margin of votes. The passage of such "close-call" proposals is akin to a random assignment of CSR to companies and hence provides a clean causal estimate. Consistent with the view that CSR is a valuable resource, I find that the adoption of CSR proposals leads to positive announcement returns and superior accounting performance. When I examine the channels through which companies benefit from CSR, I find that the adoption of CSR proposals is associated with an increase in labor productivity and sales growth. This evidence suggests that CSR improves

Read Does Corporate Social Responsibility Lead to Superior Financial Performance? A Regression Discontinuity Approach

Elroy Dimson, London Business School, Oguzhan Karakas, Boston College, Xi Li, Temple University

We analyze an extensive proprietary database of corporate social responsibility engagements with U.S. public companies from 1999-2009. Engagements address environmental, social, and governance concerns. Successful (unsuccessful) engagements are followed by positive (zero) abnormal returns. Companies with inferior governance and socially conscious institutional investors are more likely to be engaged. Success in engagements is more probable if the engaged firm has reputational concerns and higher capacity to implement changes. Collaboration among activists is instrumental in increasing the success rate of environmental/social engagements. After successful engagements, particularly on environmental/social issues, companies experience improved accounting performance and governance and increased institutional ownership.

Active Ownership

Sadok El Ghoul, University of Alberta, Omrane Guedhami, Moore School of Business, Chuck C. Y. Kwok, Moore School of Business, Dev R. Mishra, Edwards School of Business

We examine the effect of corporate social responsibility (CSR) on the cost of equity capital for a large sample of U.S. firms. Using several approaches to estimate firms’ ex ante cost of equity, we find that firms with better CSR rankings exhibit cheaper equity financing. In particular, our findings suggest that investment in improving responsible employee relations, environmental policies, and product strategies contributes substantially to reducing firms’ cost of equity. Our results also show that participation in two “sin” industries, namely, tobacco and nuclear power, increases firms’ cost of equity. These findings support arguments in the literature that firms with socially responsible practices have higher valuation and lower risk.

Read Does Corporate Social Responsibility Affect The Cost Of Capital?

Honorable Mention: Sudheer Chava, Georgia Institute of Technology for “Environmental Externalities And Cost Of Capital“

Honorable Mention: Yongtae Kim, Santa Clara University and Meir Statman, Santa Clara University for “Do Corporations Invest Enough In Environmental Responsibility?“

Rob Bauer, Maastricht University, Daniel Hann, Maastricht University; European Centre for Corporate Engagement

This study analyzes environmental management and its implications for bond investors. Poor environmental practices influence the credit standing of borrowing firms through the legal, reputational, and regulatory risks associated with environmental incidents. We devise environmental performance measures based on information from an independent rating agency, and provide evidence that these measures explain the cross-sectional variation in credit risk for a sample of 582 U.S. public corporations between 1995 and 2006. Our findings suggest that firms with environmental concerns pay a premium on their cost of debt financing and are assigned lower credit ratings. In contrast, firms with proactive environmental engagement benefit from a lower cost of debt financing. The results are robust to numerous controls for company and bond specific characteristics, alternative model specifications, and industry membership.

Read Corporate Environmental Management And Credit Risk (PDF)

David Baron, Stanford University, Hoje Jo, Santa Clara University, Maretno Agus Harjoto, Graziadio School of Business and Finance, Pepperdine University

This paper estimates a three-equation structural model based on a theory that relates corporate financial performance (CFP), corporate social performance (CSP), and social pressure. CFP is found to be independent of CSP and decreasing in social pressure, and CSP is independent of CFP and increasing in social pressure. Social pressure is increasing in CSP and decreasing in CFP, which is consistent with social pressure being directed to soft targets. These relations were stronger during the first four years of the Bush administration than the last four year of the Clinton administration. Disaggregating the measure of social pressure indicate that the relations among CFP, CSP, and social pressure are due to private politics and not public politics. For consumer industries greater CSP is associated with better CFP, and the opposite is true for industrial industries.

Read the Economics And Politics Of Corporate Social Performance

Meir Statman and Denys Glushkov, Santa Clara University’s Leavey School of Business

Typical socially responsible investors tilt their portfolios toward stocks of companies with high scores on social responsibility characteristics such as community, employee relations and the environment. We analyze returns during 1992-2007 of stocks rated on social responsibility by KLD and find that this tilt gave socially responsible investors a return advantage relative to conventional investors. However, typical socially responsible investors also shun stocks of companies associated with tobacco, alcohol, gambling, firearms, military, and nuclear operations. We find that such shunning brought to socially responsible investors a return disadvantage relative to conventional investors. The return advantage of tilts toward stocks of companies with high social responsibility scores is largely offset by the return disadvantage that comes from the exclusion of stocks of 'shunned' companies. The return of the DS 400 Index of socially responsible companies was approximately equal to the return of the S&P 500 Index of conventional companies.

Socially responsible investors can do both well and good by adopting the best-in-class method in the construction of their portfolios. That method calls for tilts toward stocks of companies with high scores on social responsibility characteristics, but refrains from calls to shun the stock of any company, even one that produces tobacco.

Read The Wages Of Social Responsibility

Honorable Mention: Javier Gil-Bazo, Pablo Ruiz-Verdu, and Andre A. P. Santos, Universidad Carlos III de Madrid for “The Performance Of Socially Responsible Mutual Funds: The Role Of Fees And Management Companies“

Alex Edmans, University of Pennsylvania, The Wharton School

This paper analyzes the relationship between employee satisfaction and long-run stock returns. A value-weighted portfolio of the "100 Best Companies to Work For in America" earned an annual four-factor alpha of 3.5% from 1984-2009, and 2.1% above industry benchmarks. The results are robust to controls for firm characteristics, different weighting methodologies and the removal of outliers. The Best Companies also exhibited significantly more positive earnings surprises and announcement returns. These findings have three main implications. First, consistent with human capital-centered theories of the firm, employee satisfaction is positively correlated with shareholder returns and need not represent managerial slack. Second, the stock market does not fully value intangibles, even when independently verified by a highly public survey on large firms. Third, certain socially responsible investing ("SRI") screens may improve investment returns.

Read Does The Stock Market Fully Value Intangibles? Employee Satisfaction And Equity Prices

Honorable Mention: Allen Goss, Ryerson School of Management, for “Corporate Social Responsibility and Financial Distress.“

Brad Barber, University of California, Davis

Many public pension funds engage in institutional activism. These funds use the power of their pooled ownership of publicly traded stocks to affect changes in the corporations they own. I review the theory and empirical evidence underlying the motivation for institutional activism. In theory, the merits of institutional activism hinge critically on two agency costs: (1) the conflicts of interest between corporate managers and shareholders, and (2) the conflicts of interest between portfolio managers and investors. This leads to two types of institutional activism: shareholder activism and social activism. While portfolio managers can use their position to monitor conflicts that might arise between managers and shareholders (shareholder activism), they can also abuse their position by pursuing actions that advance their own moral values or political interests at the expense of investors (social activism). Which of these effects dominates the actions of portfolio managers will determine the value of activism and is an empirical issue. Perhaps the most high profile activism has been pursued by CalPERS with their annual focus list. I document that CalPERS has pursued reforms at focus list firms that would increase shareholder rights and (imprecisely) estimate the total wealth creation from this shareholder activism to be $3.1 billion between 1992 and 2005. Unrelated to the focus list program, CalPERS has also pursued social activism (e.g., the divestment of tobacco stocks). In general, I argue that institutional activism should be limited shareholder activism where there is strong theoretical and empirical evidence indicating the proposed reforms will increase shareholder value. At times, institutions will be forced to take engage in social activism and take positions on sensitive issues. In these situations, I argue portfolio managers should pursue the moral values or political interests of their investors rather than themselves.

Read Monitoring The Monitor: Evaluating CalPERS’ Shareholder Activism

Honorable Mention: Harrison Hong, Princeton University, and Marcin Kacpercyzk, New York University for “The Price of Sin: The Effects of Social Norms on Markets"; Baruch Lev, New York University, Christine Petrovits, William and Mary School of Business, and Suresh Radhakrishnan, Jindal School of Management for "Is Doing Good Good for You? Yes, Charitable Contributions Enhance Revenue Growth."

Nadja Guenster, Jeroen Derwall, Rob Bauer and Kees Koedijk, Erasmus University

This study adds new insights to the long-running corporate environmental-financial performance debate by focusing on the concept of eco-efficiency. Using a new database of eco-efficiency ratings, we analyze the relation between eco-efficiency and financial performance from 1997 to 2004. We report that eco-efficiency relates positively to operating performance and market value. Moreover, our results suggest that the market's valuation of environmental performance has been time variant, which may indicate that the market incorporates environmental information with a drift. Although environmental leaders initially did not sell at a premium relative to laggards, the valuation differential increased significantly over time. Our results have implications for company managers, who evidently do not have to overcome a tradeoff between eco-efficiency and financial performance, and for investors, who can exploit environmental information for investment decisions.

Read The Economic Value Of Corporate Eco-Efficiency

Honorable Mention: Meir Statman, Santa Clara University’s Leavey School of Business for “Socially Responsible Indexes: Composition, Performance, And Tracking Errors“

Marc Orlitzky, University of Sydney, Frank L. Schmidt, University of Iowa, and Sara L. Rynes, University of Iowa

Most theorizing on the relationship between corporate social/environmental performance (CSP) and corporate financial performance (CFP) assumes that the current evidence is too fractured or too variable to draw any generalizable conclusions. With this integrative, quantitative study, we intend to show that the mainstream claim that we have little generalizable knowledge about CSP and CFP is built on shaky grounds. Providing a methodologically more rigorous review than previous efforts, we conduct a meta-analysis of 52 studies (which represent the population of prior quantitative inquiry) yielding a total sample size of 33,878 observations. The meta-analytic findings suggest that corporate virtue in the form of social responsibility and, to a lesser extent, environmental responsibility is likely to pay off, although the operationalizations of CSP and CFP also moderate the positive association. For example, CSP appears to be more highly correlated with accounting-based measures of CFP than with market-based indicators, and CSP reputation indices are more highly correlated with CFP than are other indicators of CSP. This meta-analysis establishes a greater degree of certainty with respect to the CSP-CFP relationship than is currently assumed to exist by many business scholars.

Read Corporate Social And Financial Performance: A Meta-Analysis

Honorable Mention: Nicholas P.B. Bollen, and Mark A. Cohen, Vanderbilt University for “Mutual Fund Attributes and Investor Behavior“

Charles M.C. Lee and David T. Ng, Cornell University

Using firm-level data from 44 countries, we investigate the relation between corruption and international corporate values. Our analysis shows that firms from more corrupt countries trade at significantly lower market multiples. The effect is both economically and statistically significant. Furthermore, using a two-stage estimation procedure, we show that corruption impacts firm value primarily through lower expected future cash flows, most directly captured by firms' profitability forecasts. Collectively, our evidence shows corruption has significant economic consequences for shareholder value.

Read Corruption And International Valuation: Does Virtue Pay?

Honorable Mention: Christopher C. Geczy, Robert F. Stambaugh, and David Levin, University of Pennsylvania, The Wharton School for “Investing In Socially Responsible Mutual Funds“

Rogér Otten, Maastricht University, Rob Bauer, Maastricht University, and Kees Koedijk, Tilburg University

Using an international database containing 103 German, UK and US ethical mutual funds we review and extend previous research on ethical mutual fund performance. By applying a multi-factor Carhart (1997) model we solve the benchmark problem most prior ethical studies suffered from. After controlling for investment style, we find little evidence of significant differences in risk-adjusted returns between ethical and conventional funds for the 1990-2001 period. Introducing time-variation in betas however leads to a significant under-performance of domestic US funds and a significant out-performance of UK ethical funds, relative to their conventional peers. Finally, we differentiate previous results by documenting a learning effect. After a period of strong under-performance, older ethical funds finally are catching up, while younger funds continue to under-perform both the index and conventional peers.

Read International Evidence On Ethical Mutual Fund Performance And Investment Style

Glen Dowell, Notre Dame University, Stuart Hart, University of North Carolina, and Bernard Yeung, New York University

Arguments can be made on both sides of the question of whether a stringent global corporate environmental standard represents a competitive asset or liability for multinational enterprises (MNEs) investing in emerging and developing markets. Analyzing the global environmental standards of a sample of U.S.-based MNEs in relation to their stock market performance, we find that firms adopting a single stringent global environmental standard have much higher market values, as measured by Tobin's q, than firms defaulting to less stringent, or poorly enforced host country standards. Thus, developing countries that use lax environmental regulations to attract foreign direct investment may end up attracting poorer quality, and perhaps less competitive, firms. Our results also suggest that externalities are incorporated to a significant extent in firm valuation. We discuss plausible reasons for this observation.

“Do Corporate Environmental Standards Create Or Destroy Market Value?”

Honorable Mention: Bernell K. Stone, Brigham Young University, John B. Guerard, McKinley Capital Management, LCC, and Mustafa N. Gultekin, University of North Carolina for “Socially Responsible Investment Screening: Strong Evidence Of No Significant Cost For Actively Managed Portfolios“

Robert Repetto and Duncan Austin, World Resources Institute

This report demonstrates how environmental issues can successfully be integrated into financial analysis. It explains a newly developed methodology derived from fundamental principles of financial analysis and demonstrates the approach by applying it empirically to companies in the U.S. pulp and paper industry. The results show clearly that companies within this industry face environmental risks that are of material significance and that vary widely in magnitude from firm to firm. These risks are not evident in companies’ financial statements nor are they likely

Read Pure Profit: The Financial Implications Of Environmental Performance

Siew Hong Teoh, University of California – Irvine, Ivo Welch, UCLA and National Bureau of Economic Research (NBER), and C. Paul Wazzan, Berkeley Research Group, LLC

Governments and vocal institutional shareholders have been exerting pressure on companies they deem to have objectionable operations (such as tobacco or chemical producers). This paper studies the effect of the most important legislative and shareholder boycott to date, the boycott of the South Africa's apartheid regime. We find that the announcement of legislative/shareholder pressure of voluntary divestment from South Africa had little discernible effect either on the valuation of banks and corporations with South African operations or on the South African financial markets. There is weak evidence that institutional shareholdings increased when corporations divested. In sum, despite the public significance of the boycott and the multitude of divesting companies, financial markets seem to have perceived the boycott to be merely a "sideshow."

Read The Effect Of Socially Activist Investment Policies On the Financial Markets: Evidence From The South African Boycott

Michael V. Russo, University of Oregon, and Paul A. Fouts, Golden Gate University

Drawing on the resource-based view of the firm, we posited that environmental performance and economic performance are positively linked and that industry growth moderates the relationship, with the returns to environmental performance higher in high-growth industries. We tested these hypotheses with an analysis of 243 firms over two years, using independently developed environmental ratings. Results indicate that "it pays to be green" and that this relationship strengthens with industry growth. We conclude by highlighting the study's academic and managerial implications, making special reference to the social issues in management literature.

Read A Resource-Based Perspective On Corporate Environmental Performance And Profitability

Sandra A. Waddock and Samuel B. Graves, Boston College

For years scholars have been engaged in a seemingly endless and largely frustrating studies of the relationship between the social and financial performance of the corporation. The bulk of empirical research on corporate social performance (CSP) has addressed a hypothesized relationship between CSP and financial performance. The results of these studies attempting to link "socially responsible" behaviors to either market or accounting based measures of firm performance have been ambiguous at best, partly because of methodological problems related to the measurement of CSP and partly because the relationship itself is unclear. Financial data are, of course, readily available, reasonably consistent, and relatively easily measurable. CSP, on the other hand, has been ill-defined and measured in a wide range of ways. Many past studies have used different measures as proxies for CSP, which inadequately reflect its breadth as a concept. Finally, scholars have focused to date primarily on the question "Is financial performance related to social performance?" We argue for a reformulation of the question that emphasizes the link between social performance and the way an organization is managed, i.e., that explicitly focuses on stakeholder relations.

Read Finding The Link Between Stakeholder Relations And Quality Of Management

John B. Guerard, McKinley Capital Management

In this study we address three questions concerning socially responsible investing. First, is the average return of a socially screened equity universe statistically different from the average return of an unscreened universe for the 1987–94 period? Second, do analysts' earnings per share forecasts aid a manager in selecting stocks in socially screened and unscreened universes? Third, can one use an expected return model incorporating both value and growth components to select stocks and create portfolios in the socially screened and unscreened equity universes such that one can outperform both universe benchmarks? We find no statistically significant differences in the mean returns of unscreened and screened equity universes for the 1987–94 period. Earnings forecasts and the knowledge of those forecasts add value in the creation of portfolios. We find few statistically significant differences in the predictive power of the composite model to select stocks in both unscreened and screened equity universes. The estimated composite model offers the potential for substantial outperformance of socially screened and unscreened equity universes.

Read Is There A Cost To Being Socially Responsible In Investing?