The empirical investigation of the effect on the market value of the Swedish listed companies was conducted through an event study, where the publications of the Folksam Index of Corporate Social Responsibility were defined as the events. For the estimation of normal returns, the market model was used with 126 trading days prior to the event in the estimation window. The cumulative abnormal returns were calculated over one event window, from the day prior to the event, day -1, to day 3, where day 0 corresponds to the event day.
The results from the event study showed that CSR engagement has no direct positive impact on the financial value of the firm. A poor CSR engagement on the other hand has proven to have a negative impact on the financial value of the firm. The companies with high CSR rankings were neither rewarded nor punished, while the companies with bottom rankings were punished. In short, this is explained by bottom companies not fulfilling investors’ expectations. For the top-performing segment, no significant results were found, but the overall impact appeared to be somewhat negative. Two potential explanations to these findings were identified. The first being that investors already are aware of the highly-ranked companies’ CSR engagement and hence that no impact on stock price was shown due to an efficient market. This is applicable on the Swedish market with its transparency and requirements for companies to report all information that may influence the prices of the stocks, but it could limit the applicability of this study to other countries. The second explanation is that investors only value CSR investments up to a certain point where they perceive the costs of CSR to equal the benefits. Once this equilibrium point is exceeded, the investors no longer reward the efforts put into CSR, but rather punish the companies for not acting in the best interest of shareholders.
When grouping the companies into more specific segments, as defined in the sub-hypotheses, some further significant results were found. Firstly, the results clearly confirm previous theory and research that has suggested that the interest in CSR has increased over time and is continuously increasing. When comparing the same groups of companies in 2006 to those in 2013, it was concluded that the results for 2013 were more substantially more significant than the results for 2006, particularly for the bottom performing firms.
Secondly, it was found that during the financial crisis, there was still a demand for CSR among investors and it was discussed whether the absence of CSR engagement might have functioned as a signal of an unstable financial situation and lack of resources. During the three-year period when the market was in recession, the impact on the bottom- and zero companies was negatively significant, indicating that the release of Folksam’s CSR report did have a direct impact on stock returns as investors punished bad performance. For all periods, there was no significant reaction for the top performing companies’ stock returns, but the general direction of the impact was negative.
Thirdly, the nature of the industries has shown to be of considerable importance.
When only selecting the companies operating in environmentally high-risk industries as a sample, it became clear that those companies within this segment that received worse rankings were punished as significantly negative returns followed the release of the rankings. This result was aligned with the overall perception when considering all tests; it was shown that negative performance was more punished than good performance was rewarded.
Finally, when considering the size of companies, the main conclusion following the results was that investors seem to be fully aware of the companies’ good performance, and since almost all top-ranked companies were large cap companies, it follows naturally that the ranking release comes as no surprise. As discussed above, an alternative explanation is that the companies’ CSR efforts are considered to be too costly and destroy more value than they create.
This study gives both companies and investors as well as other stakeholders, who benefit from companies’ CSR work, a better insight into CSR efforts and provides an overview of the potential long-term benefits that CSR engagement may incur. The key finding is that companies that do not engage in CSR at all clearly are punished by investors. Hence, this thesis may function as a motivator for companies for continuous development of their work on CSR, at least to a certain point, since it has identified an increased importance of CSR among investors and society in general that is likely to grow over time, and also has discussed when CSR investments are optimal and most profitable. It has also emphasized several positive CSR aspects and
how these efforts may add value to a business, despite the fact that they are not always directly reflected in the stock price. Further, it has touched the issue of CSR hurting the image and the competitiveness of a firm, and how to mitigate the risks of bad publicity and negative effects as a result of CSR.
The results and topics covered may also be valuable to investors since they have received insights into how CSR can be incorporated in a valuation. However, the main issue with CSR, as indicated throughout the thesis, is that it is difficult to measure, and even though investors know how to incorporate the CSR aspects of a firm, they still find it difficult to measure the impact and determine the exact number in which costs will be saved or avoided, or sales or market share will increase, as a result of socially responsible activities. Hence, the results will be valuable for both these parties, as well as for other stakeholders who benefit from companies’ CSR work.
7.1 Limitations
As with most studies, some limitations naturally follow the choices made during the process. When limiting the research to the Swedish market, the first limitation that followed was the potential ranking reports that could be used as a case. Folksam is, as explained above, considered a reliable source of releasing such reports, and as discussed in the method chapter, the potential problems with this report specifically are outweighed by the advantages. When comparing to the alternatives, that is if looking at other markets than the Swedish one specifically, it can be concluded that the two most common problems among other rankings are subjectivity and the criteria on which the company evaluations are based. While the issue of subjectivity is a concern for Folksam’s report too, the criteria are not. As opposed to several of the other rankings and indexes, Folksam bases their evaluations on the UN Global Compact criteria, which are the most valid worldwide definitions and criteria for how to be a good corporate citizen as of today. The issue of subjectivity is also regarded as something that follows naturally when investigating CSR in general, since the definition of CSR itself is subjective and still “under construction”.
Another limitation related to the above discussion is that CSR is a relatively new area of research compared to many other areas, and therefore the number of observations even when including all possible data related to the existing reports, is limited. The largest test in this thesis comprised a number of 186 observations, which is by far enough to achieve significant results, but can still not be considered a huge amount of data, by most standards. This also limited the sub-hypotheses, as the total population from where samples were found was small. Also, as companies not engaging at all in CSR has decreased to a total number of five in 2013, the existing sample for testing how investors perceive companies that do not engage in CSR is too small to be significant according to common rules of thumbs about sample sizes.
Another issue that follows looking at relative returns, which an event study requires, is that for those stocks that only are worth small amounts of money in absolute terms, even the smallest increase or decrease in stock price has a large impact. This is however something that follows the event study methodology, and hence the same goes for all event studies, and the perceived advantages of the methodology overweight this disadvantage.
An additional concern related to the results is the CSR measure chosen for the purpose of this study. In general, CSR is difficult to measure and to avoid shortcomings of CSR measures used in previous studies, a ranking made by a third party has been used. Due to the lack of information about the exact number of investors making use of Folksam’s ranking report, it cannot be taken for granted that it is an appropriate measure of whether CSR engagement affects the stock price of a firm. However, Folksam’s CSR report, which is publically available, is considered to be the best available option for measuring CSR on the Swedish market. Any other alternative would incur a larger amount of subjectivity and would require limitations of the study that would be even more subjective than Folksam’s report itself. In addition, Folksam is one of Sweden’s largest investment- and insurance companies, and therefore it is believed that the report is known among investors and that the release of this report thus is valid as an event for this event study.
The final limitation identified in this study is the number of days included in the estimation window and the whole event window. The number of days used in
previous studies varies, and hence no direct choice can be made based on these.
Instead, a subjective assessment of what is considered to be reasonable has been used, which may bias the results. However, based on the data available and all events that occur close to the event and estimation period, the period chosen is regarded to be the most appropriate and it is unlikely that any other number of days in any of the windows would have given a more accurate result.
7.2 Suggestions for Future Research
Several of the conclusions drawn in the analysis point towards the limitations that follow the event study methodology. A more in-depth case specific study would complement this study well, by further investigating those thoughts that have surfaced during the process of this study. For example, taking a closer look at the specific stakeholders of companies investing heavily in CSR would answer several questions, such as if different stakeholders’ demand for CSR affects the financial value related to increased CSR engagement.
Moreover, as Schaltegger and Synnestvedt (2002) discuss, knowing your stakeholders also implies knowing at what level CSR investments continue to add value. In their article they suggest that economic success does follow environmental engagement, but only to a certain level, where instead the costs become too high and the crowd no longer approves. At this point, the CSR efforts add no more value. This thesis methodology limits the possibilities to explore this further, and it is reasonable to assume that a more in-depth case study also could explore this issue better.
For the publicly listed Swedish companies, the information included in Folksam’s report for each company separately is in fact already available to the investors and it is therefore possible that the information is incorporated before the release and that the ranking does not affect the stock prices due to the efficient market. Hence, it could instead be interesting to look at stock indexes that only include companies that are good corporate citizens, and see how these perform in relation to normal stock indexes covering other companies’ stocks.