Moskowitz Prize Winner 2012: The Benefits of CSR Engagement
October 3, 2012
This strong study examines the corporate social responsibility (CSR) engagements of a large institutional investor, one of the top 100 worldwide by assets under management, for the 1999-2009 time period. The sample studied includes 2,152 engagement events with 613 public firms.
Using event study methodology, the authors find that engagements generated “a positive abnormal return over a 12-month period after the initial engagement. Abnormal returns are much higher for successful engagements (4.4%) and gradually flatten out after one year when the objective is accomplished for the median in our sample. We do not find any market reaction to unsuccessful engagements.” These findings are extensively double-checked through the analysis of buy-and-hold returns and calendar time portfolios.
Corporate governance & climate change
Financial impacts varied by issue area. In some areas little or no stock market impact was observed. According to the study, “the value-creating effect of CSR engagements is strongest on the themes of corporate governance and climate change. The average cumulative abnormal return of an additional successful engagement over a 12-month period after the initial engagement is 7.1% for corporate governance theme and 10.6% for climate change theme.”
This financial success is hard-won, however. The majority of engagements (82%) were unsuccessful, and for successful ones the authors note that “it takes 2-3 engagements before success within an average horizon of a year and a half.”
What mechanisms account for these positive returns? The study reviews a variety of possible channels, including sales growth and improved firm profitability, as well as stock clientele effects and possible signaling of changes in corporate governance. Consistent with asset efficiency explanations, the study finds that “the return on assets, profit margin, and sales-over-employee ratios improve significantly after successful engagement relative to unsuccessful ones.”
In addition, the institutional investor under study was found to increase its shareholdings following successful engagements, and target companies were found to have improved their governance practices in the two years following the engagements.
A noteworthy guidepost
This study is consistent with prior studies of activist hedge funds, which demonstrate that governance-focused activism has been both profitable and successful in creating change at target companies. But this the first study we have seen that persuasively shows positive financial outcomes to sustainability-related engagements.
“Active Ownership” is notable for its unique data set, large sample size, and the long time period reviewed. The quantitative techniques employed are sophisticated and the authors’ checks for robustness are particularly well conceived. Apart from its technical merit, however, the study is noteworthy as a guidepost for institutions considering the meaning and implications of active ownership. It demonstrates that, for at least one large institution, CSR engagement has been both socially and financially beneficial.
- Dimson, Elroy, Oguzhan Karakas, and Xi Li. “Active Ownership” SSRN eLibrary, (September 30, 2012).
Research Paper: "Active Ownership"
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