Good for the world, good for shareholders: Study finds social responsibility means less risky stock prices

May 28, 2013 ? Firms that make greater investments in corporate social responsibility (CSR) initiatives see less risk in their stock prices during economic downturns, according to a new study from the University of Iowa.

The research, by Art Durnev, assistant professor of finance in the Tippie College of Business, suggests that those companies have greater brand loyalty, so customers keep buying their products and paying a premium for them, regardless of the overall economy. That stability in turn reduces those firms' costs of equity capital, further reducing its overall risk.

CSR has become an increasingly important part of business in recent years, as more customers look to buy from companies with practices that match their own values, especially when it comes to environmental issues. While research has shown that companies like Patagonia and Ben & Jerry's have increased brand loyalty because of their extensive CSR initiatives, Durnev says little research has been done to see how that loyalty affects firms' stock prices.

"CSR's increased popularity inside boardrooms has outpaced the research needed to justify it," Durnev says. "Many questions still remain on how CSR policies affect the risks firms are facing and the stock market implications of those policies."

In their paper, Durnev and his co-authors try to find those affects by looking at the stock prices of 3,005 firms from 34 countries between 2004 and 2010. The prices were from a database that factored in the social and environmental risk factors of each company, among them: labor relations, health and safety, recruitment and retention strategies, progressive workplace practices, and environmental and climate risk. In the end, the researchers drew from 9,795 firm year observations.

The researchers tabulated a CSR score for industries of between 1 and 10, with software companies having the highest scores of 7.031. Textiles and apparel were second at 6.717, and leisure equipment and products at 6.215.

The industries with the lowest CSR score were chemicals at 2.511, insurance at 3.120, and broadcast and cable TV at 3.324.

The researchers found the level of risk was significantly lower for firms with higher CSR scores, especially during economic downturns, as loyal customers kept sales higher during hard times than firms that did not practice CSR initiatives. That revenue and stock price stability led to lower equity costs, reducing firm risk further and making the stock even more attractive to buyers.

The study also finds that timing is important, as the first firm to start using CSR practices in an industry gets a larger market share, leaving less for its competitors that adopt CSR later on.

"The second entrant into the market doesn't get as many customers as the industry leader so there's less benefit, and so on," he says. Eventually, Durnev says latecomers have no incentive to start using CSR practices because its competitors have taken up so much of the market there's nothing left for them. The risk of adopting CSR, he says, is no longer worth the investment.

The study, Corporate Social Responsibility and Asset Pricing in Industry Equilibrium, was co-authored by Rui Albequerque and Yrjo Koskinen of Boston University. It received the best paper award at the first Geneva Summit on Sustainable Finance in March and will be presented in June at the Symposium on Sustainability & Finance organized by the California Public Employees Retirement System and the University of California at Davis.

Source: http://feeds.sciencedaily.com/~r/sciencedaily/~3/KBBwiqk5gno/130528180850.htm

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