Rocco Ciciretti

Corporate Social Responsibility and Stock Market Performance

We analyse the performance of a large sample of Socially Responsible (SR) stocks relative to a Control Sample (CS) of equivalent size for 14 years. We find that individual SR stocks have on average significantly lower returns and unconditional variance than CS stocks when controlling for industry effects. This result is paralleled by descriptive evidence on the lower (daily return) mean and variance of the buy-and-hold strategies on the SR portfolio with respect to those on the control portfolio. Beyond this first evidence we discover that: (i) individual SR stocks are significantly less risky when controlling for conditional heteroskedasticity; (ii) there are no significant differences in risk-adjusted returns between the two buy-and-hold strategies on (SR and CS) portfolios; (iii) the buy-and-hold strategies on the SR portfolio exhibits significantly lower exposition to systematic nondiversifiable risk. These last findings are robust to different-market model, Generalized Autoregressive Conditional Heteroskedasticity (GARCH(1, 1)), Asymmetric Power ARCH (APARCH(1, 1))-model specifications.

Corporate Social Responsibility and Shareholder's Value: An Event Study Analysis

Corporate social responsibility (CSR) is increasingly a core component of corporate strategy in the global economy. In recent years its importance has become even greater, primarily because of the financial scandals, investors’ losses, and reputational damage to listed companies. While corporations are busy adopting and enhancing CSR practices, there is (beyond very few notable exceptions) no established empirical research on CSR’s impact and relevance in the capital market. This paper investigates this issue by tracing the market reaction to corporate entry and exit from the Domini 400 Social Index, recognized as a CSR benchmark, between 1990 and 2004. The paper highlights two main findings: a significant upward trend in absolute value abnormal returns, irrespective of the type of event (for example, addition or deletion from the index), and a significant negative effect on abnormal returns after exit announcements from the Domini index. The latter effect persists even after controlling for concurring financial distress shocks and stock market seasonality.

Socially responsible and conventional investment funds: performance comparison and the global financial crisis

We investigate the performance of socially responsible funds (SRFs) and conventional funds (CFs) in different market (geographical area and class size) segments during the period 1992–2012. From an unbalanced sample of more than 22 000 funds, we define a matched sample using a beta-distance measure to match any SRF with the ‘nearest neighbour’ CF in terms of sensitivity to risk factors. Using this matching approach and a recursive analysis, we identify several switch points in the lead/lag relationship between the two investment styles over time in different market segments. A relevant finding of our analysis is that SRFs played an ‘insurance role’ outperforming CFs during the 2007 global financial crisis.

Corporate social responsibility, stakeholder risk, and idiosyncratic volatility

Idiosyncratic volatility (IV) is a measure of firm specific information that is correlated with lower stock returns. We explore the nexus between IV and corporate social responsibility (CSR) and document that IV is positively correlated with aggregate CSR and is negatively correlated with a CSR-specific (stakeholder) risk factor. Our findings are consistent with the view that CSR reduces flexibility in responding to productive shocks via the reduction of stakeholder well-being, thereby producing the combined effect of making earnings less predictable and reducing exposure to risk of conflicts with stakeholders.

Market vs. analysts reaction: the effect of aggregate and firm-specific news

Firm-specific and aggregate shocks generate reassessment of investors and analysts expectations on earnings forecasts and on the fundamental value of equities. In this article, we evaluate the effects of this combined reaction on the implied equity risk premium extracted from a standard two-stage dividend discount (DD) model. If investors and analysts revisions coincide, and in absence of measurement errors in the DD formula, the observed shocks should not have any significant impact on prices and Implied Equity Risk Premium (IEPR). On the contrary, in an analysis based on data for all S&P 500 COMPOSITE INDEX constituents from 1990 to 2003, we observe substantial overreaction of investors to both downward and upward firm-specific forecast revisions, plus overreaction to changes in GDP and to the announcements of the Consumer and Business Confidence indicator. We also observe that positive overreaction to upward earning forecast revisions and GDP changes falls after the stock bubble burst, while overreaction to upward forecast revision and to announcements of the Consumer Confidence Index looses significance after the 9/11 terrorist attack. These findings are broadly consistent with the hypothesis of reduced participation of uninformed (noise) traders to financial markets after these two shocks.

The cooperative bank difference before and after the global financial crisis

We compare characteristics of cooperative and non cooperative banks at world level in a time spell including the global financial crisis. Cooperative banks have higher net loans/total assets ratio, lower income from non traditional activities and lower shares of derivatives over total assets than non cooperative banks. From an econometric point of view, we find that the cooperative bank specialization has a positive and significant effect on the net loans/total assets ratio in the overall sample period and in the post financial crisis subperiod. Derivatives (both in terms of assets and revenues) have a quantitatively strong and significant negative effect on the same dependent variable during both time spells. We finally document that, in a conditional convergence specification, the net loans/total assets ratio is positively and significantly correlated with the value added growth of the manufacturing sector with the exception of the two extremes of self-financing sectors and sectors in high need of external finance.We compare characteristics of the banks’ specialization (cooperative versus non-cooperative) at world level in a time spell including the global financial crisis. Cooperative banks display higher net loans/total assets ratios, lower shares of derivatives over total assets and lower earning volatility than commercial banks. With a diff-in-diff approach we test whether the global financial crisis produced convergence/divergence in these indicators. We finally document that, in a conditional convergence specification, the net loans/total assets ratio is positively and significantly correlated with value added growth in some manufacturing sectors but not in others.

Earning Forecast Error in US and European Stock Markets

Abstract The paper investigates the dynamics and determinants of the earning forecast bias in two (US and Eurozone) stock samples matched by size and industry affiliation. Evidence is found that the European bias is significantly higher in absolute terms, irrespective of the year and the distance from the release date, with the exception of the 1997–2000 period in which US stocks are more optimistically valued. Cross-market differences persist when they are regressed, in a panel GMM estimate, on various controls such as the number of individual forecasts and their standard deviation for any considered stock, with the latter being significantly lower in the US market. Finally, it is observed that a convergence process is at work in both markets, with the bias becoming progressively lower as the release date gets closer.

Fishing the Corporate Social Responsibility Risk Factors

A typical argument in the literature is that Corporate Social Responsibility (CSR) reduces the risk of conflicts with stakeholders. By considering the multidimensional nature of corporate responsible performances we create domain specific (size interacted) CSR portfolios and test if the CSR risk-reduction effects: i) generate pricing anomalies that could be captured by the introduction of risk factors accounting for the exposition to stakeholder risk, ii) are priced in the cross-section of expected returns. Our findings document that, with the exception of the corporate governance domain, corporate stock returns decrease as firm responsibility levels increase. This pattern indeed is related to the existence of pricing anomalies and the higher returns for companies with lower responsibility levels are justified by their higher exposition to stakeholder risk. Even if our domain specific CSR risk factors are not able to capture all the pricing anomalies, the higher exposition to stakeholder risk is actually priced in the cross-section of returns. Firms with lower responsibility levels pay a premium to investors in equilibrium.

Corporate Social Responsibility, Stakeholder Risk, and Idiosyncratic Volatility

Idiosyncratic volatility (IV) is regarded as a measure of firm specific information and has been shown to be correlated with ex post lower stock returns. We explore the nexus between IV and corporate social responsibility (CSR) and document that IV is positively correlated with net aggregate CSR and is negatively correlated with a CSR specific risk factor (namely stakeholder risk). Our findings show that: (i) less (more) reliance on market information (firm specific information) implies more difficulty in predictive accuracy; (ii) negative correlation between IV and exposure to the above mentioned CSR risk dimension contributes to explain the puzzle of the negative excess returns of high IV portfolios widely documented in the literature. Our findings are consistent with the hypothesis that CSR reduces flexibility in answering to productive shocks via reduction of stakeholders’ wellbeing, thereby making earnings less predictable in conventional ways, even though they are less exposed to risk of conflicts with stakeholders.

The Price of Taste for Socially Responsible Investment

Firms that score low on environmental, social, and governance (ESG) indicators exhibit higher expected returns. This negative ESG premium might be driven by higher risk associated with low ESG scores, or it could signal investors’ preferences for firms with high ESG scores. The first driver implies an underlying, systematic ESG risk factor, such that ESG risk factor betas explain differences in expected returns. The second driver implies that firm-specific ESG characteristics explain the ESG premium. To identify the separate contributions of ESG betas and ESG characteristics for explaining variation in expected returns, this study uses two global data sets from 2004-2018 and reveals that ESG characteristics mainly explain variation in expected returns. A one standard deviation decrease in ESG scores is associated with an increase of 13 basis points in monthly expected returns. This study also sheds new light on how the term structure of the ESG premium has changed over time.