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RESEARCH BRIEF: Established corporate reputation mediates market response to a firm’s addition or deletion from CSR indices


Takeaway: The inclusion of a firm in an index of responsible companies may be interpreted as an endorsement of a firm’s social responsibility. Research suggests that third-party endorsement is one way that information is conveyed to investors. The effect on firm value of inclusion in a socially responsible index is mediated by the firm’s reputation prior to inclusion. Firms with an already strong CSR reputation may benefit less than those with poorer reputations. Conversely, firms that possess strong reputations for CSR are somewhat more protected from negative effects when deleted from an index.

Suggested audience: Reputation managers, investors, companies either included in a social index or striving to be included, operations management, corporate citizenship professionals

In this study researchers looked at how being added to or removed from an index of socially responsible companies affects a firm’s financial performance. They analyzed corporate financial data, KLD social responsibility ratings, and share price data for 56 firms that were added and 69 firms that were removed from the Calvert index of socially responsible companies between Jan. 1, 2000, and Dec. 31, 2005.

Key findings from the researchers’ analysis of the data include:

  1. Across the full sample, there was not a significant positive wealth effect associated with a firm’s addition to a social index. Firms with poorer CSR reputations prior to inclusion in the index experience a greater price appreciation when added to the social index.
  2. There was a significant and negative abnormal return for companies on the first day after a deletion. Negative effects from deletion were more pronounced for companies that did not possess a strong CSR reputation prior to inclusion in the index.
  3. Firms added to a social index have superior operating performance in the period prior to their inclusion in the index, relative to companies that have been deleted from the index in the same period.
  4. Deleted firms with faster sales growth had poorer returns than firms with slower sales growth
  5. Firms with slower sales growth that were added had better returns than those with faster sales growth.
  6. Firms deleted from the index lose more than 1.5 percent of their market value on the day of, and the day after the announcement of deletion. The researchers estimated this as a loss of $4 million for the average firm.

Taken together this research suggests that the market interprets both prior CSR reputation and subsequent CSR events (such as inclusion in an indexed fund) in a more finely variegated manner than had been thought previously.  From a managerial perspective this finding suggests that investment in CSR may protect or insure the firm from a negative CSR event and that a positive CSR event (such as inclusion in an index) may help to redeem poor past performance. 

If citing please refer to the original article: Jonathan P. Doh, Shawn D. Howton, Shelly W. Howton, and Donald S. Siegel. "Does the Market Respond to an Endorsement of Social Responsibility? The Role of Institutions, Information and Legitimacy." Journal of Management 36.6 (2010): 1461-1485.

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