Social performance and market performance of stocks : (Evidence from public listed firms in Sweden)

Sammanfattning: The increasing importance of corporate social responsibility with practitioners is having huge attention in the academic literature. A growing study examines the reasons why firms engage in corporate social responsibility, and how it relates to financial performance of firms. Yet, the link between market performance of a firm’s stock and its social performance is under researched compared to that of the environment and economic perspectives. Therefore, this study adds insights to CSR-financial performance debate by focusing on the concept of social performance. Social performance refers to the firm’s product responsibility, community involvement, health and safety, diversity, training and development, human right, and employment quality. Using Thomson Reuters database social performance scores, we conduct a descripto-explanatory analysis to examine whether the Swedish stock market responds to social performance over the years 2010 to 2014 for a sample of 66 Swedish firms listed at OMX Stockholm. To accomplish this descripto-explanatory analysis, monthly returns for the stock and the market for each firm were calculated as, ri = Pi / (Pi-1 – 1), from the stock data index and OMX Stockholm30, respectively. Other financial measures such as risk factors for the market, SMB, and HML were computed based on procedures of Fama and French_1993. Moreover, making use of multivariate Fama and French regression model, ri = Rf + βmi'Rm- Rf + βsi'SMB + βhi'HML, risk adjusted return; alpha and market beta for each firm is computed. Finally, to simplify the analysis process and to ensure compatibility with existing literature, both financial and social data is computed as an average for the years 2010 to 2014. In this study, we encompass existing theories to develop testable hypotheses to scrutinize the data on how market performance of a firm’s stock relates to its social performance. Our analysis revealed an insignificant no effect linear relationship between social performance and market performance of a firm’s stock for listed firms in the analysis. The proposition of a neutral association assumes either non-existent or non-linear relation between corporate social and financial performances. However, Ullmann (1985) argues that the relationship could not be detected, even if a relationship existed, due to the problems associated, for example, with measurement in empirical studies. Our finding suggests investment in social responsibility initiatives bears no significant impact to stock market performance measured in terms of risk adjusted returns or firms cost of capital. Thus, the results appear to support the argument social investment cannot pay off, nor give up shareholders wealth. In addition, we found no significant evidence for the view expressed by CSR sceptics that CSR may make financial markets more volatile by amplifying noise in the stock markets. Finally yet importantly, the findings of this paper can have implications for managers and security analysts who are considering the implementation of social performance suggesting that abandoning social responsibility may reduce their performance, and for investors who value social responsibility as a key strategy for investment decision.