Corporate Ethical Behaviours and Equity Value

Transcription

1 Corporate Ethical Behaviours and Equity Value Evidence from the GPFG s ethical exclusions Vaska Atta-Darkua Judge Business School, University of Cambridge January 9, 2019

2 Motivation In the United States, one out of five dollars of professionally managed assets employ SRI strategies. (the US Social Investment Forum (2016)) Globally, exclusionary screening is the largest sustainable investment strategy at $15.02 trillion out of $22.9 trillion (Global Sustainable Investment Alliance (2017)) What is the impact of excluding firms due to ethical considerations? Specifically, this paper examines the effect of the GPFG s ethical exclusion announcements on firm equity value

3 Setting The GPFG is a large institutional investor, has broad index-like holdings Assets of over 1tn USD, 67.6% equities Invests in around 9,000 companies worldwide, Owns 1.4% of all listed companies worldwide, and 2.4% of listed companies in Europe. The Fund excludes firms from its investment universe if they do not meet its ethical criteria Such ethical exclusions are not based on the firms financial performance Exclusion announcements introduce detailed information to the market about firm (perceived) unethical behaviour.

4 Results Preview 1. I document a short term negative impact of exclusion announcements on firm equity value, which is reversed within a week 2. There is modest clientele change due to divestment by ethics sensitive investors 3. Preliminary analysis shows that firm clients do not seem to react to exclusions (proxied using changes to firm accounts receivable and net sales) Results

5 Hypotheses and Related Literature Exclusions are considered relevant to firm risk or fundamentals - no returns reversal Institutional Investor monitoring - Admati et al. (1994), Shleifer & Vishny (1986) Mixed evidence on ethical vs unethical portfolios performance - Derwall et al. (2005), Bauer et al. (2005), Hong & Kacperczyk (2009), Blitz & Fabozzi (2017) Investor overreaction - returns reversal Overreaction to past returns - De Bondt & Thaler (1985), De Bondt & Thaler (1987), Dissanaike (1997) Clientele change - returns reversal and investor composition change Researchers have documented clientele changes around corporate events - Dhar et al. (2004), Da & Gao (2010), Pettit (1977)

6 Overview of Exclusions 1, data to end May 2017 (N = 144) Product: Coal Product: Tobacco Product: Nuclear Exclusions by Type 47% 25% Product: Cluster Munitions Conduct: All 4% 10% 14% Regional Composition of Exclusions Asia-Pacific North America 6% Europe Central and South America, Africa 14% 35% 45% 1 Conduct exclusions can be split into (1) Serious violations to human rights, (2) Severe environmental damage, (3) Gross corruption, (4) Serious violations of individuals rights in situations of war or conflict, (5) Other particularly serious violations of fundamental ethical norms

7 Financial Impact of Exclusions Do exclusion announcements harm firm equity value? Event study methodology employed to answer the question Regional Fama French 5 Factors Estimation window is -480 to -31 days Event window is -2 to 10 days Standard event study statistics used from Campbell et al. (1997)(Ch.4) and Kolari & Pynnönen (2010) (J 1, J 2, and J 2 ) as well as Dewenter et al. (2010) Z-score statistic Exclusion announcement dates used as event date.

8 Exclusions Sample - returns reversal observed 2 Table: Statistics Period Days avg CARs FF5 J 1 FF5 z-score FF5 J 2 FF5 J 2 FF5-2 to to to *** -2.26** -2.26** -2.81*** -2 to ** -1.89* -1.88* -2.04** -2 to ** -2.08** -2.07** -2.54** -2 to *** -2.27** -2.27** -2.69*** -2 to *** -2.94*** -2.93*** -3.28*** -2 to *** -3.38*** -3.38*** -2.93*** -2 to * -2.26** -2.25** to to * -1.81* to to Significance: *** p < 0.01, ** p < 0.05, * p < 0.10; N = 144 mean CARs Mean CARs Day -2 to Day on Axis 2 thick line if J 2 s significant at 10%

9 Abnormal returns characteristics No opposite effect for reincluded firms (small sample, N = 11) Stronger results for Product relative to Conduct exclusions, and for Coal relative to non-coal exclusions. Disparity not significant after accounting for firm characteristics (Size, MtB, age, turnover, past returns, region) Stronger results for firms not owned in the pre exclusion quarter (N = 84) and similar results for non-excluded firms (small sample, N = 10)

10 Ownership by Ethics Sensitive Investors A natural comparison to the GPFG are norm constrained investors such as US Ethical Mutual Funds Pension Funds I analyse holdings before and after exclusion announcements Average number of funds owning an excluded firm US Ethical Mutual Funds modestly reduce ownership in the short term Driven by reaction to product exclusions Pension funds show large geographical heterogeneity in responses I will demonstrate the results for coal exclusions

11 European Pension Fund (PF) ownership, coal exclusions Quarter # Before or After Funds Q-1 Funds Q# Difference Firms Sample Funds Sample ** *** * Significance: *** p < 0.01, ** p < 0.05, * p < 0.10 # Funds Owned # Funds Owned Event Time Quarters European PFs have already been reducing ownership levels

12 US Pension Fund (PF) ownership, coal exclusions Quarter # Before or After Funds Q-1 Funds Q# Difference Firms Sample Funds Sample ** ** *** ** Significance: *** p < 0.01, ** p < 0.05, * p < 0.10 # Funds Owned # Funds Owned Event Time Quarters Response of US PFs is longer lasting and no clear pre-existing trend

13 Conclusions Takeaways There is a short term negative impact of the exclusions which is consistent with both the overreaction and clientele change mechanisms, and inconsistent with investor revaluation of firm risk or fundamentals. Moderate clientele change by ethics sensitive investors selling out of product exclusions, provides further evidence for the clientele change mechanism. Summary Taken together, the results suggest that ethical exclusion announcements have an impact on equity value, which is transitory due to clientele change.

14 References I Admati, A. R., Pfleiderer, P. & Zechner, J. (1994), Large shareholder activism, risk sharing, and financial market equilibrium, journal of Political Economy 102(6), Bauer, R., Koedijk, K. & Otten, R. (2005), International evidence on ethical mutual fund performance and investment style, Journal of Banking & Finance 29(7), Blitz, D. & Fabozzi, F. J. (2017), Sin stocks revisited: Resolving the sin stock anomaly, Journal of Portfolio Management 44(1), Campbell, J. Y., Lo, A. W.-C., MacKinlay, A. C. et al. (1997), The econometrics of financial markets, Vol. 2, Princeton University press, NJ. Da, Z. & Gao, P. (2010), Clientele change, liquidity shock, and the return on financially distressed stocks, Journal of Financial and Quantitative Analysis 45(1), De Bondt, W. F. & Thaler, R. (1985), Does the stock market overreact?, The Journal of finance 40(3), De Bondt, W. F. & Thaler, R. H. (1987), Further evidence on investor overreaction and stock market seasonality, Journal of finance pp

15 References II Derwall, J., Guenster, N., Bauer, R. & Koedijk, K. (2005), The eco-efficiency premium puzzle, Financial Analysts Journal pp Dewenter, K. L., Han, X. & Malatesta, P. H. (2010), Firm values and sovereign wealth fund investments, Journal of Financial Economics 98(2), Dhar, R., Goetzmann, W. N. & Zhu, N. (2004), The impact of clientele changes: evidence from stock splits. Dissanaike, G. (1997), Do stock market investors overreact?, Journal of Business Finance & Accounting 24(1), Global Sustainable Investment Alliance (2017), Global sustainable investment review Online: posted March Hong, H. & Kacperczyk, M. (2009), The price of sin: The effects of social norms on markets, Journal of Financial Economics 93(1), Kolari, J. W. & Pynnönen, S. (2010), Event study testing with cross-sectional correlation of abnormal returns, Review of Financial Studies 23(11), Pettit, R. R. (1977), Taxes, transactions costs and the clientele effect of dividends, Journal of Financial Economics 5(3), Shleifer, A. & Vishny, R. W. (1986), Large shareholders and corporate control, Journal of political economy 94(3, Part 1),

16 References III US Social Investment Forum (2016), Report on socially responsible investing trends in the united states, in Social Investment Forum.

17 No Firm Performance changes observed Receivables/5 Year Avg Assets Net Sales/L1 Assets Exclusions Year # Mean in Year-1 Mean in Year # Difference # Firms Exclusions Year # Mean in Year-1 Mean in Year # Difference # Firms All All All Conduct Conduct Conduct Product Product Product All All All ** 64 Conduct Conduct Conduct *** 24 Product Product Product Significance: *** p < 0.01, ** p < 0.05, * p < 0.10 Significance: *** p < 0.01, ** p < 0.05, * p < 0.10 Year -1 vs Years 0 to 2, data to 8th May 2018 No stakeholder reaction observed Main