Institutional investors, corporate social responsibility, and stock price performance

Transcription

1 Institutional investors, corporate social responsibility, and stock price performance Elizabeth Motta, Kyushu University Konari Uchida, Kyushu University JSPS Core-to-Core Program Workshop, Waseda University September 16, 2016

2 Motta and Uchida, September 16, Introduction: Motivation (1) Institutional investors: Movement toward socially responsible investments

3 Motta and Uchida, September 16, Introduction: Motivation (2) United Nations launched the Principles for Responsible Investment (PRI) in Require institutional investors to introduce social and environmental issues into their ownership policies. Demand for financial mechanisms to enhance responsible business practices.

4 Motta and Uchida, September 16, Introduction: Research question 1. Are international organizations guideline, which are legally non-binding, effective tools to promote social business practices? 2. Do shareholders preferences affect corporate social performance (CSP)?

5 Motta and Uchida, September 16, Introduction: Why important Previous studies: A positive correlation between institutional ownership and social performance and good governance. Coffey and Fryxell (1991); Graves and Waddock (1994); Cox et al. (2004) What s new: Only few studies examine whether initiatives that set global standard for institutional investors can effectively improve CSP We can reduce endogeneity and reverse causality concerns inherent in CSP research. Other factors

6 Motta and Uchida, September 16, Introduction: Advantages Exogenous event in 2006 Institutional investors Monitor on CSP Increase Monitor on CSP CSP of investee firms Before PRI CSP improvement due to PRI After PRI

7 Motta and Uchida, September 16, Introduction: CSP-CFP relation Long-held debate on CSP-CFP relation: Friedman (1962): Against CSR Socially responsible activities generate advantages such as good will and new market opportunities (Guenster et al., 2011). Concerns on endogeneity and reverse causality. We examine: The change in CSP, which is attributable to the PRI, and stock returns. Reduce endogeneity and reverse causality concerns.

8 Motta and Uchida, September 16, Literature review Determinants of CSR and CSP Stakeholder relation: Dhaliwal et al. (2014); Van der Laan et al. (2008). Institutional shareholders: PRI highlights the role of institutional investors. Berna and Rubin (2010): negative correlation between CSR expenditures and ownership of insiders, but no correlation between CSP and institutional investors. Graves and Waddock (1994) institutional investors are favorably inclined toward companies with higher CSP. Coffey and Fryxell (1991): positive relation between institutional ownership and the representation of women on board of directors. Cox et al. (2004): positive relation between long-term institutional investment and CSP.

9 Motta and Uchida, September 16, Literature review CSP-CFP relation Pava and Krausz (1996) Review papers polished from 1972 to Ruf et al. (2001) Changes in CSR ratings from 1991 to 1992 are positively related to sales growth from 1991 to Al-Tuwaijri et al. (2004) Simultenous regression: Environmental performance has a positive effect on CFP. Renneboog et al. (2008) CSR creates long-term shareholder value. Fisher-Vanden and Thorburn (2011) Announcements of enrollment in the EPA s Climate Leaders are negatively reacted by the stock market.

10 Motta and Uchida, September 16, Research design and hypothesis Principles for Responsible Investment (PRI): Developed by US Secretary General Kofi Annan and a group of large institutional investors. Officially launched in Emphasizes active ownership. Advises investors to use: Their rights acquired through shareholding influence gained through visibility to encourage companies to improve management systems, ESG performance, and reporting.

11 Motta and Uchida, September 16, Research design and hypothesis Japanese signatories: April 27, 2006: Kikkoman signed up. May 1, 2006: 4 institutional investors announced sign-up. Sumitomo Trust & Banking Mitsubishi UFJ Trust & Banking Daiwa Asset Management Sompo Japan As of April, 2007, 9 Japanese institutional investors signed up. Mitsui Asset Trust Management Taiyo Life Insurance Currently: 41 Japanese segnotories

12 Motta and Uchida, September 16, Research design and hypothesis We examine: The relation between institutional ownership and the change in CSR ratings of Japanese companies. Japanese setting: dual pressure on institutional investors for environment care. Particular attention to environmental attribute of CSR, since environment protection is a main ESG issue in Japan. Dual pressure especially for environment care

13 Motta and Uchida, September 16, Research design and hypothesis Actions by the Japanese Ministry of Environment in 2006: April: Set up the Round Table Conference on the Environment and Finance. July: Created the report, Expanding the Flow of Environmentally Conscious Money. August: Symposium on the Environment and Finance: Discussions about CSR with private investors, corporate representatives, and security industry insiders.

14 Motta and Uchida, September 16, Research design and hypothesis Hypothesis: Firms with higher percentages of ownership by institutional investors improved CSR ratings, especially in terms of environmental protection, following the launch of the UN Global Compact PRI and the Ministry of Environment Roundtables.

15 Motta and Uchida, September 16, Sample selection and data CSR data: Toyo Keizai CSR database Companies are rated on performance in four categories: Environment; social engagement; corporate governance; employee relations. Five-score rating system based on survey: AAA; AA; A; B; C Ratings from 2007 to 2012 were used in the empirical analysis. Ratings in 2007 (book published in 2008) Based on survey conducted from July to September Contains information of accounting year 2006 (e.g., environmental target and performance). Adopt the starting year for environmental rating change.

16 Motta and Uchida, September 16, Sample selection and data Questionnaires in Toyo Keizai CSR survey Organization and information disclosure Disclosure of environmental accounting Environmental performance Environment protection cost and performance Economic effects of environment preservation measures Environmental management system Environmental auditing; EMS; ISO Related indicators Actions for environment protection Mid-term plan for reduction of CO2 emission Environmental target and achievements

17 Motta and Uchida, September 16, Sample selection and data Financial data: Nikkei NEEDS FinancialQuest Corporate governance data: Nikkei NEEDS Cges Include institutional ownership

18 Motta and Uchida, September 16, Sample selection and data Two samples: 3-year sample: trace rating change from 2007 to year sample: trace rating change from 2007 to Main variable: D_IMPROVE: 1 if the firm improved the rating, and zero for firms with no rating change or downgrade. For 3-year sample (5-year sample), D_IMPROVE takes a value of zero if the rating in 2011 (2013) is same or lower than the 2007 level. INST: institutional ownership (%) at DINST: domestic institutional ownership at 2007 FRGN: foreign ownership at 2007

19 Motta and Uchida, September 16, Sample selection and data Table 2 Improvement 3-year sample 108 (23%) 5-year sample 107 (24%) Examples No improvement Total (77%) (76%) Kubota: AA (2007) AAA (2009) Renewed the target of CO 2 emission reduction in its mid-term plan. Morinaga Milk: A (2007) AA (2008) Describe the target of CO 2 emission reduction in its mid-term plan.

20 19 Motta and Uchida, September 16, Sample selection and data Table 3: Ownership structure variables (%) Improvement Mean N No improvement Mean N Difference T-statistics INST *** DINST *** FRGN *** 3-year sample Biodiversity protection (2010) INST = 29.99% INST = 46.49% INST = 34.40%

21 20 Motta and Uchida, September 16, Empirical results Table 5: Logit regression results (Entire sample) 3-year sample INST 0.03*** (3.10) [0.004] Control N 0.02*** (2.12) [0.003] 0.038*** (2.48) [0.005] DINST FRGN 5-year sample 0.04*** (2.13) [0.005] 0.02** (1.85) (1.56) [0.003] [0.003] Initial Rating; Size; Leverage; ROA; Tobin s Q; Industry dummy Z-stats are in parentheses. Marginal effects are in brackets. Results support our hypothesis. 443

22 21 Motta and Uchida, September 16, Empirical results Table 6: Logit regression results (Eliminate firms with highest rating in 2007) 3-year sample INST 0.03*** (2.58) [0.004] Control N 0.02* (1.69) [0.003] 0.03*** (2.00) [0.005] DINST FRGN 5-year sample 0.03* (1.71) [0.005] 0.03*** 0.03* (2.17) (1.66) [0.005] [0.006] Initial Rating; Size; Leverage; ROA; Tobin s Q; Industry dummy Z-stats are in parentheses. Marginal effects are in brackets. Results support our hypothesis. 361

23 22 Motta and Uchida, September 16, Empirical results Table 7: Change in ownership variables (%) Improvement Mean N No improvement Mean N Difference T-statistics INST DINST FRGN INST *** DINSTOWN FRGN *** 3-year sample 5-year sample No reverse causality

24 Motta and Uchida, September 16, Empirical results Improvements of rating in other CSR attributes: No relation with institutional ownership. Former findings on environmental rating is attributable to the dual pressure from PRI and the Ministry of Environment. Pressure mainly on institutional investors. Not on investee firms We can rule out the following concern: firms with specific (unobserved) characteristics generally follow social norms (improve CSR ratings), and these firms also had high institutional ownership

25 Motta and Uchida, September 16, Empirical results A natural question: Did PRI improve environmental rating at the expense of the firms shareholders? The second objective of the paper: Address the CSP-CFP relation, in a way which mitigates endogeneity and reverse causality concerns. We can view the environmental rating improvements as being driven by exogenous pressure. We examine CSP-CFP relation by investigating performance of the portfolio investing in firms which improved environmental rating.

26 25 Motta and Uchida, September 16, Empirical results Table 8: Calendar-time portfolio regression Alpha RM - Rf SMB HML WML R2 N 3-year sample (Apr to Mar. 2011) Improvement (-0.58) (-1.69) 0.44 (1.68) (-0.41) *** (7.79) -0.57** (-2.50) 0.59** (2.37) (-0.77) ** (2.20) 0.17 (1.46) (-1.22) 0.05 (0.51) *** (8.49) No Improvement (-0.70) Difference 0.00 (0.19) No significant underperformance for Improvement portfolio. Qualitatively same results for 5-year sample.

27 Motta and Uchida, September 16, Conclusion We find: Institutional ownership is positively associated with the probability of improved environment ratings following PRI. No significant relation between the institutional ownership and the probability of improved ratings in other CSR attributes. Firms with improved environment ratings do not underperform in the long-term stock return.

28 Motta and Uchida, September 16, Conclusion Implications and contributions: International organizations guidelines, combined with national government initiatives, are effective tools promote social business practices. Shareholder preference (especially institutional shareholders preference) affects CSP. High CSP does not harm shareholder wealth. We show these evidence in a research setting, which is less subject to endogeneity and reverse causality concerns, by using a exogeneous event.