DEGREE PROJECT FOR MASTER OF SCIENCE IN ENGINEERING INDUSTRIAL ECONOMICS Proof That Voluntary Corporate Responsibility Investments Does Not Affect Financial Returns When in the News Alexander Andersson Blekinge Institute of Technology, Karlskrona, Sweden, 2017 Supervisor: Emil Numminen, Department of Industrial Economics, BTH Abstract This paper presents the results of financial return analyses after 133 articles regarding social and environmental news were published in Svenska Dagbladet. During the period from 2006 to 2015 Swedish Large Cap companies were analysed after the news announcements, using the event study methodology. The study shows that abnormal returns were significant for only three events at the announcement date. A regression analysis shows that firms issuing ESG reports do not significantly have distinct returns from non-issuing firms when in the news. The study shows that firms producing consumer goods or services experienced 0.5 percent significant return differences compared to other firms in the pre-announcement period (two days). Findings also suggest that there are no significant differences between different industries when in the news regarding social and environmental aspects. An analysis of means shows no implications of differences regarding articles of: equality, employees, society or environment. This study concludes that voluntary corporate responsibility acts are not premiered when a firm is in the news regarding social or environmental events. I Sammanfattning Denna studie presenterar resultatet fran˚ analyser av finansiell avkastning efter det att 133 ar- tiklar gallande¨ sociala och miljom¨ assiga¨ faktorer publicerats i Svenska Dagbladet. Svenska Large Cap-foretag¨ analyserades under perioden 2006 - 2015 med eventstudiemetoden. Stu- dien visar att dessa artiklar endast genererar signifikant abnormal avkastning vid eventdagen i tre fall. En regressionsanalys visar att bolag som publicerar ESG-rapporter inte visar pa˚ en signifikant avkastningsskillnad jamf¨ ort¨ med icke-publicerade bolag till foljd¨ av dessa event. Studien visar aven¨ att foretag¨ som producerar konsumentprodukter och konsumenttjanster¨ up- pvisar 0,5 procents signifikant skillnad i avkastning under perioden fore¨ artikelpublicering (tva˚ dagar). Resultaten av studien visar aven¨ att det inte finns nagra˚ signifikanta skillnader mellan industrier efter det att nyheter om sociala eller miljom¨ assiga¨ omstandigheter¨ publicerats. En analys av skillnader i medelvarde¨ visar inga implikationer pa˚ att investerare varderar¨ nyheter av typerna jamst¨ alldhet,¨ personal, samhalle¨ och miljo¨ pa˚ skilda satt.¨ Studien konkluderar att frivilliga investeringar i foretagsansvar¨ inte premieras nar¨ foretaget¨ belyses i nyheter gallande¨ sociala och miljom¨ assiga¨ faktorer. III Preface I would like to direct my gratitude to Emil Numminen for providing valuable knowledge and insights regarding the directions of the research. I also want to thank Henrik Linde and Mikael Westling for critically reviewing the thesis. Their insight and feedback have undoubtedly improved the quality of the thesis. V Nomenclature AAR Average Abnormal Return AD Announcement Date API Application Programming Interface AR Abnormal Return CAAR Cumulative Average Abnormal Return CAR Cumulative Abnormal Return ESG Environmental, Social, Governance FLS First Line Supplier ISO International Standardisation Organisation OLS Ordinary Least Square Contents 1 Introduction 1 2 Literature Review 3 2.1 Investor Reactions to Corporate Responsibility Announcements . 3 2.2 The Four Pillars of Media . 5 2.3 Portfolio Selection Under Conditions of Risk . 7 2.4 Random Walks in Efficient Markets . 9 2.5 Agents of the Corporation: Value Maximization versus Stakeholder Theory . 12 2.6 More than Rationality in the Stock Market . 14 3 Research Purpose and Hypothesis Development 18 4 Method 22 4.1 Event Study . 22 4.2 Event Study Procedure . 22 4.2.1 Abnormal Returns . 23 4.2.2 Aggregation of Abnormal Returns . 23 4.2.3 Magnitude of Abnormal Returns . 23 4.3 The Market Model . 24 4.4 Models Used in the Event Study . 24 4.5 Regressions Models . 25 5 Data and Descriptive Statistics 27 6 Results 31 6.1 Hypotheses Testing . 31 6.1.1 ESG report regression . 31 6.1.2 Robustness check ESG report regression . 32 6.1.3 Consumer goods and services supplier regression . 33 6.1.4 Robustness check consumer goods and services supplier regression . 33 6.1.5 Industry regression . 34 6.1.6 Robustness check industry regression . 34 6.2 Analysis of Variances for Event Types . 35 6.2.1 Post-Hoc Analysis of Variances for Event Types . 35 7 Discussion 36 7.1 Some Nascent Remarks . 36 7.2 Implication for Managers and Investors . 37 8 Conclusion 39 9 Recommendations and Future Work 40 A Industry Regression Results 45 B Industry Controlled for Confounding 46 C Post-Hoc 47 VIII D ESG reports during the sample period 48 E Articles published in SvD 49 F Total media coverage for sample firms 52 List of Tables 1 Final sample and event representations . 28 2 Keywords . 29 3 Sample Firms ESG reports . 29 4 Sample industry representation . 30 5 Abnormal Returns . 30 6 jCAARj Returns . 31 7 ESG Report . 32 8 ESG Report and Confounding . 32 9 FLS........................................ 33 10 FLS and Confounding . 34 11 ANOVA . 35 12 Industry independent . 45 13 Industry Controlled for Confounding . 46 14 Announcement Date Post-Hoc ANOVA . 47 15 ESG Reports . 48 16 Employees . 49 17 Environment . 49 18 Equality . 50 19 Society . 51 20 SvD coverage during 2006 - 2015 . 52 List of Figures 1 Capital asset pricing . 8 2 Portfolio Diversification . 9 3 A Random Walk of +1/-1 steps . 11 4 Efficient Market Hypothesis . 11 5 Efficient Market Hypothesis . 31 IX 1 Introduction This paper presents the results of financial return analyses after firms are in the news regarding social and environmental content. During the period from 2006 to 2015 the effect of 133 news articles published in Svenska Dagbladet were evaluated for Swedish Large Cap firms. This pa- per also relates voluntary corporate responsibility acts to financial returns, effects of consumer proximity and industry effects. Where the first compares returns for firms issuing environmen- tal, social and governance (ESG) reports to non-issuing firms when the firm is in the news, to show if such reports affect returns. The second controls if investors are more informed about the policy of firms close to the consumer, revealing if information is more effectively dispersed for such companies. Lastly an industry control is conducted in order to draw upon distinctions between industries. The contents of this paper relates corporate repressibility to managerial decisions and the re- ception of investors. The definition of corporate responsibility in the last four decades has in many aspects taken a straight-line direction. In the 1970s M. Friedman (1970) was among the first economists to present a critical view regarding social responsibilities of a business. M. Friedman (1970) in agreement with Jensen (2002) argues that there is only one responsibil- ity of a corporation and that is to effectively use resources in activities that increase its profits. M. Friedman (1970) argue that managers are agents of the shareholders and therefore exist only for the good of shareholders. Freeman (1984) maintain that a firm’s objective must contain the interests of the stakeholders. Stakeholders include, among shareholders, employees, customers, suppliers, community organizations, and consist of those individuals or organizations that can influence the outcomes of the firm in question. Freeman (1984) thus implies that there could be an implication for firms to engage in social as well as environmental activities to further satisfy the needs of stakeholders. In this study corpo- rate responsibility is defined as a phenomena leaning towards the ideas of Freeman (1984). The used definition is that imposed by McWilliams et al. (2006) stating that corporate responsibility is when firms go beyond what they are required to do by law and engage in actions that could improve both social and environmental aspects. The findings of related studies have suggested that corporate responsibility announcements do not generate significant return differences (Doh et al., 2010; Consolandi et al., 2009; Bauer et al., 2005). In line with this previous research, this study assumes a critical view of the corporate responsibility approach from a financial perspec- tive. Corporate responsibility has grown together with an increased influence from non-governmental organizations (Guay et al., 2004). Corporate regulation have also been a driving factor. For instance, the Sarbanes-Oxley Act of 2002 regulated and generated board changes in affected corporations (Coville, 2011). In later years, firms have increased their reporting on ESG mat- ters (Fitzgerald, 2007). King & Bartels (2015) report that more companies report their ESG, but many lack quality and consistency which makes one company’s report hard to compare to another. Media as an information intermediary generate sentiment and guide investor decisions (Chen et al., 2013). There are many ways to communicate social and environmental events. In this study news media is used as the communicator. As a trend or phenomena rises, media is more prone to report on the matter. The stakeholder approach has become widely adopted because intangi- 1 ble assets such as reputation has become of greater importance in the modern economy when valuing a company (Robinson et al., 2011). This has caused many companies