• Ethical finance

Ethical finance

This paper investigates the impact of Corporate Social Responsibility on the capital market by tracing the market reaction to corporate entry and exit from the Domini 400 Social Index, recognized as a CSR benchmark, between 1990 and 2004. The paper highlights two main findings:

• a significant upward trend in absolute value abnormal returns, irrespective of the type of event (for example, addition or deletion from the index), and
• a significant negative effect on abnormal returns after exit announcements from the Domini index.

The latter effect persists even after controlling for concurring financial distress shocks and stock market seasonality.

This result is robust to

• the adoption of different parametric/non parametric methods;
• stock market seasonality
• changes in the estimation window
• changes in the event window and
• the model used for estimating abnormal returns and persists when calculated net of the impact of exits presumably related to financial distress.

The findings, when considered together, suggest that the penalty for exit from social responsibility might depend more from the reaction of ethically screened funds than from an expected negative shock on shareholders’ value. This interpretation is consistent with the growth of volumes intermediated by SR funds, with their behavior on financial markets (violation of ethical criteria should lead to sell a stock independently from its expected performance) and with the shift of focus hypothesis.

The findings establish that CSR leads corporations to refocus their strategic goals from the maximisation of shareholders’ value to the maximisation of the goals of a broader set of stakeholders.

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