[an occasional series skating on the edge of ethics, investing and SRI (Sustainability, Responsibility, Impact)]
The winner of this year’s Moskowitz prize for excellence in quantitative SRI research is Dr. Caroline Flammer, Ivey Business School, for “Does Corporate Social Responsibility Lead to Superior Financial Performance? A Regression Discontinuity Approach”. The approach taken in this study finds a positive causal relationship between CSR and financial performance.
This paper uses a new approach to assess, quantitatively, whether CSR[1] is beneficial to companies. What is novel is the use of a regression discontinuity design that allows the author to draw sharp causal inference on the impact of CSR on financial performance.
Prior studies of the effect of CSR on performance have found, in general, a small positive correlation between CSR and financial performance.[2] A common concern with these studies is that endogenous factors, not reflected in the model or that cannot be measured, can just as easily explain the higher financial performance associated with CSR.
To address these concerns, Dr. Flammer’s study uses a different approach. It examines the impact of shareholder-sponsored CSR proposals that pass or fail by a small margin – “close-call” proposals – on stock prices. This approach addresses the above concerns in two ways:
- Shareholder-sponsored proposals are developed by external shareowner groups, and hence are independent of company management. Unlike management-sponsored proposals, they cannot be strategically withdrawn by the management if the outcome is expected to be unfavorable to the management.
- Restricting the analysis to close-call votes eliminates proposals that pass or fail by a wide margin (“wide-margin” proposals). The rationale for eliminating wide-margin proposals is that the outcomes of wide-margin proposals are anticipated and reflected in stock prices before the vote takes place. In contrast, close-call votes have a random element: their outcomes are uncertain. Close-call votes are not reflected in prices in advance and therefore are more useful for estimating the causal effect of CSR on financial performance.