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Journal of Business Ethics
Published in: Journal of Business Ethics 1/2018

12-05-2016

The Corporate Social Responsibility Information Environment: Examining the Value of Financial Analysts’ Recommendations

Authors: Changhee Lee, Dan Palmon, Ari Yezegel

Published in: Journal of Business Ethics | Issue 1/2018

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Abstract

This study examines the relationship between corporate social responsibility (CSR)-related information and the value of financial analysts’ stock recommendations. The information environment in which analysts operate in is affected by CSR-related reports that companies voluntarily issue as well as information that becomes available through third-party analysis and rating institutions. We find an inverse relationship between the value of both upgrade and downgrade revisions and the supply of CSR-related information compiled by third-party institutions, suggesting that CSR-related data are associated with a richer information environment that makes it more challenging for analysts to issue informative recommendations, thereby mitigating their contribution to the price discovery process. We further find that the value of analysts’ recommendation revisions is lower for companies that voluntarily issue CSR-related reports compared to those that do not make such disclosures and that the overall effect of CSR on the informativeness of analysts is stronger in the recent years. Our findings have implications for the evolution of CSR reporting as the incorporation of CSR-related information into market prices legitimizes the relevance of such reports. Furthermore, these findings contribute to our understanding of the role and value of information intermediaries in changing information environments.
previous article Evaluation of the Cultural Environment’s Impact on the Performance of the Socially Responsible Investment Funds

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Footnotes
1
The US SIF Foundation’s 2014 “Report on Sustainable and Responsible Investing Trends in the United States” states that as of the end of 2013, nearly 17 percent of all capital under professional management in the U.S. is invested according to sustainable, responsible, and impact investing (SRI) strategies. Further, SRI investing experienced a growth rate above 76 percent during the period from 2012 to 2014.
 
2
The relevance of CSR-related information to the capital market is also evident by the 1991 formation of the commercially available database MSCI ESG KLD STATS which was formerly known as KLD Research & Analytics, Inc. This database offers annual snapshots of the environmental, social, and governance performance of companies rated by MSCI ESG KLD STATS. Given the growing demand for CSR-related information, the universe covered by MSCI ESG KLD STATS grew from 650 companies in 1991 to approximately 3100 in 2014. A key reason for the existence of MSCI ESG KLD STATS is that investors demand CSR information and CSR disclosure is not mandatory in the U.S.
 
3
We focus on analysts’ recommendation revisions because recommendation revisions reflect the culmination of analysts’ valuations and are generally the output that investors pay the most attention to.
 
4
For robustness we also produce results based on the sum of the strengths (STRENGTHS) and concerns (CONCERNS).
 
5
In untabulated analysis, we identify companies that voluntarily disclose CSR information through the Global Reporting Initiative (GRI) dataset and find that firms that disclose have significantly higher number of strengths and concerns. This finding suggests that our primary variable of interest, CSRIS, the sum of the strengths and concerns, is positively associated with the supply of CSR information.
 
6
We use two-year changes in CSR ratings as opposed to one because of the sticky nature of CSR ratings. Specifically, we find that there is no change in the CSR strength and concern variables for 72.19 and 66.33 percent of the sample, respectively.
 
7
We use 250 days of return data ending 40 days prior to the recommendation date to avoid the recommendation announcement from biasing the estimated risk parameters.
 
8
For an expanded discussion of these variables and the full model, please refer to Fama and French (1992), Fama and French (1993), and Carhart (1997).
 
9
We exclude cases where the analyst reiterates the existing recommendation rating.
 
10
We thank Professor Fama and Professor French for making their data available to the public.
 
11
We eliminate such revisions because they were potentially confounded by other events or because the revisions may have been deemed irrelevant by market participants.
 
12
We find that there is no change in the CSR strength and concern variables for 72.19 and 66.33 % of the sample, respectively.
 
13
The GRI is a leading organization in the sustainability field. GRI promotes the use of sustainability reporting as a way for organizations to become more sustainable and contribute to sustainable development.
 
14
We thank the reviewer for suggesting this analysis.
 
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Metadata
Title
The Corporate Social Responsibility Information Environment: Examining the Value of Financial Analysts’ Recommendations
Authors
Changhee Lee
Dan Palmon
Ari Yezegel
Publication date
12-05-2016
Publisher
Springer Netherlands
Published in
Journal of Business Ethics / Issue 1/2018
Print ISSN: 0167-4544
Electronic ISSN: 1573-0697
DOI
https://doi.org/10.1007/s10551-016-3197-4

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