Corporate social irresponsibility and Portfolio ...•Empirical measure of reputational risk...

Corporate Social Irresponsibility And Portfolio Performance: A Global Perspective

Maretno Agus Harjoto Pepperdine Graziadio Business School, Pepperdine University

Andreas HoepnerSmurfit Graduate Business School, University College of Dublin

Mistra Financial System, Stocholm School of Economics

Qian Li* Cardiff Business School, Cardiff University

JRC Summer School on Sustainable FinanceJuly 1, 2019

Top Examples Of Corporate Irresponsible Behaviour

• Boeing 737 Max (2018-2019)

• Facebook’s data security breach (2018)

• United airlines passenger scandal (2017)

• Volkswagen emission scandal (2015)

• H&M, Zara - the Bangladesh factory collapse (2013)

• BP Oil Spill Scandal (2010)

• Satyam Scandal (2009)

• Lehman Brothers Scandal (2008)

• American Insurance Group Scandal (2005)

• WorldCom Inc. (2002)

• Enron Corp. (2001)

• …

JRC SUSTAINABLE FINANCE 2019 HARJOTO, HOEPNER AND LI (2019) 2

United Airlines Passenger Scandal (2017)




Source: market watch

Volkswagen’s Emissions Scandal (2015)


• In September 2015, the EPA

(Environmental Protection Agency)

found out that Volkswagen had

been cheating in emission tests.

• EPA discovered that 482,000 VW

diesel cars on American roads

were emitting up to 40 times more

toxic fumes than permitted. Since,

VW has admitted that the cheat

affected 11 million cars worldwide.

• CEO Martin Winterkorn resigned.

• Volkswagen had to recall 8.5 million

cars in Europe and 500,000 in the

US.

• In April 2017, a US federal judge

ordered Volkswagen “to pay a $2.8

billion criminal fine for rigging

diesel-powered vehicles to cheat

on government emissions tests.”



Source: Laurtsen et al. 2015

Sentiment and stock prices before and during the scandal



Source: Laurtsen et al. 2015

Sentiment and social engagement before and after the scandal

There Is An Opposite Story…


VW’s share price plummeted but sales did not

Source: RepRisk case study (Volkswagen, 2018)

More Recently, The Boeing 737 Max Issue…


Source: Refinitiv (formerly Thomson Reuters)

Motivations

• CSI is not the opposite coin of CSR

CSI = Corporate Reputation Damaging Factor

Based on Reputational Capital (Rhee & Valdez, 2009 & Rhee & Kim,

2012) and Institutional Theory (Strike et al., 2006; Kolbel et a;. 2017)

• Empirical measure of reputational risk (RepRisk)

7,368 firms across 42 countries from 2007 to 2017

• Impact of CSI on shareholder return

Examine CSI in both developed and emerging markets

Examine the role of Trust

Examine across different institutional settings

CSR CSI

11JRC SUSTAINABLE FINANCE 2019 HARJOTO, HOEPNER AND LI (2019)

Research Questions

• Are there differences in shareholder return from high vs. no reputation (CSI) risk portfolios?

• Are there differences in the impact of reputation risk on shareholder value across developed and developing countries?

• Are there differences in the impact of reputation risk on shareholder value across different institutional settings?


Literature Review

Why would investors even care about a firm’s CSI?

• CSI can affect firm value (Akey et al., 2018; Price & Sun, 2017)

• Firms receiving higher CSI media coverage leads to higher financial risk (Kölbel et al., 2017)

• CSI moderates the positive relation between CSR and firm value (Lenz et al., 2017) and

provides a longer enduring effect than CSR (Price & Sun, 2017)

• CSI creates Bad stakeholder relationships (Frooman, 1997; Jones, Bowd & Tench, 2009;

Lenz, Wetzel & Hammerschmidt, 2017)

• CSI negatively impact reputation (Brammer & Pavelin, 2006; Friedman, 1970; Karpoff, Lee &

Martin, 2008)

• CSI causes higher explicit costs (Waddock & Graves, 1997)

Theoretical foundations

• Reputational capital (Fombrun & Shanley, 1990; Deephouse, 2000; Fombrun 2001; Barnett et

al. 2006)• Institutional setting & corporate reputation (Brammer & Jackson, 2012; McKenna & Olegario，

2012; King & Whetten, 2008)


Data: Reputational Risk (RepRisk)

• Big data: 500k news/day• Advanced text and

metadata extraction from unstructured content

• Multilingual de-duplication and clustering

• Entity identification and auto-linking

• Sentiment and relevancy scoring

• Human scores severity and novelty and review the topic tagging

• Confirmation of relevancy

• Assessment of severity and

novelty

• Curation including risk

summary

• Approval of news analytics

• Review and quality check

• Curated risk research, metrics, and analytics

• Standard and customized metrics

• In-depth qualitative research

• Risk analytics and trends for all entities


Reprisk Index (RRI)

Quantifies the exposure of environmental, social and governance risks

Identifies controversial companies to avoid financial, compliance and enterprise reputational risks

Allows comparison to peers and avoidance of controversial investments and risky business relationships

Calculation based on source, severity and novelty of data as well as frequency and timing of data


Sample Distribution Across Countries and IndustriesCountry Basic Cons. Cons. Energy Health Indus. Tech. Telec. Utilities Total

Mat. Discr. Staples Care

Panel A: Developed Markets

Australia 91 47 14 24 10 49 7 4 10 256

Austria 4 7 2 2 10 1 1 2 29

Belgium 5 3 6 1 4 8 3 3 4 37

Canada 183 42 10 96 6 40 8 4 21 410

Denmark 1 7 3 2 8 14 1 36

Finland 9 12 4 1 4 20 2 1 1 54

France 6 58 11 8 11 56 10 4 7 171

Germany 18 46 7 11 12 42 11 5 9 161

Hong Kong 19 35 8 7 8 38 6 4 6 131

Ireland 1 4 4 5 7 10 1 32

Israel 8 11 5 9 2 11 6 4 1 57

Italy 29 5 5 3 22 2 6 12 84

Japan 59 171 37 12 19 171 37 5 14 525

Netherlands 11 13 10 6 3 28 7 7 6 91

New Zealand 3 9 4 3 1 9 1 4 34

Norway 4 8 7 18 14 3 1 2 57

Portugal 1 3 1 10 3 2 20

Singapore 5 9 16 2 3 23 1 1 1 61

Spain 9 17 6 3 3 26 2 3 9 78

Sweden 8 24 3 4 5 27 7 4 82

Switzerland 12 14 9 4 7 27 6 1 10 90

United Kingdom 40 104 23 43 20 96 17 10 22 375

United States 154 475 106 244 230 377 169 36 157 1948

Subtotal 651 1148 300 511 366 1128 305 110 300 4819

Country Basic Cons Cons Energy Health Indus. Tech. Telec. Utilities Total

Mat. Discr. Staples Care

Panel B: Emerging Markets

Brazil 21 24 17 5 3 26 10 33 139

Chile 7 10 12 2 8 2 9 50

China 203 149 78 32 98 218 55 4 36 873

Colombia 2 3 2 4 3 6 20

Greece 7 1 2 1 15 3 1 30

India 59 51 23 23 35 77 15 5 21 309

Indonesia 10 4 10 2 1 4 2 2 35

Korea 51 65 27 5 34 104 12 6 12 316

Malaysia 8 15 29 16 2 27 2 3 6 108

Mexico 12 14 11 15 1 3 2 58

Pakistan 5 3 4 5 5 1 5 28

Peru 11 1 2 1 1 2 1 19

Philippines 7 12 5 3 7 3 10 47

Poland 8 4 2 9 1 2 6 32

Russia 36 12 5 18 2 18 7 27 125

South

Africa28 18 9 3 22 2 3 85

Taiwan 19 35 11 6 8 61 43 4 3 190

Thailand 12 10 6 4 1 15 1 5 3 57

Turkey 2 7 2 3 1 5 2 2 4 28

Subtotal 501 444 254 133 189 640 134 67 187 2549

Total 1152 1592 554 644 555 1768 439 177 487 7368

(All Countries)


Statistics: RepRisk Index Rating – Developed Markets

CountryNO. of Statistics of RepRisk Index rating Year Comparison of Average RepRisk Index Rating

Companies Mean StdDev Min Max 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Australia 256 5.36 5.08 0.06 25.05 1.08 2.93 3.73 4.84 5.56 6.45 6.79 8.22 7.71 6.22 5.42

Austria 29 5.96 6.11 0.46 22.54 0.79 3.07 4.09 3.84 5.16 6.8 7.36 8.18 8.08 8.67 9.51

Belgium 37 5.71 5.63 0.33 24.8 0.94 5 3.31 2.92 3.69 5.63 6.63 9.29 7.34 8.28 9.74

Canada 410 6.38 6.46 0.23 46.85 2.23 5.2 5.99 5.1 5.81 6.68 6.54 7.83 9.37 7.57 7.81

Denmark 36 5.69 5.49 0.24 24.75 0.84 2.17 3.47 2.13 4.08 6.21 7.96 10.96 10.27 8.9 5.66

Finland 54 6.42 6.23 0.19 31.04 2.4 2.42 2.35 3.58 5.66 8.61 10.1 11.78 7.81 6.93 8.93

France 171 8.27 9.17 0.19 52.44 2.17 5.11 6.12 5.27 7.36 8.96 9.74 12.41 12.4 11.24 10.23

Germany 161 9.3 10.66 0.24 52.89 3.52 6.6 6.52 6.63 8.82 9.59 12.21 13.36 11.76 11.05 12.21

Hong Kong 131 4.85 4.85 0.22 22.44 1 2.58 2.75 2.65 3.92 5.45 6.14 7.44 8.34 7.29 5.84

Ireland 32 8.47 5.54 1.73 24.17 1.29 4.12 5.99 9.02 9.07 10.34 9.63 12.37 11.62 10.79 8.95

Israel 57 5.05 5.33 0.4 25.45 0.68 1.46 6.26 4.92 3.53 5.79 5.05 5.82 6.73 6.23 9.13

Italy 84 7.09 8.21 0.36 44.8 1.01 3.74 3.5 4.08 5.19 5.55 7.04 11.26 12.77 11.5 12.33

Japan 525 5.65 6.25 0.03 41.5 1.4 3.83 3.02 3.32 5.49 7.03 6.97 8.63 8.24 7.69 6.58

Netherlands 91 6.53 8.9 0.39 61.98 2.21 3.75 4.61 4.91 5.03 5.93 7.77 10.13 8.9 8.07 10.57

New

Zealand34 3.89 4.35 0.41 21.96 0 0.71 1.47 3.5 4.07 5.24 5.76 6.41 4.32 5.99 5.34

Norway 57 6.15 6.81 0.34 39.51 1.17 3.58 3.06 2.72 4.02 6.94 7.83 9.92 10.05 9.85 8.46

Portugal 20 6.15 4.92 0.59 16.98 0.03 1.5 2.23 3.79 4.52 4.84 9.43 11.15 10.96 9 10.2

Singapore 61 5.23 7.14 0.19 35.96 1.94 3.73 3.18 3.3 4.11 5.73 5.72 6.54 7.46 8.57 7.23

Spain 78 8.84 7.56 1.08 33.48 2.24 5.95 7.81 6.53 6.77 6.97 8.75 12.97 13.82 10.73 14.69

Sweden 82 6.84 7.13 0.33 36.12 1.65 3.4 3.17 3.71 5.13 6.84 10.88 12.63 10.21 9.18 8.48

Switzerland 90 9.93 11 0.52 52.97 4.63 8.6 7.62 9.12 10.78 10.64 11.86 12.78 10.81 9.76 12.64

United

Kingdom375 7.54 8.16 0.18 58.81 2.63 5.35 6.3 6.1 7.01 8.2 8.3 10.61 10.2 9.48 8.81

United States 1948 7.56 7.98 0.02 58.4 2.19 4.63 4.73 5.17 6.8 8.56 9 10.68 11.43 10.69 9.23

Subtotal 4819


Country

NO. of Statistics of RepRisk Index rating Year Comparison of Average RepRisk Index Rating

Companies Mean StdDev Min Max 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Brazil 139 7.32 8.34 0.26 47.88 1.49 3.2 3.64 4.76 5.31 5.88 9.69 11.44 12 13.07 10.06

Chile 50 6.17 6.03 0.47 23.37 1.15 3.29 6.5 4.73 6.12 7.17 5.8 8.88 8.35 7.36 8.54

China 873 3.81 4.36 0.01 40.19 0.79 1.75 1.75 1.52 2.24 2.99 4.63 5.77 6.75 6.62 7.09

Colombia 20 6.5 5.92 0.77 25.32 2.31 2.73 3.38 4.25 4.75 6.54 8.09 6.99 8.79 11.83 11.8

Greece 30 3.69 4 0.11 16.11 0.22 2.29 2.65 0.74 2.26 4.09 5.32 5.35 5.27 8.33 4.07

India 309 6.08 5.72 0.04 28.08 1.66 3.73 4.71 4.82 5.74 8.32 8.25 7.98 8.36 7.48 5.82

Indonesia 35 7.15 5.74 0.25 20 2.4 5.62 5.97 6.9 4.24 6.25 9.68 10.7 9.2 9.06 8.66

Korea 316 7.33 7.52 0.09 47.31 1.57 3.26 2.56 3.54 6.08 7.28 10.03 12.29 11.89 11.62 10.47

Malaysia 108 5.09 5.22 0.11 28.13 1.21 5.1 5.29 2.39 3.12 5.74 6.69 7.13 7.67 7.04 4.57

Mexico 58 6.35 6.73 0.64 32.07 1.26 4.5 5.52 4.64 4.76 4.58 5.62 9.17 8.56 9.81 11.48

Pakistan 28 3.55 2.77 0.55 9.56 0 0.65 0.67 1.03 2.57 4.36 4.8 4.56 4.3 8.76 7.36

Peru 19 6.37 5.97 0.19 21.55 3.17 6.1 7.42 6.49 6.21 5.27 5.33 7.84 9.45 5.97 6.82

Philippines 47 6.07 4.99 0.19 20.72 0.87 2.44 3.9 3.99 4.65 6.71 7.51 7.59 9.27 9.58 10.23

Poland 32 3.67 3.02 0.25 13.66 0.76 0.8 1.13 0.31 2.1 4.23 7.02 7.24 6.29 4.98 5.49

Russia 125 7.26 7.57 0.35 47.49 1.5 3.73 5.16 5.88 6.51 8.59 8.96 9.41 9.78 10.23 10.11

South Africa

85 6.94 6.62 0.19 33.12 2.99 7.34 6.21 4.38 4.31 7.07 8.55 10.69 10.44 7.9 6.51

Taiwan 190 3.87 4.8 0.04 35.72 0.72 1.3 1.37 2.64 4.15 3.98 3.79 5.71 6.17 5.55 7.16

Thailand 57 5.37 6 0.25 26.68 2.91 6.75 6.12 5.52 5.14 3.7 3.86 5.75 6.27 7.67 5.41

Turkey 28 2.71 1.55 0.25 5.63 0.45 1.38 1.48 1.2 1.04 1.27 3.13 4.76 6.96 5.48 2.68

Subtotal 2549


Statistics: RepRisk Index Rating – Developing Markets

Methodology• Portfolio approach

o Long-only portfolios

o Long-short portfolios

o Characteristic-matched portfolios

• Regressiono Model: Carhart (1997) four-factor model

o Benchmark: Self-constructed benchmark based on the universe of selection criteria

• Robustness Testso Equal-weighted portfolios and Fama-French 3-factor model

o Selecting characteristic matched sample in both high and low reputational risk portfolios by country, sector, size and value

o Excluding financial crisis period (examine only for April 2009-Dec 2017)

o Excluding U.S. and China


Risk Adjusted ReturnsEmerging Vs. Developed Markets

Developed Markets Emerging MarketsHighRisk

MediumRisk

LowRisk

NoRisk

Long Short

HighRisk

MediumRisk

LowRisk

NoRisk

Long Short

Alpha -0.0002 -0.0006 -0.0013 0.0017 0.0019 -0.0061 -0.0043 -0.0016 0.0033 0.0094

(-0.36) (-0.99) (-2.63)*** (4.03)*** (2.03)** (-3.38)*** (-3.03)*** (-1.64) (5.61)*** (4.54)***

MKT 0.9705 0.9986 1.0106 0.9964 0.0259 1.1166 1.0941 1.0272 0.9293 -0.1873

(59.29)*** (76.14)*** (83.74)*** (97.88)*** (1.09) (33.86)*** (33.20)*** (56.32)*** (95.69)*** (-4.95)***

SMB -0.2244 -0.1209 0.0502 0.3351 0.5595 -0.0878 -0.0597 -0.1580 0.1500 0.2378

(-3.08)*** (-1.78)* (1.02) (6.56)*** (5.13)*** (-1.01) (-1.56) (-4.55)*** (7.63)*** (2.36)**

HML 0.1133 0.0365 0.0257 -0.1374 -0.2507 0.1650 0.0702 0.0715 -0.1301 -0.2951

(1.11) (0.57) (0.44) (-2.40)** (-1.71)* (2.79)*** (1.90)* (1.82)* (-9.76)*** (-4.67)***

MOM -0.0196 -0.0142 0.0112 0.0192 0.0388 -0.0528 0.0543 0.0010 -0.0045 0.0483

(-0.85) (-0.83) (0.65) (1.60) (1.19) (-0.82) (1.01) (0.04) (-0.38) (0.74)

Adj. R2 0.97 0.97 0.98 0.99 0.54 0.91 0.94 0.97 0.99 0.40


Legal Origin, Institutional Trust, Confidence Toward Major Companies

Panel A: Legal Origins Panel B: Institutional Trust Panel C: Company Confidence

High Medium Low No Long High Medium Low No Long High Medium Low No Long

Risk Risk Risk Risk Short Risk Risk Risk Risk Short Risk Risk Risk Risk Short

Panel A1: English Common Law Panel B1: Trust Panel C1: High Confidence

-0.0009 -0.0008 -0.0007 0.0017 0.0025 -0.0057 -0.0081 0.0001 0.0020 0.0078 -0.0006 -0.0004 -0.0016 0.0022 0.0028

(-1.57) (-1.10) (-1.28) (2.93)*** (2.59)** (-2.05)** (-3.98)*** (0.07) (2.23)** (2.32)** (-0.94) (-0.41) (-2.00)** (4.00)*** (2.87)***

Panel A2: French Civil Law Panel B2: Neutral Trust Panel C2: Medium Confidence

-0.0020 0.0007 -0.0007 0.0020 0.0039 -0.0005 -0.0004 -0.0009 0.0008 0.0013 -0.0014 -0.0005 0.0002 0.0009 0.0024

(-0.87) (0.38) (-0.78) (1.84)* (1.69)* (-0.21) (-0.16) (-0.65) (0.83) (0.45) (-1.75)* (-0.70) (0.22) (1.88)* (2.07)**

Panel A3: German Civil Law Panel B3: Distrust Panel C3: Low Confidence

-0.0050 -0.0006 0.0000 0.0026 0.0076 -0.0002 -0.0004 -0.0016 0.0016 0.0018 -0.0034 -0.0037 -0.0018 0.0033 0.0068

(-3.02)*** (-0.47) (0.02) (3.96)*** (3.90)*** (-0.25) (-0.66) (-2.90)*** (3.82)*** (1.82)* (-2.19)** (-4.47)*** (-2.33)** (5.90)*** (3.64)***

Panel A4: Scandinavian Civil Law

-0.0059 -0.0034 0.0011 0.0023 0.0084

(-1.71)* (-1.10) (0.57) (2.13)** (2.09)**

Panel A5: Socialist Civil Law

-0.0096 -0.0061 -0.0009 0.0031 0.0127

(-2.69)*** (-3.00)*** (-0.49) (2.83)*** (2.89)***


Robustness ChecksDeveloped Markets Emerging Markets

High Medium Low No Long High Medium Low No Long

Risk Risk Risk Risk Short Risk Risk Risk Risk Short

Panel A: Equal weighted returns

-0.0028 -0.0036 -0.0034 -0.0011 0.0017 -0.0071 -0.0057 -0.0036 -0.0019 0.0051

(-3.20)*** (-4.81)*** (-4.08)*** (-1.04) (2.14)** (-2.81)*** (-3.03)*** (-2.69)*** (-1.56) (2.16)**

Panel B: Fama French three-factor model

-0.0003 -0.0006 -0.0013 0.0017 0.002 -0.0062 -0.0041 -0.0016 0.0033 0.0096

(-0.43) (-1.02) (-2.55)** (4.18)*** (2.13)** (-3.73)*** (-3.01)*** (-1.61) (5.61)*** (4.90)***

Panel C: Excluding financial crisis (April 2009 - December 2017)

0.0005 -0.0004 -0.0016 0.0012 0.0007 -0.0047 -0.0035 -0.0018 0.0035 0.0083

(0.81) (-0.75) (-2.75)*** (2.80)*** (0.78) (-3.27)*** (-2.89)*** (-1.82)* (5.25)*** (4.43)***

Panel D: Sub sample period (January 2007 - March 2009)

-0.0032 -0.0044 0.0004 0.0029 0.006 -0.0172 -0.0034 0.0026 0.0023 0.0195

(-1.32) (-2.16)** (0.29) (2.00)* (1.82)* (-2.62)** (-0.60) (0.72) (1.18) (2.52)**

Panel E: Post financial crisis (April 2009 - December 2013)

0.0009 -0.0001 -0.0023 0.0006 -0.0003 -0.0064 -0.0066 0.0011 0.0035 0.0099

(0.92) (-0.08) (-2.63)** (1.51) (-0.22) (-3.69)*** (-4.32)*** (0.79) (5.53)*** (4.90)***

Panel F: Sub sample period (January 2014 - December 2017)

-0.0001 -0.0008 -0.0006 0.002 0.0021 -0.0022 0.0004 -0.0042 0.0033 0.0055

(-0.14) (-1.15) (-0.84) (2.50)** (1.67) (-1.16) (0.27) (-3.43)*** (2.47)** (1.83)*

Panel G: Excluding US and China

-0.0019 0.0007 -0.0005 0.0011 0.003 -0.0044 -0.0031 -0.0014 0.0027 0.0071

(-1.90)* (0.75) (-0.82) (2.45)** (2.90)*** (-2.30)** (-2.46)** (-1.57) (3.77)*** (3.09)***


Main Findings

• Impact of CSI is greater in Emerging Markets

• Impact of CSI is greater during Financial Crisis period

• Impact of CSI is greater in Civil Law than Common Law

• Impact of CSI is greater in countries with High Institutional Trust

• Impact of CSI is greater in countries with Low Confidence toward major companies

• Results are robust under different estimation models and subsampling


Conclusions & Future Studies

• Firms with greater reputational risk (highest CSI) have lower abnormal return

• Value relevance of CSI varies across institutional settings

• Public trust plays significant role on the value relevance of CSI

• Future studies to examine firms’ action/reaction to CSI

• Spillover effect (intra-industry, intra-country, intra-period)

• Organizational level analysis that leads to CSI (individual/manager, group/division or company level)


Thank you!

Any comments or questions welcome!

Contact email: [email protected]


Corporate social irresponsibility and Portfolio ...•Empirical measure of reputational risk...

Documents

Transcript of Corporate social irresponsibility and Portfolio ...•Empirical measure of reputational risk...