infonet-economy

In capitalist societies it is the role of the state to establish the preconditions that promote societal well-being through proper functioning markets.
On the other hand enterprises have a right to provide goods and services in return for private profit. This sharp contrast between government and corporate responsibilities is created by a theoretical idealized first-best world.
Only governments have the legitimacy and the power to overcome free riding and collective action problems which cause market ineficiencies such as negative externalities and underprovision of public goods. With this classical
dichotomy between state and corporate responsibilities in mind, at first glance it seems puzzling that some firms also seem to provide public goods. They other goods and services or operate in a manner which can be characterized
as the private provision of public goods.
This thesis asks how information about the voluntary private provision of public goods, also known as corporate social responsibility (CSR), affects asset prices. Since the stock market has a disciplining effect on corporations,
stock price reactions capture the possibilities and limits of voluntary corporate action. The thesis proposes some answers to the question of whether corporate acts that do primarily benefit stakeholders without share ownership
are against the interest of shareholders, and, if so, under which circumstances. The first chapter starts with a broad introduction to the topic. It discusses the role of government on the basis of welfare theory and market failures. In addition, it emphasizes the moral dimension of voluntary action and explains the link between the private provision of public goods and CSR. Because the thesis studies asset price reactions, relevant finance concepts are introduced. Furthermore, the ambition and contribution of the thesis is outlined.
The first chapter gives short summaries of chapter two to five and offers a primer on portfolio theory to foster understanding of the last two chapters. It closes with a description of the findings and discusses their implications.
Chapters 2 and 3 contribute to the literature on voluntary firm action by introducing the role of regulatory pressure for asset price reactions. Both chapters study corporate efforts to reduce carbon emissions. Chapter 2 asks
whether the carbon intensity of a firm carries any information on its growth opportunities as measured by Tobin's Q. Panel regressions that account for unobserved firm heterogeneity and autocorrelation, tackle this question by using carbon emission data on the global firm level. In order to obtain insight into the role of regulatory pressure for the relationship between carbon
intensity and Q, two countries with different regulatory regimes are juxtaposed.
Chapter 3 explores one specific motivation for firms to join voluntary environmental agreements: the anticipation of more restrictive future regulation. The research design explores in an event-study stock market reactions for
firms in two popular corporate climate initiatives, when the likelihood for stricter federal carbon emission regulation suddenly increases. Additionally, the market reactions for membership announcement in these initiatives are evaluated and discussed.
The last two chapters investigate whether voluntary investment screens used in socially responsible investing (SRI) have any implications for financial performance. These two chapters are complementary and analyze the risk
adjusted return performance of synthetically constructed portfolios that are unaffected by skill or luck of asset managers. Chapter 3 analyzes portfolios of high market capitalization firms from Europe and the United States. Even
though firms from many industries are excluded in the creening process, the risk adjusted returns for these SRI portfolios are neutral in both markets. In Chapter 4 a distinct portfolio of small European growth firms with an innovative strategic CSR implementation is put to the test. Bad model problems prevalent for portfolios with the observed characteristics are addressed by using a novel robustness check and the finding of positive abnormal performance obtained by conventional methods is confirmed. It is argued that two different hypotheses, one of them under appreciated in the literature, might be responsible for this apparent market inefficiency.