Stuart L. Gillan, Jay C. Hartzell, Andrew Koch, and ... - Pitt Business

More documents

Recommendations

Info

their value (and to avoid myopic behavior), or because investors simply place higher valuations on such firms, or because it is in the managers’ own self interests. These possibilities differ in terms of their predictions for relations between ESG or CSR performance and firm’s operating performance, operational efficiency or revenues, managerial compensation, trading by institutional investors, and ultimately, firm value. We examine these relations in a sequence of tests in hopes of better understanding the typical motive behind firms’ ESG decisions and the market’s response to those decisions. Using KLD’s important index of firms’ environmental, social and governance strengths, concerns, and the net of those two, we find little evidence that “good” ESG behaviors are typically pursued by self-interested managers at the expense of shareholders. Instead, it appears that ESG firms operate more efficiently, generate greater returns on assets, and have higher valuations. Further, it does not seem to be the case that managers implementing stronger ESG policies are more highly compensated than their peers, after controlling for standard determinants of compensation. This suggests that if CEOs are using ESG policies to extract rents, it is not linked to average profitability and expenses, and they are not also extracting rents via higher compensation. Interestingly, while these results are consistent with the idea that firms benefit from investing in stronger ESG policies, the mechanism by which these practices are reflected in stock prices is unclear. One natural candidate, increased institutional investment, does not appear to be borne out in the data. If anything, it appears that on aggregate institutions own less, and sell more, of firms that have greater scores along the environmental, social, and governance dimensions, at least as measured by KLD through 2007. We do find some exceptions to these overall finding in the case of KLDs governance rankings. Specifically, there is evidence 23
suggesting that institutional investors may avoid firms with more governance concerns, and that institutions may also successfully pressure some firms into adopting more shareholder-friendly policies. 24
Page 1 and 2: FIRMS’ ENVIRONMENTAL, SOCIAL AND
Page 3 and 4: that 31 of the top 50 institutional
Page 5 and 6: underlying meaning for everyone - s
Page 7 and 8: struggled with identification issue
Page 9 and 10: In aggregate our findings suggest t
Page 11 and 12: indicators in each of the three ESG
Page 13 and 14: esults that are consistent with the
Page 15 and 16: Recall that Benabou and Tirole’s
Page 17 and 18: On average, firms with 1 unit net E
Page 19 and 20: contrast, we find significant negat
Page 21 and 22: In Table VIII, we report the result
Page 23: The results of this analysis are re
Page 27 and 28: Fisher-Vanden, Karen, and Karin S.
Page 29 and 30: Table II Firm Operating Performance
Page 31 and 32: Panel C. Governance Net Score [1] [
Page 33 and 34: Panel B: Total Direct Compensation
Page 35 and 36: Table VI Relation between Fraction
Page 37 and 38: Table VII Changes in ESG Scores ove
Page 39 and 40: Table VIII Changes in ESG Scores an
Page 41 and 42: C. Governance (1) (2) (3) (4) (5) (
Page 43 and 44: Figure 1a: Histogram of Environment

Stuart L. Gillan, Jay C. Hartzell, Andrew Koch, and ... - Pitt Business

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?