Using a novel measure, we study how the personal religiosity (or sense of higher purpose) of independent directors affects the effectiveness of their intense board oversight. We find that, relative to their non-religious counterparts, religious monitoring-intensive directors exhibit significantly lower sensitivity of CEO turnover to firm performance over a holding period of 1 year. However, for the more extended holding period of 2 years, this difference in sensitivity significantly switches direction, consistent with the “higher purpose, incentives, and economic performance” theory, which suggests that believers in higher purpose will tend to hold a longer-term perspective. We also find that religious monitoring-intensive directors further reduce both earnings management and excess total CEO compensation, especially when the lead independent director and/or a majority of the principal monitoring committee chairs are also religious. Overall, our findings show that religious monitoring-intensive directors differentially influence intense board oversight results and, thereby, help infuse or propagate a corporate culture consistent with an authentic organizational higher purpose.
{"title":"Religiosity, Higher Purpose, and the Effectiveness of Intense Board Oversight","authors":"Todd Milbourn, K. Wabara","doi":"10.2139/ssrn.3805416","DOIUrl":"https://doi.org/10.2139/ssrn.3805416","url":null,"abstract":"Using a novel measure, we study how the personal religiosity (or sense of higher purpose) of independent directors affects the effectiveness of their intense board oversight. We find that, relative to their non-religious counterparts, religious monitoring-intensive directors exhibit significantly lower sensitivity of CEO turnover to firm performance over a holding period of 1 year. However, for the more extended holding period of 2 years, this difference in sensitivity significantly switches direction, consistent with the “higher purpose, incentives, and economic performance” theory, which suggests that believers in higher purpose will tend to hold a longer-term perspective. We also find that religious monitoring-intensive directors further reduce both earnings management and excess total CEO compensation, especially when the lead independent director and/or a majority of the principal monitoring committee chairs are also religious. Overall, our findings show that religious monitoring-intensive directors differentially influence intense board oversight results and, thereby, help infuse or propagate a corporate culture consistent with an authentic organizational higher purpose.","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"121 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116289644","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Purpose- This study investigates the impact of Corporate Social Responsibility (CSR) on stock prices of Indian listed companies. The literature reviews show a strong contradictory of the relationship between CSR and stock prices which is still debatable. This study will tell whether there is a positive or negative or no correlation between CSR and stock price in Indian context. Methodology- The research design used in this study was an experimental cross-sectional design. This study uses regression, correlation and hypothesis testing to find the relationship between corporate social responsibility and stock price and financial performance. The stock price and some financial measures like dividend, ROE and employee benefit are also taken to measure the financial performance which indirectly affects stock price and to measure CSR the CSR expenditure is taken. Findings- This study will tell whether there is a positive or negative or no correlation between CSR and stock price in Indian context. This study is also used to suggest if the company are able to get enough returns from their CSR spending. Originality/value- The primary contribution of this study is to present a valid and robust evidence of the relationship between CSR and stock price of India listed companies. The proper reason behind CSR spending’s and its impact.
{"title":"Impact of CSR on the Stock Returns of Indian Companies","authors":"G. Kurien","doi":"10.2139/ssrn.3799134","DOIUrl":"https://doi.org/10.2139/ssrn.3799134","url":null,"abstract":"Purpose- This study investigates the impact of Corporate Social Responsibility (CSR) on stock prices of Indian listed companies. The literature reviews show a strong contradictory of the relationship between CSR and stock prices which is still debatable. This study will tell whether there is a positive or negative or no correlation between CSR and stock price in Indian context. \u0000 \u0000Methodology- The research design used in this study was an experimental cross-sectional design. This study uses regression, correlation and hypothesis testing to find the relationship between corporate social responsibility and stock price and financial performance. The stock price and some financial measures like dividend, ROE and employee benefit are also taken to measure the financial performance which indirectly affects stock price and to measure CSR the CSR expenditure is taken. \u0000 \u0000Findings- This study will tell whether there is a positive or negative or no correlation between CSR and stock price in Indian context. This study is also used to suggest if the company are able to get enough returns from their CSR spending. \u0000 \u0000Originality/value- The primary contribution of this study is to present a valid and robust evidence of the relationship between CSR and stock price of India listed companies. The proper reason behind CSR spending’s and its impact.","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"104 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124061440","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This monograph provides a thorough review of earnings quality issues and analysis. Its primary objectives are to help gain a deep understanding of earnings quality and facilitate the development of comprehensive, granular, and contextual earnings quality indicators and analyses. While there are several alternative definitions of earnings quality, the monograph focuses on the earnings sustainability or persistence view, which emphasizes valuation implications. With a working definition of earnings quality, the study then analyzes comprehensive and line-item financial statement indicators of earnings quality, and it relates the indicators to specific earnings quality issues. The monograph also describes nonfinancial indicators of earnings quality, including proxies for incentives and ability to manipulate earnings as well as transactions, events and circumstances that inform on earnings sustainability.
{"title":"Earnings Quality","authors":"Doron Nissim","doi":"10.2139/ssrn.3794378","DOIUrl":"https://doi.org/10.2139/ssrn.3794378","url":null,"abstract":"This monograph provides a thorough review of earnings quality issues and analysis. Its primary objectives are to help gain a deep understanding of earnings quality and facilitate the development of comprehensive, granular, and contextual earnings quality indicators and analyses. While there are several alternative definitions of earnings quality, the monograph focuses on the earnings sustainability or persistence view, which emphasizes valuation implications. With a working definition of earnings quality, the study then analyzes comprehensive and line-item financial statement indicators of earnings quality, and it relates the indicators to specific earnings quality issues. The monograph also describes nonfinancial indicators of earnings quality, including proxies for incentives and ability to manipulate earnings as well as transactions, events and circumstances that inform on earnings sustainability.","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"57 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121865843","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We document that shareholders respond to strengthening of creditor rights after the staggered adoption of anti-recharacterization laws across various U.S. states by reducing the cost of equity capital. This effect is more pronounced among firms that are financially constrained, have more growth opportunities, and weaker corporate governance. We further find that the adoption of such laws directly lowers information asymmetry, overall firm risk, and leads to a more dispersed debt structure. These results suggest that strengthening of creditor rights leads to improved financing capacity and creditor monitoring, and shareholders benefit from it.
{"title":"Creditor Protection, Ease of Repossession, and the Cost of Equity Capital: Evidence from Quasi-natural Experiments","authors":"Xiaoran Ni, David Yin","doi":"10.2139/ssrn.3678059","DOIUrl":"https://doi.org/10.2139/ssrn.3678059","url":null,"abstract":"We document that shareholders respond to strengthening of creditor rights after the staggered adoption of anti-recharacterization laws across various U.S. states by reducing the cost of equity capital. This effect is more pronounced among firms that are financially constrained, have more growth opportunities, and weaker corporate governance. We further find that the adoption of such laws directly lowers information asymmetry, overall firm risk, and leads to a more dispersed debt structure. These results suggest that strengthening of creditor rights leads to improved financing capacity and creditor monitoring, and shareholders benefit from it.","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"26 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-02-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124685777","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Alex Edmans, Adrian Fernández-Pérez, Alexandre Garel, Ivan Indriawan
This paper introduces a real-time, continuous measure of national sentiment that is language-free and thus comparable globally: the positivity of songs that individuals choose to listen to. This is a direct measure of mood that does not pre-specify certain mood-affecting events, nor assume the extent of their impact on investors. We validate our music-based sentiment measure by correlating it with mood swings induced by seasonal factors and weather conditions. We find that music sentiment is positively correlated with same-week market returns and negatively correlated with next-week returns, consistent with sentiment-induced temporary mispricing. Results also hold under a daily analysis and are stronger when short-sale constraints limit arbitrage. Music sentiment also predicts increases in net mutual fund flows, and absolute sentiment precedes a rise in stock market volatility.
{"title":"Music Sentiment and Stock Returns Around the World","authors":"Alex Edmans, Adrian Fernández-Pérez, Alexandre Garel, Ivan Indriawan","doi":"10.2139/ssrn.3776071","DOIUrl":"https://doi.org/10.2139/ssrn.3776071","url":null,"abstract":"This paper introduces a real-time, continuous measure of national sentiment that is language-free and thus comparable globally: the positivity of songs that individuals choose to listen to. This is a direct measure of mood that does not pre-specify certain mood-affecting events, nor assume the extent of their impact on investors. We validate our music-based sentiment measure by correlating it with mood swings induced by seasonal factors and weather conditions. We find that music sentiment is positively correlated with same-week market returns and negatively correlated with next-week returns, consistent with sentiment-induced temporary mispricing. Results also hold under a daily analysis and are stronger when short-sale constraints limit arbitrage. Music sentiment also predicts increases in net mutual fund flows, and absolute sentiment precedes a rise in stock market volatility.","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"263 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131759334","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper uses FAS 123R regulation to examine how reduction in CEO compensation incentives affects managerial `playing-it-safe' behavior. Using proxies reflecting deliberate managerial efforts to change firm risk, difference-in-difference tests show that affected firms drastically reduce both systematic and idiosyncratic risks, leading to an 8% decline in total firm risk. These reductions in risk are achieved by shifting to safer, but low-Q segments while closing the riskier ones, without significant changes in investment levels. Our findings suggest that decrease in risk-taking incentives provided by option compensation, when not compensated for by alternative incentives or governance mechanisms, exacerbates risk-related agency problem.
{"title":"CEO Compensation Incentives and Playing It Safe: Evidence from FAS 123R","authors":"N. Carline, O. Pryshchepa, Bo Wang","doi":"10.2139/ssrn.3774070","DOIUrl":"https://doi.org/10.2139/ssrn.3774070","url":null,"abstract":"This paper uses FAS 123R regulation to examine how reduction in CEO compensation incentives<br>affects managerial `playing-it-safe' behavior. Using proxies reflecting deliberate managerial efforts<br>to change firm risk, difference-in-difference tests show that affected firms drastically reduce both<br>systematic and idiosyncratic risks, leading to an 8% decline in total firm risk. These reductions in<br>risk are achieved by shifting to safer, but low-Q segments while closing the riskier ones, without<br>significant changes in investment levels. Our findings suggest that decrease in risk-taking <br>incentives provided by option compensation, when not compensated for by alternative incentives or<br>governance mechanisms, exacerbates risk-related agency problem.<br>","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124968251","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
John Kingman’s review of the Financial Reporting Council (FRC) doubted the effectiveness of the UK’s Stewardship Code in encouraging informed and engaged stewardship by institutional investors of the companies in which they invest (issuers). Accordingly, the FRC published the Stewardship Code in 2020 in a final opportunity to prove its effectiveness and relevance, and, in particular, enhance issuer-specific engagement by institutional investors. The up-date has enhanced the reach and substance of the code. However, the legal, regulatory, contractual and competitive environment in which institutional investors exist will constantly forestall soft-law attempts to foster greater issuer-specific engagement, a point perhaps tacitly acknowledged by the 2020 Stewardship Code with its wider scope. Instead, in relation to engagement, stewardship disclosure should focus on the types of engagement that institutional investors are motivated to exercise in practice, such as engagement in response to hedge fund activism, and engagement on systemic risks.
John Kingman对财务报告委员会(FRC)的评论怀疑英国的管理守则在鼓励机构投资者对他们投资的公司(发行人)进行知情和参与的管理方面的有效性。因此，FRC在2020年发布了《管理守则》，这是证明其有效性和相关性的最后机会，特别是加强机构投资者对特定发行人的参与。更新增强了代码的范围和内容。然而，机构投资者所处的法律、监管、合同和竞争环境将不断阻止旨在促进更大特定于发行人的参与的软法律尝试，这一点可能在范围更广的2020年《管理守则》中得到了默认。相反，就参与而言，管理披露应侧重于机构投资者在实践中被激励行使的参与类型，例如应对对冲基金激进主义的参与，以及对系统性风险的参与。
{"title":"The Emperor’s New Code? Time to Re-Evaluate the Nature of Stewardship Engagement Under the UK’s Stewardship Code","authors":"Bobby V. Reddy","doi":"10.1111/1468-2230.12636","DOIUrl":"https://doi.org/10.1111/1468-2230.12636","url":null,"abstract":"John Kingman’s review of the Financial Reporting Council (FRC) doubted the effectiveness of the UK’s Stewardship Code in encouraging informed and engaged stewardship by institutional investors of the companies in which they invest (issuers). Accordingly, the FRC published the Stewardship Code in 2020 in a final opportunity to prove its effectiveness and relevance, and, in particular, enhance issuer-specific engagement by institutional investors. The up-date has enhanced the reach and substance of the code. However, the legal, regulatory, contractual and competitive environment in which institutional investors exist will constantly forestall soft-law attempts to foster greater issuer-specific engagement, a point perhaps tacitly acknowledged by the 2020 Stewardship Code with its wider scope. Instead, in relation to engagement, stewardship disclosure should focus on the types of engagement that institutional investors are motivated to exercise in practice, such as engagement in response to hedge fund activism, and engagement on systemic risks.","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126050413","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Guoli Chen, Ronghong Huang, Shunji Mei, Kelvin Jui Keng Tan
This paper examines whether CEOs with shorter initial contract lengths suffer from greater pressure and consequently engage in more visible efforts via mergers and acquisitions (M&As). By using CEO initial fixed-term contracts and exploiting U.K. corporate governance reform as an exogenous shock, we find that (1) CEOs with shorter initial contract lengths engage in more (and salient) M&As with relatively weaker market reactions; (2) the likelihood of contract renewal is higher among CEOs who engage in more visible efforts, while long-term performance still matters the most; and (3) firms with better corporate governance are more vigilant to visible efforts.
{"title":"Pressured to Perform: Evidence from a Quasi-Experiment of Initial CEO Contract Length and M&As","authors":"Guoli Chen, Ronghong Huang, Shunji Mei, Kelvin Jui Keng Tan","doi":"10.2139/ssrn.3770432","DOIUrl":"https://doi.org/10.2139/ssrn.3770432","url":null,"abstract":"This paper examines whether CEOs with shorter initial contract lengths suffer from greater pressure and consequently engage in more visible efforts via mergers and acquisitions (M&As). By using CEO initial fixed-term contracts and exploiting U.K. corporate governance reform as an exogenous shock, we find that (1) CEOs with shorter initial contract lengths engage in more (and salient) M&As with relatively weaker market reactions; (2) the likelihood of contract renewal is higher among CEOs who engage in more visible efforts, while long-term performance still matters the most; and (3) firms with better corporate governance are more vigilant to visible efforts.","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"25 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134296812","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Jess Cornaggia, Feifan Jiang, Jay Y. Li, Chenyu Shan, Dragon Yongjun Tang
Using manually collected data associated with bribery in China, we find that firms receive higher credit ratings when their travel and entertainment expenses are abnormally high. Higher credit ratings help firms to expand their debt capacity, which incentivizes issuers to bribe rating firms for rating favor. We find no evidence that the results are driven by bribery of government officials or bond underwriters. Exploiting the exogenous shock from China’s unprecedented anti-corruption campaign, we show that the effect of entertainment on credit rating is causal. The results are more pronounced during credit crunches and for firms with limited access to external finance. Overall, we identify a specific, external financing channel for bribery to create value for issuers and our study is among the first to quantify the marginal effect of bribery on firm value.
{"title":"Does Bribery Pay? Evidence from Credit Ratings","authors":"Jess Cornaggia, Feifan Jiang, Jay Y. Li, Chenyu Shan, Dragon Yongjun Tang","doi":"10.2139/ssrn.3858235","DOIUrl":"https://doi.org/10.2139/ssrn.3858235","url":null,"abstract":"Using manually collected data associated with bribery in China, we find that firms receive higher credit ratings when their travel and entertainment expenses are abnormally high. Higher credit ratings help firms to expand their debt capacity, which incentivizes issuers to bribe rating firms for rating favor. We find no evidence that the results are driven by bribery of government officials or bond underwriters. Exploiting the exogenous shock from China’s unprecedented anti-corruption campaign, we show that the effect of entertainment on credit rating is causal. The results are more pronounced during credit crunches and for firms with limited access to external finance. Overall, we identify a specific, external financing channel for bribery to create value for issuers and our study is among the first to quantify the marginal effect of bribery on firm value.","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126804742","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this study, we explore how investors reconcile information on firms’ social responsibility with analysts’ assessments of future firm risk in share pricing. We ask whether investors pay attention to small strides toward and/or small slips away from socially responsible behavior, arguing that analysts’ corporate bias toward gains and against losses influences investor reactions to corporate social responsibility. We hypothesize that analysts notice and reward improvements in social responsibility, yet excuse lapses. We find support for this hypothesis, using a unique dataset of the sample of eighteen firms that appeared within the 2013 KSE 100 index for 5 years (2014–2018). We also collected firm-level social responsibility disclosures data through content analysis of selected companies' annual reports. We also gather share-specific data of risk of default and pricing from rating agencies. Results suggested better CSR disclosures seem to positively affect returns. Surprisingly, higher-risk companies also enjoy higher returns. Moreover, according to expectations, market risk like beta and default risk measures like debt to equity ratio seems to decrease stock returns, whereas ROA seems to have a positive effect. Interestingly smaller size companies enjoy higher returns. We also found robust evidence that when firms increase the amount of good that they do (i.e., their social performance improves), analysts reward them with improved risk ratings. Yet, we also note an asymmetrical effect: analysts do not punish, and investors do not respond to, decreases in social responsibility. In short, analysts seem to be subject to a strongly positive corporate bias when interpreting corporate social responsibility performance. This bias prompt analyst to improve risk ratings when social responsibility improves but resist worsening risk ratings when social responsibility declines. Other findings suggested that default risk decreases more with a higher level of risk, higher debt to equity ratio also seems to cause an increase in growth of default risk, ROA also seems to cause a decrease in default risk. Results also suggested the inclusion of independent directors seems to decrease the default risk. A decrease in default risk also seems to have a positive effect on returns. Our findings elaborate earlier behavioral research on how corporate bias influences analysts’ assessments of risk. As a result, firms may come to understand that they merely must start social responsibility projects to gain the cost of capital benefits—they need not follow through with them. Second, investors may find that relatively minor decreases in social responsibility accumulate over time to constitute quite substantial risks— but they will not be forewarned about these risks because analysts ignore them, and as a result, they will have failed to raise their yield expectations commensurate with these escalating risks. Hence, our work motivates more critical scrutiny of the role analyst
{"title":"Is Doing Good, Good for Business: The Effect of Corporate Rating Analysts’ Corporate Bias on Investor Reactions to Changes in Social Responsibility","authors":"Shahzaib Khan, D. Siddiqui","doi":"10.2139/ssrn.3756725","DOIUrl":"https://doi.org/10.2139/ssrn.3756725","url":null,"abstract":"In this study, we explore how investors reconcile information on firms’ social responsibility with analysts’ assessments of future firm risk in share pricing. We ask whether investors pay attention to small strides toward and/or small slips away from socially responsible behavior, arguing that analysts’ corporate bias toward gains and against losses influences investor reactions to corporate social responsibility. We hypothesize that analysts notice and reward improvements in social responsibility, yet excuse lapses. We find support for this hypothesis, using a unique dataset of the sample of eighteen firms that appeared within the 2013 KSE 100 index for 5 years (2014–2018). We also collected firm-level social responsibility disclosures data through content analysis of selected companies' annual reports. We also gather share-specific data of risk of default and pricing from rating agencies. Results suggested better CSR disclosures seem to positively affect returns. Surprisingly, higher-risk companies also enjoy higher returns. Moreover, according to expectations, market risk like beta and default risk measures like debt to equity ratio seems to decrease stock returns, whereas ROA seems to have a positive effect. Interestingly smaller size companies enjoy higher returns. We also found robust evidence that when firms increase the amount of good that they do (i.e., their social performance improves), analysts reward them with improved risk ratings. Yet, we also note an asymmetrical effect: analysts do not punish, and investors do not respond to, decreases in social responsibility. In short, analysts seem to be subject to a strongly positive corporate bias when interpreting corporate social responsibility performance. This bias prompt analyst to improve risk ratings when social responsibility improves but resist worsening risk ratings when social responsibility declines. Other findings suggested that default risk decreases more with a higher level of risk, higher debt to equity ratio also seems to cause an increase in growth of default risk, ROA also seems to cause a decrease in default risk. Results also suggested the inclusion of independent directors seems to decrease the default risk. A decrease in default risk also seems to have a positive effect on returns. Our findings elaborate earlier behavioral research on how corporate bias influences analysts’ assessments of risk. As a result, firms may come to understand that they merely must start social responsibility projects to gain the cost of capital benefits—they need not follow through with them. Second, investors may find that relatively minor decreases in social responsibility accumulate over time to constitute quite substantial risks— but they will not be forewarned about these risks because analysts ignore them, and as a result, they will have failed to raise their yield expectations commensurate with these escalating risks. Hence, our work motivates more critical scrutiny of the role analyst","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"29 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125651470","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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