Corporate Social Performance and Stock Returns: UK Evidence from Disaggregate Measures

Author(s): Stephen Brammer, Chris Brooks and Stephen Pavelin

Source: Financial Management, Vol. 35, No. 3 (Autumn, 2006), pp. 97-116
Published by: Wiley on behalf of the Financial Management Association International
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Corporate Social Performance and

Stock Returns: UK Evidence from

Disaggregate Measures
Stephen Brammer, Chris Brooks, and Stephen Pavelin*

This study examines the relation between corporate social performance and stock returns in
the UK. We closely evaluate the interactions between social andfinancial performance with a

set of disaggregated social performance indicators for environment, employment, and

community activities instead of using an aggregate measure. While scores on a composit
social performance indicator are negatively related to stock returns, we find the poorfinancial

reward offered by such firms is attributable to their good social performance on the environmen

and, to a lesser extent, the community aspects. Considerable abnormal returns are available
from holding a portfolio of the socially least desirable stocks. These relationships between
social and financial performance can be rationalized by multi-factor models for explaining
the cross-sectional variation in returns, but not by industry effects.

There are now a large and growing number of ethical mutual funds in the US, Canada,

Europe. According to the US Social Investment Forum, over 10% of all equity invest

currently managed under the guidelines for Socially Responsible Investment (SRI). SRI is
to the concept of corporate social responsibility (CSR), and the former often involve
implementing "ethical screens" to ensure that it does not invest in firms that have poor
in the latter. Many large mutual funds and pension funds now include ethical criteria in
stock selection processes, and there is evidence that analysts are under pressure to
research on SRI issues.1
While the number of academic studies in this area has also increased substantially in re
years, no clear consensus has yet emerged concerning whether investment in socially res

stocks or funds is favorable or detrimental to returns. From a theoretical perspective, one

argument associated with the efficient markets hypothesis suggests the following logic co

the merits or otherwise of SRI. At the individual firm level, under some assumptions conc
the existence of markets and well-defined property rights, an equilibrium should develop
engaging in expenditure on socially responsible activities that take place up to the point w
marginal profitability is zero. Socially responsible and irresponsible firm returns should
same for given levels of risk and other firm characteristics.

At the portfolio level, however, if this argument concerning the neutrality of co

responsibility for returns holds, then investors must be made unambiguously worse off

screening-out process. Removing some stocks, sectors, or even whole countries on

grounds from the investable universe of securities will reduce portfolio efficiency. If w

this issue from another angle, for investors who hold a well-diversified spread of a

remain no worse off as a result of their social consciences, the remaining socially respon

firms' stocks must on average outperform their unscreened counterparts.

Finally, a third line of argument suggests that enhanced corporate social responsibility
lead to enhanced returns. Several possible reasons for this are outlined in Section III. All

'Coggan, P., 2004, "Big Investors Want SRI Research," Financial Times fund management supplement, Octo

The authors thank an anonymous referee for useful comments that substantially improved this article. Th
disclaimer applies.

*Stephen Brammer is a senior lecturer at the University of Bath, UK. Chris Brooks is a professor of f
Stephen Pavelin is a lecturer in economics at the University of Reading, UK.

Financial Management Autumn 2006 * pages 97 - 116

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98 Financial Management * Autumn 2006

to an improvement in the firm's operating perfo

price. Hence, it is possible to justify a positi

firm's social performance and its financial perf

The European Commission (2001) defines cor

whereby companies integrate social and environ

and in their interaction with stakeholders on a vo

that corporate social performance (CSP) is multi-

on the wrong aspect may yield inappropriate in

stock returns either directly through cost reductio

through an improvement in the firm's overall s

recommend the stock and investors more willing

revenues. Thus, having a social conscience may e

satisfy its stakeholders (employees, altruistic sha

and Pavelin (2006) show that a strong CSP may en

upon how important that particular type of activ

may be measured along a number of different d

reduction of adverse environmental impacts,

knowledge, no single study has yet examined the

of CSR on stock returns.

Our research employs data at the highly desirab

It is more than possible that previous studie

confused corporate social performance with f

average, socially responsible firms may yield hig

firms, but that ethical fund managers are poor

costs than standard funds. To the extent that tale

records are headhunted to work for large, prest

these effects is likely to be confounded by the
small. To summarize our main finding in brief, t
on ethical criteria appear on the surface to repr
lends support to the notion that findings of eth
of the stocks concerned, rather than bad fund
The remainder of this study unfolds as follow
on the relationships between CSR and firm fina

employ are described and examined in Secti

employed while Section IV contains the results
remarks and suggestions for further research.

I. Corporate Social Responsibility

The Existing Evidence

In this section, we review the existing evidenc

social responsiveness and stock market performa

body of work examines the link between social

of financial performance (Griffin and Mahon, 1

literature that we review consists of three prin
relating to assessments of firm reputation and
level concerning the relative performance of SR

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Brammer, Brooks, & Pavelin * Corporate Social Performance and Stock Returns 99

firm level regarding the relationship between social performance and stock returns. We
consider each strand in turn.

Several papers have investigated the relationship between a firm's degree of CSR and its
reputation. For example, Antunovich and Laster (2000) employ data for the 1983-1996 period

from the US survey conducted each year by Fortune magazine in producing its list of
"America's Most Admired Companies." They find that the stocks of the most-admired firms
yield positive abnormal returns of 3.2% in the following year and 8.3% over the following
three years. The stocks of the decile of lowest-scoring firms yield negative abnormal returns
of 8.6% in the succeeding nine months, although there is a sharp reversal thereafter. Chung,

Eneroth, and Schneeweis (1999), on the other hand, find little evidence that highly rated
firms outperform less admired firms on a risk-adjusted basis when they examine the
performance of only the very highest ranked 10 firms and the very lowest ranked 10 firms.

A large number of studies have empirically examined the link between SRI and returns by
examining the performance of ethical mutual funds. Guerard (1997a) finds little significant
difference between the performances of socially screened versus unscreened investments.

Kahn, Lekander, and Leimkuhler (1997) show that divesture of tobacco stocks would have
made little difference to typical investors' returns since allocations to such stocks are usually
very small.2 In a follow-up study to his previous work, Guerard (1997b) shows that investment

screens to preclude environmental or alcohol/tobacco/gambling or nuclear stocks actually

yield higher average returns than unscreened investments.3 Graves and Waddock (1994) and
Cox, Brammer, and Millington (2004) suggest, using UK and US data respectively, that poor
corporate social performance leads to a reduction in the number of long-term institutional
investors holding the firm's stock. On the other hand, a view dating back to Rostow (1959),
and Friedman (1970), is that CSR may divert resources away from projects that would have
had a greater impact on profitability (see also McWilliams and Siegel, 2001).
Using more recent data for 1990-1998, Statman (2000) examines the performance of the

Domini Social Index (DSI), produced by Kinder, Lydenberg, and Domini (KLD). In pure
return terms, the DSI slightly outperformed the S&P 500 over the period, although risk
adjustment led to a slight underperformance. Therefore, Statman's conclusion is that "pooling
investing power for something other than making money is no worse at making money than
pooling it for money alone" (p. 38).

Many early studies of the performance of ethical funds considered returns only and did
not allow for differential levels of risk between ethical and standard funds. Hamilton, Jo, and
Statman (1993) use the CAPM to examine the performance of 32 socially responsible mutual
funds. They conclude that "the market does not price socially responsible characteristics"
(p. 66). Using a more sophisticated multi-factor performance attribution model, Bauer, Koedijk,
and Otten (2002) show that both German and US ethical funds underperform their benchmark

in terms of their risk-adjusted returns, although similar UK funds achieve slight

outperformance. The performances of ethical fund managers in all three countries have
improved, consistent with the size and prestige of ethical funds increasing over time, enabling
them to recruit increasingly talented managers. More recently, Guenster, Derwall, Bauer, and

Koedijk (2005) focus on the environmental aspect of CSR and they investigate the impact on
Tobin's q ratio and on a firm's return on assets (ROA) of what they term its "relative ecoefficiency." This measures the extent to which a firm is able to create maximum value with
minimum environmental inputs relative to the peers in its sector. They find a positive but
2The four tobacco companies that were members of the S&P 500 during the late 1990s had a total capitalization
that was only around 2% that of the whole index.

3See also Barnett and Salomon (2002) for an examination of the impact of various degrees of social screening.

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100 Financial Management Autumn 2006

asymmetric relationship between eco-effic

with high eco-efficiency scores do not hav
firms with low eco-efficiency scores have

The importance of employing an appro

highlighted by Geczy, Stambaugh, and L

screens for passive investors who do not bel

factor models to enhance returns is very s
month. But for investors who have skill in

models, the cost of imposing ethical screen

Several studies examine the link between C

rather than empirical specifications related

Angel and Rivoli (1997) and Heinkel, Kra

from the perspective of the impact of env

equity capital. It is argued that socially res

environmental policies are questionable, a

firms will come only from "neutral" invest

conscience. This lack of demand will force

to green firms.

Finally, there is virtually no evidence of t

at the firm level, aside from studies by Fe
Gunster, Bauer, and Koedijk (2004). The for
only, and suggest that firms who are able

reduce their CAPM betas and raise their

employ data on "ecoefficiency" scores, w
find that whether a CAPM framework or a

and other portfolio characteristics is use

scoring portfolio significantly outperform

II. Data

The following sections describe the EIRIS data on social performance, an

variables that we employ in the study, respectively.
A. EIRIS Data

The Ethical Investment Research Service (EIRIS) specializes in the measurem

corporate social performance against an objective set of criteria, principally fo
institutional investors. EIRIS surveys firms concerning their social performance

undertakes its own research. As a result, it is able to provide social performance sco

a firm irrespective of whether it participates in its survey. EIRIS updates its d

continuous basis, making the distribution of scores fairly stable over time. Each com

examined at least twice annually, and significant pieces of information are ad

company's profile as they happen. Our data were drawn from this database in Febru

based on ratings that were last updated in June 2002. Therefore, we assume th

ratings constitute information that was available to investors from July 1, 2002. Th

are based on fairly objective, quantifiable criteria (such as the number an

environmental fines, or the proportion of women on the firm's Board). Althou

relating to employment, the environment, community, human rights, and sup

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Brammer, Brooks, & Pavelin * Corporate Social Performance and Stock Returns 101

management are all covered, due to the limited availability of data regarding the last two, we
restrict our attention to the first three of these dimensions of social performance.

The indicator of employee responsibility is based upon six measures relating to health and
safety systems, systems for employee training and development, equal opportunities policies,

equal opportunities systems, systems for good employee relations, and systems for job
creation and security. The environment variable comprises three measures, which are the
quality of environmental policies, environmental management systems, and environmental
reporting. Finally, our indicator of community responsiveness is measured as a single variable.

Following Graves and Waddock (1994), we translate each of the text ratings into quantitative
variables. Each employment measure has four text ratings, the environment variables have
five text ratings, and the community variable has four text ratings, which were all transformed

into integer scales beginning with 0 and ending in 3, 4, and 3, respectively. Thus, the three
measures of social performance are:
* Community performance, graded 0 to 3.

* Environmental performance: 3 categories (policies, management systems, and

reporting), each rated from 0 to 4, yielding a total environmental responsibility score
out of 12.

* Employee performance: 6 categories (health and safety, training and development,

equal opportunities policies, equal opportunity systems, employee relations, systems

for job creation and job security) each rated from 0 to 3, yielding a total employee
responsibility score out of 18.
To arrive at a single aggregate measure (termed "CSR" in our subsequent regressions), we
normalized the three scores to a 0 to 3 scale, and then summed them, generating an overall
score out of 9.

The availability of disaggregate data on various aspects of CSR performance is likely to be

important since CSR is multi-faceted and these various aspects may have differential impacts

depending on the nature of the firm's business. Some CSR projects can directly reduce
operating costs-for example, reducing the use of agrochemicals or employing energy-saving

technology. On the employee relations side, it is possible that flexible scheduling allows
workers to achieve desirable work-life balances which may enhance productivity, reduce
absenteeism, and make it easier to recruit and retain high-caliber staff (Turban and Greening,
1997). Visible funding of or involvement in community projects may also strengthen brand

images, engendering a sense of loyalty among consumers. Finally, companies with good
records on CSR issues may be less subject to stringent regulatory oversight, enabling them

to focus more time and energy on strategic business issues. There is also evidence that
awareness and consideration of environmental and employee issues may reduce the potential
for costly lawsuits (Ullman, 1985).
Examining first some descriptive statistics for the EIRIS data in the first panel of Table I, a
large number of companies appear to achieve zero scores for some or all measures. Of the 451

companies in our sample, 296 (66%) have scores, while the remainder do not. Not having a
score cannot be taken necessarily to imply poor social performance, and probably relates
predominantly to firm size since most of these firms are relatively small. At the other end of
the CSP spectrum, the number of companies achieving top scores varies from one measure

to another. Too many firms to list achieve the highest possible ratings for the community

indicator, but the top firms for other measures are dominated by banks (e.g. Abbey and

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96 Financial Management Autumn 2006

HSBC

TableI.Sumrytisc

PanelC.ortisbwV

PanelB.AvrgScosfEhIduti

PanelA.CompischvgHtSrfEMu

Std

Enviromet(12)Cuy4pl8s
ComunityEplesAPMBarc-k

ThesumaryfocinPlBdCptgb-w.S'

MeanDvdi

ranksmeu.Socilpfdthvb1J20TCAPMg5-yw
date.MximuposblcrnhCSRgvPB

EnvirometCuypls
BP56companieswthrAbyEg

ShelBritsEngyTGoup
UnilevrBTGoupNthRck

Finacls5.173026894

IT1.82740563
Cycliaserv3.02981547

Basicndutre4.83051792
Non-Cycliasumer5.90312784

Utiles9.201853476

Resourc9.205318467
Cycliaonsumer2.38906715

Genralidust2.95840316

Enviromet0.578-346
Non-cyliaserv5.064197832

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Comunity0.6583947 Employent0.8124
Compsite-0.145

CAPMBeta0.58
Price-tobk0.19

Brammer, Brooks, & Pavelin * Corporate Social Performance and Stock Retumrns 103
Northern Rock), oil or energy companies (e.g. BP, Shell, and British Energy), and
manufacturing firms (e.g. Cable & Wireless and Unilever).
Clearly, firms' social performance achievements vary significantly across sectors, as further

indicated in Panel B of Table I. This was expected since some industrial sectors have high
environmental impacts (e.g. power generation, resources, chemicals), and it is likely that
environmental performance may be more important in such sectors. In other sectors, including

retailing and light manufacturing, the treatment of workers will probably have higher
importance. For firms where brand reputation is crucial, charitable giving and community
work may provide greater impact than other aspects of CSR.
As Table I shows, for the environmental aspects of CSR, the utilities and resources firms
score highly, supporting the view that such considerations are now viewed as very important
in these traditionally "dirty" sectors. Interestingly, utilities and resources firms also score
most highly under all other measures, and therefore also under the composite statistic. The
worst-performing sectors by some margin are information technology, cyclical consumer
goods, and general industrials. Indeed, the median scores for firms in the cyclical consumer
sector are zero for both the environmental and community indicators. It may be that differing
levels of CSP across sectors reflects the levels of operating profitability in those sectors, so
that highly profitable industries may have the luxury of expending funds on activities that
will enhance CSP scores. On the other hand, highly competitive and less profitable sectors,
such as general industrials, may appreciate the benefits of behaving in a socially responsible
manner, but may not be able to afford to take the necessary measures.
B. Other Variables

Our sample comprises all firms that were constituents of the FTSE All-Share Index as of
2002. This index is a market-capitalization weighted index ofUK quoted firms. We obtained
from Datastream on all firms that were index constituents at that time for the following varia
share total return indices (i.e. with dividends included), market value of equity in thousand
pounds, book value in thousands of pounds, and industry code. All of the data points for th
variables are observed as of July 1, 2002. After excluding investment trusts, and companie
which either the Datastream codes or one of the required variables was missing, we were left w
a total of451 firms plus the All-Share Index itself.
A matrix of correlations between each of the variables employed in this study is presente
Panel C of Table I.4 We examine these correlations first to check for strong relations that
cause near multicollinearity in our subsequent regressions and, second, to determine whe
there are any associations between the social performance indicators and the other variab
The most salient feature of the correlation matrix is the very high degree of association within
set of CSP scores. For example, the employment and community variables have a correlatio

0.65. Also, as one would expect, the composite measure is highly correlated with all o
components. As a result, we shall employ the composite measure in separate regressions f
the 3 component variables.

All of the performance attribution financial variables (beta, price-to-book, market capitalizat

and the previous year's return) have negligible correlations with the CSP variables except

market capitalization. Confirming our intuition, all else being equal, large firms are likely to ach

higher CSR scores than small firms, although the association is only moderately strong."

4Since the CSP scores are ordinal rather than cardinal numbers, we employ Spearman's rank correlations ra

than Pearson correlations in the table.

5A regression analysis of the determinants of the scores under each social responsibility indicator confirms the
finding that market capitalization positively affects each of the scores, so that large firms are more likely to score
highly however corporate social performance is measured. None of the other factors employed in this study (CAPM

beta, price-to-book value or previous year's return) significantly affect the scores under any CSR category, and
therefore these results are not shown to preserve space but are available from the authors on request.

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104 Financial Management Autumn 2006

Ill. Methodology

Some previous studies of corporate social perf

price impacts following announcements of

performances for one or more years following

of the short-run price impact is not feasible i
a continuous rather than a discrete basis. Thus
1, 2, and 3 years following the cut-off date at
That the EIRIS scores are updated on a cont
First, there is no event as such- where there w
equity offering. Hence a comparison in the pe

snapshot values of the EIRIS scores may y

observation date returns are qualitatively the

CSR performance has not changed, or because
this. Relatedly, another issue that does not ari
the firm's decision about which sample ("equit
in, continuing the seasoned equity offering co
scores are assigned by an independent externa

factors, some of which will be beyond the

procedure more like that advocated by Fam

returns over time rather than an examination

any cross-correlations of abnormal return

automatically accounted for when we calculate

as described below.

Our first step is to examine the returns to various portfolios formed on the basis of differin
levels of CSR scores, comparing them with FTSE All-Share and an equally weighted portfolio
as benchmarks. The CSR score-sorted portfolios are all equally weighted (apart from the FTS
benchmarks), and assume initial investment on July 1,2002 for a 1-, 2-, or 3-year holding perio
We investigate five sets of portfolios: for all firms with scores of exactly zero under a particul
measure; firms within the FTSE All-Share Index, but with no scores; and triciles ranked by
score (zero-scoring firms excluded), with equal numbers of firms in each portfolio. This procedure

ensures that a reasonable portfolio size is examined in each case, and that all of the tricileranked portfolios contain the same number of firms so that a valid comparison can be made.
In order to more fully examine the impact of CSP on stock performance, we consider whethe
the average returns for firms with zero scores (the lowest possible scores) are significantly
different from the scores of each of the non-zero ranked triciles under each social performanc
indicator. We also consider whether the lowest (non-zero) ranked tricile average returns are
significantly different from those of the other two triciles. To this end, we employ two-

sample paired t-tests. Given that the length of our time-series of post-CSR performanc
observation is limited, we conduct these significance tests using all available data (July

2002-December 2005) rather than separately for 1-, 2-, and 3-year horizons in order to maximiz
the power of the statistical tests.
Next, we run a series of cross-sectional regressions of the stock returns on the composite
CSP measure and separately on the three constituent indicators (environment, employment,
and community). This enables us to disaggregate the effects of the various aspects of CS
on returns, and to determine whether there are any differences between them:

ri,t = a + a CSRi,,t + aENVi,t + a3EMP,, + a4COMMi,t-, + u,, (1)

6For example, in the manner of Brav, Geczy, and Gompers (2000), Eckbo, Masulis, and Norli (2000), or Mitchell
and Stafford (2000).

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Brammer, Brooks, & Pavelin * Corporate Social Performance and Stock Returns 105

composite
is the environment
indicator,
is the employment
where r,.measure,
are theENV
returns
to stock i in
monthEMP
t (where
each year indicator,
runs from

July 1), CSR is the

COMMis the community indicator, u, is a disturbance term, and either a1 = 0 or a2, a3, a4 = 0.

We employ a Fama-MacBeth (1973)-style approach where we construct a time-series of

cross-sectional regressions for each of the 42 months commencing in July 2002 after we
observe social performance. We then average the parameter estimates across the time-series
observations, and the coefficient standard errors are the standard deviation of the parameter
estimates divided by the square root of the number of observations.
It is important to consider firm characteristics when examining the relationship between
stock return performance and CSP, since high-scoring firms were found typically to be large,
and the stock returns of large firms are on average lower than those of small firms (see, e.g.,
Fama and French, 1993). Thus, we wish to examine the relationship between CSP and returns
after allowing for firm characteristics. So, suppose that we observe companies with scores
yield large abnormal returns. Does this exceptional performance directly follow from their
good social performance, or does it arise, for example, because such firms have large exposures
to a momentum factor and stocks with momentum usually outperform in the following year?
In order to answer this question, we re-run Regression (1), but also include the four standard
performance attribution factors:

a8r,,.,
+
u,,
r,,= ao+
+ 4 CSR1,.
+ a2ENiW + aEMP,,1 + a4COMMM,4
+ aPTB
V., + a6BETAi,, (2)
+ c4CAP,,

We

regress

the

retu

(PTBV),
and
a
meas
factors,
plus
a
mea

(1997)
suggesting
th
are
likely
to
continu
Fama-MacBeth
and
a
problem
that
may
p
variable
is
an
estimat
second
pass
(cross-se
advocate
the
formati
to
reduce
the
measur
not
be
perfectly
cor
errors-in-variables
p
a
database
comprisin
far
fewer
firms
in
o
is
somewhat
arbitra
Litzenberger
and
Ra
errors
are
given
by

2
&
z' (3)
= 62

(3)

where a1 denotes parameter i; pm

market portfolio excess returns.
Next,
7This

8See

is

as

an

based

also

alternative
on

the

Gibbons

return

approach
averaged

(1982).

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All use subject to http://about.jstor.org/terms

ove

106 Financial Management Autumn 2006

performance of the highly rated firms, w

French (1993) and augmented by Carhart

regression of the portfolio returns (for exam

100 companies by overall score) on the exces
size, book-to-market and previous return:

r,= P1 + J2RMRF, +P3SMB, + JP4HML +f3MOMM + u, (4)

where r, is the portfolio return, RMRF is the excess return on the market (return on the FTSE
All-Share index minus the 3-month T-bill yield), SMB is the average return on the portfolio

comprising the smallest 50% of stocks minus the average return on the portfolio comprisin

the largest 50%, HML is the average return on the bottom 30% of stocks ("value stocks
minus the top 30% of stocks ("growth stocks") sorted by price-to-book ratio, and MOM
the average return on a portfolio comprising the highest 50% of stocks ranked by prio

returns minus the average return on the lowest 50% of stocks by prior returns. The regression

are run on the 42 months of post-CSR observation returns, based on portfolios constructed
from stocks comprising the FTSE All-Share index constituents.
Finally, as suggested above, it may be the case that the relation between stock returns and
CSP varies across sectors, so that activities regarded as best practice in some industries are

viewed as wasteful and value-destroying in others. We do this by running the followin

regression separately for each sector:

ri, = a + x ENV,, + a2EMPi,t. + aoCOMMi,., + u, (5)

Note that, in order to avoid repetition, only the individual social performance indicato
and not the composite measure are employed in this sector-based model.

IV. Results

Table II presents the average monthly returns and standard deviations of portfolio ret
over time for equal-sized tricile portfolios constructed using firms ranked separately on
CSR component measure and on the composite measure. The tricile portfolios are constru
using only firms that have non-zero scores; we also report the average returns for firms

have been assigned zero scores, the lowest possible social performance indicator v

Panel A reports average returns and standard deviations for a 1-year holding period beginn

July 1, 2002, while Panels B and C report returns for 2- and 3-year holding periods, respect

commencing at the same time. All portfolios are equally weighted across firms. For compa
it is worth noting that an equally weighted portfolio comprising all stocks in the FTSE A

Share Index returned, on average, -0.61%, 0.41%, and 0.56% per month over the 1-, 2-, an
year horizons, respectively.

In contrast to the findings ofAntunovich and Laster (2000) and Filbeck and Preece (200

but consistent with those of Bauer et al. (2002), we find that the 1-year returns are all nega

except for those of firms with zero scores on all measures. The predominance of negativ
returns arises from the fact that world equity markets fared badly at that time (July 2
June 2003). However, considering first the overall CSR measure in the final column of T
II, it is evident that firms with high scores over all three investment horizons have conside
lower average returns than the benchmarks. For example, over the 1-year horizon, the z

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Brammer, Brooks, & Pavelin * Corporate Social Performance and Stock Returns 107

Table II. Returns, Standard Deviations, Numbers of Firms for Portfolios Based on
Triciles of CSR Scores

Cell entries are arithmetic average monthly returns (standard deviations of returns over time in parentheses)

for 1-year (Panel A), 2-year (Panel B), and 3-year (Panel C) holding periods from July 1, 2002. Numbers o

firms are given in Panel A as {.}. "Zero score" is an equally weighted portfolio comprising the firmnns wit
zero CSR scores (unrated firms are excluded); "Tricile 1" is an equally weighted portfolio of firms with the
lowest (but non-zero) scores, and so on. For comparison, the FTSE All-Share (a value-weighted index) 1
year, 2-year, and 3-year returns are -1.21% per month, -0.07% per month; and 0.42% per month respectively;

an equally weighted index comprising the same firms returned monthly averages of-0.61%, 0.41% an
0.56%, respectively over the same periods.
Panel A. 1-Year Returns

Environment Community Employment Composite

Zero

score

-0.07

-0.53

-1.42

-0.09

(2.41) (2.27) (2.61) (2.21)

{68} {54} {28} {17}
Tricile 1 (low score) -0.82 -1.19 -0.95 -0.43
(2.89) (3.32) (3.18) (3.07)
{76} {81} {90} {93}
Tricile

-1.26

-0.49

-1.04

-1.07

(2.90) (2.18) (2.83) (2.47)

{76} {81} {89} {93}
Tricile 3 (high score) -0.92 -0.85 -0.46 -0.98

(2.55) (2.78) (2.41) (2.65)

{76} {80} {89} {93}
Panel B. 2-Year Returns

Environment Community Employment Composite

Zero

score

1.08

1.07

-0.26

1.91

(1.90) (1.84) (1.59) (2.00)

Tricile 1 (low score) 0.41 0.21 0.52 0.60
(1.85) (2.17) (1.55) (2.21)
Tricile

0.36

0.55

0.12

0.38

(1.90) (1.51) (1.97) (1.33)

Tricile 3 (high score) 0.38 0.52 0.52 0.40
(1.11)

(1.26)

(2.02)

(1.39)

Panel C. 3-Year Returns

Environment Community Employment Composite

Zero

score

1.05

1.21

0.14

1.78

(1.51) (1.31) (1.27) (1.39)

Tricile 1 (low score) 0.62 0.53 0.72 0.69
Tricile

(1.33) (1.72) (1.19) (1.65)

0.70

0.74

0.33

0.73

(1.59) (1.23) (1.47) (1.16)

Tricile 3 (high score) 0.79 0.79 0.55 0.75
(0.87) (0.98) (1.56) (1.13)

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108 Financial Management Autumn 2006

scoring portfolio yields returns of -0.09% pe

and the highest-scoring tricile yields -0.98%
returns between the highest and lowest scor

The 2- and 3-year returns in Table II paint a

highest on the composite CSR measure un

All-Share value weighted) benchmark. Again

that bad firms from a social responsibility s
that, over a 3-year period, the portfolio com
measure actually yields a positive return of
market-wide benchmark by 16%.

Considering now the component CSR measu

highly rated firms overall arises from the im

high scores on both of which lead to poor in

across investment periods, usually both the
outperform the mid and top triciles, while t
Thus there is not a monotonic fall in perform

between the lowest and the highest scores

outperform those with high scores, accordin

the other hand, has the opposite effect o

scores lead to lower returns over all horizon

portfolios yield -1.42% and -0.95% respective

yields -0.46%. On an annualized basis, the dif
tricile is 12.1%.

Table III presents the test statistics and p-values of tests for the significance of the
differences between the high scoring and low scoring portfolios. The tests are conducted

using all available post-CSR measurement data from July 2002-December 2005 (42
observations). But given this relatively modest sample size, and the relatively large withintricile variation in performance, none of the differences are statistically significant, even
though the analysis above showed that they are financially meaningful.

Existing firm-level evidence of the link between CSP and stock returns focuses on
environmental aspects of CSP and reports a positive relationship between CSP and returns
(Feldman et al., 1997; Derwall et al., 2004). Table IV presents the results of a set of regressions

of returns on the various measures of CSP together with the firm characteristics (CAPM
beta, price-to-book value, market capitalization, and the previous 12 months' return), as
described above. These regressions include all companies in our sample that have (zero or
non-zero) CSP scores. Examining first the relationship between the composite performance

measures and returns, it is evident that a higher score leads to a lower average return,
although not statistically significantly so. Each 1-point increase in the score leads to a fall in

returns by around 0.04% per month (0.48% per year), so that the difference between the
expected returns for the highest- and lowest-scoring firms based on the overall CSP measure
is around 4.2% per year. Allowing for the standard performance attribution characteristics
does not markedly change this result.
Examining each social performance indicator separately, the second and fourth rows after
the header in Table IV present the results of a regression on the 3 constituents and on the 3

constituents plus the performance attribution variables, respectively. Again, it is evident

that high scores on either the environment or the community indicators lead to lower returns,
although only the environment parameter is significant at the 10% level. This result is in

contrast to the findings of Feldman et al. (1997) and Derwall et al. (2004). Each 1-point

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Brammer, Brooks, & Pavelin * Corporate Social Performance and Stock Returns 109

Table III. Tests for Significances in the Differences Between the Mean Returns
Across Triciles

The comparisons are conducted using all available data from July 2002 to December 20

observations) in order to maximize the power of the t-tests; a paired t-test for the difference betw

means of the returns is employed. Cell entries are t-test statistics with p-values in parenthese
score" is an equally weighted portfolio comprising the firms with zero CSR scores (unrated fi
excluded); "Tricile 1" is an equally weighted portfolio of firms with the lowest (but non-zero) scor
so on.

Comparison Environment Community Employment Composite

Zero score vs tricile 1 0.477 0.748 0.413 0.641

(0.636) (0.459) (0.682) (0.525)

Zero score vs tricile 2 0.515 0.521 0.777 0.954

(0.609) (0.605) (0.442) (0.346)

Zero score vs tricile 3 0.472 0.671 0.822 0.861

(0.639) (0.506) (0.416) (0.394)

Tricile 1 vs tricile 2 0.856 0.718 0.020 0.070

(0.397) (0.477) (0.984) (0.945)

Tricile 1 vs tricile 3 0.994 0.850 0.272 0.354

(0.326) (0.400) (0.787) (0.725)

increase in the score (on a 20-point scale where 0

yields a 0.72% per annum fall in the average return
scores on this variable would on average yield retu
investing in firms with zero scores on this measu
indicator scores lead to higher returns on average
positive sign for the employment variable means

lowest attained score (zero) to the highest (14)

average returns. It should be noted, however, t

the 42 cross-sectional regressions) are very small

alone, corporate social performance is not able to e
in stock returns. Incorporating the four risk attr
not affect either the sizes or the significances of
values increase somewhat to around 0.1.

Table V shows the results of a Fama-French (1993) style time-series analysis where th

time-series of returns of the zero score and tricile sorted portfolios over the 42 months (July

2002-December 2005) formed according to the various CSR scores, as described above, a

regressed on a constant, the excess market return, small-minus-big, high-minus-low, and

momentum factors. Panels A to D of Table V show the results when the portfolios are formed
on the basis of the composite CSR measure, the environment score, the community score,
and the employment score, respectively. The results show that the firms in our database,
whatever their scores, had positive loadings on the CAPM, size, value and momentum terms

as one would expect. In almost all cases, the average monthly return, measured by the

intercept terms, is higher in the regression including the Fama-French factors compared to
those without. The R-squared values for these regressions are high (typically of the order o
0.8 or more), suggesting that these risk factors are well able to explain the temporal variation
in the returns to the score-sorted portfolios.
Of more interest are the last two rows of each panel of Table V, which show the average
returns of an arbitrage strategy of buying the portfolio of firms with the highest CSR score

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110 Financial Management Autumn 2006

Table IV. Fama-Macbeth Style R

ri, = ao + aICSRi,t-1
+ a2EMP,t,.1
+ a3ENVi,t1
+ a4COMMi,t-i
+ a5PTBVi,t-i
+ aBETAi,tI
+ a7CAPi,tI
+ a8ri, t-,
+ ui,
We conduct a "time-series of cross-sections" approach in the spirit of Fama and MacBeth (1973), but applied
to individual stocks rather than portfolios. This table employs returns in excess of the risk-free rate as the

dependent variables. Cell entries are parameter estimates averaged over 42 post-CSR observation months
with standard errors in parentheses, based on Shanken (1992); ri, are the returns to stock i in month t, CSR is

the composite measure, ENV is the environment indicator, EMP is the employment indicator, COMM is the
community indicator, CAP is market capitalization, PTBV is price-to-book value, ui,, is a disturbance term; *
and ** denote significance at the 10% and 5% levels, respectively; market capitalization figures have been
multiplied by 10,000 for simplicity of presentation.

a0 a1 a2 a3 a4 as a6 ag a

0.761

-0.044

0.01

(0.868) (0.052)
0.806

0.024

-0.055

-0.004

0.02

(0.857) (0.048) (0.034) (0.155)

0.847 -0.035 - - - 0.007 -0.065 0.001 -0.026 0.09

(0.624) (0.025) (0.003)** (0.768) (0.001) (0.025)

0.874 - 0.031 -0.060 0.007 0.006 -0.045 0.001 -0.026 0.10

(0.616) (0.037) (0.032)* (0.177) (0.003)* (0.764) (0.001) (0.025)

under each measure, and short selling a portfolio of either the lowest no
or of the zero-scoring firms. The average returns over time to this strate
but never statistically significant, as the results above suggest. For exam
by the composite measure, buying the best performing and selling the

(non-zero-score) stocks yields an annualized return of -3.5%, while

selling stocks with zero scores yields an annualized return of-0.17%.
the financial predominance of socially less responsible firms largely
performance attribution variables are accounted for. After allowing for
risk variables, only 1 of the 8 strategies (2 for each of the 4 CSR ranki
negative returns; the other 7 are positive, although again none is statist

so. For example, the outperformance of the zero-scoring firms under th

of 0.26% per month changes to an underperformance of 0.29% per mon
the relatively poor returns from the socially most responsible firms m
their characteristics as being larger, more highly priced stocks, for exa
Finally, Table VI examines the relation between financial and social pe

for each industrial sector based on a cross-sectional regression of t

return in the year following observation of the CSR scores.9 The number

the sectors, presented in the final column of Table VI, are somewh
utilities, resources, cyclical consumer and non-cyclical services), inev

standard errors and therefore adversely affecting the statistical signific

9In order to avoid excess repetition, we conduct the analysis using the returns over on

measurement (July 2002-June 2003). We focus upon the 1-year horizon since the r

and financial performance appears relatively stronger for this investment period. This
changes in the CSR scores after July 2002, upon which we do not have information.

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Brammer, Brooks, & Pavelin Corporate Social Performance and Stock Returns 99

PanelA.SortbyCR

PanelB.SortbyEvimc

(0.836)17*5942
(0.912)34*57

(0.82)*5417

(0.941)3*8726
(0.39)817425

(1.2)8045*639
(0.924)31*75

(0.87)31*52
(0.95)327*148

(0.915)4*62387
(0.46)528139*

(0.382)917*5

r,=a1+u/32RMFtSBJaHL,+5Ou

soilftrPuaVcehCmriFnosutRwafeg.VlbT

tnesioc-yadkrh)0891('W;mpnoisegtfrlC.uyhmacesnoigrtlbvdphT

rofsnitavebylhm24=T;osrgtcaf-ehi2R;ylvpsre%5dna01htcifgseod*na;htrpisoedna

ehtrofgniwlauvsId,pmehtroilfcanugvsdpb1.502remcD-yluJ

efctohprmancetibuofrs.

91.05238760.1erocsZ

19.052 639.1)erocswl(iT

39.015-6274elicrT

8.02913765 0.)erocshgi(3lT

62.078135-962.0elicrtT

04.725-31 0.erocsz-3liT

19.082-76 13.erocsZ

78.0251349.0)erocswl(1iT

19.0842 760.1elicrT

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78.01923540.1)erocshgi(3lT

81.0954263-1.0elicrt T

91.04235-816.0erocsz3liT

96 Financial Management Autumn 2006

PanelC.Sortbymuic

PanelD.SortbyEmpc

(0.928)73*615

(0.875)3*6291

(0.423)671 8

(0.39)4162*

(0.935)*241

(0.869)23*1

(1.54)0*632

(0.89)342*651

(0.796)2*4138

(0.34)96187

(0.947)5*321

(0.569)3127

TableV.RgrsionfwtuFmChcPl(ed)

Zerosc1.2034589

Tricle1(ows).07582-9

Tricle20.917458

Tricle3(hgso)1.045827

Tricle3-t10.245678

Tricle3-zos0.1689452

Zerosc0.9516723-8

Tricle1(ows).3865209

Tricle20.7139864-

Tricle3(hgso)1.046598

Tricle3-t10.42697

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Tricle3-zos0.1849752

Brammer, Brooks, & Pavelin * Corporate Social Performance and Stock Returns 99

ri,=o+flCSRt-u

ri,=ao+lENVt2MP13COu

(1.056)38294

(0.49)81*62

(0.392)17845

(0.498)*1736

(0.657)12438

(10.86)9742

(1.035)46879

(0.496)*71825

(1.8)035246

(0.569)31427*

TableVI.RgrsionutfMhyOv1YSc

morfgniu,taeykcsh;pdnio-taecr)0891(s'hWmplC
July20tone3;-1dshacrmipf().CSR,ENV

enviromtdca,EMPshplyCOub;*gf5%

1%levs,rpctiy.
Sectora023iNumbfFs

Finacls-0.315246

IT0.31-248956

Cycliaserv-1.72059864

Basicndutre0.48-1*796523

Non-cyliasumer1.0548932

Utiles12.76-45803

Resourc2.78-03614

Cycliaonsumer-0.4251736

Genralidust0.192-54387

Non-cyliaserv2.7403156

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114 Financial Management Autumn 2006

for those sectors. However, perhaps surpri

and Pavelin (2006), there is very little di

indicators on returns across the majority o

shows, the composite CSR measure negative

positive sign only for the cyclical consume
that this was a sector with spectacularly poo
indicator has a negative sign for all 10 secto
have a negative signs for only 4 of them. O

estimates statistically significantly diff

(significantly negative for the environmen

positive for the community indicator). How
firms in our sample, and which performed
the stocks of firms with poor social perfor

case of the general industrials sector, wher

score and the lowest community score wou
and 30% higher, respectively, than firms w

V. Conclusions

This article has investigated the relation between corporate social performance an
performance, measured using stock returns, for a sample of UK quoted companie
finding is that firms with higher social performance scores tend to achieve lowe
while firms with the lowest possible CSP scores of zero outperformed the marke
only have one set of social performance indicators at our disposal, our dataset con

unusually high quality of disaggregate data that enables us to distinguish the

impacts of the various aspects of social performance. We observe that the en
and community indicators are negatively correlated with returns while the

indicator is weakly positively related. Hence we conclude that the various aspects of
social behavior must be examined separately in order to achieve an accurate pictu
impacts on returns.
On the surface at least, our findings on balance lend weight to the argument that

on some corporate social activities is largely destructive of shareholder valu

1988). Industry effects are not able to fully explain the low returns offered by t
scoring firms, although the standard performance attribution measures put forwa

and French (1993) do go a long way in rationalizing our results. These observ
clearly relevant to equity analysts and fund managers considering the implem
ethical screens in suggesting that this will dent their performance given
characteristics of such firms as relatively poor investments.

As well as standard risk-based models, one may alternatively consider be

explanations. It may be the case that altruistic private or institutional shareholders

to forgo returns in order to feel morally at ease with the stocks that they h

required returns on the stocks of socially responsible firms are lower. Equally, it
case that expenditure on some aspects of CSR affects the bottom line negatively

the share prices of firms that engage excessively in such activities are puni

financial markets over the longer term, and shareholders are slow to realize this.
improvement in an individual firm's social performance is rewarded by a one-off

increase by an over-exuberant equity market in the short term, cross-secti

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Brammer, Brooks, & Pavelin * Corporate Social Performance and Stock Returns 115

relationship between social and financial performance may be negative. Future research m
be able to shed light on the relative merits of these competing explanations of our results
may conduct event studies to examine in a time-series context the impact on its share price
a change in corporate social policy by a firm.E

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