Corporate Lobbying and Firm Performance

Corporate lobbying activities are designed to influence legislators, regulators and courts, presumably to encourage favorable policies and/or outcomes. In dollar terms, corporate lobbying expenditures are typically one or even two orders of magnitude larger than spending by Political Action Committees (PAC), and, unlike PAC donations, lobbying amounts are direct corporate expenditures. We use data made available by the Lobbying Disclosure Act of 1995 to examine this more pervasive form of corporate political activity. We find that, on average, lobbying is positively related to accounting and market measures of financial performance. These results are robust across a number of empirical specifications. We also report market performance evidence using a portfolio approach. We find that portfolios of firms with the highest lobbying intensities significantly outperform their benchmarks in the three years following portfolio formation.     

The effect of corporate sustainability performance on leverage adjustments

We examine the impact of corporate sustainability performance (CSP) on the speed at which firms adjust their leverage ratios to the target levels for a large sample of 31 countries from 2002 to 2018. Using two proxies of CSP, we find that firms with superior CSP tend to adjust faster toward their target leverage ratios. In exploring the potential underlying economic mechanisms through which CSP affects leverage adjustments, we find that better CSP helps firms to ease information asymmetry, enhance stakeholder engagement, push up stock prices in the stock market, and improve competitive advantage in the product market. In the cross section, the positive association between CSP and leverage adjustment speed is less pronounced in countries with high-quality institutions. The results remain unchanged in robustness tests. Overall, this paper highlights the important role of CSP in shaping corporate capital structure dynamics and suggests implications for corporate strategic planning on the privately optimal levels of CSP activities.     

Does it cost to be sustainable?

We investigate whether firms’ corporate social performance (CSP) ratings impact their performance (cost of capital) and risk. Using a proprietary CSP ratings database, we find no difference in the risk-adjusted performance of UK firms with high and low CSP ratings. Additionally, the firms do not differ in their amount of idiosyncratic risk. We find some evidence of high-ranked firms being larger. The empirical evidence therefore indicates that investors and managers are able to implement a CSP investment or business strategy without incurring any significant financial cost (or benefit) in terms of risk or return.     

The IPO corporate social responsibility information disclosure: Does the stock market care?

We create textual information indices using corporate social responsibility (CSR) information extracted from IPO prospectuses in China. We use the indices to measure the issuers’ corporate social performance (CSP) and corporate environmental performance (CEP) and assess how the stock market reacts. We find that CSP disclosure is significantly related to the post‐market performance of the firm. Specifically, better CSP disclosure is correlated with higher post‐IPO listing holding period returns among firms that do not disclose donations or environmental expenditures, although the association does not hold for firms that make donations and environmental expenditures. In addition, institutional investors seem to care more about the CEP information for a firm than the CSP information.     

Benchmark Invariancy,Seasonality and APM-Free Portfolio Performance Measures

The Jobson-Korkie (1981) Z score and the positive period weighting (PPW) score of Grinblatt and Titman (1989) are applied to various benchmarks of market and mimicking portfolios to study the benchmark invariancy problem. Significantly different portfolio performance inferences are found for a sample of 146 equity mutual funds depending on the mean-variance efficiency of the portfolio benchmarks (mimicking portfolios versus market indices). Portfolio performance inferences are affected significantly by the number of factors, nonsynchronous trading adjustment, and the sizes of the firms used for factor extraction. The returns of the portfolio benchmarks exhibit significant monthly seasonalities, which, in turn, significantly influence mutual fund performance inferences.     

Evaluating corporate credit risks in emerging markets

Corporate leverage among emerging market firms went up considerably after the 2007–09 Global Financial Crisis (GFC). We investigate how the increased emerging market corporate leverage in the post-GFC period (2010–15) impacted the underlying credit risk, compared to the pre-GFC (2002–2006) and GFC (2007–09) periods. Using firm-level credit risk, financial, and balance sheet data for 350 firms in 23 emerging markets, we find that leverage growth leads to a significant increase in corporate credit default swap (CDS) spreads only in the post-GFC period, and the incremental effect is mainly evident among risky firms (firms with high leverage and idiosyncratic volatility). In contrast, emerging market CDS spreads during the GFC period are mainly driven by global market risk factors. The post-GFC corporate debt vulnerability is mitigated for high growth prospect firms and firms domiciled in countries with high net capital inflows and superior governance. While corporate leverage growth impacts aggregate corporate credit risk, there is no evidence that it increases sovereign credit risk. Our paper contributes to the recent literature on potential sources of default risk in emerging markets.     

An analysis of the importance of S&;P 500 discretionary constituent changes

The main purpose of this paper is to investigate the impact of the S&P 500 index committee’s decisions to change the constituent firms in the index on benchmark risk measures. The index is managed and changed discretionally by the index committee to make it as representative of the market condition as possible. In addition, the index constantly changes due to important corporate events such as bankruptcies, mergers and acquisitions, and spin-offs. We reconstruct market portfolios by retaining all discretionally deleted firms in a 3 and 5 year periods. We estimate betas at every deletion date in terms of reconstructed market portfolios; we found that these estimate betas are significantly different from the betas obtained from the constantly updated S&P 500 portfolio. We also found that such portfolios are less representative of the business cycle than the actual S&P 500 portfolio. Finally, we found that the portfolio returns obtained by retaining all discretionally deleted firms deviate significantly from the returns of the actual S&P 500 index over the studied period, October 1989 to December 2007.     

The cross-section of industry equity returns and global tactical asset allocation across regions and industries

This study investigates which index characteristics predict returns in the cross-section of local industry indexes in six regions. The results show that geographical origin and market capitalization of indexes critically determine the predictive ability of characteristics. We find that industry indexes of any market capitalization with high earnings-to-price ratio yield higher expected returns in the US, Europe, and Asia-Pacific. Recent winner (loser) portfolios in Europe have a tendency to outperform (underperform) recent loser (winner) portfolios in the near future for all groups of market capitalization. Small portfolios with high idiosyncratic volatility in Asia-Pacific earn an idiosyncratic volatility premium. Dividend yield is positively related to future returns of small European portfolios. These results are robust to the inclusion of transaction costs and control variables and have implications for portfolio managers following a global tactical asset allocation policy.     

Risk Reduction and Mean-Variance Analysis: An Empirical Investigation

Abstract:  I examine the performance of global minimum variance (GMV) and minimum tracking error variance (TEV) portfolios in UK stock returns using different models of the covariance matrix. I find that both GMV and TEV portfolios deliver portfolio risk reduction benefits in terms of significantly lower volatility and tracking error volatility relative to passive benchmarks for every model of the covariance matrix used. However, the GMV (TEV) portfolios do not provide significantly superior Sharpe (1966) (adjusted Sharpe) performance relative to passive benchmarks except for the restricted GMV portfolios. I find that a number of alternative covariance matrix models can improve the performance of the restricted TEV portfolio formed using the sample covariance matrix but not the restricted GMV portfolio. I also find that simpler covariance matrix models perform as well as the more sophisticated models.     

Expected Returns and Idiosyncratic Risk: Industry-Level Evidence from Russia

We explore a relation between expected returns and idiosyncratic risk in Russia. Investors in the Russian stock market cannot fully diversify their portfolios due to transaction costs, information gathering and processing costs, and shortcomings in investor protection. This implies that investors demand a premium for idiosyncratic risk. We estimate the price of idiosyncratic risk using MIDAS regressions and a cross section of Russian industry portfolios. We find that idiosyncratic risk is economically significant and commands a negative (positive) premium, on average, of 10.0% (8.0) per year before (after) the global financial crisis in 2008. The results remain unaffected after controlling for global pricing factors and return reversal.     

Business sustainability factors and stock price informativeness

This paper investigates whether and how business sustainability performance and disclosure factors affect stock price informativeness (SPI). We find that non-financial environmental, social, and governance (ESG) sustainability performance factors are positively associated with idiosyncratic volatility (our proxy for SPI) after controlling for financial-economic performance. We further show that the association between sustainability performance factors and SPI is stronger for firms with higher sustainability disclosure. We find that the association between ESG sustainability performance factors and SPI is stronger when economic performance is weaker, suggesting that investors tend to pay more attention to ESG performance factors when firms are financially underperforming. This study shows that investors pay attention to both firm economic performance (corporate profitability and growth prospect) and ESG sustainability performance and disclosure factors, which have implications for policymakers, regulators, investors, businesses, and researchers.     

Renewable Governance: Good for the Environment?

We conjecture that board renewal mechanisms—those substantive enough to renew the thinking of the board—are required before investors can address the mismatch between their preferences regarding environmental sustainability and what insiders at firms are actually doing. We identify the adoption of majority voting for directors and the introduction of a female director as two corporate governance mechanisms potentially strong enough to renew a board's thinking on sustainability. Using a sample of 3,293 firms from 41 countries, along with quasi-exogenous shocks to board renewal mechanisms in Canada and France, we find that both board renewal mechanisms are associated with significantly higher future environmental performance. Further tests provide suggestive evidence that board renewal is more strongly associated with environmental performance in settings with better institutions and more motivated institutional investors. These results suggest the importance of board renewal for alignment of firm policies with investor preferences around the world.     

Corporate Social Performance,Competitive Advantage,Earnings Persistence and Firm Value

In this paper, using a generalised valuation framework inspired by Ohlson, we show that corporate social performance (CSP) is value relevant and that, in particular, it appears to be associated with a higher coefficient on earnings. This could be attributable to either a lower cost of equity for these firms, or greater earnings persistence. We show that, once industry membership is controlled for, any cost of capital effect is minimal. Regression tests based on realised earnings confirm that the valuation effect is attributable mainly to greater earnings persistence in firms with higher levels of CSP. These outcomes are consistent with higher CSP conferring a competitive advantage on firms.     

市场摩擦对特质风险溢价的影响效应——基于A股主板市场的实证分析

与国外发达市场相比,我国A股主板市场的市场摩擦因素对市场微观结构和资产定价的影响更大。在防范和化解系统性风险的过程中,进一步分析市场摩擦如何作用于特质风险定价效应的问题具有重要的理论和现实意义。本文通过采用多维市场摩擦指标来代理信息不对称、交易成本、买卖限制、卖空限制、风险对冲和外部冲击,检验中国股市特质风险和预期收益率的关系,并判断出市场摩擦因素间的差异性影响机制。回归发现,市场摩擦和特质风险因子(特质波动率和特质偏度)都具有定价效应。各维度市场摩擦因素降低了股票流动性,进而增强了特质波动率的负向定价效应,部分解释了“特质波动率之谜”,但市场摩擦对特质偏度因子溢价的影响较为微弱。同时,基于特质波动率和特质偏度因子的投资策略能够产生超越CAPM、三因子和五因子模型的绝对收益,并印证了市场摩擦对特质风险因子绝对收益的影响作用。     

Corporate social performance and financial risk: Further empirical evidence using higher frequency data

Using a unique dataset of corporate social responsibility rating – available on a monthly basis – we shed new light on the relationship between corporate social performance (CSP) and firm risk. Where previous studies use annual (at best) measures of CSP, assuming that a change in CSP leads a change in risk, we formally test the direction of the relationship using Granger causality. Looking at large UK companies over 2002–2018 (for a total number of 19,832 firm-months), we reject any causality (either way) between CSP and financial risk (both systematic and idiosyncratic risk). This shows that the CSP-risk relationship is not an endogenous one, contrary to what previous evidence has found. Given the structure of our panel data (long T and short N), we apply GLS based estimator to correct for serial correlation in our panel regressions. We find strong evidence that CSP has a negative impact on idiosyncratic risk; however, the effect of CSP on systematic risk is not statistically significant. The existence of a contemporaneous, rather than lagged relationship doesn't fare well with established CSP theories. Overall, our original approach has opened a new door to further the study of the link between CSP, financial performance and financial risk.     

Corporate social responsibility and Eurozone corporate bonds: The moderating role of country sustainability

In this paper, we empirically examine whether superior performance in corporate social responsibility (CSR) results in lower credit risk, measured by credit ratings and zero-volatility spreads (z-spreads). We are especially interested in how the environmental, social, and governance (ESG) related performance of the corresponding countries moderates this relationship. We find only weak evidence that superior corporate social performance (CSP) results in systematically reduced credit risk. However, we do find strong support for our hypothesis that a country’s ESG performance moderates the CSP–credit risk relationship. Superior CSP is regarded as risk-reducing and rewarded with better ratings and lower z-spreads only if it is recognized by the environment. In addition, we find a reduction of corporate bonds’ z-spreads by approx. 9.64 basis points if the CSP of a company mirrors the ESG performance of the country it is located in.     

The Role of Corporate Sustainability and Its Consistency on Firm Financial Performance: Canadian Evidence*

This paper investigates the impact of corporate sustainability and the consistency of corporate sustainability efforts on firm financial performance in Canada. Using data on 266 Canadian companies over the 2007–2017 period, we find a significantly positive association between corporate sustainability performance and firm financial performance. In addition, we find that companies that perform consistently well on sustainability (i.e., consistent performers) achieve better financial performance compared to inconsistent performers. Thus, far from their being net costs/expenses, our results indicate that corporate sustainability performance and consistency in sustainability performance both provide net benefits and significantly impact financial performance positively, implying that corporate sustainability not only helps address the needs of the current and future generations but also has a positive effect on the corporate bottom line. Taken together, our results suggest that not only does corporate sustainability have a positive effect on firm performance, but better financial performance may be achieved through a committed—rather than a “tokenism”—approach to corporate sustainability.     

The explanatory role of factor portfolios for industries exposed to foreign competition: evidence from the Swedish stock market

Our purpose is to find factors that are important for expected returns and risk of Swedish industrial portfolios during 1980–1997. The tested factors are supposed to be essential for a small open economy. We take into account the small sample problem that surfaces in the form of firms dominating the value weighted test portfolios. An extreme bound analysis (EBA) investigates the robustness of the estimated parameters. Principal component analysis is used to assess the importance of the factors in explaining return covariances. Our overall conclusion is that the market portfolio, which refers to the world as well as the Swedish market portfolio, is almost sufficient for explaining expected returns and risk.     

SOME ESTIMATES OF THE IMPACT OF CORPORATE DIVERSIFICATION ON THE VALUATION AND LEVERAGE OF USA FIRMS: ESTIMATES FROM 1972 DATA

This paper estimates the effect of corporate diversification on market valuation and leverage. Using a data base which allows one to determine the product lines of companies on the 3-digit S.I.C. code level, a set of multi-industry firms was chosen. For each of these diversified firms, a portfolio of single industry firms was constructed which matched the component parts of the multi- industry firm. Tests showed that although diversified firms employ significantly greater financial leverage, their relative market value is significantly less than that of the matching portfolios of single industry firms with which they com- pete. This study does not support the view that corporate diversification creates synergistic benefits which can be translated into increased market value of the firm's securities.     

La medición del desempeño social empresarial a través de las redes sociales

Corporate social performance (CSP) has been studied extensively by management scholars, yet most approaches to its measurement continue to be ambiguous, controversial and difficult to research. In this paper, we propose measuring CSP via the construct of stakeholder satisfaction through social media. Using organizational justice theory, we argue that the satisfaction of stakeholder expectations can be understood partly through the perception of unjust corporate behavior, which is then expressed by stakeholders through social media. The explosion of social networking and microblogging has made it possible for people to express opinions with respect to the economic, social, and environmental events for all sorts of firms. We test these ideas using event study methods with a sample of 5,440 observations from ten firms. We find preliminary evidence of the sensitivity of social media to these events.