Do ESG ratings promote corporate green innovation? A quasi-natural experiment based on SynTao Green Finance's ESG ratings

Corporate efforts in green technology improvements are critical for enhancing sustainability; consequently, how to promote green innovation has attracted scholarly attention. This study explores whether and how environment, social, and governance (ESG) ratings influence corporate green innovation by using an independent third-party rating agency's (SynTao Green Finance) ESG ratings in China as a quasi-natural experiment. We find companies covered by the ESG rating agency significantly increase green innovation output by 3.9%, mainly as an increase in green invention patents. ESG ratings' positive effects on green innovation are more pronounced for firms whose investors are less short-sighted, non-state-owned enterprises and firms with higher degree of financial constraints. Additionally, we find ESG ratings' impact can also increase the green innovation quality and synergetic green innovation. Thus, ESG ratings from third-party institutions can effectively increase corporate green innovation, which has important implications for companies to achieve green transformation and for emerging markets to improve ESG rating systems.     

Penetrating the Book-to-Market Black Box: The R&D Effect

The book-to-market (BM) phenomenon – the positive association between BM and subsequent returns – looms large among capital market enigmas. Economic theory postulates that the difference between market and book values of companies reflects their future abnormal profits. We capture these abnormal profits for a large sample of science-based companies by estimating the value of the off-balance sheet investment generating those profits – the value of R&D capital – and show empirically: (i) Firms' R&D capital is associated with their subsequent stock returns. (ii) For R&D intensive firms, this 'R&D effect' subsumes the 'book-to-market effect.' (iii) The association between R&D and subsequent returns appears to result from an extra-market risk factor inherent in R&D, rather than from stock mispricing. We thus provide an explanation for the book-to-market phenomenon of R&D companies.     

Stock returns and future tense language in 10-K reports

This paper shows that firms talking less about the future in their annual reports generate positive abnormal returns of about 5% annually. I measure how much companies talk about the future in their annual 10-K reports by the frequency of the verbs will, shall, and going to. The evidence favors a risk-based interpretation: firms that use less future tense in their report offer higher returns since they are riskier. These results are consistent with finance theories stating that investors need to be rewarded for holding stocks of firms that put less information about the future in the marketplace.     

Does the effect of the annual year taboo exist? Empirical evidence from senior managers’ zodiac year and corporate inefficient investment

Based on the unique folk belief of the zodiac year, this study explores the effect of senior managers' zodiac year on corporate inefficient investment (CII) using data from Chinese A-share listed companies from 2006 to 2019. The study findings are as follows: (1) senior managers are more conservative and cautious in their zodiac year. Increasing risk aversion prevents blind investment and inhibits CII. (2) The restraining effect of the zodiac year on CII is more apparent in nonstate-owned enterprises, regions with low marketization levels, Central China, and Northeast China. This effect is attributed to the degree of superstitious belief of senior managers and becomes more pronounced with increasing age. The zodiac years of the Year of the Ox, Year of the Dragon, and Year of the Pig affect the Annual Year Taboo the most; meanwhile, the zodiac years of the CEO and the chairman exert a more significant effect than that of the vice-chairman. In addition, the restraining effect is only reflected in the zodiac year and draws a significantly negative market reaction. (3) The level of cash holdings is a potential channel for senior managers to improve corporate investment efficiency in managers’ zodiac year. By providing unique evidence from the Eastern cultural context, this study enriches the research literature on emerging market culture and business management.     

Climate change news sensitivity and mutual fund performance

In the presence of rising concern about climate change that potentially affects risk and return of investors' portfolio companies, active investors might have dispersed climate change risk exposures. We compute mutual fund covariance with market-wide climate change news index and find that high (positive) climate news beta funds outperform low (negative) climate news beta funds by 0.24% per month on a risk-adjusted basis. High climate news beta funds tilt their holdings toward stocks with high potential to hedge against climate change news risk. In the cross section, such stocks yield higher excess returns, which are driven by greater pricing pressure and superior financial performance over our sample period.     

Do Chinese managers listen to the media?: Evidence from mergers and acquisitions

This study investigates whether listed companies in China are sensitive to public media coverage when making investment decisions regarding mergers and acquisitions (M&As). We find that the likelihood of abandoning a proposed M&A transaction is positively associated with negative media coverage, and this association is stronger with lower announcement abnormal returns. Our analysis demonstrates that the negative information effect is amplified for glamour acquirers. We argue that negative media reactions drive the external feedback mechanism of M&A attempts and help guard against managerial hubris.     

Does Cross-Listing Benefit the Shareholders? Evidence from Companies in the GCC Countries?

The goal of this study is to estimate the impact of cross-listing on stock returns, on liquidity, and on risk. A sample of 24 companies from the Gulf Cooperation Council countries which cross-listed their stocks in a foreign market over the period 2000–2010 were chosen for study. An event study estimating abnormal returns related to the cross-listing event as well as parametric and nonparametric tests find that there is (1) a significant abnormal return of about 6 % that lasts until 6 days after the cross-listing day and starts fading away thereafter (2) a significant increase in liquidity during the event period for most firms and (3) on average a decrease in risk. Our results also suggest that cross-listing had a small impact on market risk measured by the average beta but led to a decrease in the total risk measured by standard deviation of returns and a decrease in the potential loss measured by the average value at risk at the 5 % confidence. Additionally, an analysis based on the foreign market of secondary listing suggests that the benefit of cross-listing varies with the market of secondary listing. The positive abnormal return is more obvious for companies that cross-listed in Kuwait, Bahrain, and London. The most obvious increase in liquidity is for firms that cross-listed in London or in Bahrain and the biggest decrease in risk is for companies that cross-listed in London. We conclude overall that cross-listing in London benefits the shareholders the most as it leads to positive significant abnormal returns, an increase in liquidity, and a decrease in risk.     

Dividend Omissions and Intraindustry Information Transfers

We examine potential information transfers from companies that announce dividend omissions to their industry rivals. Specifically, we examine the abnormal stock returns and abnormal earnings forecast revisions of rivals after a company makes a dividend‐omission announcement. Our results show negative and significant abnormal stock returns and negative and significant abnormal forecast revisions for rival companies in response to the announcement, and a significant and positive relation between the two. We conclude that a dividend‐omission announcement transmits unfavorable information across the announcing company's industry that affects cash flow expectations and ultimately stock prices.     

Shared auditors,social trust,and relationship-specific investment in the supply chain

An auditor common to a supplier and customer may serve an information role, reduce information asymmetry, or mitigate a potential hold-up problem in the supply chain. The information role of shared auditors could be more important in a lax institutional environment where a lack of trust exists between the supplier and customer. Using a sample of listed firms in China from 2009 to 2015, we find that (1) a shared auditor enhances the supplier’s relationship-specific investment (RSI), and (2) this positive association is stronger when the customer is located in a region with lower trust. We also document an incremental effect of a shared audit partner on enhancing the supplier’s RSI in addition to the effect of a shared auditor at the audit firm level. Additional analyses suggest that a shared auditor alleviates information asymmetry between the supplier and customer and hence improves the supplier’s RSI. A shared auditor particularly improves the supplier’s RSI when the customer is limited in its legal protection, which validates the usefulness of this unique research setting (China) for studying the information role of shared auditors. By extending the research on shared auditors and social trust, this paper provides a reference for companies that wish to explore the role of auditors in enhancing RSI in the supply chain.     

Preserving Value through Adaptation to Climate Change

Corporate “mitigation” efforts to limit greenhouse gases alone will not be sufficient to protect companies against future environmental impacts. For most companies intent on preserving their operating efficiency and value, “adaptation”—the process of changing behavior in response to actual or expected climate change impacts—is emerging as a critical partner to mitigation efforts aimed at reducing the accumulation of greenhouse gases in the atmosphere. The recent growth in the expected costs associated with the risk of climate change emphasizes the importance of developing new technology and redesigning infrastructure and other assets that will enable companies to respond to such change without excessive reductions in profitability. The nature and extent of adaptation in each situation will depend on the costs involved relative to the benefits of adopting different adaptation strategies to achieve a target level of resilience. Companies that choose to adapt and do so effectively are expected to benefit from an improvement in their net risk‐return profile. Consistent with this expectation, the authors found that a sample of companies from the European energy sector that adapted to the 2005 EU climate change mandate by diversifying their fuel sources (mainly away from coal) experienced reductions in both risk and return while non‐adapting firms experienced roughly the same returns, but at the cost of higher risk. The benefit of adapting is thus seen as showing up not in higher returns per se, but in higher risk‐adjusted returns.     

Media tone and expected stock returns

We find that media tone reflects firm-level expected returns—firms with low-negative tone stories over a few months earn higher returns in the medium to long term than do firms with high-negative tone stories. The tone premium is driven by consistent outperformance of low-negative stocks, while high-negative stocks do not produce significant abnormal returns. The media tone effect is associated with some common risk factors, among which the size factor plays a consistent and most significant role. The tone effect also reflects differences in firms' idiosyncratic risk, and there is evidence that it is partially related to mispricing and limits to arbitrage.     

Do corporate press releases drive media coverage?

We examine the role of voluntary corporate press releases about firms' financial performance as a stimulus for financial media coverage. We find that there is a spike of media articles on the same day and one trading day following firms' press releases. We provide evidence that managers compete for media attention and can use voluntary press releases to increase their firms' media coverage; a firm's issuance of press releases attracts more media articles about the firm leading to greater abnormal returns and trading volumes. Our results are robust to controlling for firm characteristics, different model specifications as well as regular earnings announcements, which have been the focus of prior literature. We also show that our inferences are not sensitive to managers' duty to disclose material information to investors. Collectively, our findings suggest that media coverage decisions can be influenced by a firm.     

Social Capital,Trust, and Corporate Performance: How CSR Helped Companies During the Financial Crisis (and Why It Can Keep Helping Them)

The authors summarize the findings of their study, published recently in the Journal of Finance, that shows that CSR investments can help companies when they perhaps need it most—that is, during sharp downturns when overall trust in companies and markets declines. Companies with high‐CSR rankings experienced stock returns that were five to seven percentage points higher than their low‐CSR counterparts during the 2008–2009 financial crisis, and even larger excess returns during the Enron crisis of 2001–2003. High‐CSR companies during the crisis also reported better operating performance, higher growth, higher employee productivity, and greater access to debt markets—while continuing to generate higher shareholder returns as late as the end of 2013. Many of these operating improvements continued well into the post‐crisis period, though at more modest levels. As the authors view their findings, the ‘social capital’ built up by corporate CSR programs complements effective financial capital management in increasing shareholder wealth mainly by limiting companies' downside risk. CSR is seen as not only reducing systematic as well as firm‐specific risk, but as also providing protection against overall ‘loss of trust.’ The social capital created by CSR programs is said to provide a kind of insurance policy that pays off when investors and the overall economy face a severe crisis of confidence.     

Social media effect,investor recognition and the cross-section of stock returns

Investor recognition affects cross-sectional stock returns. In informationally incomplete markets, investors have limited recognition of all securities, and their holding of stocks with low recognition requires compensation for being imperfectly diversified. Using the number of posts on the Chinese social media platform Guba to measure investor recognition of stocks, this paper provides a direct test of Merton's investor recognition hypothesis. We find a significant social media premium in the Chinese stock market. We further find that including a social media factor based on this premium significantly improves the explanatory power of Fama-French factor models of cross-sectional stock returns, and these results are robust when we control for the mass media effect and liquidity effect. Finally, we find that investment strategies based on the social media factor earn sizable risk-adjusted returns, which signifies the importance of the social media premium in portfolio management.     

Bank Holding Company Acquisition Activity: Evidence From Pre- and Post-Deregulation Periods

Both acquisition activity and deregulation have had an impact upon share price and performance of commercial bank holding companies. The purpose of this study is twofold: First, to discern the effects of acquisition activity from the effects of the passage of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) and Garn-St Germain Depository Institutions Act of 1982 (GSG) on balance sheet composition of bank holding companies; and second, to examine the effects of deregulation on returns to shareholders of acquiring bank holding companies. This study finds that commercial bank holding companies involved in acquisitions experience significant changes in their balance sheet composition, not as a result of acquisition activity, but as a result of deregulation. Additionally, bank holding companies that announced acquisitions prior to the effective date of deregulation earned abnormal returns that were significantly negative, whereas holding companies announcing acquisitions after enactment of deregulation earned returns that were not significantly different from zero. Also, the abnormal returns found in previous studies of bank acquisitions may be biased upward because of increases in systematic risk associated with the passage of DIDMCA and GSG.     

Do low-carbon investments in emerging economies pay off? Evidence from the Brazilian stock market

Climate change has created both challenges and opportunities for investors worldwide. Investing in carbon-efficient assets, for instance, may reduce investors' climate risks while contributing to global efforts for climate change mitigation. Investors need updated and robust information on the financial performance of low-carbon investments, especially in emerging markets, where climate finance initiatives are still scattered. In this work, we provide a first insight into the financial performance of a portfolio of shares from Brazilian carbon-efficient companies. To that end, we use as reference the Carbon Efficient Index (ICO2) and assess its financial performance from 2010 to 2019 through the lens of several classic and modern portfolio metrics. We find that the index outperformed both the Brazilian market benchmark and the country's broad sustainability index, and provided competitive risk-adjusted returns compared with other sectorial indices. The results thus indicate that investing in carbon-efficient companies in Brazil has so far positively contributed to portfolio performance while offering investors an opportunity to reduce climate risk exposure in stock markets.     

Corporate Governance,Social Responsibility,and Data Breaches

We study whether corporate governance and social responsibility are related to data breaches. We find that socially responsible companies with smaller boards and greater financial expertise are less likely to be breached. The financial impact of a breach is visible in the long term. Specifically, data‐breach firms have –3.5% one‐year buy‐and‐hold abnormal returns. Additionally, banks with breaches have significant declines in deposits and nonbanks have significant declines in sales in the long run. Finally, we find that following a data breach, companies are more likely to replace their chief executive officer and chief technology officer as well as improve their governance and social responsibility.     

Evaluating the information in the federal reserve stress tests

We present evidence that the Federal Reserve stress tests produce information about both the stress-tested bank holding companies and the overall state of the banking industry. Our evidence goes beyond a standard event study, which cannot differentiate between small abnormal returns and large, but opposite-signed, abnormal stock returns. We find that stress test disclosures are associated with significantly higher absolute abnormal returns, as well as higher abnormal trading volume. More levered and riskier holding companies seem to be more affected by the stress test information. We find no evidence that stress test disclosures have reduced the production of private information. After disclosure begins, stress tested firms attract equity analysts without changing analysts’ forecast dispersions or their mean forecast error.     

Does CSR matter in times of crisis? Evidence from the COVID-19 pandemic

The debate over how firm stakeholder engagement is tied to preserving shareholder wealth has received growing attention in recent years, especially in the wake of the COVID-19 crisis. Against this backdrop, we examine the relation between corporate social responsibility (CSR) and stock market returns during the COVID-19 pandemic-induced market crash and the post-crash recovery. Using a sample of 1750 U.S. firms and two major sources of CSR ratings, we find no evidence that CSR affected stock returns during the crash period. This result is robust to various sensitivity tests. In additional cross-sectional analysis, we find some supporting evidence, albeit weak, that the relation between CSR and stock returns during the pandemic-related crisis is more positive when CSR is congruent with a firm's institutional environment. We also find that Business Roundtable companies, which committed to protecting stakeholder interests prior to the pandemic, do not outperform during the pandemic crisis. We conclude that pre-crisis CSR is not effective at shielding shareholder wealth from the adverse effects of a crisis, suggesting a potential disconnect between firms' CSR orientation (ratings) and actual actions. Our evidence suggests that investors can distinguish between genuine CSR and firms engaging in cheap talk.     

When the Japanese stock market meets COVID-19: Impact of ownership,China and US exposure,and ESG channels

We identify factors affecting the Japanese stock market during the COVID-19 pandemic period. First, we focus on the ownership structure. We find that indirect ownership through the exchange-traded fund purchasing program by the Bank of Japan has a positive impact on abnormal returns. Foreign ownership is negatively associated with abnormal returns, whereas ownership by traditional business groups is positively associated with abnormal returns. Second, we examine the impact of global value chains and find that stock returns are lower for companies with China and U.S. exposure. Third, in terms of environmental, social, and governance (ESG) engagement, there is no evidence that firms that have highly rated ESG scores have higher abnormal returns, but firms with ESG funds outperform those without.