1 - Kellogg School of Management



Here are a collection of ideas. They are ordered based on our current thinking about the order of the work.

1. Mutual Fund Analysis: Description of the SR Sub-sector

Do SRFunds hold a substantial part of SRfirms’ stocks? (relative to institutional holdings of other firms) Is there consensus in how they define corporate social responsibility?

a. size of SRFunds over time (using holdings in mutual funds) in absolute dollars and relative to total mutual fund holdings

b. correlations between holdings in these funds

• correlations between stated investment criteria in proxies across funds

• assuming the associated KLD ratings proxy for these investment criteria, do firms follow their investment criteria

• how similar are the holdings

c. Can we derive an revealed preference that proxies for missing socially responsible attributes?

d. difference in mix of investors using Spectrum data using a technique of technique developed by Bushee (1998 and 1999). (institutional vs. private investors and relative activity in and out of stock). % investor mix = social indicators + controls, where the controls used by Bushee and Noe are market returnst, trading volumet, market capt, betat, leveraget, book/pricet, earnings/pricet, log of standard deviation of market-model residuals calculated from daily stock returns over one yeart, dividends/market valuet, book-market valuet, yes/no in S&P 500t, S&P stock ratingt, and sale growth rate t.

2. Mutual Fund Analysis: Cost of Restrictive Investment Criteria

Is there a price you have to pay to restrict yourself to investing in stocks of socially responsible firms? In terms of diversification benefits? Multifactor analysis; Portfolio holdings based style analysis;

a. develop portfolios based on key social indices

b. develop portfolios based on combining SR mutual funds

c. develop portfolios based on KLD

d. develop “bad” portfolios of firms that do the wrong things

e. develop systematic risk assessment (Fama-French, Beta, momentum)

f. try to identify general investment style of the funds to develop benchmarks

g. try to distinguish what is industry and size effects

3. Industry Analysis: In-Depth Study on Environmental Issues

Use toxic release inventory or other environmental information to do an in-depth analysis of role of socially responsible investing. Could be a good subset to study the stock market response issues outlined in Idea #4 (below).

4. Stock Market Responses to Events Important to SR Investors

Can we discern stock responses (event studies) to certain SR events?

a. entrance of a stock into a social indices vs. other stock indices

CALVIN™

KLD BMSI

KLD DSI

KLD LCSI

FTSE4Good™ Europe50

FTSE4Good™ Global100

FTSE4Good™ UK50

FTSE4Good™ US100

DJSI STOXX

DJSI Euro STOXX

DJSI World

b. contact SIF and find out they get data on the “socially screened separate accounts” They claim “The increase in screened separate accounts can be attributed largely to the growing number of institutions and investors that have been attracted to the field of socially responsible investment. Institutions and individual investors that have placed their money into privately managed socially and environmentally screened portfolios include:

• Religious organizations

• Municipal and state governments

• Unions

• Foundations

• Universities and colleges

• Insurance companies

• Corporations

• Individuals turning to professional investment managers to tailor personal portfolios”

c. announcement of

• shareholder proxies ( in the shareholder action section lists topics and dates) . We could narrow to selected topics (environment)

• 0ther shareholder actions from

• consumer boycotts. Could use CoopAmerica’s list

• securities lititgation (Calpers provides )

• Change in community reinvestment act ratings by banks

• Adverse media reports

5. Firm-Based Analysis: In-Depth (Case Study) Matched-Pair Analysis

Comparing a set of firms that are regarded as SR to ones in the same industry that are not, can we discern differences in their SR profile and economic attributes

a. SR profile measured by:

• KLD

• Revealed preference

• Reputation indices

• Activist attention (proxy fights, boycotts, lawsuits, etc.)

b. Economic attributes

• cost of equity

• cost of debt

• accounting returns – ROE, ROA, sales growth, employee costs, depreciation

• stock returns

• variance of stock returns

• other risk measures

6. Firm-Based Analysis: Cost of Capital

Do SRfirms have a lower cost of capital? Better access to capital markets (lower debt cost, lower issue cost…);

c. cost of equity capital

• classical dividend discount formula (rDIV)

• EBO valuation model and employed in Botosan (1997) (rEBO)

• finite horizon specification of the Gordon growth model and employed in Gordon and Gordon (1997) (rGORDON)

• Gebhardt, Lee and Swaminathan (1999) (rGLS)

• implied cost of equity (Jagarathan)

d. cost of debt (Sengupta TAR Oct. 1998)

• yield to maturity

• effective interest rate

7. Firm-Based Analysis: Performance Differences (In terms of Earnings, Stock Returns or Risk (variance))

Do socially responsible firms perform differently than otherwise similar firms? ROA; EVA; Ex post financial performance. Is it that the story is really one of risk-reduction rather than enhanced returns?

a. Categorize type of CSR of a firm

• product quality

• employee benefits

• community relations

• environment

b. control: disclosure quality/transparency (AIMR, Botosan’s own index)

c. performance attributes

• accounting returns – ROE, ROA, sales growth, employee costs, depreciation

• stock returns

• variance of stock returns

• other risk measures

• cash flow predictability

8. Firm-Based Analysis: Are the benefits of primarily based on being more transparent, focused or efficient?

a. develop criteria for more CSR firms

b. develop criteria for transparency

• degree of R&D/intangibles

• disclosure quality or level (AIMR, Botosan’s own index)

• PWC’s Opacity index accounting is one of the factors (Accounting opacity was addressed by questions concerning disclosure standards and access to information about publicly traded corporations. We assume here that firms that disclose more information are more attractive to investors, because the relative risks of investing in these companies are more fully revealed.)

• Ball et al. “We interpret “transparency” in the financial statements as timely incorporation of economicincome in accounting income, and hence in the book value of equity.

• Bhattacharya et al. identify three characteristics of accounting numbers that suggest opaque earnings: earnings aggressiveness, loss avoidance, and earnings smoothing.

c. develop criteria for “benefits”

• less earnings variability

• higher analyst coverage

• stock market liquidity (volumes, bid-ask spread)

• cost of capital

• forecast precision

• Cash flow predictability

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