Ethics Rankings and Value Creation: An Abstract

Abstract

We explore the effects of CSR rankings inclusion on stock market performance by considering Ethisphere’s annual announcements of companies the independent rating institution deems the World’s Most Ethical Companies® (WME). While Ethisphere provides a third-party confirmation to firms’ ethical behavior, participants in the index are self-selected. By requesting to be evaluated by Ethisphere, firms send signals about how they want to be perceived. External stakeholders may see the index as an additional marketing tool rather than an informative ranking of “The World’s Most Ethical Companies”. Prior studies have claimed that from investors’ perspective, the Dow Jones Sustainability Index is the most rigorous and the most credible in terms of CSR information (Hawn et al. 2018). That would mean that from a purely informational standpoint, Ethisphere’s list would be of little value to investors. Accordingly, we investigate whether Ethisphere listings provide any value and what kind of value might that be. Our findings indicate that companies entering the WME list register abnormal returns robust to the specification of the estimation window (0.17% on the day of announcement of the list). Further, we suggest that the value may be reputational rather than informational. We formulate competing hypotheses by investigating the moderating effect of other reputational rankings. Specifically, if a company’s presence on other reputation-related lists augments the value of the WME list, then we are observing a reputational effect as investors are already familiar with that reputational dimension. Reversely, if companies that are not present on other lists are boosted by the WME listing, we can assume that the effect is informational. We attempt to explain which dimension of the reputational asset is augmented by the Ethisphere list. Following Rindova and Martins’ (2012) categorization of reputational dimensions, we introduce proxy interactions for: (a) specificity – abnormal returns moderated by GRI reports; (b) accumulation – abnormal returns moderated by a strong brand; (c) breadth of appeal – abnormal returns moderated by listing in the Forbes’ World’s Most Reputable companies list. We observe that companies with stronger brands are rewarded with higher abnormal returns pointing at the accumulation dimension of reputation. None of the informational value hypotheses is supported.