This paper analyzes the relationship between employee satisfaction and long-run stock returns. A value-weighted portfolio of the "100 Best Companies to Work For in America" earned an annual four-factor alpha of 3.5% from 1984-2009, and 2.1% above industry benchmarks. The results are robust to controls for firm characteristics, different weighting methodologies and the removal of outliers. The Best Companies also exhibited significantly more positive earnings surprises and announcement returns. These findings have three main implications. First, consistent with human capital-centered theories of the firm, employee satisfaction is positively correlated with shareholder returns and need not represent managerial slack. Second, the stock market does not fully value intangibles, even when independently verified by a highly public survey on large firms. Third, certain socially responsible investing ("SRI") screens may improve investment returns.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1448247_code393296.pdf?abstractid=985735&rulid=8649398&mirid=3

Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices

http://faculty.london.edu/aedmans/Rowe.pdf

Ianalyze the impact of a firm's environmental profile on its cost of equity and debt capital. Using implied cost of capital derived from analysts' earnings estimates, I find that investors demand significantly higher expected returns on stocks excluded by environmental screens such as hazardous chemical, substantial emissions, and climate change concerns compared to firms without such environmental concerns. Lenders also charge a significantly higher interest rate on the bank loans issued to firms with these environmental concerns. I provide evidence that the environmental profile of a firm is not simply proxying for an omitted component of its default risk. Further, firms with these environmental concerns have lower institutional ownership and fewer banks participate in their loan syndicate than firms without such environmental concerns. These results suggest that exclusionary socially responsible investing and environmentally sensitive lending can have a material impact on the cost of equity and debt capital of affected firms.

This paper was accepted by Brad Barber, finance.

Environmental Externalities and Cost of Capital

The Price of Sin: The Effects of Social Norms on Markets

This paper not only attempts to survey the burgeoning literature on environmental, social and governance disclosures and performance and their effects on firm value, but its focus also lies on highlighting stylised observations coming from the most recent work that has not yet become part of the ‘conventional wisdom’ in the field. In addition, it outlines some of the crucial knowledge gaps and interesting questions that have not, as of yet, been addressed and thus outlines a potential agenda for future research on socially responsible investing. Lastly, it introduces the papers published in this special issue of the British Accounting Review.

/pdf/the-effects-of-environmental-social-and-governance-55b6iqkcvy.pdf

The effects of environmental, social and governance disclosures and performance on firm value: a review of the literature in accounting and finance

Typical socially responsible investors tilt their portfolios toward stocks of companies with high scores on social responsibility characteristics such as community, employee relations and the environment. We analyze returns during 1992-2007 of stocks rated on social responsibility by KLD and find that this tilt gave socially responsible investors a return advantage relative to conventional investors. However, typical socially responsible investors also shun stocks of companies associated with tobacco, alcohol, gambling, firearms, military, and nuclear operations. We find that such shunning brought to socially responsible investors a return disadvantage relative to conventional investors. The return advantage of tilts toward stocks of companies with high social responsibility scores is largely offset by the return disadvantage that comes from the exclusion of stocks of 'shunned' companies. The return of the DS 400 Index of socially responsible companies was approximately equal to the return of the S&P 500 Index of conventional companies. Socially responsible investors can do both well and good by adopting the best-in-class method in the construction of their portfolios. That method calls for tilts toward stocks of companies with high scores on social responsibility characteristics, but refrains from calls to shun the stock of any company, even one that produces tobacco.

The Wages of Social Responsibility

This article offers a factor model for classifying socially responsible mutual funds and measuring their performance. The authors provide a factor model that consists of six factors: the four widely used factors of market, smalllarge (SMB), value-growth (HML), and momentum, and two social responsibility factors, reflecting the criteria most widely used by socially responsible funds. The first social responsibility factor is the top-bottom factor (TMB), consisting of the difference between the returns of stocks of companies ranked in the top third and the bottom third by five social responsibility criteria: employee relations, community relations, environmental protection, diversity, and products. The second is the accepted-shunned factor (AMS), consisting of the difference between the returns of stocks of companies commonly accepted by socially responsible investors and the returns of stocks of companies they commonly shun. Shunned stocks are stocks of companies in the alcohol, tobacco, gambling, firearms, military, and nuclear industries. A factor’s coefficient is its loading, tilt, or beta; the authors use the term beta. TMB and AMS factors’ betas effectively capture the social responsibility features of indices and mutual funds, and the TMB and AMS betas of indices and mutual funds generally reflect the social responsibility scores of the companies whose stocks they contain. The classification of socially responsible mutual funds by betas and contents differs from classification by Morningstar and other classifying services. Mutual funds’ measured performance when the authors consider TMB and AMS factors differs from their measured performance when these factors are overlooked.

Classifying and Measuring the Performance of Socially Responsible Mutual Funds

It is widely believed that stocks with high idiosyncratic risk exhibit stronger anomalies because arbitrageurs avoid holding these stocks due to diversification concerns, allowing deviations of prices from fundamental values. In this paper we test this proposition using hedge fund holding data. Controlling for stock size, we find that hedge funds allocate on average more capital towards holding high idiosyncratic stocks than they do towards low idiosyncratic risk stocks. Contrary to the prediction that diversification concerns prevent arbitrageurs from holding high idiosyncratic risk stocks, we find that the effect is stronger for small hedge funds and for less diversified hedge funds, and does not vary with hedge fund leverage. We also find that hedge fund trades in high idiosyncratic risk stocks earn significantly higher abnormal returns than trades in low idiosyncratic risk stocks. We propose that these results can be reconciled by high idiosyncratic risk being a proxy for information noise about the fundamental value. Consistent with this idea, we find that hedge funds require stronger mispricing signals from highly idiosyncratic stocks before trading.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1572955_code333062.pdf?abstractid=1572955&mirid=1&type=2

Do Arbitrageurs Really Avoid High Idiosyncratic Risk Stocks

Working with Analyst Data: Overview and Empirical Issues

Using a comprehensive sample of 164 domestic equity Smart Beta (SB) ETFs during 2003-2014 period, I analyze whether these funds beat their benchmarks by tilting their portfolios to well-known factors such as size, value, momentum, quality, beta and volatility. I then test if Smart Beta funds harvest factor premiums more efficiently than their traditional cap-weighted benchmarks by periodic trading against price movements. While 60% of SB fund categories have beaten their raw passive benchmarks, I find no conclusive empirical evidence to support the hypothesis that SB ETFs outperform their risk-adjusted benchmarks over the studied period. Performance of SB funds is also insignificant when compared with the risk-adjusted blended benchmark that uses existing cap-weighted funds to provide low-cost passive exposure to market, size and value factors. SB ETFs exhibit potentially unintended factor tilts which may work to offset the return advantage from intended factor tilts. After decomposing total allocation component of SB funds into static and dynamic effects, I find that the benefit from dynamic factor allocation is neutral at best. This is consistent with the hypothesis that static factor exposure rather systematic rule-based rebalancing is the main driver of SB ETFs performance.

https://static.nzz.ch/files/7/8/0/SSRN+zweifel+an+smart+beta+etfs_1.18634780.pdf

Denys Glushkov

Papers

The Wages of Social Responsibility

Classifying and Measuring the Performance of Socially Responsible Mutual Funds

Do Arbitrageurs Really Avoid High Idiosyncratic Risk Stocks

Working with Analyst Data: Overview and Empirical Issues

How Smart are 'Smart Beta' ETFs? Analysis of Relative Performance and Factor Exposure