Do Investors Trade around Social Rating Announcements?

Date01 June 2016
Published date01 June 2016
Do Investors Trade around Social
Rating Announcements?
Alexis Cellier
e Paris-Est, IRG, Place de la Porte des Champs, 4 Route de Choisy, 94010 Cr
eteil, Paris,
Pierre Chollet
e de Montpellier, MRM, Espace Richter Rue Vend
emiaire - B^
at. B CS 19519 34960
Montpellier, France
Jean-FranScois Gajewski
e Savoie Mont Blanc, IREGE, 4 chemin de Bellevue BP 80439 - 74944 Annecy-Le-Vieux,
This paper investigates trading around Corporate Social Responsibility (CSR)
rating announcements. Focusing on CSR rating announcements made by Vigeo on
European markets, we use Euronext intraday data to prove that trading volume
drops sharply before announcements and increases afterwards. Willingness to
trade depends mainly on prior private information and the content of the
announcement. Our results show effects from disaggregated scores, but not from
overall scores. More specically, we nd that some topics like business behaviour,
human resources and human rights signicantly inuence investor trades.
Environmental risk does not have an impact on trading behaviour.
Keywords: corporate social responsibility, rating, trading volume, event study
JEL classification: G11, G12, G14, L25, M14
We gratefully acknowledge support from Vigeo for kindly providing data and for numerous
discussions on the rating methodology and data dissemination process. We are grateful to
Jean-Marc Suret, C
ecile Carpentier and the participants at the European Financial
Management Association (Braga, 2011), the French Finance Association Conference
(Strasbourg, 2012), the International Conference of Governance (Lyon, 2012), the
multinational finance society conference (Krakow, 2012), and seminar at University of
Laval. We also thank two anonymous referees and Editor John Doukas for their valuable
input to this article.
European Financial Management, Vol. 22, No. 3, 2016, 484515
doi: 10.1111/eufm.12066
© 2015 John Wiley & Sons, Ltd.
1 Introduction
In recent decades, we have observed development of Socially Responsible Investing
(SRI) around the world. esg criteria are increasingly integrated in asset management
decisions following Principles for Responsible Investment.
As a result, investors are
looking for more information on CSR. Such information is provided partly by rms.
However, the literature shows that not all rms voluntarily disclose environmental
information (e.g., Brammer and Pavelin, 2006), or both environmental and social
information (e.g., Gray et al., 2001; Bouten et al., 2012). In some countries, such as
companies must disclose extra-nancial information according to regulation.
Extra-nancial rating agencies, like KLD in the US or Vigeo in Europe,
should solve
this low availability problem by providing relevant CSR information to investors.
The growing attention given over the last several decades to CSR ratings is also
explained by the characteristics of investors involved in SRI. On one hand, institutional
investors have become the main owners of large companies in Europe, particularly in the
UK (Cox et al., 2007). These investors, and especially pension funds, increasingly
incorporate CSR issues in their investment policies. According to Eurosif,
demand from
institutional investors is today the main driver for SRI; institutional investor assets under
management represent 94% of the SRI market in 2012. Institutional investors are looking
for detailed information on CSR, particularly social ratings. On the other hand, most
investors, especially individual ones, have a limited degree of expertise on social
responsibility topics, which does not allow them to analyse extra-nancial information in
detail. Moreover, such investors are generally short of time with which to make the right
decision to invest by taking into account esg criteria. These investors prefer to refer to
summarised information disclosed by rating agencies.
In this study, we aim to answer the following research question: Do investors trade
around CSR rating announcements? Up to now, numerous studies have addressed either
the effects of nancial disclosure (e.g., earnings) on trading volume (see Bamber et al.,
2011, for a literature review) or the relationship between CSR performance and nancial
performance (see Orlitzki, 2008, for a literature review). Very few papers address the
impact of extra-nancial ratings announcements on nancial markets, and even fewer on
trading volume. Existing studies mainly focus on stock returns and show a debatable
relationship between social performance and returns (Renneboog et al., 2008a). The
empirical literature on CSR shows an impact on stock returns from scores in some CSR
elds, for example, employee relations(Scholtens and Zhou, 2008) or environment
The laws no 2001-420 (05/15/2001 so-called NRE) and no 2010-788 (07/12/2010 so called
Grenelle 2) regulate extra-nancial disclosure by quoted rms.
Recently, sector concentration has been increasing. In the US, MSCI created MSCI ESG
Research following acquisition of RiskMetrics in March 2010, which previously acquired, in
2009, Innovest Strategic Value Advisors and KLD Research & Analytics. In Europe, we have
observed the same trend since Vigeo became the European leader of extra-nancial analysis
after several acquisitions/mergers. We focus here on Vigeo; there are numerous other rating
agencies. To name a few with general and international coverage: EIRIS, SAM, Inrate,
Oekom Research, Sustainalytics.
European SRI study 2012: 2012.
© 2015 John Wiley & Sons, Ltd.
Do Investors Trade around Social Rating Announcements 485
(Derwall et al., 2005), but investors do not seem to pay attention to aggregated scores.
However, to our knowledge, there is no study on the relationship between CSR rating
announcement and trading volume.
This question is of great importance, since trading volume is one of the best metrics of
information content (Cready and Hurtt, 2002, show that volume metrics are more
powerful than return metrics to detect investor responses to an event). Thus, this paper
underlines the information content (or lack thereof) of CSR ratings. Moreover, trading
volume can be analysed in terms of stock market liquidity. If we follow Hong and
Kacperczyk (2009), a high CSR could improve stock market liquidity, since more
investors (including responsible ones) may invest in the rm, whereas low CSR would
deter responsible investors from choosing the rm.
In addition, we use new evidence on CSR from throughout Europe, whereas most
empirical studies on SRI performance are built on either US or UK samples with extra-
nancial information from KLD or Innovest (Renneboog et al., 2008a). In fact, the
European context of extra-nancial information from Vigeo is specic on this matter.
Month by month, Vigeo rates the rms of an ICB (Industry Classication Benchmark)
industry following a calendar known in advance, while other agencies (such as KLD) rate
all rms annually. The mean time between two ratings in the same industry, and therefore
of the same rms, is about 18 months. The extra-nancial ratings are privately given to
subscribers, who can be either professional (institutional investors, asset managers) or
non-governmental organisations. Since dissemination is not wide (about 100
professionals are paying subscribers), we do not follow the standard approach of
considering this information as public (Kempf and Osthoff, 2007). Indeed, we actually
take into account the true nature of this event: a private, costly signal. Consequently, we
face two specic aspects of market reaction to information disclosure: rst, diffusion of
extra-nancial information versus the usual nancial one; second, reinforcement of
information asymmetry among investors, due to the private signal on CSR rating.
Further, Vigeo ratings contain a high degree of precision, with several aggregation
levels, and they follow a metric scale. Thus, we can study the effects, on investor
behaviour, of both aggregation level and score value.
The monthly frequency of Vige o ratings enables us to use an event study to measure
Abnormal Volume (AV) associated w ith announcements. This choice is motiv ated by
several arguments. As for event stu dies on stock returns, we use this methodolo gy to
identify any information co ntent of an announcement. An event st udy on trading
volume could reveal how investors change their beliefs at the time of announcement.
Moreover, the event-study me thodology, generally used to show t he information
content of an announcement, can also be considered a causality test (see for exam ple
Morck and Yeung, 2011). Th is methodological choice has two benets . First, the
event study yields evidence o f causality from CSR to stock market, controlling for
endogeneity. Second, it is ve ry unlikely that volume suffers fr om a reverse causality
problem. Thus, this study yields clear conclusions on the information contribution of
CSR ratings to the nancial markets.
In the absence of any study on the relationship between CSR and trading volume, we
consider several arguments that suggest that CSR rating announcements induce a change
in trading volume, mainly based on informational motives. First, rating announcements
can mitigate incomplete information (Merton, 1987). In this framework, spreading (even
already known) information across the market induces a discount rate reduction, due to
less incomplete information, and in turn increases rm value and trading volume.
© 2015 John Wiley & Sons, Ltd.
486 Alexis Cellier, Pierre Chollet and Jean-FranScois Gajewski

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