How Much Does It Pay to Be Socially Responsible?

31 Pages Posted: 9 May 2011

See all articles by Sojung Carol Park

Sojung Carol Park

California State University, Fullerton - Department of Finance; University of Pennsylvania - Applied Economics Department, The Wharton School

Jon Jungbien Moon

Korea University Business School

Date Written: January 21, 2011

Abstract

How much does it pay to be socially responsible? In order to answer this question, we combined two components from two different streams of business scholarship. We employed the KLD SOCRATES Social Ratings database as our measure of corporate social performance (CSP), and we applied Carhart’s four-factor model, a standard extension of the Fama-French 3-factor model in the field of finance, to quantify the relationship between CSP and financial performance. Our results show that, for large US corporations belonging to the S&P 500 Index, the stocks of companies in the top CSP quantile outperform those of companies in the bottom CSP quantile by as much as 6.24 percentage points annually for years 1991 through 2006, after adjusting for standard risk factors such as market risk, size, book to market ratio, and stock momentum. For a company in the S&P 500 Index with average market capitalization, this translates to $1.28 billion in additional shareholder wealth.

Suggested Citation

Park, Sojung Carol and Moon, Jon Jungbien, How Much Does It Pay to Be Socially Responsible? (January 21, 2011). Available at SSRN: https://ssrn.com/abstract=1760632 or http://dx.doi.org/10.2139/ssrn.1760632

Sojung Carol Park (Contact Author)

California State University, Fullerton - Department of Finance ( email )

PO Box 34080
Fullerton, CA 92834-9480
United States

University of Pennsylvania - Applied Economics Department, The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Jon Jungbien Moon

Korea University Business School ( email )

145 Anam-ro, Seongbuk-gu
Seoul, 136-701
Korea, Republic of (South Korea)
+822 3290 2837 (Phone)

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