A roundup of academic research from the world of IR studies
Academic studies show that building an appropriate reservoir of positive corporate responsibility can help insure against the effect of future bad CSR news on stock performance. But new research shows that investors’ negative perceptions of corporate irresponsibility can also be mitigated with the same-day release of positive CSR news.
‘Same-day CSR news can minimize the negative outcome of same-day news of corporate social irresponsibility,’ says Christopher Groening, assistant professor of marketing and entrepreneurship at Kent State University in Ohio. ‘But the effect is contingent on the quantity and type of announcements.’
Together with Vamsi Kanuri at the University of Miami, Groening analyzed abnormal returns for a set of companies that had concurrently released at least one positive and one negative stakeholder news item. They find that news of the number of CSR activities involving secondary stakeholders (community, environmental groups) counteracts the effect of same-day news of corporate irresponsibility in an inverted U-shaped fashion. By contrast, news of the number of CSR activities involving primary stakeholders (employees, investors, customers) mitigates the effects in a U-shaped manner.
‘News of a low number of CSR activities [aimed at secondary stakeholders] will boost the moral reputation of a firm and produce a positive abnormal return,’ says Groening. ‘But investors may view announcements of too many of these sorts of activities as a misallocation of resources, creating an inverted U-shaped effect on abnormal return.’
Groening adds, however, that news of a low number of CSR activities directed at primary shareholders (such as a governance improvement) signals the self-serving nature of a firm and will trigger a negative market reaction. This negative reaction can be counteracted as a company releases greater amounts of news demonstrating its commitment to its value chain.
‘A small amount of CSR directed at secondary stakeholders appears to provide a moral buffer against a bad CSR event,’ explains Groening. ‘And providing lots of company-serving positive news will signal to investors that the firm is acting in the best interests of its future cash flows. We find you get diminishing returns in the first instance, but increasing returns in the second instance as the number of announcements rises.’
World of research
A recent NIRI survey sheds light on earnings process practices:
- The proportion of respondents participating in a quiet period has increased by 9 percent to 91 percent over the last six years
- More than half (58 percent) of respondents provide both financial and non-financial guidance (identical to 2014 percentages), compared with 39 percent in 2012
- The vast majority (98 percent) continue to issue a full press release, despite SEC guidance indicating that an advisory release with a link to the full release on the corporate website fulfills transparency requirements
- Almost all respondents (97 percent) hold earnings calls. Twenty years ago, 20 percent of companies did not.
Research suggests new CEOs should talk about strategy sooner rather than later:
When researchers analyze stock price responses to strategy presentations given by companies on the NYSE or Nasdaq, they find that new CEOs who present their strategy within the first 100 days of their appointment can see stock prices rise by an average of 5.3 percent on presentation day (around $2.8 bn in market value). The average stock price gain for presentations by new CEOs appointed from outside the organization is 9.3 percent (just under $5 bn), and for new CEOs from outside the company’s home industry it’s 12.4 percent (around $6.6 bn).
‘Given that only 40 percent of new CEOs present on strategy in their first 200 days post-appointment, we suggest new chief executives pay more attention to this potential means of communicating, especially if they are unfamiliar to investors,’ write the study’s authors in the Strategic Management Journal.
This article first appeared in the winter 2016 issue of IR Magazine
