تاثیر رتبه بندی اخلاقی در عملکرد امنیتی کانادا: مدیریت پرتفوی و مفاهیم اداره امور شرکت ها

One approach that is gaining in popularity among portfolio managers uses ethical ratings, published by specialized research organizations, to screen securities for portfolio selection. Portfolio managers can thus gain a better understanding of the phenomenon and adopt a better and more consistent approach to ethical investment. By the same token, board of directors can measure the impact of their ethical policies on the market performance of the stock of their company. This paper provides new evidence about the impact of ethical ratings published in Canada on the risk-adjusted returns of the securities concerned, within the framework of a multi-factor Capital Asset Pricing Model, and gives an interpretation of the results from the perspective of portfolio composition and of corporate governance.

Ethical screening of securities for portfolio composition has received considerable attention in recent years, particularly from institutional investors and corporate managers. The major preoccupation of investors, in this regard, is their ability to achieve the same or even a better risk/return tradeoff from portfolios restricted to securities of socially responsible companies as from portfolios without such constraints. For corporate managers, the question is whether ethical screening will affect the market evaluation of the securities of their companies. Either way, this new attention to the ethical behavior of companies can have an impact on business policies and practices particularly as regards the choice of operating procedures, products mix, sector diversification, and the relationship with stakeholders. It can also have an impact on the extent to which investors may make ethical concerns a corporate governance issue in an effort to protect the value of their investment. Various approaches can be followed by investors in order to construct a universe of investment opportunities on an ethical basis. One approach that is gaining in popularity among portfolio managers uses ethical ratings, published by specialized research organizations, to screen securities for portfolio selection. These ratings are usually built around a number of criteria pertaining to ethical behavior and lines of business. As more investors adopt this framework to define their universe of eligible securities, it becomes important to clarify the range of criteria included in these ratings, and to measure their impact on security risk-adjusted returns. By analyzing the influence of these criteria, portfolio managers can gain a better understanding of the phenomenon and adopt a better and more consistent approach to ethical investment. By the same token, boards of directors can measure the impact of their ethical policies on the market performance of the stock of their company. As seen in this way, investors’ perceptions of ethical business behavior become a corporate governance issue. Ignoring ethical concerns may result in discount on the price of stock, as investors defect to firms that display higher ethical standards. While adopting strict ethical standards may increase operating costs, if they are priced by the market ignoring them could result in a loss of wealth to shareholders that may exceed those costs. This could result in ethical issues becoming a concern for corporate governance that may be impossible to ignore by firm managers and directors without penalty, since investors concerned about their wealth are likely to increase the pressure on directors to adopt sound ethical standards to avoid discount by the market. So far, no study has addressed this issue in a market equilibrium framework. To be sure, a number of event studies have examined the impact of specific ethical news or specific ethical policies on security returns. For example, Gunthorpe (1997) examined whether the financial markets penalize public corporations at the announcement of unethical business behavior. His study uses a sample of 69 US corporations that were involved in some form of alleged illegal activity over the period 1988–1992. He uses the Market Model to estimate for each firm the average and cumulative average abnormal return 5 days before and 5 days after the announcement of the alleged unethical event. His results show that public announcements of unethical behavior carry a statistically significant penalty for stock prices of the firms concerned of about 1.3% over a day and 2.3% over a week. Klassen and McLaughlin (1996) also used the Market Model approach and found a significant relationship between positive and negative environmental event announcements affecting companies and abnormal returns for their stocks. Their study covers a sample of 96 publicly traded US firms for which a positive public announcement was made in regard to strong environmental performance, and 16 firms for which a negative public announcement was made thus signalling weak environmental performance over the period 1985–1991. They report a positive cumulative average abnormal return of 0.82% following positive environmental events and a negative cumulative average abnormal return of 1.5% following negative environmental events. In the same vein, Feldman, Soyka, and Ameer (1997) using the CAPM methodology found that improving both the environmental management system and environmental performance can reduce firms’ perceived risk in the market place and increase their stock price by as much as 5%. Other studies have also examined the impact of ethical constraints from the perspective of portfolio performance. Thus, Guerard (1997) compared the average monthly return of 950 stocks of companies designated as socially responsible with that of 1300 stocks of companies not having that designation for the period 1987–1994. He also conducted a multi-factor regression analysis of the total return of each stock on a number of accounting variables, on a quarterly basis, in order to rank stocks in terms of their expected returns, and form portfolios on this basis. His results show that by and large no significant difference exists in average monthly returns between portfolios of socially screened and unscreened stocks. He also shows that a composite model using both value and growth components produces no significant differences in stock selection modeling in screened and unscreened universes. In the wake of the divestment movement of South African equities in the 1970s, Rudd (1979) looked at the impact of such exclusions on portfolio risk. He began by excluding from the S&P 500 Index the 116 companies listed by the Investor Responsibility Research Center as having links with South Africa. He then optimized the remaining securities to form a portfolio that matched the S&P 500 Index as closely as possible for September 1978. His results show that this optimal portfolio although very well diversified with an R2 of 0.989 has an annual residual standard deviation of 2.21% in comparison to a residual standard deviation of zero for a pure index fund and 1.5% for a typical marketed index fund. In the same vein, Wagner, Emkin, and Dixon (1984) examined the possibility of replacing 152 companies of the S&P 500 index operating in South Africa with the largest “unrestricted” companies of their respective industries and compared this modified portfolio with the original index from the first quarter of 1979 to the first quarter of 1984. They concluded that the modified portfolio, although very well diversified (R2 of 0.968), is riskier than the index (Beta of 1.08) and entails additional costs of research, trading and administration. Kahn, Lekander, and Leimkuhler (1997) examined the investment implications of a forced divestiture of the tobacco holdings of pension funds for passive as well as for active managers. By using the S&P 500 as benchmark for passive fund managers, the study shows that removing tobacco stocks from the index reduces its performance by 21 basis points per year, over the period 1987–1996, with a negligible effect on risk. As for active managers, the study indicates that the tobacco divestiture decision reduces their potential for outperformance by reducing the number of stocks in the opportunity set, and creates measurement problems associated with imperfect benchmarks. The study also shows that a strategy of optimally weighting the tobacco-free portfolio to match the beta and other risk characteristics of the S&P 500 as closely as possible would result in higher transaction costs due to higher turnover. On the other hand, Diltz (1995) looked at the impact of various ethical screens on portfolio performance for the period 1989–1991 and concluded that 11 ethical screens and combinations of them had no significant effect on performance. He also found that the good environmental behavior screen and the nuclear and military exclusion screen had positive impacts on performance, whereas the provision of a family-related benefits screen had a negative impact. Attempts were also made to study the relationship between ethical behavior and financial performance at the company level. Thus, Waddock and Graves (2000) find that companies that successfully pass a social screen and those that do not perform about the same financially. Vreschoor and Murphy (2002), on the other hand, report that the 100 companies included in the S&P 500 index which qualified for the “Business Ethics Best Citizen” title awarded by Business Week in 2001 ranked higher by 10 percentile points on average than the mean ranking of the remaining companies in this index in terms of overall financial performance as measured by Business Week on the basis of eight financial ratios. A range of studies, such as those by Hart and Ahuja (1996) and Russo and Fouts (1997) draw on the resource-based theory of the firm to evaluate the impact of environmental policies and show that environmental performance and economic performance are positively linked.1 In all cases, the results suggest a positive association between ethical behavior and profitability although it should be noted that causality has not been demonstrated by these tests. Given the growing interest in ethical investing around the world, rating agencies have proliferated in the major industrialized countries to provide social investment screens that allow investors to obtain information on the social and environmental performance of the corporations of their countries. The most important of these agencies are the Domini 400 Social Index and the KLD Research & Analytics Inc. for US securities, the NPI Social Index for British securities, the Ethos agency for Swiss securities, the Arèse agency for European securities, the Avanzi agency for Italian securities, the Dow Jones Sustainability Group Indexes for international securities and Michael Jantzi Research Associates Inc. (MJRA) and EthicScan for Canadian securities. The large number of agencies involved in this activity has resulted in a diversity of approaches and concepts used in rating the social and environmental record of corporations in each national market. In this paper, we use the MJRA screening system as it is the most appropriate for the ethical rating of Canadian securities. Indeed, MJRA was the major supplier of ethical ratings for Canadian securities during the period examined. In contrast to other rating agencies, MJRA uses a “best-of-sector” approach to social investing. In this approach, a company's social record is measured against the standard of best practices in its industry rather than against an absolute standard. More importantly, the MJRA approach rates corporate activities in terms of strengths and concerns rather than only in terms of exclusions, thus allowing investors to evaluate the totality of a company's social record. These aspects of the MJRA screening system will be examined in more detail in the next section. Using the MJRA screening system, this paper focuses on the impact of ethical ratings published in Canada on the risk-adjusted returns of the securities concerned, within the framework of a multi-factor Capital Asset Pricing Model, as well as from the perspective of portfolio composition and from that of corporate governance. The relevance of this study derives, in the first place, from the importance of the Canadian security markets for the US investors. Indeed, not only is the Canadian economy largely dependent on trade with the US, but also US companies turn to Canada for investment and/or financing opportunities. By analyzing the impact of the ethical environment on Canadian securities, individually and in a portfolio framework, this study provides new evidence that can prove useful to investors in both countries. Secondly, by virtue of the particular rating system of MJRA, which is based on strengths and concerns, and the appropriate methodology chosen, the study fills a gap in the literature by providing a refined evidence as to the reaction of investors to this detailed information. The remainder of the paper is organized as follows. The next section describes the data set and presents the methodology used. The third section discusses the statistical estimation procedures used in the tests and gives the empirical results and their interpretation. The fourth section concludes the paper.

Increasingly, investors are stressing the importance of the ethical posture of corporations in choosing their universe of investment opportunities. The strategy that is gaining momentum in this regard is to screen stocks on the basis of ethical ratings published by specialized research organizations. These ratings relate to various aspects of the business behavior of corporations as observed and evaluated by the research organization with respect to an accepted standard. The purpose of this study is to investigate the market response to the ethical business behavior of Canadian publicly traded corporations, as signalled to the public through ratings of ethical strengths concerns and exclusions. By examining whether or not stock returns are correlated to positive ethical practices and policies insight might be gained into two related questions, namely: (1) Should ethical screening scores be considered in portfolio composition? (2) Is there a financial incentive to incorporate ethics into business culture and decision making? The findings of this research suggest that investors react to the level of concern scores signalled to them by the scoring agency, without regard to the particular aspect of unethical behavior covered by each concern. The analysis also shows that a portfolio of stocks with zero concerns outperforms portfolios comprising securities with one, two and three or more concerns. Furthermore, there is a significant decline in portfolio risk-adjusted returns as exposure to the number of concerns increases. From the investor's point of view, our research indicates that there is good reason for relying on the number of concern scores in screening securities for portfolio composition. The viability of this strategy in terms of portfolio performance indicates that such ethical screening is not about to go away soon. From the point of view of corporate governance, the findings of this paper suggest that ignoring ethical concerns may trigger a negative reaction from investors, as they defect to firms that display higher ethical standards. Thus, although the implementation of strict ethical standards can undoubtedly increase operating costs for corporations, and could decrease the quantity produced, ignoring them could result in loss of wealth to shareholders that may exceed those costs. These findings also suggest that ethical issues may increasingly become a consideration in corporate governance that cannot be overlooked by corporate directors without penalty to the market value of their companies. Indeed, if the trend identified in this research persists, investors are likely to increase the pressure on directors for the implementation of sound ethical standards and practices in order to avoid the market penalties. Alternatively, corporate raiders may be able to extract rent by acquiring undervalued firms and devising ethical standards and policies for them. Corporations should therefore be proactive as regards the level of ethical concerns they wish to signal to the market, and to conduct their business policy accordingly.