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Market responsiveness to corporate social responsibility

Market reaction to surprises in earnings announcements has long been used to measure the quality of the information content of the announcement, and studies have explored various factors affecting the response. | http afr.sciedupress.com Accounting and Finance Research Vol. 8 No. 4 2019 Market Responsiveness to Corporate Social Responsibility Zev Fried1 1 Silberman College of Business Fairleigh Dickinson University USA Correspondence Zev Fried PhD Fairleigh Dickinson University USA. E-mail zfried@fdu.edu Received August 26 2019 Accepted October 11 2019 Online Published October 12 2019 doi 10.5430 afr.v8n4p114 URL https doi.org 10.5430 afr.v8n4p114 Abstract Market reaction to surprises in earnings announcements has long been used to measure the quality of the information content of the announcement and studies have explored various factors affecting the response. This study adds to this body of research by factoring in the level of corporate social responsibility CSR exhibited by the firm and employs a relatively new measure of a company s level of CSR rankings published by JUST Capital. This study hypothesizes that financial information reported by higher ranked companies is weighed more heavily by investors than those reported by non-ranked or lower-ranked companies. Using earnings response coefficients as a measure of the perceived quality of the financial information reported by the firms this study measures the effect of being ranked by JUST Capital as well as the ranking of the firms on the marked response. The results provide direct support of the hypotheses indicating that the market reacts more strongly to earnings surprises for firms with high JUST rankings than for unranked firms as well as reacting stronger for higher ranked firms relative to lower ranked firms. We conclude from this study that investors do take into account the level of a corporation s social responsibility when evaluating earnings announcements. This result contributes new insights into the impact of a firm s CSR in terms of the perceived quality of a firm s financial reporting. Keywords corporate social responsibility market reaction earnings quality earnings response coefficient JUST capital