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The World Capital Markets’ Perception of Sustainabilityand the Impact of the Financial Crisis

Kerstin Lopatta • Thomas Kaspereit

Received: 21 June 2012 / Accepted: 10 May 2013 / Published online: 13 June 2013

Springer Science+Business Media Dordrecht 2013

Abstract Using a unique dataset provided by the inter-

national rating agency GES, we investigate the effects of corporate sustainability and industry-related exposure to

environmental and social risks on the market value of

MSCI World firms. The results show a negative relation-

ship in the earlier years of our sample period. However, the

analysis reveals that the capital market perception of sus-

tainability has changed owing to the financial crisis.

Looking at the height of the crisis in September 2008, the

month in which Lehman Brothers shocked the world’s

capital markets by filing for Chapter 11 bankruptcy pro-

tection, we find that the previously negative perception of

corporate sustainability across its various dimensions was

positively affected and offset. In addition, as a moderated

regression analysis shows, the crisis led to a positive per-

ception of corporate sustainability in industries that are

exposed to higher environmental and social risks. Our

study has the practical implication that executives, in par-

ticular in industries with high environmental and social

risks, should increase their commitment to corporate sus-

tainability due to the changes in the institutional setting

triggered by the financial crisis.

Keywords Corporate sustainability Environmental risks Financial crisis Global Engagement Services (GES) Instrument variable regression Moderated regressionanalysis Social risks

Introduction

The current financial crisis not only shocked the capital

markets but also led to a change in the society’s perception of

profit maximization and its inherent risks. In October 2011,

members of the Occupy Wall Street movement claimed that

they had greater fear of the public risks of global climate

change and social inequality than of their personal risk of

being arrested and charged. The protesters directly connected

theserisks to thegreed of firms andcapitalmarkets, an attitude

that was shared even by a broad spectrum of political orga-

nizations (Wall Street Journal, 17 October, 2011). Thus, the

financial crisis seems to have strengthened public concerns

about the traditional neo-liberal shareholder value paradigm

that currently rules the major capital markets and which

dominated the corporate world before the concept of sus-

tainability appeared on the stage in the late 1990s. Underthese

circumstances, it is worth questioning how the world’s capital

markets perceive commitment to corporate sustainability and

what impact the financial crisis had on this perception.

This paper contributes to at least two strands of the liter-

ature. First, we expand the empirical literature on the con-

nection between corporate sustainability, sustainability at

the industry level and shareholder value creation. Our study

is the first to use a large sample of MSCI World firms with

sustainability ratings by Global Engagement Services

(GES), an established international rating agency special-

izing in socially responsible investments. Other studies on

the value relevance of corporate sustainability focus on local

markets (e.g. Hassel et al. 2005; Semenova and Hassel 2008;

Semenova et al. 2009; Guenster et al. 2011), whereas this

study addresses all of the world’s developed stock markets.

In addition, the sample has a panel data structure, which

covers the period December 2003–June 2011, which allows

us to control for individual heterogeneity. Applying a

K. Lopatta T. Kaspereit (&)Accounting and Corporate Governance, University of

Oldenburg, Ammerländer Heerstr. 114–118,

26111 Oldenburg, Germany

e-mail: [email protected]

K. Lopatta

e-mail: [email protected]

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J Bus Ethics (2014) 122:475–500

DOI 10.1007/s10551-013-1760-9


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generalized method of moments (GMM) approach and using

instrumental variables partially mitigate the endogeneity

problem. Thus, we provide reliable results that help to

understand the drivers of corporate sustainable development

and answer the question whether implementing sustainabil-

ity into corporate strategies is compatible with a broader

concept of shareholder value orientation.

Second, we contribute to the sparse theoretical andempirical literature on the momentum change in the capital

market’s perception of corporate sustainability that was

induced by the global financial crisis starting in 2007.

There is empirical evidence that during economic crises,

firms are forced to engage in cost-cutting activities and

consequently cut their spending on sustainability projects

(Karaibrahimoglu 2010). This tendency may be aggravated

by consumers’ focus on the cheapest price rather than

quality or additional product features such as ethical pro-

duction (Manubens, 2009). However, the crisis and the

concept of sustainability call for similar needs, for instance,

innovation to ensure long-term entrepreneurial survival, aninternal organizational culture and employee motivation,

all of which help firms to navigate rough economic waters

(Fernández-Feijóo Souto 2009). From this perspective,

corporate sustainability can serve as an effective tool to

manage economic crises and make firms less vulnerable to

their vicious effects. Furthermore, we argue that main-

taining or even improving the level of corporate sustain-

ability is a signal to the capital markets that a firm still has

enough financial strength to pursue a long-term business

strategy and is not forced to restrict its resources to vitally

important short-run functions. Our empirical findings sup-

port this argument since they detect a positive momentum

shift in perception of corporate sustainability during the

financial crisis, in particular for firms that operate in

industries with high environmental and social risks.

The paper is structured as follows. In the next section, we

develop our research hypotheses, which are based on the

theoretical literature describing the potential relationship

between corporate sustainability, shareholder value and the

financial crisis. Section ‘‘Results of Prior Empirical

Research’’ reviews the existing empirical evidence, before

the ‘‘Data and Methodology’’ section introduces the data and

methodology of our analysis. The results are presented in the

‘‘Results’’ section. Section ‘‘Conclusion’’ summarizes our

findings and provides an outlook on further research.

Theoretical Background and Hypotheses Development

Corporate Sustainability and Firm Value

The business ethics literature so far has provided several

approaches towards deriving a theoretical foundation for a

link between corporate sustainability and the market value

of a firm. These approaches can be assigned to three major

theories, namely, the resource-based view, legitimacy

theory and stakeholder theory.

The resource-based view sees expenditures for envi-

ronmentally friendly and socially desirable business prac-

tices as investments that lead to a better reputation and in

turn to higher long-run profits. In this theoretical frame-work, corporate sustainability contributes to the creation of

the essential resource reputation and can be regarded as a

management practice or even a total quality management

system that reduces manufacturing costs, produces com-

petitive advantages by enhancing production efficiency,

and lowers compliance and liability costs (Klassen and

McLaughlin 1993; Hart 1995; McWilliams and Siegel

2011; Hart and Dowell 2011). Whilst on the cost side,

corporate sustainability has the potential to reduce expen-

ditures resulting from material waste, recruitment and

inefficient processes (Klassen and McLaughlin 1996; Lo

and Sheu 2007), there is empirical evidence that certaincustomer groups tend to favour ‘green’ products from firms

that respect environmental and social standards (Tanner

and Wolfing Kast 2003; Gilg et al. 2005; Trudel and Cotte

2009). Nonetheless, most recent research finds that con-

sumers’ perception of sustainability differs depending on

product attributes. The positive effect of product sustain-

ability on consumer preferences is reduced when strength-

related attributes are valued, sometimes even resulting in

preferences for less sustainable product alternatives (Luchs

et al. 2010). Thus, the net effect of sustainability is case

sensitive and no general prediction is possible.

From a legitimacy theory perspective, corporate sus-

tainability can be seen as a management practice that

ensures going concern by preserving a firm’s organiza-

tional legitimacy. It delays the expected end of the time

series of future cash flows to infinity and in this way

increases firm value. Suchman (1995) defines legitimacy as

‘‘a generalized perception or assumption that the actions of

an entity are desirable, proper, or appropriate within some

socially constructed system of norms, values, beliefs, and

definitions’’. If the behaviour of a firm is at odds with these

norms, values, beliefs and definitions, there is a danger that

customers or suppliers will refuse to do business with that

firm. Then, the firm lacks legitimacy, which implies a

decline in profit or even corporate failure (Hybels 1995).

One example of the economic consequences of violating

customers’ norms was the Shell boycott after the company

announced plans to dump its oil storage buoy Brent Spar in

the Atlantic Ocean in 1995. Even though none of its cus-

tomers were directly affected in the economic sense, many

refused to buy gasoline from Shell gas stations, which

caused revenues and the share price to decline considerably

(Sandhu 2010). There are similar case studies for firms that

476 K. Lopatta, T. Kaspereit

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employ workers in developing countries under question-

able conditions, e.g. Coca-Cola and Nike (Baron 2001;

Martin 2002; Lawrence 2010).

Stakeholder theory and related empirical work suggest

that firms that follow the principles of sustainability have

lower cost of capital due to lower stakeholder risks and a

broader investor base (Heinkel et al. 2001; Sharfman and

Fernando 2008; Bartkoski et al. 2010; Dhaliwal et al.2011; El Ghoul et al. 2011; Goss and Roberts 2011).

Godfrey (2005) developed a comprehensive framework

describing how corporate sustainability in the form of

philanthropy can create shareholder value by generating

positive moral capital amongst communities and stake-

holders. This moral capital can serve as insurance-like

protection for a firm’s relationship-based intangible assets

and in turn may reduce its exposure to stakeholder risks. A

reduction in risk implies lower cost of capital and, all other

factors being equal, higher firm value.

However, besides the benefits of corporate sustainability

described by these theories, when assessing the overalleffects of corporate sustainability on firm value, the

potential benefits have to be balanced against the costs,

which can be broken down into additional capital cost,

material and services, and labour (McWilliams and Siegel

2001). For instance, modern plants, equipment and end-of-

pipe facilities have to be financed, purchased and amor-

tized. To enhance the ecological efficiency of the produc-

tion process, additional research and development have to

be undertaken and money spent on in-house or external

training. Although widely ignored in the literature, the

costs that are most capable of substantially reducing future

cash flows are the opportunity costs that arise due to sus-

tainability-induced constraints on management decisions.

Firms that strive to maintain a sustainable image have to

abandon profitable but unethical business strategies such as

wage dumping, child labour and the use of environmentally

hazardous production materials. Since it remains an

empirical question whether the cost of sustainability

exceeds the benefit or vice versa, our first hypothesis is two

sided.

Hypothesis 1 The level of corporate sustainability affects

the market value of a firm.

If there is no evidence for Hypothesis 1, this can be

explained by microeconomic considerations. In Lundgrens’

(2011) model, firms invest in corporate sustainability until

their related marginal benefits equal the marginal costs.

Different observed levels of corporate sustainability are the

result of different benefit and cost structures rather than of

the varying abilities of management to follow the generally

value-enhancing business strategy of corporate sustain-

ability. As a consequence, the chosen level of corporate

sustainability is always individually optimal and not

relevant to cross-sectional and intertemporal variance in

firm valuation. Recent empirical findings by Chiu and

Sharfman (2011) support this strategic instrumentalization

of corporate sustainability.

Industry Sustainability and Firm Value

The theoretical analysis of the impact of industry envi-

ronmental and social risks on firm value differs from the

corporate level in that industry sustainability is not at the

discretion of management. These risks can change over

time and are driven by macroeconomic factors and trends.

Assuming risk-averse investors and an at least partial

inability to diversify these risks, less exposed industries are

anticipated to have higher firm values. The opposite would

imply the presence of risk-seeking investors or a broader

investor base in more exposed industries. Whilst the exis-

tence of risk-seeking investors would violate theoretical

consensus and be in opposition to broad empirical evi-

dence, the assumption of a broader investor base in riskier

industries can be reasonably justified by the observation

that sustainable investments only account for approxi-

mately 10 % of total assets under management (Derwall

et al. 2011). In addition, a large number of stock market

participants are still focused on dividend stocks with low

economic risk but high environmental and social risks,

such as energy, materials and utilities. Since we do not

know which theoretical argument best reflects reality, we

choose a two-sided hypothesis to account for the effect of

industry environmental and social exposure on firm value.

Hypothesis 2 The level of industry sustainability affectsthe market value of a firm.

Momentum Shifts in the Perception of Corporate

Sustainability During the Financial Crisis

Before the financial collapse in September 2008, capital

market deregulation was the ruling principle in politics.

The financial crisis and its major negative impact on the

real economy caused a turnaround in societal and political

attitudes. At this point, the belief in the corporate world’s

power to self-regulate vanished. More state and supra-

national regulation has become a serious threat, in partic-

ular for the financial sector (Emeseh et al. 2010). Whilst

regulation is not an issue for the non-financial sectors,

debates about greed and the rationale of profit maximiza-

tion are. As Kemper and Martin (2010) noted, the rules and

the values of firms to society changed overnight. Now, they

are employers first and producers of valuable goods sec-

ond. Argandoña (2009) interprets the crisis as an ethical

problem and proposes that genuine, ethical standards-based

corporate sustainability could have protected firms against

The World Capital Markets’ Perception 477

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the negative impact of the financial crisis. This suggestion

is reasonable since there is evidence in the marketing lit-

erature that the crisis has influenced consumers such that

they now attach higher importance to environmental and

social issues. Gerzema and D’Antonio (2011) report that

77 % of Americans agreed with the statement ‘‘Since the

recession, I realize that how many possessions I have does

not have much to do with how happy I am’’, 72 % agreedthat ‘‘I make it a point now to buy brands from companies

whose values are similar to my own’’, and two-thirds of all

respondents agreed that ‘‘I make it a point to avoid buying

brands whose values contradict my own’’. Kotler (2011),

although provides no empirical evidence, also asserts a

similar shift in the business-to-business market. These

momentum shifts in consumers’ and contractors’ attitudes

towards corporate sustainability can potentially affect the

cash flow distribution of firms and therefore their market

values, provided these effects are recognized by the capital

markets.

These developments are also covered by a currentlyemerging stream of research that links corporate sustain-

ability with institutional theory. Campbell (2007) analyses

which institutions determine whether a firm acts in a

socially responsible manner. He concludes that firms are

more likely to be socially responsible if they are finan-

cially healthy, operate in a business environment with

moderate competition, or see themselves confronted with

state regulation or social movements that encourage or

even enforce this kind of conduct. We have good reason

to assume that these institutional settings changed dra-

matically during the financial crisis. State regulation has

increased or is more likely to be increased in the near

future, whilst the Occupy Wall Street movement is a clear

indicator for an increase in societal demand for socially

and environmentally responsible business practices. As

Brammer et al. (2012, p. 6) aptly state, whilst before the

crisis a firm was considered a ‘political creation for which

the state granted limited liability in order to facilitate the

accumulation of capital, the post-2008 era of financial

crisis has taught an important lesson: the limited liability

of the privately owned corporation has re-emerged as the

collective liability of society’.

Although the financial crisis has changed the institu-tional setting towards a higher demand for corporate sus-

tainability, at the same time the financial constraints and

increasing competition have prevented many firms from

meeting this demand. In fact, during times of economic

crises, firms tend to restrict themselves to short-term vital

activities and to reduce their spending on sustainability

projects, which are long term by definition (Waddock and

Graves, 1997; Karaibrahimoglu 2010). The degree of

restriction is anticipated to increase in step with the firm-

specific impact of the crisis. The less the firm is affected,

the less non-vital activities are expected to be scaled back.

Support for this line of reasoning is illustrated in Fig. 1,which shows the development of mean GES sustainability

ratings. The shaded area marks the time span between the

first major write-down of subprime loans by HSBC in

February 2007 and Lehman Brothers’ Chapter 11 filing,

during which a decline in average corporate sustainability

and a rise in average environmental risks across industries

were observed. Since Jensen and Meckling (1976) devel-

oped their theory of the firm, it has been widely accepted

that market valuation depends on asymmetric information

between the management and owners. During the financial

crisis, this asymmetry mainly referred to a given firm’s

exposure to it. Thus, firms that did not reduce their cor-

porate sustainability activities signalled that they did not

suffer as much. Seen in aggregate, these and the above-

mentioned potential effects lead to Hypothesis 3.

Fig. 1 Average GES ratings

during the financial crisis


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Hypothesis 3 The financial crisis affected the capital

market perception of sustainability positively.

Hypothesis 3 can also be based on the idea that man-

agers balance the expected benefits of corporate sustain-

ability against its expected costs (McWilliams and Siegel

2001; Lundgren 2011). The financial crisis was an external

shock for the above-mentioned institutions, which has inturn increased the expected benefits of corporate sustain-

ability. However, firms have not been able to adjust their

levels of corporate sustainability to the new optimum level

immediately since this is a complex and time-consuming

task. Therefore, firms the management of which was more

optimistic with respect to the benefits of corporate sus-

tainability before the crisis are now expected to have a

comparative advantage over firms which were more

reluctant to implement corporate sustainability strategies.

This idea applies to sustainability at the industry level as

well. Here, the ability to adjust is even more constrained.

To implement higher standards of business ethics, socialengagement or environmental protection can take several

years or even decades, if it is possible at all.

Interactions Between Corporate Sustainability

and Sustainability at the Industry Level

Recent empirical literature concentrates on the value rele-

vance of corporate sustainability in industries that are

strongly exposed to environmental and social risk, such as

the electric utility industry in Hughes (2000) and the

chemical industry in Griffin and Mahon (1997). The

rationale behind this is the potentially greater importanceand visibility of sustainability issues in these industries

compared to less exposed sectors. In the case of water

pollution, non-sustainable behaviour on the part of an

insurance company has a far weaker negative impact on

biodiversity than if it comes from a global leading chem-

icals manufacturer. This argument is in line with the

empirical results of Brammer et al. (2006), who find that

environmental performance has a positive reputational

effect only in the chemicals, consumer products and

transportation sectors. Thus, it can be hypothesized that

sustainability at the corporate level is more important the

greater the environmental and social risks at the industrylevel. However, Semenova (2011) argues that firms in more

exposed industries face more restrictive regulatory

requirements and have fewer opportunities to gain com-

petitive advantages through sustainability activities. As a

consequence, their corporate sustainability efforts are per-

ceived as costly activities without corresponding benefits.

As in the case of the capital market’s general perception of

sustainability, both arguments appear reasonable, and

therefore Hypothesis 4 is two sided.

Hypothesis 4 The capital market’s perception of corpo-

rate sustainability depends on industries’ exposure to

environmental and social risks.

Results of Prior Empirical Research

Prior research on local markets has found evidence that

corporate sustainability affects firm value, but in diverg-

ing directions. Using KLD social issue ratings for the

period 1991–2003, Bird et al. (2007) show that the market

value of S&P 500 firms is negatively affected if they fail

to meet regulatory and community standards with respect

to the environmental dimension, but that it is positively

affected if the firm abstains from proactive engagement in

employee relations. For the UK stock market, Brammer

et al. (2006) arrive at contradictory results. For the period

July 2002–December 2005, their analysis of portfolio

returns for FTSE All-Share listed firms reveals a negativerelationship between environmental and community indi-

cators and stock returns. Furthermore, they measure a

weakly positive relationship for the employment indicator.

Very closely related to our analysis is the empirical study

by Hassel et al. (2005) who investigate the effect of

environmental performance on the market value of

Swedish firms for the period June 1998–September 2000.

Their results indicate a negative relationship between

environmental performance and market value. They

interpret this as evidence that investors perceive envi-

ronmental responsibility activities as profit-decreasing

measures. In a follow-up study to Hassel et al. (2005),Semenova et al. (2009) use the GES rating as a proxy for

environmental and social performance and find a positive

relationship with shareholder value between 2005 and

2008. Using the same dataset, Semenova (2011) finds

evidence of the positive effect of corporate sustainability

and of an interaction with environmental risks at the

industry level. Another study by Semenova and Hassel

(2008), which also uses the GES rating for U.S. compa-

nies from 2003 to 2006, measures a positive impact on

firm value for lower industry-specific environmental risk

as well as for higher environmental preparedness and

performance. Bagaeva (2010) applies the research designby Hassel et al. (2005) to Russian listed firms for the

period 2005–2007. She finds that environmental perfor-

mance has incremental value relevance and that investors

value lower environmental impacts positively. These

results are in line with the results of Guenster et al.

(2011), who find a positive effect of eco-efficiency in

U.S. companies between 1996 and 2004, together with a

time lag in this perception and an upwards trend over

time.


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Data and Methodology

Sustainability, Financial and Market Data

Our sample consists of all firms in the GES database from

December 2003 to June 2011 the financial and market data

of which are available in Thomson Financial Datastream/

Worldscope. Besides its reliability, the most importantadvantage of the GES database over its direct opponent

KLD is that it covers the whole MSCI World universe

instead of only U.S. firms. It therefore includes firms from

26 different countries and various industries. For this study,

Datastream/Worldscope is preferable to the commonly

used alternative Compustat because a merged sample from

Compustat North America, Compustat Global, and Com-

pustat Banks yielded a significantly lower coverage of the

firms rated by GES. Table 1 lists the firms and industries in

the sample.

The GES rating assesses both environmental and social

risks at the industry level and the corresponding opportuni-

ties at the firm level. Industries are demarcated using the 6- or

8-digit MSCI Global Industry Classification Standards

(GICS) classification, and all ratings are measured on a

7-level scale ranging across C (high risk/low opportunities),

over C?, B-, B , B?, A-, to A (lowrisk/high opportunities).

The industry-specific environmental rating ( IENV ) i s aweighted average of the direct risks of the industry and the

indirect risks that result from dependencies on other indus-

tries. The social rating at the industry level ( ISOC ) averages

employee, community and supplier concerns.

At the firm level, GES breaks down the environmental

dimension into two subdimensions, environmental perfor-

mance (FEPF ) and environmental preparedness (FEPR).

Environmental preparedness captures the relevant efforts

by management such as environmental certification, envi-

ronmental policy and programmes, implementation of an

Table 1 Country and industrycomposition of sample

observations

Countries Industries

Country Frequency Percent 4-Digit GICS Frequency Percent

United States 7,675 41.10 Capital goods 1,818 9.73

Japan 3,257 17.44 Materials 1,651 8.84

Great Britain 1,293 6.92 Banks 1,430 7.66

Canada 826 4.42 Energy 1,142 6.11

France 823 4.41 Utilities 1,019 5.46

Australia 729 3 .90 Insurance 856 4.58

Germany 632 3.38 Diversified financials 839 4.49

Sweden 409 2.19 Real estate 836 4.48

Italy 388 2.08 Food, beverage & tobacco 801 4.29

Hong Kong 387 2.07 Retailing 724 3.88

Switzerland 358 1.92 Technology hardware & equipment 719 3.85

Spain 317 1.70 Health care equipment & services 702 3.76

Shanghai 254 1.36 Transportation 669 3.58

The

Netherlands

223 1.19 Consumer durables & apparel 669 3.58

Finland 188 1.01 Software & services 656 3.51

Belgium 168 0.90 Media 644 3.45

Norway 132 0.71 Pharmaceuticals, biotech & life sciences 639 3.42

Denmark 129 0.69 Telecommunication services 547 2.93

Greece 117 0.63 Automobiles & components 423 2.26

Austria 97 0.52 Consumer services 422 2.26Portugal 87 0.47 Commercial & professional services 411 2.20

Ireland 71 0.38 Food & staples retailing 405 2.17

New Zealand 57 0 .31 Semiconductors & semiconductor

equipment

397 2.13

Israel 38 0.20 Household & personal products 196 1.05

Luxembourg 15 0.08 Unknown 61 0.33

Cyprus 3 0.02

Unknown 3 0.02

Total 18,676 100.00 Total 18,676 100.00


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environmental management system, screening of suppliers

and environmental reporting. These efforts can, but do not

necessarily, result in better environmental performance.

Therefore, environmental performance is measured directly

using a battery of 21 indicators such as investment in

renewable energies, product recycling, decrease in green-

house gas emissions and water use. The firm-specific social

ratings are broken down into employee (FEMP), commu-nity (FCOM ) and supplier (FSUP) subratings. There are

between three and six direct indicators for each subcate-

gory that are derived from the United Nations’ Universal

Declaration of Human Rights, the United Nations’ Con-

vention on the Rights of the Child and the International

Labor Organization’s Core Labor Convention. In this way,

the GES ratings provide reliable proxies for a reasonable

selection of corporate sustainability issues. Although the

equal weightings of indicators are arbitrary and the

assignments of scores are, at least to some extent, subject to

personal judgement, the rating process is highly transparent

and reproducible. To make use of the GES ratings, thealphabetical scores are uniformly transformed to an integer

scale ranging from 1 (Score C) to 7 (Score A?) and are

interpreted as a metric variable. The database contains

ratings for the constituents of the MSCI World in 16

semiannual intervals during the period from the end of

2003–mid-year 2011, which results in an initial sample of

21,723 observations, of which 18,676 are covered by Da-

tastream/Worldscope. Table 2 contains an overview of the

GES variables used in this study.

The quarterly accounting and market data for each

semiannual observation of the GES ratings encompass

market capitalization ( MV ), book value of equity ( BV ), net

income ( NI ), the logarithm of total assets (lnTA), leverage

( LEV ) defined as total debt divided by total assets, one-year

sales growth (SG), country and currency codes, and

accounting standards in use. Additionally, some derivative

variables are constructed. The loss variable LO takes the

value of net income if net income is negative and zero

otherwise. BVI, BVL, NII, NIL, LOI and LOL are the

interactions between book value of equity, net income and

loss with two dummy variables that indicate whether the

accounting information is generated by IAS/IFRS (suffix I ) or local standards (suffix L ) instead of U.S.-GAAP.

However, the model contains no intercept terms for the

different accounting standards since they are collinear with

firm fixed effects. All accounting variables are translated

into U.S. dollar amounts at the daily exchange rate and

divided by total assets to mitigate the problem of different

scales (Barth and Clinch 2009). Table 3 summarizes the

descriptions of the descaled accounting and market data

variables.

The correlation matrix in panel B of Table 4 reveals a

strong correlation between all sustainability proxies. Firms

with a high degree of corporate sustainability in onedimension tend to have a high degree of corporate sus-

tainability in the other dimensions. However, the relation-

ship is negative for sustainability proxies at both the firm

and industry level. The higher the corporate sustainability

score, the higher the environmental and social risks for a

given industry. This supports the idea that corporate sus-

tainability acts as an opponent to serious industry envi-

ronmental and social risks and is therefore more important

in exposed industries.

Reference Model and Removing Statistical Outliers

The empirical analysis begins with setting up a reference

valuation model that explains the market value of a firm in

Table 2 Overview of GES rating variables

Variable Dimension Description

IENV Industry environmental

risk

Describes the environmental risks inherent in a specific industry at a specific point in time. Industries are

defined by their 6- or 8-digit GICS codes

FEPF Firm environmental

performance

A measure of 21 indicators that measure current success in environmental issues

FEPR Firm environmental

preparedness

Captures the efforts of the management in environmental sustainability, for instance, environmental

certification, environmental policy and programmes ISOC Industry social risk Describes the social risks inherent in a specific industry at a specific point in time. Industries are defined by

their 6- or 8-digit GICS codes

FEMP Firm employee rating Firm rating for the compliance with general human rights issues, such as exclusion of child labour and

discrimination

FCOM Firm community rating Captures the engagement of a firm in the community. Indicators are, for instance, policies for local

community involvement, a document policy towards prevention of corruption and a policy to identify the

social impacts of the firm’s investments

FSUP Firm supplier rating Captures the efforts of a firm in screening its entire supply chain for compliance with human rights.

Indicators are the existence of a corresponding management system and a supplier policy that covers the

core value of the International Labor Organization


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terms of its book value of equity, net income, the loss

variable, their interactions with the accounting standards’

dummy variables, sales growth, leverage and the natural

logarithm of total assets as a proxy for size. In this way, the

model can be regarded as an extended version of theempirical analogues of the Ohlson (1995) model, which is

commonly used in association studies to measure the

incremental value relevance of accounting and other

information (Barth et al. 2001; Hassel et al. 2005).

MV it ¼b0 þ b1 BV it þ b2 NI it þ b3 LOit þ b4 BVI it

þ b5 BVL it þ b6 NII it þ b7 NIL it þ b8 LOI it

þ b9 LOL it þ b10SGit þ b11 LEV it þ b12lnTAit þ d t

þ gi þ it

(Reference model)

In the reference model, the indexes i are for the individualcross-sectional unit and t for the time period. d t captures

the time effects, which are macroeconomic variables that

have the same effects on all firms, but differ from period to

period. The loss variable LO captures the capital market’s

special perception of losses. The expected sign of its

coefficient is negative, whilst its absolute value is expected

to be smaller than that of the coefficient of net income. It

hence partly offsets the net income coefficient. The eco-

nomic rationale behind this is the assumption that capital

market participants perceive losses as temporary and lim-

ited liability prevents negative market values (Hayn 1995;

Basu, 1997). Since quarterly data are released with a fairly

short delay, and capital markets are assumed to have the

ability to accurately anticipate accounting information, notime lag is included. Nevertheless, all results that are

reported later in this paper have been checked for sensi-

tivity to a time lag of three month and are found to be

robust to this modification.

Column A of Table 5 shows the regression results for all

the observations with available accounting and market

data. It is noticeable that the absolute value of the loss

variable’s coefficient is larger than its counterpart for net

income. This result is not in line with economic theory

because it implies that higher losses are connected to a

higher market value. Furthermore, the marginal effects of

book value of equity under IAS/IFRS, which is the sum of the coefficients on BV and BVI , and local accounting

standards, which is the sum of the coefficients on BV and

BVL , are negative. Therefore, the estimates of the reference

model lack economic reason. It is known from other

empirical studies (Collins et al. 1997; Hirschey et al. 2001;

Rajgopal et al. 2003) that removing statistical outliers can

solve this problem. After removing outliers in a three-step

procedure, defined as observations with an externally stu-

dentized residual greater than 12 (8 in the second and 4 in

Table 3 Overview of accounting, market and instrumental variables

Variable Mnemonic Description

MV MV Market value, calculated as the product of ordinary shares and share price scaled by total assets (WC02999A)

BV WC03501A Common equity, which, amongst others, includes common stock value, retained earnings, capital surplus, capital

stock premiums and cumulative gain or loss of foreign currency translation. BV is scaled by total assets

(WC02999A)

NI WC01751A Net income available to common, excluding extraordinary items. NI is scaled by total assets (WC02999A) LO – Loss, which takes the value of NI if NI is negative and a value of zero otherwise

BVI – Interaction variable of BV and a dummy that takes the value of 1 if the accounting standards are IAS/IFRS and zero

otherwise

BVL – Interaction variable of BV and a dummy that takes the value of 1 if the accounting standard is local and zero otherwise

NII – Interaction variable of NI and a dummy that takes the value of 1 if the accounting standards are IAS/IFRS and zero

otherwise

NIL – Interaction variable of NI and a dummy that takes the value of 1 if the accounting standard is local and zero otherwise

LOI – Interaction variable of LO and a dummy that takes the value of 1 if the accounting standards are IAS/IFRS and zero

otherwise

LOL – Interaction variable of LO and a dummy that takes the value of 1 if the accounting standard is local and zero otherwise

SG WC08631A Sales growth, calculated as follows: (Current year’s net sales or revenues divided by last year’s total net sales or

revenues - 1)*100

LEV – Leverage, calculated as the relation of total debt (WC03255A) to total assets (WC02999A)

TA WC02999A Represents total assets, i.e. the sum of total current assets, long-term receivables, investment in unconsolidated

subsidiaries, other investments, net property plant and equipment and other assets

EGY ENERDP033 Total direct and indirect energy consumption, scaled by sales (WC01001A)

ACC SOHSDP027 Number of injuries and fatalities reported by employees and contractors whilst working for the company, divided by

the number of employees (WC07011) and sales (WC01001A)


1 3


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T a b l e 4

D e s c r i p t i v e s t a t i s t i c s a n d c o r r e l a t i o n m a t r i x f o r m o d e l v a r i a b l e s

I E N V

F E P F

F E P R

I S O C

F E M P

F C O M

F S U P

M V

B V

N I

P a n e l A : D e s c r i p t i v e s t a t i s t i c s

M e a n

3 . 7 6

2 . 6 6

3 . 3 9

3 . 7 7

2 . 8 9

2 . 9 0

1 . 9 7

1 . 0 5

0 . 3 7

0 . 0 2

M e d i a n

4 . 0 0

3 . 0 0

4 . 0 0

4 . 0 0

3 . 0 0

3 . 0 0

1 . 0 0

0 . 6 8

0 . 3 7

0 . 0 1

S D

2 . 1 2

1 . 6 4

1 . 8 9

2 . 2 1

1 . 4 4

1 . 3 4

1 . 3 7

1 . 2 8

0 . 2 3

0 . 0 3

M i n

1 . 0 0

1 . 0 0

1 . 0 0

1 . 0 0

1 . 0 0

1 . 0 0

1 . 0 0

0 . 0 0

-

3 . 5 5

- 0 . 6 0

M a x

7 . 0 0

7 . 0 0

7 . 0 0

7 . 0 0

7 . 0 0

7 . 0 0

7 . 0 0

3 3 . 0 6

1 . 0 3

1 . 0 8

P a n e l B : C o r r e l a t i o n m a t r i x

I E N V

1 . 0 0

F E P F

- 0 . 2 7 * * *

1 . 0 0

F E P R

- 0 . 4 2 * * *

0 . 7 8 * * *

1 . 0 0

I S O C

0 . 6 6 * * *

- 0 . 1 8 * * *

- 0 . 3 0 * * *

1 . 0 0

F E M P

- 0 . 2 2 * * *

0 . 6 5 * * *

0 . 6 2 * * *

- 0 . 1 3

* * *

1 . 0 0

F C O M

- 0 . 1 2 * * *

0 . 4 0 * * *

0 . 4 0 * * *

- 0 . 1 2

* * *

0 . 5 8 * * *

1 . 0 0

F S U P

0 . 1 0 * * *

0 . 4 0 * * *

0 . 3 7 * * *

- 0 . 0 4

* * *

0 . 5 3 * * *

0 . 4 4 * * *

1 . 0 0

M V

0 . 0 4 * * *

- 0 . 1 4 * * *

- 0 . 1 0 * * *

- 0 . 1 1

* * *

- 0 . 1 2 * * *

0 . 0 1

- 0 . 0 1

1 . 0 0

B V

- 0 . 1 8 * * *

- 0 . 0 7 * * *

0 . 0 0

- 0 . 2 7

* * *

- 0 . 1 5 * * *

- 0 . 1 0 * * *

- 0 . 1 1 * * *

0 . 3 6 * * *

1 . 0 0

N I

- 0 . 0 2 * * *

- 0 . 0 3 * * *

0 . 0 0

- 0 . 1 0

* * *

- 0 . 0 1

0 . 0 2 * *

0 . 0 5 * * *

0 . 3 6 * * *

0 . 2 0 * * *

1 . 0 0

L O

0 . 0 1 *

0 . 0 2 * *

0 . 0 1 *

0 . 0 0

0 . 0 1

0 . 0 1

0 . 0 2 * *

0 . 0 1 *

0 . 0 2 * *

0 . 6 7 * * *

B V I

- 0 . 1 4 * * *

0 . 2 0 * * *

0 . 1 9 * * *

- 0 . 0 9

* * *

0 . 2 4 * * *

0 . 0 5 * * *

0 . 1 8 * * *

0 . 0 3 * * *

0 . 2 6 * * *

0 . 1 3 * * *

B V L

- 0 . 1 3 * * *

0 . 0 2 * *

0 . 0 8 * * *

- 0 . 1 0

* * *

- 0 . 2 1 * * *

- 0 . 2 7 * * *

- 0 . 1 8 * * *

0 . 0 1

0 . 3 5 * * *

0 . 0 1 *

N I I

- 0 . 0 3 * * *

0 . 0 8 * * *

0 . 0 8 * * *

- 0 . 0 5

* * *

0 . 1 0 * * *

0 . 0 2 * *

0 . 1 0 * * *

0 . 1 5 * * *

0 . 0 3 * * *

0 . 6 5 * * *

N I L

- 0 . 0 4 * * *

- 0 . 0 3 * * *

0 . 0 2 * *

- 0 . 0 4

* * *

- 0 . 1 1 * * *

- 0 . 0 8 * * *

- 0 . 0 5 * * *

0 . 1 1 * * *

0 . 1 7 * * *

0 . 3 3 * * *

L O I

0 . 0 2 * *

- 0 . 0 2 * *

- 0 . 0 1 *

0 . 0 0

- 0 . 0 2 * *

0 . 0 2 * *

0 . 0 0

0 . 0 0

0 . 0 1 *

0 . 3 6 * * *

L O L

0 . 0 2 * *

- 0 . 0 2 * *

- 0 . 0 2 * * *

0 . 0 1

0 . 0 2 * *

0 . 0 6 * * *

0 . 0 3 * * *

0 . 0 3 * * *

0 . 0 0

0 . 2 5 * * *

S G

0 . 0 0

- 0 . 0 4 * * *

- 0 . 0 4 * * *

- 0 . 0 1

*

- 0 . 0 4 * * *

- 0 . 0 1

- 0 . 0 3 * * *

0 . 0 5 * * *

0 . 0 2 * * *

0 . 0 3 * * *

L E V

- 0 . 0 9 * * *

0 . 0 3 * * *

0 . 0 2 * * *

- 0 . 0 1

0 . 0 7 * * *

0 . 0 8 * * *

- 0 . 0 1

- 0 . 1 7 * * *

-

0 . 5 1 * * *

- 0 . 1 2 * * *

l n T A

0 . 1 5 * * *

0 . 2 7 * * *

0 . 1 7 * * *

0 . 2 7 * * *

0 . 3 1 * * *

0 . 2 4 * * *

0 . 2 7 * * *

- 0 . 4 8 * * *

-

0 . 4 5 * * *

- 0 . 1 9 * * *

L O

B V I

B V L

N I I

N I L

L O I

L O L

S G

L E V

l n T A

P a n e l A : D e s c r i p t i v e s t a t i s t i c s

M e a n

0 . 0 0

0 . 0 9

0 . 1 0

0 . 0 1

0 . 0 0

0 . 0 0

0 . 0 0

8 . 8 6

0 . 2 6

1 6 . 6 8

M e d i a n

0 . 0 0

0 . 0 0

0 . 0 0

0 . 0 0

0 . 0 0

0 . 0 0

0 . 0 0

6 . 2 7

0 . 2 3

1 6 . 4 3

S D

0 . 0 2

0 . 1 9

0 . 2 1

0 . 0 2

0 . 0 1

0 . 0 1

0 . 0 1

6 4 . 4 6

0 . 1 9

1 . 6 5

M i n

- 0 . 6 0

- 3 . 5 5

- 0 . 4 9

- 0 . 4 9

- 0 . 4 7

- 0 . 4 9

- 0 . 4 7

- 3 6 9 1 . 9 3

0 . 0 0

1 2 . 2 2

M a x

0 . 0 0

0 . 9 9

0 . 9 8

1 . 0 8

0 . 2 2

0 . 0 0

0 . 0 0

4 8 0 5 . 4 2

3 . 9 7

2 5 . 3 5


1 3


10/27

the third step) or a Cook’s measure of distance greater than

12/ n (8/ n, 4/ n) with n as the number of observations, we

obtain the coefficients in Column B of Table 5. Now, all

coefficients have economically sound estimates.

After correcting for outliers, we end up with a sample of

16,619 observations from 1,993 firms. The entire sample

reduction process from missing accounting or market data

to the removal of outliers is reported in Table 6.

Regression Models

To test for the effects of the various levels and dimensions of

corporate sustainability on firm value, the market value of a

firm’s equity is regressed on its GES ratings and all of the

independent variables in the reference model, which are now

interpreted as control variables and summarized under CTRL .

T a b l e 4

c o n t i n u e d L

O

B V I

B V L

N I I

N I L

L O I

L O L

S G

L E V

l n T A

P a n e l B : C o r r e l a t i o n m a t r i x

L O

1 . 0 0

B V I

- 0 . 0 1

1 . 0 0

B V L

0 . 0 2 * *

- 0 . 2 3 * * *

1 . 0 0

N I I

0 . 2 7 * * *

0 . 3 9 * * *

- 0 . 1 2 * * *

1 . 0 0

N I L

0 . 2 1 * * *

- 0 . 1 1 * * *

0 . 4 8 * * *

- 0 . 0 6 * * *

1 . 0 0

L O I

0 . 5 3 * * *

- 0 . 1 0 * * *

0 . 0 4 * * *

0 . 4 6 *

* *

0 . 0 2 * *

1 . 0 0

L O L

0 . 3 4 * * *

0 . 0 4 * * *

- 0 . 1 2 * * *

0 . 0 2 *

* *

0 . 5 1 * * *

- 0 . 0 1

1 . 0 0

S G

0 . 0 1

0 . 0 0

- 0 . 0 1

0 . 0 1

0 . 0 2 * * *

0 . 0 2 * * *

0 . 0 0

1 . 0 0

L E V

- 0 . 0 6 * * *

- 0 . 1 2 * * *

- 0 . 1 6 * * *

0 . 0 0

- 0 . 0 9 * * *

- 0 . 0 5 * * *

- 0 . 0 2 * * *

0 . 0 1

1 . 0 0

l n T A

0 . 0 6 * * *

- 0 . 1 0 * * *

- 0 . 2 4 * * *

- 0 . 1 1 * * *

- 0 . 1 2 * * *

0 . 0 4 * * *

0 . 0 4 * * *

- 0 . 0 1

0 . 0 8 * * *

1 . 0 0

A l l fi n a n c i a l v a r i a b l e s a r e s c a l e d b y t o t a l a s s e t s

A s t e r i s k s i n d i c a t e s t a t i s t i c a l s i g n i fi c a n c e a t t h e 1 % ( * * * ) , 5 % ( * * ) a n d 1 0 %

( * ) l e v e l s

Table 5 Regression of market value on controls before and after

removing outliers

Variables Column A: before

removing outliers

Column B: after

removing outliers

BV 1.3808*** 0.9431***

(0.1020) (0.0398)

NI 11.0762*** 8.7503***

(0.5773) (0.2633)

LO -11.5836*** -8.6348***

(0.7280) (0.3154)

BVI -1.6401*** -0.0919*

(0.1234) (0.0487)

BVL -1.7591*** -0.2674***(0.1406) (0.0526)

NII -6.8652*** -6.2689***

(0.6821) (0.3336)

NIL -6.7727*** -5.9098***

(0.9242) (0.3874)

LOI 5.9914*** 5.4080***

(0.9939) (0.4556)

LOL 7.3164*** 5.3147***

(1.4505) (0.5493)

SG 0.0093 0.0019

(0.0077) (0.0034)

LEV 0.2713*** -0.2193***

(0.0710) (0.0297)

lnTA -0.4581*** -0.2523***

(0.0085) (0.0034)

Observations 18,676 16,619

Firms 2,266 1,993

Adj. R2 0.2321 0.5135

Standard errors displayed in parentheses. Asterisks indicate statistical

significance at the 1 % (***), 5 % (**) and 10 % (*) levels. Variables

are defined as in Table 3


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Since the correlation matrix in Table 4 and variance

inflation indicators calculated on the basis of a model that

includes all sustainability proxies simultaneously indicate

strong collinearity between the sustainability proxies,

Regression (1) estimates the effects separately for each

corporate sustainability dimension represented by FSUS .

Nevertheless, the corresponding risk rating at the industry

level, represented in the model by ISUS , is always included

because omittance would induce bias as it correlates with

the corporate sustainability proxy.

MV it ¼ b0 þ b1 ISUS it þ b2FSUS it þ b3CTRL it

þ d t þ gi þ it ð1Þ

If, as stated by Hypothesis 3, the financial crisis brought

about a change in the perception of corporate sustainability

or industry environmental and social risks, the regression

coefficient of the sustainability proxies in Model (1) should

have shifted with the onset of the crisis. To capture this

effect, the 16 semiannual cross sections in the sample are

divided into twoparts, oneranging from the endof 2003–mid

2008 and the other ranging from the end of 2008–mid 2011.The first part hence contains all observations before Lehman

Brothers’ Chapter 11 filing, whilst the second contains all

observations after this triggering event at the peak of the

financial crisis. This partitioning enters Model (2) in the form

of a dummy variable CRISIS that takes the value of 1 if the

observation is from the later part and zero otherwise. CRISIS

interacts with the sustainability proxies, and the coefficients

on the interactions measure the crisis-induced shift in the

marginal effect of sustainability on the market value of firms.

MV it ¼ b0 þ b1 ISUS it þ b2CRISIS t ISUS it þ b3FSUS it

þ b4CRISIS t FSUS it þ b5CTRL it þ d t þ gi þ it :

ð2Þ

The coefficients b1 and b3 in Model (2) capture the mar-

ginal effects under the condition that CRISIS is zero. The

estimates for b1 ? b2 and b3 ? b4 measure the marginal

effects when CRISIS is one. Positive estimates for the

coefficients b2 and b4 would indicate a shift to a more

positive perception of sustainability, compared to before

the crisis. Note that no intercept dummy for the crisis is

included since it would be perfectly collinear with the time

dummies d t .

The interaction effects of sustainability at the firm and at

the industry level are tested by a moderated regression

analysis, which includes interaction terms of the explana-

tory variables.

MV it ¼ b0 þ b1 ISUS it þ b2CRISIS t ISUS it þ b3FSUS it

þ b4CRISIS t FSUS it þ b5 ISUS it FSUS it

þ b6CRISIS t ISUS it FSUS it þ b7CTRL it þ d t þ gi þ it :

ð3Þ

In moderated regression analysis with continuous vari-

ables, as in Model (3), the interpretation of the coefficient

substantially differs from that in purely additive multiple

linear regression models. The coefficient b5 captures the

contingent effects of the research interest variables on each

other’s coefficients before the crisis. The coefficient b6

Table 6 Sample reductionDate GES

Tape

Missing accounting

or market data

Sample before

removing outliers

Statistical

outliers

Sample after

removing outliers

End of Q04/2003 890 233 657 46 611

End of Q02/2004 1,000 297 703 94 609

End of Q04/2004 994 248 746 59 687

End of Q02/2005 1,000 292 708 59 649

End of Q04/2005 1,000 205 795 80 715End of Q02/2006 999 195 804 74 730

End of Q04/2006 1,000 128 872 75 797

End of Q02/2007 1,002 162 840 65 775

End of Q04/2007 1,883 254 1,629 255 1,374

End of Q02/2008 1,941 267 1,674 213 1,461

End of Q04/2008 1,696 150 1,546 172 1,374

End of Q02/2009 1,676 142 1,534 80 1,454

End of Q04/2009 1,659 93 1,566 112 1,454

End of Q02/2010 1,658 103 1,555 113 1,442

End of Q04/2010 1,655 60 1,595 164 1,431

End of Q02/2011 1,679 227 1,452 396 1,056

Total 21,732 3,056 18,676 2,058 16,619


1 3


12/27

captures this effect when CRISIS is one (Dawson and

Richter 2006). However, the constitutive elements, which

are the terms without interactions, cannot be directly

interpreted in a meaningful sense. The term b3 FSUS it , for

instance, measures the marginal effect of a one-unit

increase in corporate sustainability on the market value of a

firm conditional on CRISIS and ISUS being zero. Whilst the

interpretation of the first condition is straightforward(‘‘before the crisis’’), the second is not, in particular when

the sample consists of no observations with ISUS being

zero (Brambor et al. 2006). Therefore, to draw inferences

from Model (3), we apply a plotting technique that depicts

the marginal effect of corporate sustainability on the

market value of a firm conditional on the level of industry

sustainability.

Endogeneity and Method of Estimation

The degree to which a firm follows the concept of sus-

tainability is at the discretion of the management, and thenet benefits that arise from a given level of corporate

sustainability may depend on size, which is proxied by

market capitalization. Therefore, the regression models

potentially suffer from endogeneity due to reverse causal-

ity. Other potential sources of endogeneity are measure-

ment errors in the sustainability proxies and omitted

variables. In these cases, the coefficient estimates are

biased and the results of the empirical analysis are unreli-

able (Wooldridge 2010, Chap. 8). To mitigate the problem

of endogeneity, we estimate each model using an instru-

ment variable approach.

Since it is difficult to find valid and relevant instrumentsfor corporate sustainability in a price-level regression, we

do not claim to have found perfect instruments, but rather

the best available instruments. For the environmental

dimensions of corporate sustainability, these are the 6-digit

GICS industry averages of the potentially endogenous

variables calculated without the instrumented observation

and the industry average of energy consumption scaled by

sales. The proxies for corporate sustainability in the social

dimension are instrumented by their industry averages and

the industry average of the total accidents per employees

scaled by sales. Using industry averages as instruments

solves the problem of pure reverse causality that is not the

result of omitted variables because a firm’s market valua-

tion is unlikely to affect the level of corporate sustain-

ability of other firms in the same industry. The calculation

procedure also largely averages out random measurement

errors. However, there can be industry-specific factors that

affect both valuation of the firms and their chosen level of

the corporate sustainability. If these effects are constant

over time, they will be mitigated by fixed effects estima-

tion. If they vary over time, they will prevent the

instruments from overcoming endogeneity. Whether an

instrumental variable approach with semi-endogenous

instruments is preferable to not instrumenting depends on

the unknown correlations between the instruments and the

error term, between the endogenous regressors and the

instruments, and between the endogenous regressors and

the error term (Larcker and Rusticus 2010). Therefore, we

report the results for both the instrumented and non-instrumented models. All the models in this study are

estimated with the two-step GMM estimator that provides

efficient estimates and standard errors that are robust to

arbitrary heteroskedasticity and intra-firm correlation of the

residuals.

Results

Regression Results

Tables 7 and 8 show the regression results for Model (1).At the industry level, in all Specifications (a)–(e), the

perception of sustainability in the environmental and social

dimensions is significantly negative at the 1 % level. This

implies that a broader investor base prefers to invest in

environmentally and socially riskier industries. At the firm

level, there is only weak statistical evidence of a negative

perception of sustainability in the community dimension

when instrument variable estimation is applied (Table 8).

Thus, Model (1) provides no substantial support for

Hypothesis 1, but does provide evidence for Hypothesis 2

in a negative direction.

In Model (2), the impact of the financial crisis on the

perception of sustainability is included in the form of

interaction between a dummy variable CRISIS and the

sustainability proxies from GES. Tables 9 and 10 show

the regression results for the estimation of this model. At the

industry level, Specifications (a) and (b) in both the instru-

mented and non-instrumented regression measure a signif-

icantly positive effect of the crisis on the perception of lower

environmental risks, the latter being equivalent to higher

values of the rating score IENV . At first glance, the results

are inconclusive concerning the effect of the crisis on the

perception of industry-related social risks. In Specification

(c), the impact is significantly positive, whereas in Specifi-

cation (e), it is negative. The divergence of these results can

be attributed to a substantial sample reduction of almost five

thousand observations due to missing values of the variable

FSUP. However, when the analysis is conducted with a

multiply imputed dataset or with ISUS and controls as

explanatory variables alone (not reported), a statistically

significant positive impact of the crisis is measured.

At the firm level, the results reported in Table 9 show a

significantly positive change in the perception of


1 3


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environmental performance and corporate sustainability in

the employee dimension. The instrument variable approach

indicates that this effect also exists for the community

dimension, although the level of significance is weak

(Table 10). Thus, we note that the model estimates provide

support for Hypothesis 3. The financial crisis has had a

positive effect on the perception of corporate sustainability

in specific dimensions. Model (2) also provides new

estimates for the perception of corporate sustainability

before the financial crisis. The coefficients of environmental

performance and sustainability in the employee dimension

are negative when CRISIS is zero. This is true for the

community dimension when instrument variable regression

is applied. Hence, when the variable CRISIS is included,

there is empirical evidence for the materiality of some of the

corporate sustainability dimensions in firm valuation.

Table 7 Regression results for Model (1)

Variables Hyp. Exp. (a) (b) Variables Hyp. Exp. (c) (d) (e)

IENV H2 ? -0.0329*** -0.0332*** ISOC H2 ? -0.0302*** -0.0228*** -0.0208***

(0.0044) (0.0044) (0.0048) (0.0052) (0.0057)

FEPF H1 ? -0.0061 FEMP H1 ? -0.0036

(0.0038) (0.0040)

FEPR H1 ? -0.0049 FCOM H1 ? -0.0011

(0.0042) (0.0045)

FSUP H1 ? 0.0018

(0.0055)

BV ? 0.9552*** 0.9566*** BV ? 0.9388*** 0.9451*** 0.9675***

(0.0919) (0.0917) (0.0915) (0.0972) (0.1006)

NI ? 8.7162*** 8.7030*** NI ? 8.6904*** 8.6614*** 8.4205***

(0.7098) (0.7107) (0.6970) (0.6819) (0.6652)

LO - -8.6282*** -8.6188*** LO - -8.5906*** -8.5593*** -8.3554***

(0.7626) (0.7637) (0.7494) (0.7343) (0.7137)

BVI -0.1025 -0.1076 BVI -0.0784 -0.0240 -0.0411

(0.1181) (0.1181) (0.1215) (0.1293) (0.1318)

BVL -0.2752** -0.2750** BVL -0.2512** -0.2986** -0.3351***

(0.1167) (0.1164) (0.1187) (0.1248) (0.1271)

NII -6.2491*** -6.2401*** NII -6.1640*** -5.8863*** -5.2990***

(0.8034) (0.8027) (0.7963) (0.8010) (0.8147)

NIL -5.9537*** -5.9317*** NIL -5.9008*** -5.8013*** -4.9586***

(0.8464) (0.8479) (0.8375) (0.8312) (0.8557)

LOI 5.4559*** 5.4533*** LOI 5.4156*** 4.8546*** 4.2495***

(0.9056) (0.9052) (0.9021) (0.9185) (1.0200)

LOL 5.3637*** 5.3473*** LOL 5.3260*** 5.0148*** 4.0153***

(0.9535) (0.9551) (0.9441) (0.9419) (0.9726)

SG 0.0018 0.0016 SG 0.0020 0.0040 0.0225*

(0.0029) (0.0029) (0.0029) (0.0030) (0.0127) LEV -0.1981*** -0.1968*** LEV -0.1953*** -0.1541*** -0.1619***

(0.0532) (0.0531) (0.0525) (0.0550) (0.0622)

lnTA -0.2522*** -0.2521*** lnTA -0.2523*** -0.2528*** -0.2614***

(0.0057) (0.0057) (0.0057) (0.0059) (0.0064)

Time dummies YES YES Time dummies YES YES YES

Firm dummies YES YES Firm dummies YES YES YES

Observations 16,556 16,556 Observations 16,555 13,890 11,590

Firms 1,968 1,968 Firms 1,968 1,781 1,399

Adj. R2

0.5202 0.5201 Adj. R2

0.5193 0.5334 0.5465

Heteroskedasticity and cluster robust standard errors from GMM estimation are displayed in parentheses. Asterisks indicate statistical signifi-

cance at the 1 % (***), 5 % (**) and 10 % (*) levels. Variables are defined as in Tables 2 and 3


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The coefficients estimated in Model (2) measure the

perception of sustainability before the crisis and the change

induced by the crisis. To measure the marginal effect of

sustainability on shareholder value after September 2008,

we calculate the sum of the coefficient before the crisis and

the coefficient of the crisis interaction term. The standard

Table 8 Instrument variable regression results for Model (1)

Variables Hyp. Exp. (a) (b) Variables Hyp. Exp. (c) (d) (e)

IENV H2 ? -0.0390*** -0.0376*** ISOC H2 ? -0.0383*** -0.0270*** -0.0295***

(0.0049) (0.0050) (0.0053) (0.0053) (0.0070)

FEPF H1 ? -0.0288 FEMP H1 ? -0.0140

(0.0449) (0.1309)

FEPR H1 ? -0.0068 FCOM H1 ? -0.0694**

(0.0290) (0.0335)

FSUP H1 ? 0.1004

(0.1041)

BV ? 0.9475*** 0.9611*** BV ? 0.8782*** 0.8223*** 0.8505***

(0.1055) (0.1022) (0.1304) (0.1108) (0.1124)

NI ? 8.0837*** 8.1269*** NI ? 7.7301*** 7.8526*** 7.8451***

(0.6807) (0.6891) (0.6466) (0.6467) (0.7046)

LO – -7.9594*** -8.0296*** LO – -7.5834*** -7.7448*** -7.7841***

(0.7446) (0.7447) (0.7051) (0.7099) (0.7727)

BVI -0.1369 -0.1484 BVI -0.0341 0.0226 -0.0186

(0.1243) (0.1277) (0.1641) (0.1458) (0.1403)

BVL -0.2679** -0.2778** BVL -0.1903 -0.1643 -0.1620

(0.1247) (0.1233) (0.1343) (0.1402) (0.1427)

NII -5.5598*** -5.6712*** NII -4.8914*** -5.1992*** -4.5043***

(0.7954) (0.7809) (0.8020) (0.7872) (0.8182)

NIL -5.4538*** -5.4871*** NIL -4.4146*** -4.5160*** -4.6910***

(0.8305) (0.8576) (1.1290) (0.8449) (1.0117)

LOI 4.7348*** 4.8701*** LOI 3.8665*** 4.1693*** 3.0369***

(0.9067) (0.8825) (0.9367) (0.9176) (1.0373)

LOL 4.7313*** 4.8200*** LOL 3.4617*** 3.5938*** 3.7626***

(0.9470) (0.9644) (1.2201) (0.9727) (1.1615)

SG 0.0012 0.0012 SG 0.0002 0.0016 0.0076

(0.0028) (0.0029) (0.0039) (0.0032) (0.0154) LEV -0.2329*** -0.2229*** LEV -0.1966*** -0.1660*** -0.1873**

(0.0604) (0.0563) (0.0578) (0.0619) (0.0728)

lnTA -0.2487*** -0.2493*** lnTA -0.2488*** -0.2508*** -0.2576***

(0.0059) (0.0058) (0.0058) (0.0060) (0.0068)

Time dummies YES YES Time dummies YES YES YES

Firm dummies YES YES Firm dummies YES YES YES

Observations 15,121 15,121 Observations 13,284 11,638 9,742

Firms 1,896 1,896 Firms 1,789 1,640 1,294

Adj. R2

0.5227 0.5257 Adj. R2

0.5256 0.5163 0.5134

Kleibergen–Paap (KP) 17.1523 40.4726 KP 4.5025 53.0325 5.3760

p-value (KP) 0.0002 0.0000 p-value (KP) 0.1050 0.0000 0.0680

Hansen-J 0.0014 0.3533 Hansen-J 0.4660 0.1843 0.1641

p-value (J) 0.9710 0.5538 p-value (J) 0.4950 0.6686 0.6859

Heteroskedasticity and cluster robust standard errors from GMM estimation are displayed in parentheses. Asterisks indicate statistical signifi-

cance at the 1 % (***), 5 % (**) and 10 % (*) levels. Variables are defined as in Tables 2 and 3. The Kleibergen-Paap (KP) Wald F -statistic tests

the relevance of the instruments. Its null hypothesis is that the instruments are uncorrelated with the endogenous regressors (Kleibergen and Paap

2006). Hansen-J is a test of the over-identifying restrictions. Its null hypothesis is that the instruments are exogenous (Hansen 1982)


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T a b l e 9

R e g r e s s i o n r e s u l t s f o r M o

d e l ( 2 )

V a r i a b l e s

H y p .

E x p .

( a )

( b )

V a r i a b l e s

H y p .

�

world capital market's perception

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