The Relationship between Stock Price and Social Responsibility of Company - Essay Example

? Introduction Part (The relationship between stock price and company's social responsibility) Contents Contents 2 Background and history 3 Rational for the research 4 Findings on Corporate social responsibility and stock prices 5 Aims and objectives 6 Research questions 7 References 8 Background and history Corporate social responsibility has attained significance over the past few decades as the investors are increasingly aware of the ethical, social and environmental responsibilities fulfilled by the companies. The companies benefit from the societies in which they operate by the use of natural resources, manpower, etc. It is also the responsibility of the companies to give back the benefits to the societies in which they exist. Investors highly value the social performance of the companies as they create an impact on the long term sustainability of the companies. Over the last two decades, the different rating agencies have focussed on developing innovative methodologies for evaluation of social performance of the companies. The evaluation is important as the non-financial performance of the companies like corporate social responsibility reflects the strategic policies of the company gives an insight of the future course of action and business of the companies. Undertaking corporate social responsibility leads to spread of information in the market that the company is looking to maintain a stable environment and reduce the damages caused to the society as an effect of its operations. Thus the information flow to the market gives an understanding of the long term plans and sustainability of the companies. As a result of this flow of information, the decision of the market investors, suppliers, creditors, customers would vary in terms of entering into a relationship with the company. The activities of corporate social responsibility also pass the information on the profitability, retained earnings, capability to engage in non-financial performance. Due to this information, the investors would decide in favour of investment in the stocks of the companies. The creditors would feel safe to provide credit offerings to such companies and the suppliers would allow more days payable to the companies. The goodwill developed due to the social performance of the companies would influence customers in taking their products and services. All these information and subsequent effects in investment decisions of the stakeholders create an impact of the prices of stocks and shares of the companies (Celliera and Chollet, 2010, p.1). The stock prices would fluctuate in anticipation of good financial health and sustainability of the companies in long run which would be interpreted from the information derived out of their social performance. Thus the stock prices of the companies carry an important relationship with the company’s social responsibility. Rational for the research The announcements and disclosure of corporate social responsibility has shown a proportional impact on the stock prices of the companies over the years. The degree of social performance delivered by the companies could be understood from the ratings on corporate social responsibility. The rational of this research is to find significance of corporate social responsibility by interpreting the effects of CSR ratings on the stock prices of the companies. A company rated highly on its social performance would give rise to investor reactions and these reactions would influence the investment decisions. Through research, the change in prices of the stock could be compared to the change in responsibility on social actions performed by the companies. The effect on stock prices could be determined to check whether the changes in stock price are directly proportional to the increase or decrease in social performance. Social performance may also be viewed by some sections of the investor as not contributing to maximization of their financial wealth in the long run. The research would also serve to provide an understanding as to what percentage of investors on an average do not consider ethical and social performance of companies in their investment decision making. Thus the reason of undertaking research on establishing the relationship between corporate social performance and stock prices of companies is to establish the importance of social performance of companies and provide an insight of the effect on its stock prices leading to increased valuation of the companies and their profitability and sustainability in the long run. Findings on Corporate social responsibility and stock prices A couple of findings on corporate social responsibility and stock prices of companies have been given below. The findings indicate the effect of social performance of the companies on their stock prices. An introspection on the social performance of TATA GROUP over the years have shown that the group has emphasized in contributing through social activities like promotion of self help group, projects on economic empowerment of the society, projects on health care improvement for the people, etc. By conducting these activities aimed at uplift of the society, protection of the environment, TATA GROUP has been able to gain competitive advantage in the market through its acceptability as a social market player and has a developed confidence and trust among its employees, suppliers, creditors, customers and all other stakeholders. The group due to this have been able to increase its profitability over the years and has been able to maintain a sustainable business. The information flown to the market as a result of its sustainability and long term policies on social performance have led to the increase in stock prices of TATA Group. Another case of British Petroleum was found in which the stock prices of the company fell as result of an operational accident of the company and its adverse effects borne by the society and environment. The incident of oil spill in British Petroleum happened in April, 2010 for which the marine environment was badly affected and it caused an environmental hazard. The community did not take this incident and its damages on the environment in acceptable terms which led to the flow of information on the social risk involved in the operations of the company. This influenced the decision of investors in the competitive market of reducing interest in the stocks of British petroleum in anticipation of opportunity cost of investment and future risk. These factors led to the fall in share prices from $59.5 in April, 2010 to $28.9 by the end of June, 2010. The stock prices in April, 2010 were reduced to half of the prices held before the oil spill incident in British Petroleum. Aims and objectives The aim of research on social performance of companies and its stock price during the same period is to establish the impacts of CSR ratings on the prices of stock of the companies. The objective is to establish the significance of protecting the society and environment in which the business exists and also the stakeholders co-exist. The research also aims at finding the nature of investors whether they are eco-friendly. This fulfils the objective to find the sensitivity of the investors in terms of their reaction to the activities on social performance undertaken by the companies. The sensitivity of the investors would influence their investment decision on the stocks of the companies and this would create an impact of the stock prices and company valuations. The sensitivity of the investors indicates the way in which they perceive the social performance of the companies. The degree of acceptability of the investors towards a non-financial performance like social responsibility could also be found. A hypothesis on the investor reactions to the social performance of the companies could be framed for the research. The objective of the research would be fulfilled if the findings from the stock price as an effect of the social performance of companies justifies the hypothesis framed for the research. Research questions Keeping in mind the research objectives, the relationship between the social performance of the companies and the changes in stock prices could be understood by obtaining data on the research questions and undertaking a subsequent analysis involving a qualitative and quantitative tool. The suitability of the collected data would depend on the appropriateness of the research questions developed. A set of research question in order to address the impact of corporate social actions on the stock prices of the companies is given below. The responses to the research questions could be used for analysis in order to derive a relationship between the social actions of the companies and their stock prices. Sl. Research Questions 1 Is it strategically correct for companies to invest in undertaking corporate social responsibility? 2 Can Corporate social responsibility be considered a key asset to the business? 3 Is the cost justified for undertaking social performance by companies? 4 Does performance of social actions reduce long term costs of the company? 5 Does performance of social action by companies impact the profitability? 6 Does performance of social action lead to short term growth of companies? 7 Does performance of social action lead to long term growth of companies? 8 Is the brand image of a company dependent on its social responsibilities? 9 Is competitive advantage proportional to social responsibilities of companies? 10 Does social performance give an idea of business sustainability? 11 Does performance of social action by companies influence the stakeholders? 12 Does valuation of companies depend on their social performance? 13 Does stock price fluctuate on the basis of information of social actions by the companies? 14 Is stock price correct representation of impacts of social performance of companies? References Celliera, A. and Chollet, P. 2010. The Impact of Corporate Social Responsibility on Stock Prices: An Event Study of Vigeo Rating Announcement. [Pdf]. Available at: http://www.kadinst.hku.hk/sdconf10/Papers_PDF/p232.pdf. [Accessed on 20 April, 2013]. Read More