The Impact of Environmental Corporate Social Responsibility on Stock Prices in UK - Research Paper Example

Table of Contents

Abstract2

Introduction4

Literature review5

Research Methodology7

Conclusions10

• Abstract

This is study about the impact of environmental corporate social responsibility on the entertainment industry in the UK. The research aimed at determining; whether environmental protection awareness of shareholders has an effect on the stock prices of the Disney Company.; the existing theories to get hypotheses on what the relationship between environmental CSR and stock prices may have in the past; whether shareholders reward or penalize corporations for their environmental behaviour and how these rewards and punishments change in the past, and some responsible an irresponsible behaviour of the aim industry (or company), then analyse how the stock price reacts during the period when the events happen. The research employed the event study methodology. The study findings indicated that there is a relationship between environmental social responsibility and the stock prices of organisations.

• Introduction

An increase in corporate social responsibility has been on the rise in the past ten years. The fact that managers of various companies including the entertainment industry are willing to increase their budgets to enhance social responsibilities is an indication that there are benefits that come along with it. The need for established social responsibilities and ethical frameworks has become a norm in the current business world. The prominence of such activities is an indication that the perception of many managers has shifted from it being an unnecessary addition to a critical business function. This study reiterates that enhanced corporate social responsibility may result into increased stock returns in two ways. Either directly through improvement in productivity or reduction in costs, or indirectly through the overall improvement in an organisations standing that makes it appealing for analysts to recommend its stocks and investors willing to stay in it irrespective of the organisations costs and revenues ( Lee, 2009).

Originally the focus on CRS was on the social aspect (for example paying fair wages to employees, community based programs), however a new focus has emerged – that’s the inclusion of environmental responsibility (for example reduction in smoke emissions). Just as Zacchaeus et al (2014) argue, the environment aspects of CSR play a vital part in the corporate landscape. The acknowledgement of the importance of environmental CSR is steadily getting the attention of academicians. Much of the documented literature review how corporate social responsibility impacts on corporate performance. Awhile this is the case very little attention has been given to the impact of environmental CSR on stock prices. In this study the researcher will examine the impact of environmental corporate social responsibility on stock prices in the entertainment industry using the case of Disney. The researcher endeavours;

• To examine whether environmental protection awareness of shareholders has an effect on the stock prices of the Disney Company. 
• To review the existing theories to get hypotheses on what the relationship between environmental CSR and stock prices may have in the past.
• To investigate whether shareholders reward or penalize corporations for their environmental behaviour and how these rewards and punishments change in the past
• To identify some responsible an irresponsible behaviour of the aim industry (or company), then analyse how the stock price reacts during the period when the events happen.

• Literature review

Environmental issues can have adverse effects on stock prices of a corporation. In this study the researcher will use existing literature to derive a hypothesis on the evolvement of a relationship between environmental corporate social responsibility and stock prices in the entertainment industry. Thereafter the researcher will establish whether shareholders reward or penalize corporations for their environmental behaviour and how these rewards and punishments change in the past. Earlier scholars termed CSR as an additional cost that would reduce the revenue of an organisation hence violating the contractual relationship with shareholder (Friedman, 1970).

The literature that emerged later on challenged Friedman’s view and reiterated that you can compare pollution and profitability because they are not mutually exclusive. Friedman’s argument was that, before engaging in environmental CSR the interest of all shareholders should be considered. To him CRS was an additional cost that would reduce organisational revenue hence impacting negatively on the relationship with shareholders. Other scholars like (Porter, 1991; Clelland et all, 2000; Rusinko, 2007) had a contrary view. According to them pollution is costly and environmental CSR programmes increases an organisations competitiveness. To them organisations that spare resources so as to use in environmental awareness are likely to gain competitive advantage and as a result achieve higher profits. It is against this literature background that the researcher hypothesis a positive relationship between environmental CSR and stock prices. The hypothesis is hereby stated as follows;

Shareholders react positively to the announcement of eco-friendly activities

This study is conceptually premised on the view that the environment is a resource. This view is dependent on ether internal or internal pressures. Internal pressures imply that how the organisation scores in terms of environmental concerns and strengths (Lee, 2009). For instance companies that are doing ell as far as environmental awareness is concerned are likely to benefit less should new green initiative be introduced as compared to those that have serious environmental concerns. Just as Zacchaeus et al (2014) argues shareholders of organisations that have strong environmental performance won’t be moved much by news of eco-friendly initiatives. This is not the case with shareholders of organisations that perform poorly as far as environmental issues are concerned.

External pressure usually comes from the media (The Economist, 2011), environment regulators (Allan and Shonnard, 2011) and even customers. According to Donato and Izzo (2012) recently many organisations have been receiving external pressure demanding that they behave responsibly towards the environment.Notably external pressure has been known to have an impact on the value of environmental social corporate responsibility. Just as Barnnet and King (2008) note, in case of high external pressures, shareholders reaction to eco harmful news is most likely to be negative. Such news is likely to shake the contractual relationship with shareholders, impact adversely on an organisations reputation and even scare away customers. In summary, when adopting green initiatives becomes the norm, then eco-friendly behaviour is welcome across many companies and consequently shareholders will most likely to punish their organisations for eco harmful behaviour. This in turn has some effects on the stock prices. Lee (2009) reiterates that when every other company is adopting green initiatives making it a norm everywhere, it then reduces the chances of shareholders awarding those companies that take up green initiatives.

• Research Methodology

This study is about the impact of environmental corporate social responsibility on the entertainment industry in the UK. The researcher will employ the event study methodology to examine the stock price reaction to news or events in the entertainment industry. Usually the reaction to stock prices is calculated by an average cumulative return (CAR) during what is called the event window. CAR measures the deviation of the stock market from the expected price during the event window. There is considerableliterature that explains how CAR is used to calculate the reaction to market stock prices (See for example Kothari and Warner, 2007). According to these scholars usually an event date is set at the day when the news are published.

However there is a setback of setting the date as highlighted by Donato and Izzo (2012). Actually the day the news appears in the dailies is not necessarily when the event happened. This is termed as eventuncertainty. In order to solve this problem, normally the event window is given a span of two days (day-1 and day 0), thus keeping in mind the 2 day interval (-1,0) as the event window. Another weakness of the event study is that even if one is sure of when the news were announced, you can’t be sure whether the information leaked or not. Moreover sometimes shareholders may not immediately react to the news maybe due to non-trading delays or changes in the opening hours of the stock markets. To this end the event window should cover several days so that such uncertainties can be taken care of.

Data Analysis and Discussion

The purpose of this study was to make analysis of whether environmental corporate social responsibility has an impact on stock prices of the entertainment industry using a case of Disney. Over the past five years there are various news especially about its new engagements in environmental activities has really had a positive impact on its stock prices. The green initiatives that have been heavily reported includes Disneys efforts towards; zero waste, zero net direct greenhouse gas emissions from fuels, reduce indirect greenhouse gas emissions from electricity consumption, net positive impact on ecosystems, minimize water use, minimize product footprint and inform, empower and activate positive action for the environment.

In this analysis three parameters were used; environment, employment and community (Donato and Izzo,). Some measures were assigned to each of these parameters. Thereafter the standard deviation and medians of each of the three years (2013-2015) and mean values were calculated. The results are as shown below

2013

Emp

2014

Env

2015

com

Mean values

4.5

6.6

5.3

6.2

7.5

7.0

4.2

7.6

6.1

Standard deviation

4.1

6.3

4.7

4.8

6.6

7.5

8.4

5.3

4.8

Median

3

6

3

6.5

11.0

3.0

7

6

4.5

Key

Env- Environment

Emp- Employees

Com- Community

From the above table it’s very clear that the Disney Company have over the years increased its involvement in green initiatives. This is even evident because its 2014 corporate social responsibility report highlights the increases scope in the green initiatives that the company plans to undertake. From the above analysis it is very clear for a fact there is a relationship between environmental social responsibility and stock prices of companies. This results give an indication ha shareholders are willing to invest or stay with companies that invest in green initiatives. Additionally the results show that customers are more willing to pay more for products and goods of companies with effective green initiatives. And the fact that customers are willing to pay more makes the shareholders continue to have trust in companies that initiate environmental corporate social responsibility programs.

This view agrees with the assertion that environment is a resource. The engagement in green initiatives by many organisations results from both external and internal pressures. Again the results show that shareholders tend to react more positively on eco-friendly initiatives and negatively to the eco harmful ones.

From this study it is clear that the external pressures on adopting green initiatives is setting the pace for environment corporate social responsibility. This means because becoming green is becoming the norm all over, being otherwise can be detrimental to the reputation of the firm and its rating in the stock market.

• Conclusions

From the collected data it is very evident that Disney’s engagement in eco-friendly initiative has increases its competitiveness. The results of this study have approved of the hypothesis that shareholders tend to react positively to the announcement of eco-friendly activities and react otherwise to eco harmful activities. However there is need to point out that, more research needs to be done on the correlation between environmental social responsibility and stock prices. In summary this study is making a lot of contribution to scholarly literature in the sense that it provides empirical evidence on the impact of environmental corporate social responsibility on the stock prices of companies. The study also illustrates how shareholders react to news of eco-friendly or harmful events in their firms. Most importantly, these findings will be important to a cross section of experts such as accountants, strategists and corporate venturing. This study may also be important to policy makers specially those that deal with environmental regulations.

Recommendations

It would be interesting to carry out more studies to find out whether the results of this study will hold on for a while. Available literature shows that sometimes the impact of environmental corporate social responsibility on many companies who are just starting the programs may be negative. That’s why it’s important for periodic studies to be carried out so as to study the trend in the correlation between the two variables. Again another important consideration that should be measured in future research is the transparency of environmental corporate social responsibility reporting. This is because unless the shareholders are aware of the green initiatives that the company is involved in, then it becomes difficult to measure their reaction about what they don’t know.