Financial market reactions to variations in social corporate performance

This study examines the differential impacts of social performance rating upgrades and downgrades on the financial performance and risk levels of 242 Canadian firms from 2010 to 2011. The use of a conditional model allows for consideration of changes in the economic context, a factor frequently ignored in event studies. The results show that a rating downgrade positively affects systematic risk. The market therefore appears to penalize socially irresponsible firms with a higher financial risk level yet fails to reward the performance of firms that cultivate their social image. There is limited evidence that downgraded firms, i.e. those considered to be less socially responsible, have higher positive abnormal returns. The results support the risk/performance relationship, whereby irresponsible firms must deliver better financial performance as a result of their higher risk rating.