Abstract

The impact of corporate social responsibility initiatives on shareholder value is uncertain. Research points to both positive and negative market reaction to the announcement of a firm either being recognized for its social responsibility or voluntarily engaging in an activity that would presumably be perceived as such. In this study, I examine market reaction to a firm’s decision to make a voluntary, yet legally binding and potentially costly commitment to reduce green house gas emissions by joining the now-defunct Chicago Climate Exchange. The Chicago Climate Exchange, as a field experiment, provides a unique opportunity to study the connection between corporate social responsibility and market valuation because the expected and actual costs of non-compliance are more observable, when compared against non legally binding initiatives. I find that the market reacts negatively to a firm’s decision to join as evidenced by negative, although insignificant, cumulative abnormal returns and significant declines in trading volumes around the announcement date. Price reaction is negatively associated with a firm’s price-to-book ratio in the year prior to joining the exchange and positively associated with the Kinder, Lydenberg, Domini Research & Analytics (KLD) rating of a firm’s environmental strengths. Trading volume is positively associated with firm size, measured with market capitalization in the year prior to the announcement. Larger firms were less likely to make the commitment, whereas, firms in more highly concentrated industries and those with higher KLD rankings for community strengths were more likely to have joined the exchange.