Abstract

This study examines additions to and deletions from the Domini 400 Social Index, specifically looking at the reactions of the added or deleted firm's stock price and of analyst earnings forecasts to the news of the index change. It is found that additions to the Domini 400 Social Index are met with an abnormally positive stock price response and more favourable earnings forecasts than comparable firms. It is also found that deletions from the index are met with an abnormally negative stock price response, while no reaction is observed on the part of analyst earnings forecasts. This evidence indicates that the observed price response to index deletions is most likely caused by the actions of social investors, while the observed price response to index additions may be jointly attributable to the actions of social investors as well as the influence of social factors on the future earning potential of the added firm.