Abstract

This paper investigates the stock market reaction to the announcement that a firm has been included in the UK FTSE4Good index of socially responsible firms. We use the announcement of firm inclusion in the index to estimate the stock market reaction to a firm being classified as socially responsible. This is an important test of whether investors view the undertaking of socially responsible activities by firms as a value increasing or value decreasing initiative by management. We do not find strong evidence in favour of a positive market reaction. However, there is a large cross-sectional variation in the market reaction to this announcement. Investors appear to be reacting to this event and there are a number of firm characteristics that are well-established proxies for CSR that can explain the market reaction