New research co-authored by London Business School’s Elroy Dimson suggests that investors who actively engage with the companies they own to improve governance and strategy outperform more passive rivals.
The paper, Active Ownership with Oguzhan Karakas and Xi Li, focuses on corporate social responsibility engagements on environmental, social and governance issues.
The authors find average one-year abnormal return after initial engagement is 1.8%, with 4.4% for successful engagements whereas there is no market reaction to unsuccessful ones. The positive abnormal returns are most pronounced for engagements on the themes of corporate governance and climate change:
We find that reputational concerns and higher capacity to implement corporate social responsibility changes increase the likelihood of a firm being engaged and being successful in achieving the engagement objectives. Target firms experience improvements in operating performance, profitability, efficiency, and governance indices after successful engagements.
Figure 1 from the paper shows cumulative abnormal returns around corporate social responsibility engagements (click to enlarge):
A version of the paper can be found on SSRN here.
Via Financial News’ Studies reveal the value of activism.