ESG enhances valuations – Paris academic study


When it comes to valuation, how ethical or not a firm is matters, according to an academic study by Augustin Landier, Professor of Finance at HEC Paris Business School, and his associates. People are prepared to pay more for an “ethical” stock and want to pay less for an “unethical” one.

A new study by Landier, Jean-François Bonnefon of Toulouse School of Economics, and Parinitha Sastry and David Thesmar of MIT Sloan, shows in an experiment that investors are willing to pay 70 cents more for buying a share in a firm giving one more dollar per share to charities.

The same study reveals that firms that are socially harmful – those exercising a negative externality of $1 on a charity in the researchers’ experiment – are valued $0.9 less than other companies which are socially neutral.

Landier and his colleagues ran an experiment with participants recruited via Amazon’s Mechanic Turk, an online platform that allows requesters – mainly researchers and businesses – to post small-scale tasks to be completed by volunteers.

“In our experiment, participants submitted bids for shares in three fictional companies that varied significantly in terms of what dividends they paid to the individual and by how much money they added or removed from a fund that would be donated to charities,” Landier says.

In the experiment, the ethical company donated some shareholder profit to charity. The unethical company proactively took money from the charity fund to give to shareholders. Finally, the third neutral company neither took nor donated to the charity wallet. Participants were asked to bid on all three in random order.

“We made sure that participants fully understood the bidding mechanism and its consequences, and the results were clear: participants strongly integrated social externalities into their pricing bids,” Landier says. “They were willing to pay $.7 more for buying a share in a firm giving one more dollar per share to charities. Symmetrically, a firm that makes profits by exercising a negative externality of $1 on a charity is valued $0.9 less than a similar company with no externality.”

This effect remained true when the researchers ramped up the scale of the social externalities: doubling the amount the pro-social company donated to charity saw the investors willing to double the amount they were willing to invest. The converse was true of the unethical company: taking away another dollar from the charity pot saw investors reduce their bid by half.

Landier says: “We found that investors behave similarly whether their bids are pivotal or not for the ethical behaviour of companies. Their levels of generosity remained the same, which suggests investors are driven by an objective of value-alignment rather than an objective of impact.”

He and his colleagues argue that their research shed new light on the debate around corporate social responsibility and the maximisation of shareholder value, giving weight to the argument that shareholders put some value on companies’ prosocial behaviour.

“Our study is motivated by the classic policy debate on corporate social responsibility. Many call for firms to integrate social concerns into their objective functions, thereby challenging Milton Friedman’s classic statement that ‘the social responsibility of business is to increase its profits’,” Landier says. “According to these voices, firms should sometimes accept to make decisions that hurt their profits in order to benefit society. Our study shows this can actually have a positive effect on the stock price, because shareholders do value the ethical dimensions of the firms they invest in.”

– G.B.