Claremont Colleges

Scholarship @ Claremont
CMC Senior Theses CMC Student Scholarship

2012

The Effect of Corporate Sustainability Reporting

on Firm Valuation
Brian D. Bartlett
Claremont McKenna College

Recommended Citation
Bartlett, Brian D., "The Effect of Corporate Sustainability Reporting on Firm Valuation" (2012). CMC Senior Theses. Paper 489.
http://scholarship.claremont.edu/cmc_theses/489

This Open Access Senior Thesis is brought to you by Scholarship@Claremont. It has been accepted for inclusion in this collection by an authorized
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 CLAREMONT McKENNA COLLEGE

THE IMPACT OF CORPORATE SUSTAINABILITY REPORTING

ON FIRM VALUATION

SUBMITTED TO

PROFESSOR MAFRED KEIL

AND

DEAN GREGORY HESS

BY

BRIAN BARTLETT

FOR

SENIOR THESIS

FALL 2012

DECEMBER 3, 2012
ii
 iii

Table of Contents

Acknowledgements…………………………………………………………………………… iv

Abstract………………………………………………………………………………………. v

I. Introduction……………………………………………………………………………….. 6

II. Literature Review

II.i Introduction to CSR……………………………………………………………………… 8

II.ii Link Between CSR and Financial Performance………………………………………… 9

II.iii CSR and the Recession…………………………………………………………………..12

III. Data Description

III.i The Pacific Scoring Index (PSI)………………………………………………………… 13

IV. Methodology & Results

IV.i Cross Section……………………………………………………………………………..15

IV.ii Panel Analysis…………………………………………………………………………...17

IV.iii Results………………………………………………………………………………….. 18

V. Discussion………………………………………………………………………………….. 25

VI. Conclusion………………………………………………………………………………… 28

References……………………………………………………………………………………... 32

Appendix………………………………………………………………………………………. 34
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Acknowledgements

I would like to thank Professor Keil and Professor Rosett for their guidance and efforts in

helping me complete this thesis. Professor Keil’s support regarding the nature of my study and

regression analysis was paramount to the completion of this thesis. Additionally, I would like to

thank the Roberts Environmental Center for allowing me to use their data set regarding the

Pacific Scoring Index (PSI) for my environmental data. This data was truly unique, because it

quantified countless qualitative corporate sustainability reports from a variety of sectors over

multiple years. This scoring system was developed by Professor Emil Morhardt and his research

fellows, and was supplied to me by his research assistant, Elgeritte Adidjaja. Without these

people, this thesis would not have been possible. I would also like to thank my family and

friends for their continued support throughout this process.

 v

Abstract

The topic of corporate sustainability reporting has seen rapid growth in the past couple of

years as more firms are placing a greater emphasis on becoming sustainable. However, the true

impact of sustainability reporting on firm value has been widely debated, often due to the nature

of the qualitative data in sustainability reports. This thesis uses a normalized sustainability

scoring system to examine the effects of sustainability reporting on firm value. In particular, this

paper analyzes these effects during the Great Recession to note if there was any change in the

effects on a year-by-year basis due to macroeconomic differences. This study finds that not only

is superior corporate sustainability reporting positively correlated with increased firm value, but

also that the degree of the impact greatly drops during the recession. These findings suggest that

sustainability could be an advantageous business tool during stable economic times but not

nearly as important in terms of increasing firm value during times of recession. Therefore, the

results of this thesis have important practical uses and serve as a basis for analyzing the financial

effects of corporate sustainability initiatives as this type of reporting becomes more prevalent in

the future.
 6

I. Introduction

“We strive to be a safety leader in our industry, a world-class operator, a good corporate citizen

and a great employer. We are working to enhance safety and risk management, earn back trust

and grow value.”

This quote came from the sustainability page of a company website. This company’s

website also has statistics about what the firm is doing to plan for sustainable growth in the

future and how they are changing to become more environmentally friendly. Additionally, this

company has published statistics detailing various safety, environmental, and social performance

indicators relative to their industry. Clearly, this is a firm that deeply cares about its

environmental and social sustainability efforts and performance. One would assume that this

company is a model of superior corporate sustainability reporting and performance and is looked

upon favorably by stakeholders. In fact, this company is BP, famously known for being the main

culprit of the Deepwater Horizon oil spill of 2010. This oil spill, which lasted for roughly three

months, is widely considered the worst oil spill ever with roughly 4.1 million barrels of oil

leaked into the Gulf of Mexico in eighty-seven days (Gosden, 2012). Since the oil spill has been

cleaned up and BP has repeatedly apologized for the catastrophe, why do BP and other

companies feel such a need to continually spend money on apology advertisements and publish

corporate sustainability reports to the public? Clearly, companies feel the need to report their

sustainability measures, possibly because these reports have an effect on firm value. The

purpose of this thesis is to explain if environmental and social factors in corporate sustainability

reports have any impact on firm value. More specifically, this thesis will analyze various

companies from a wide range of industries during the Great Recession of 2007-2009 to analyze

any potential impact on corporate sustainability measures’ influence on firm value during times
 7

of recession. In order to get these reports into an equal and qualitative format, the companies in

this study are ranked using the Pacific Scoring Index (PSI), a normalized scoring system of a

firm’s corporate sustainability performance. This thesis will now go into detail about the

background of corporate sustainability reporting and outline the progression of this paper.

Corporate sustainability reporting, commonly abbreviated as CSR, involves firms

publicly reporting about their environmental, social, and governance measures and their ability to

deal with the related risks of these factors (Ballou, Heitger, and Landes, 2006). This type of

reporting, which was virtually non-existent thirty years ago, has become a major factor in a

company’s public reports because internal and external stakeholders are increasingly demanding

this information: “[…] meeting stakeholder expectations is as necessary a condition for

sustainability as the need to achieve overall strategic business objectives. While maximizing

shareholder value continues to be an overriding concern, companies will not be able to do that

over the long term if they don’t meet other key stakeholder interests” (Ballou, Heitger, and

Landes, 2006; 1). However, companies may be unsure how the market will react to their

corporate sustainability reporting. If the initiatives are favorable, this may theoretically boost

firm value or stock price. On the other hand, some firms may be hesitant to release information

because of a possible negative reaction to the firm by the market. This thesis will attempt to

analyze any effects of better corporate sustainability practices on firm value. This paper

proceeds as follows. A review of relevant literature, which goes into greater detail concerning

the link between corporate sustainability reporting and firm value, immediately follows this

section. An empirical study followed by results will come afterwards. A discussion of these

results will follow the regressions. This paper will end with a conclusion that discusses how

these results compare to other studies in the field and give takeaways from this study.
 8

II. Literature Review

II.i Introduction to CSR

Corporate sustainability reports are publically released documents detailing the

environmental, social, and governance performance of a company. Sustainability reporting

began in the late 1980s, and has quickly become an important focus for companies from a wide

range of industries (Global Reporting Initiative, 2012). From a financial performance

perspective, corporations engage in sustainability in order to reduce costs for the future and help

manage change, thus becoming a more sustainable and profitable business in the future.

Additionally, it may be a requirement to release certain environmental information to satisfy

local or federal laws regarding emissions or a similar matter. Companies most likely have other

reasons to release these reports, such as building superior reputations and meeting informational

needs of stakeholders, who are classified as anyone who is impacted by the company’s actions.

Companies can report about sustainability initiatives using a variety of different methods

because no U.S. law or regulation exists regarding the need to release a full sustainability report.

The only federal regulations regarding environmental reporting stem from the Sarbanes-Oxley

Act of 2002. According to Sarbanes-Oxley, environmental costs must be released in a report:

“Sab-92 states that, with respect to contingent losses, companies should provide detailed

disclosures regarding the facts and assumptions underlying the amounts of environmental

liabilities” (McKenna Long & Aldridge, 2005). Firms must now quantify environmental

liabilities if they represent an amount that is deemed material to their financial statements. If the

environmental liability is not easily quantifiable, then a note must be attached detailing the

nature of the environmental cost. Due to increased pressure from stakeholders to release

environmental and social initiatives, firms are not only reporting on environmental costs but also
 9

providing the public with an adequate representation of their sustainability initiatives and

performance. Common frameworks that firms are using to report on their sustainability

initiatives include the Global Reporting Initiative (GRI) and ISO 14000 frameworks. The GRI

Sustainability Framework works in conjunction with the United Nations, which gives it

credibility across the globe. Furthermore, it has grown into one of the most common

frameworks (Global Reporting Initiative, 2012). The ISO 14000 is a set of standards that helps

to address environmental management. It provides organizations with a framework to improve

their environmental impact and performance in at attempt to lower costs and improve corporate

image (ISO, 2012).

II.ii Link Between CSR and Financial Performance

The topic of corporate sustainability reporting/initiatives affecting financial performance

has been a hotly debated topic for nearly thirty years. Early studies of the correlation between

the two have yielded mixed results. Studies performed by Cochran and Wood (1984) found a

positive correlation, while other studies, such as Aupperle and Pham (1989) found no correlation

at all.

A positive relationship between corporate sustainability reporting and firm value may

exist because firms that report on sustainability initiatives at a high quality may attract more

investors and increase market value. However, due to the nature of regression analysis, it is

difficult to imply causation between this relationship, which prompts questions about which

aspect comes first. Preston and O’Bannon (1997) attempt to discover if social and financial

performance is positively correlated, negatively correlated, or not correlated at all. Additionally,

they wish to determine if a casual relationship behind these factors exists. This means that social
 10

performance may drive financial performance, financial performance may influence social

performance, or there is a synergistic relationship between the two. The theory that more closely

relates to this thesis is defined as the stakeholder theory, which claims that favorable social

performance influences positive financial performance because the firm is meeting more needs

of the stakeholders, thus increasing transparency and firm value. In Preston and O’Bannon’s

empirical results, they discovered that there was not a single negative relationship between social

and financial performance in large U.S. companies, which is consistent with the stakeholder

theory. The strongest evidence indicated that social-financial performance is a positive synergy,

meaning that available funds drive positive social performance and that positive social

performance also drives financial performance (Preston and O’Bannon, 1997).

Waddock and Graves (1997) also argue that attention to corporate social performance

builds effective and lasting relationships with stakeholder groups, which causes better overall

financial performance. Financial performance is measured based on return on assets (ROA),

return on equity (ROE), and return on sales. Waddock and Graves attempt to discover if “[…]

there is a positive relationship between CSP and financial quality performance and whether slack

resources and good management theory may be operating simultaneously” (Waddock and

Graves, 1997; 2). The slack resources theory means that financially prosperous companies have

available resources to invest in social sustainability initiatives, meaning that better financial

performance is an indicator of better corporate social performance. After an empirical analysis,

Waddock and Graves concluded that corporate social performance influences financial

performance, and strong financial performance also drives increased corporate sustainability

practices. Their concluding theory is in line with Preston and O’Bannon, stating that this
 11

relationship is a virtuous cycle where firms perform well, increase corporate sustainability, and

then perform even better.

However, other researchers have attempted to prove that corporate sustainability has no

effect on the financial performance of a firm. Aupperle and Pham (1989) measured both market

returns and accounting return ratios and discovered that there is no direct relationship between

these initiatives and increased firm value. Instead, they claim that sustainability initiatives are an

indirect factor with regards to financial performance, and there are other more direct factors that

truly impact a firm’s financials. The article claims that:

“Because a firm's financial performance is partly determined by its selection of

corporate and business strategies, its organizational structure and culture, its reward

systems and employee morale, as well as by its resources, capabilities, and environmental

conditions and constraints, it is possible that a given social orientation may not clearly

register a performance effect” (Aupperle and Pham, 1989; 2).

This theory concludes that it is ultimately things such as business management and strategy that

influence financial performance and firm value, not corporate sustainability initiatives. Business

management and strategy may promote better sustainability practices and witness increased

financial performance, but these business strategies were the initial driver of financial

performance. Aupperle and Pham reasoned that the other studies that showed a positive social-

financial relationship failed to note that the true driver behind financial value of a company was

the positive company culture/leadership, not the initiatives. However, after looking at their

dependent variables, it becomes apparent that they were measuring financial performance using

long-term ratios, such as long term ROA and long-term stock price. This may play a large factor

in their findings because they fail to consider how sustainability initiative reporting may
 12

influence a value such as stock price in the short term.

Oliver Salzmann (2005) presents a different view on measuring sustainability initiatives by

looking at social, environmental, and governmental (ESG) factors to see how they affect

financial performance and more importantly stock return. Salzmann looks at firms with high

ESG scores and reasons that these firms will have excessive demand, which will lead to a higher

stock price, claiming, ““Further, if there is excessive demand for stocks with high ESG scores,

this could result in their stock price being inflated” (Salzmann, 2005; 2). Through empirical

research, Salzmann concludes that a positive relationship exists between ESG and performance,

however, the social aspect impacts financial performance much more that the government or

environmental aspects. Additionally, Salzmann discovers that, “disaggregation shows that firms

with higher environmental ratings have lower book-to-market ratios in line with these firms

experiencing higher levels of market demand for their stocks” (Salzmann, 2005; 15). Therefore,

Salzmann adds another element towards the debate about the effectiveness of corporate

sustainability initiatives by analyzing these initiatives and book-to-market ratios.

II.iii CSR and the Recession

Because this paper focuses on how corporate sustainability initiatives influence firm value

during the recession, it is important to see if companies still actively engage in CSR during the

Great Recession. When profits are reduced, it would logically make sense that a company needs

to engage in cost-cutting tactics, possibly causing corporate sustainability to be reduced or

forgotten. An essay by Placier Klara attempted to solve this issue and discovered that corporate

sustainability was reduced during periods of recession, but not at all close to levels that most

critics believed. Klara mentions, “The economic crisis clearly has caused financial losses, and
 13

this is obviously reflected in the field of social responsibility” (Klara, 2011; 14). Additionally,

Klara states, “Even though businesses have been affected by the crisis in all three CSR areas,

research has shown that the expectations of critics about the decline of CSR in a recession have

not been fulfilled. It was rather the opposite; recession re-aimed CSR and demonstrated its social

importance, as well as its potential to improve corporate competitiveness” (Klara, 2011; 14).

According to this theory, it would make sense that CSR would be used in the Great Recession to

improve firm value. Klara expands upon this theory, emphasizing that companies learned that

the sustainability initiatives must be the most efficient in potentially increasing firm value due to

tighter corporate sustainability budgets during the recession (Klara, 2011; 15). Therefore, I

would expect to find that corporate sustainability initiatives and reporting during the most recent

financial crisis would positively impact firm value.

For this study, I want to extend upon the findings that corporate sustainability initiatives

impact financial performance during the Great Recession time period. While it can be argued

that sustainability initiatives impact the financial value of a firm, it will be interesting to see if

this same theory holds up in times of economic difficulty. Judging by Placier Klara’s theoretical

research, it appears that these initiatives may have a positive effect on firm value similar to years

of economic stability.

III. Data Description

III.i The Pacific Scoring Index (PSI)

For the purposes of environmental data collection, this thesis uses data from the Roberts

Environmental Center at Claremont McKenna College. Every year, the Roberts Environmental

Center, led by Professor Morhardt, conducts multiple corporate sustainability sector analyses
 14

using the Pacific Scoring Index (PSI) scoring system. This system analyzes the quality of a

firm’s sustainability reporting by reviewing how much information the company released, their

plans for the future, and performance relative to competitors in the industry. These reports use

questionnaires to award points to companies for having certain levels of sustainability reporting.

Two questionnaires, one with industry specific questions and one with general questions, are

used to grade the corporate sustainability reports of companies. The overall PSI score is broken

up into three parts, Environmental, Social, and Human Rights. Each part represents a percentage

of the overall score, with Environmental and Social being the more heavily weighted categories

and human rights being more lightly regarded. Each company in a sector report is graded and

given a numerical score based on its Overall Report (Overall), Environmental Overall (EO),

Environmental Intent (EI), Environmental Reporting (ER), Environmental Performance (EP),

Social Overall (SO), Social Intent (SI), and finally Social Performance (SP). According to the

Roberts Center, Intent measures, “the coverage and company’s involvement in general

environmental or social issues. The “Intent” topics are each worth 2 points; 1 point for a

discussion of intentions, vision, or plans, and a 1 point for evidence of specific actions taken to

implement them” (Roberts Environmental Center, 2012). This could be a specific environmental

plan for the present and future or social standards the company is striving to achieve.

Additionally, the environmental and social reporting scores measure “transparency in publicly

discussing the company’s dealing with issues independent of success in making

improvements”(Roberts Environmental Center, 2012). For example, reporting could include

pollution statistics and discussion of these statistics. “Performance” is scored based off

improved performance from the previous year and performance compared to other firms in the

same industry, normalized for revenue. For the purposes of this study, the Roberts
 15

Environmental Center normalized all scores out of a total score of 100 for comparability across

sectors. For example, when there is a score of 45.5, this indicates that the firm received 45.5%

of the possible points available on their sustainability testing. This scoring system was chosen

because it measures both qualitative and quantitative data on a point scoring system. Sample

questionnaires are included in the appendix (Table 5).

IV. Methodology & Results

IV.i Cross Section

Because this thesis is focusing on the impact of the Great Recession on corporate

sustainability and firm value, sustainability PSI scores from 2008 and 2009 are analyzed for ten

various industries, from the Metals sector to the Pharmaceutical industry. The financial data for

the companies being analyzed in this thesis were obtained from the Wharton Research Data

Services (WRDS) COMPUSTAT database. The model to analyze any impact of corporate

sustainability reporting on firm value uses a simplified version of the Linear Information Model,

based off Ohlson (1995) and further developed by Crouse (2007):

MVit = ao + a1 NI it + a2 BVit + a3vit

MV=market value= common shares outstanding (end of fiscal year)*closing stock price (end of

fiscal year)

BV= book value (Total assets-Total liabilities)

NI= net income

v= corporate sustainability score, either social/environmental reporting (SR,ER),

social/environmental intent (SI,EI), or social/environmental performance (SP,EP), social/

environmental overall (SO,EO), or overall score

 16

In theory, book value (BV) should have a coefficient of one because book value should

move proportionally to market value. Book value is measured as total assets minus total

liabilities, meaning it represents the total equity value of a firm. Net income is a company’s net

income before extraordinary items so that unusual items do not skew the results. The various

corporate sustainability metrics are included as the other factor in this regression. My hypothesis

is that book value, net income, and the sustainability metrics will be statistically significant in

this regression, showing that increased sustainability reporting performance has a positive

correlation with a higher market value. Corporate sustainability would need to be statistically

significant and have a positive coefficient in 2008 in order to uphold Placier Klara’s theory that

corporate sustainability may serve as an important factor for firms to increase during times of

recession.

The first regression analyzes the effects of corporate sustainability reporting on market

value for 162 companies in 2008, the middle of the financial crisis. The ten sectors analyzed in

this regression are shown in Table 1 below:

Table 1- Industries Analyzed

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IV.ii Panel Analysis

The panel data analysis was conducted with the Roberts Environmental Center’s PSI

scores and the Wharton Research Data Services financial information for 62 companies. The

data spanned across five years, from 2006 to 2010. The purpose of running a panel regression is

to observe the impact of a firm’s sustainability score on market value over time, more

specifically the time period that dealt with the full economic effects of the Great Recession. The

Roberts Environmental Center possessed sustainability scoring for this time period, but

unfortunately a vast amount of the companies were not scored on a year-by-year basis. Upon

discussing this issue with Elgeritte Adidjaja of the Roberts Environmental Center, this occurs

because the company may not provide a sustainability report on an annual basis or the new report

is not significantly different from the previous year. Rescoring usually happens when the

company requests a rescore or the report is significantly different than before. Due to this,

company scores for years that did not have data were lagged based on the previous year’s score.

For example, if a company received a score for 2009 but did not receive a score for 2010, the

2009 score was used for the 2010 year as well. Additionally, Ohlson’s Linear Valuation Model

(1995), which was later developed by Crouse (2007), was used for the basis of this regression as

well. This regression added book value and net income together and placed it into one variable

because the main purpose of the panel is to study the effect of sustainability initiatives on firm

value. By adding the two together, Ohlson’s model still holds true. A binary variable was

created for each year that is interacted with overall score to analyze the yearly effects.

Additionally, another binary variable was created for each industry and used as an interaction

term with overall score to analyze the effects corporate sustainability reporting has on a

particular sector. In order to have a model with entity (firm) fixed effects, the binary variable for
 18

each individual company is included in the regression to control for the difference in inherent

value for each firm. The equation for this regression is given below:

MVit = ao + a1 NIBVit + a2 (Industry1 * v)it + ...+ a9 (Industry7 * v)it + a10 (Company2 )it + ...
+a71 (Company62 ) + a72 vit + a73 (D _ 07 * v)it + ...+ a76 (D _10 * v)it

MV = market value

NIBV = Net Income + Book Value

Industry = binary variable for each industry

Company = binary variable for each company (Company 1 omitted)

D_07 & D_10 = binary variable for each year (2006 omitted)

v = Overall sustainability score

IV.iii Results

The sustainability metrics used in this study have a possibility of being highly correlated

because they are all measuring similar aspects. Thus, a correlation matrix is necessary to

determine the necessary nature of the regression. As shown in Table 2 below, the various

sustainability measurements do appear to be highly correlated with one another. Not only are

environmental measurements highly correlated with each other, but social measurements are

highly correlated with environmental scores as well. For the purposes of this study, it is

necessary to regress each sustainability measurement on the market value formula independently

in order to avoid any possible error resulting from highly correlated independent variables.
 19

Table 2- PSI Correlation Matrix

EO SO SI SR SP EI ER EP Overall
EO 1.00
SO 0.75 1.00
SI 0.83 0.81 1.00
SR 0.71 0.99 0.74 1.00
SP 0.64 0.96 0.68 0.95 1.00
EI 0.90 0.72 0.84 0.67 0.60 1.00
ER 0.95 0.69 0.73 0.66 0.59 0.73 1.00
EP 0.80 0.55 0.56 0.52 0.49 0.57 0.79 1.00
Overall 0.81 0.88 0.79 0.86 0.82 0.77 0.74 0.62 1.00

The regression in Table 3 is a 2008 cross section analysis of all 162 companies.

Differences in industry are not taken into account or controlled for in this regression. The

regression results show that book value and net income are both statistically significant at the 1%

level in every regression.

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Table 3-2008 Cross Section without controlling for industry

dependent variable= Market Value (MV) (millions)

{1} {2} {3} {4} {5} {6}
Independent
Variables
BV 0.63*** 0.6*** 0.59*** 0.61*** 0.57*** 0.61***
(7.29) (7.58) (7.55) (7.96) (6.61) (7.56)
NI 1.50*** 1.46*** 1.48*** 1.39*** 1.55*** 1.53***
(2.43) (2.72) (2.82) (2.57) (2.82) (2.77)
------------- ------------- ------------- ------------- -------------
Overall -- 3.82*** -- -- -- --
(4.1)
------------- ------------- ------------- ------------- -------------
EO -- -- 2.13* -- -- --
(1.6)
------------- ------------- ------------- ------------- -------------
ER -- -- -- -- -- 4.03***
(3.58)
------------- ------------- ------------- ------------- -------------
EI -- -- -- -- 2.2*** --
(3.72)
------------- ------------- ------------- ------------- -------------
EP -- -- -- 4.45** -- --
(2.17)
------------- ------------- ------------- -------------
SO -- -- 2.67** -- --
(2.16)
------------- ------------- ------------- ------------- -------------
SP -- -- -- 3.12** -- --
(2.5)
R2 0.5549 0.6116 0.6175 0.6254 0.5945 0.5969

SER 20637 19338 19253 19109 19760 19702

Note: t-stat in parenthesis; *** denotes 99% confidence, ** denotes 95% confidence, * denotes
90% confidence
 21

Industry related factors could potentially play a major factor in the effects of corporate

sustainability reporting on market value. Sustainability can have a large influence in some

industries, such as the petroleum industry, where sustainability is highly important to

stakeholders. With controls for each industry, it is now possible to see how each sustainability

measurement impacts the market value of different types of companies. This regression was

conducted based off Ohlson’s model as well:

MVit = ao + a1 NI it + a2 BVit + a3 (Industry1 * v)it + ... + a12 (Industry10 * v)it

 22

Table 4-Industry Controlled 2008 Regression

dependent variable= market value (MV) (in millions)

{1} Overall {2} EO {3} SO
Independent Variables
BV 0.57*** 0.57*** 0.59***
(6.76) (6.91) (6.8)

NI 1.45*** 1.4*** 1.36***

(3.5) (3.07) (3.12)

Auto*v 6.68*** 6.81*** 5.78***

(2.92) (2.62) (2.97)

Banks*v 3.05* 2.81 2.98*

(1.43) (1.04) (1.54)
Industrial*v 1.35* 0.82 1.74***
(1.6) (0.66) (2.37)

Chemicals*v 1.53** 1.10 2.20***

(2.08) (1.23) (2.42)

Food/Beverage*v 3.84** 4.62** 3.68***

(2.2) (1.78) (2.45)
Electronics*v 1.50** 1.16 1.76**
(1.64) (1.13) (2.1)

Forest/Paper*v 0.63 -0.28 1.16**

(1.22) (0.43) (2.09)

Metals*v 0.28 -0.52 0.69

(0.37) (0.5) (0.94)

Pharmaceutical*v 6.07*** 7.74*** 7.00***

(5.81) (4.56) (6.2)

Telecommunications*v 4.97** 5.31** 5.01***

(2.27) (1.89) (2.58)
R2 0.6975 0.6785 0.6953

SER 17573 18118 17639

Note: t-stat in parenthesis; *** denotes 99% confidence,
** denotes 95% confidence, * denotes 90% confidence
 23

The panel regression discussed in the methods section is listed below in Table 5. Two

regressions were performed, one controlling for industry and another without these effects. The

regression without industry effects was performed because the industry-controlled model had

correlation issues with the overall sustainability score variable and the sector variable. As visible

in the first regression, overall score appears to be insignificant. However, this is not the case,

and is exhibited in the second regression.

 24

Table 5-Panel Data

Dependent variable = Market Value (MV) (in millions)

{1} {2}
Independent Variables
BVNI 0.54*** 0.53***
(4.34) (4.44)
Banks*v 9.48* ---------------
(1.63)
Chemicals*v 0.44 ---------------
(0.09)
Food*v 2.48 ---------------
(0.18)
Electronics*v 2.71 ---------------
(0.5)
Forest*v 14.46** ---------------
(2.32)
Metals*v -0.7 ---------------
(0.14)
Pharmaceuticals*v 1.19 ---------------
(0.22)
v (Overall Sustainability
Score) 4.25 6.09***
(1.00) (3.78)
D_07*v -1.12 -1.09
(1.12) (1.11)
D_08*v -5.92*** -5.73***
(5.79) (6.02)
D_09*v -4.28*** -4.09***
(4.02) (4.16)
D_10*v -4.43*** -4.27***
(4.22) (4.41)
R2 0.9 0.9

SER 19907 19725

Note: t-stat in parenthesis; *** denotes 99% confidence,
** denotes 95% confidence, * denotes 90% confidence

Additionally, it is important to perform tests to determine that the years are significantly different

from 2008. F tests were conducted and validated the hypothesis that each year was different than

the 2008 year. Results are visible in the appendix (Table 4).
 25

V. Discussion

The 2008 cross section without controlling for industry in Table 3 shows that book value

and net income are always statistically significant at the 99% confidence level, proving that

Ohlson’s model holds true. Furthermore, the coefficient on book value is roughly 0.6 in every

regression, which is close to the theorized value of one for Ohlson’s model. The fact that the

coefficient is below one is probably due to the bear market in 2008 caused by the recession.

Equation 2, which measures the impact the overall score PSI sustainability score has on market

value, shows that the overall score is significant at the 99% confidence level. The interpretation

of the overall coefficient states that for every 10 percent point increase in overall PSI score,

market value increases by $38 million, on average. This result reinforces the hypothesis that

superior corporate sustainability reporting is related to higher market value. Additionally, the

increase in R2 of roughly 5% from Equation 1 to Equation 2 shows that Ohlson’s model of firm

valuation becomes a better predictor of market value with the addition of a variable measuring

sustainability. Equation 3 breaks up the Overall score into the Overall Environmental score and

Overall Social score, the two factors of Overall score, in order to determine which has the greater

effect on market value. Environmental overall proves significant at the 90% confidence level

and Social Overall is significant at the 95% confidence level. Both are clearly significant and

have similar coefficients, showing that both facets of corporate sustainability reporting are

important. The coefficient for Social Overall proves to be slightly higher than the coefficient of

Environmental Overall, which coincides with Oliver Salzmann’s (2005) hypothesis that social

factors of the sustainability report have a greater impact on firm profitability than environmental

factors. Upon looking at the statistically significant environmental and social performance

metrics in Equation 4, it is clear that environmental performance has a greater effect on market
 26

value of a firm than social performance. It also appears that when the other aspects of the overall

environmental score are regressed separately due to correlation issues with other scoring

variables, they are significant as well.

The industry controlled regression in Table 4 shows similar results on book value and net

income, both of which are significant and book value has a coefficient of roughly 0.60. The

coefficient on net income states that for every $1 million increase in net income, market value

increases $1.45 million for Equation 1. Industries that are both significant at the 99% confidence

level and have a large coefficient include the automobile, pharmaceutical, and

telecommunications industries. The food and beverage industry is also significant at the 95%

level and has a relatively high coefficient of 3.84. The fact that the automobile industry has the

highest coefficient, with every percentage point increase in sustainability score increasing market

value by $6.68 million on average, is easily justifiable. Automobile companies should be

extremely concerned with sustainability initiatives because public perception of corporate

sustainability greatly impacts firms in this industry. Automobile firms are constantly being

scrutinized for their sustainability efforts, which could potentially magnify the issue and lead to

companies that are more concerned with sustainability to be perceived as better companies than

those who are not as concerned. Another interesting industry to note is the Pharmaceuticals

industry, which is also highly statistically significant and has a large coefficient. This is another

industry in which it is extremely important to have a positive public image. Dr. Faiz Kermani

explains, “the pharmaceutical industry is under constant scrutiny regarding the way it operates

[…] Media coverage of the pharmaceutical industry’s activities has often been negative and

whether they like it or not companies have to pay greater attention to their public image”

(Kermani, 2005). Some industries where we expect to see a great impact of corporate
 27

sustainability on market value, such as the forest and paper industry, appear statistically

insignificant in this regression. This is most likely due to the fact that data was available for only

seven forestry companies, possibly skewing the results. Other industries faced similar issues. In

order to combat this issue, a panel was created which allowed for more data points to be

analyzed and provide a more accurate model.

The purpose of the panel regression in Table 5 Equation 1 is to see the effects of the

recession on certain years and analyze any possible industry effects. The model shows that the

combined book value and net income variable is still highly significant, which helps show that

Ohlson’s model still holds true. Furthermore, the regression appears to be a good fit for the data,

seeing as the model explains 90% of the variation in market value. Surprisingly, many of the

industries are no longer statistically significant, which shows that over the course of the five

years the impact of corporate sustainability on market value was not determined by differences in

industries. The only industry where sustainability appears to be statistically significant at the

99% confidence level is the Forestry and Paper industry. This makes sense because this industry

is heavily scrutinized for its sustainability initiatives based on their business practices of using

natural resources to create revenues. The most interesting part of this regression appears to be

the interaction term of year and overall score, which measures the effectiveness of overall

sustainability on market value on a year-by-year basis. Because these determinants are binary

variables, the variable “v” represents year 2006 when all the other terms for year drop out of the

equation. A 2006 year variable is excluded to prevent issues with linear dependency. As seen in

Equation 1, the variables for year do not always appear to be statistically significant. This is

because of linear dependency issues with the sector interaction terms, which interacts with the

“v” variable statistic. Thus, Equation 2 eliminates the industry interaction terms from the
 28

equation, instead focusing on the year-to-year effects. When interpreting the coefficient for the

effect of each year, it is important to add the “v” variable with the year and overall score

interaction term for each year. This yields coefficients of 6.09, 5, 0.36, 2, and 1.82 for the years

2006, 2007, 2008, 2009, and 2010, respectively. Additionally, all of these terms are statistically

significant at the 99% confidence level. For the year 2007, a ten percentage point increase in

overall PSI sustainability score correlates with an increase in market value of $5 million, on

average. Each coefficient, which can be interpreted in this same manner, yields interesting

results. The positive correlation between sustainability reporting and market value supports

previous research that shows a positive link between superior corporate sustainability and

increased firm value. Additionally, there is a slightly decrease in the effect of sustainability

reporting in 2007 followed by a massive drop in 2008. In 2009 and 2010, there is a gradually but

slow recovery in the effectiveness of corporate sustainability’s impact of market value. This

decrease and gradual increase draws similar parallels to the Great Recession, which officially

lasted from December 2007 to June 2009 (Rampell, 2010). Thus, during the recession, corporate

sustainability reporting remained significant but the correlation it had with market value

decreased dramatically. It is also interesting to note how there was very little difference between

the coefficients for 2009 and 2010. This slow recovery in the magnitude of the coefficient also

parallels the slow recovery characterized by the Great Recession.

VI. Conclusion

Although many firms place a heavy reliance on claiming that they possess effective

corporate sustainability initiatives, the true added value of these initiatives has been debated for

years. The purpose of this thesis is to look at firms from a wide range of sectors and determine if
 29

any correlation between the level of corporate sustainability reporting and firm value, measured

as market value, exists. Additionally, this thesis analyzes the effects of the Great Recession on

corporate sustainability’s impact on market value. In order to measure the effects on firm value,

this thesis uses a modified version of the Ohlson Linear Information Valuation Model. This

formula determines firm value as market value, and the components of market value are net

income before extraordinary items, book value, and corporate sustainability level. Corporate

sustainability level was determined by a standardized ranking system provided by the Roberts

Environmental Center at Claremont McKenna College. The ranking system analyzes

sustainability reports based on a wide array of factors, such as environmental/social intent,

environmental/social reporting, and environmental/social performance. A cross section

valuation study is conducted for 2008 and concludes that both the environmental and social

aspects of sustainability reporting are significant and positively correlated with market value. An

additional cross section regression controlled for industry and showed that corporate

sustainability is a highly significant factor for market value in the pharmaceuticals industry and

automobile industry. Due to the limitations of cross sectional data and the desire to test the

effects the Great Recession had on corporate sustainability and firm value, a panel analysis is

conducted for 2006-2010. This test not only controls for year, but also controls for industry and

entity fixed effects of each individual company. This testing determines that industry does not

play a large effect on the correlation between sustainability reporting and market value.

However, the impact that corporate sustainability reports has on market value changes greatly on

a year-by-year basis. During the prime year of the Great Recession, mainly 2008, corporate

sustainability still maintained a slight positive correlation with market value but the magnitude of

the correlation dropped dramatically. These results would indicate that firms would not be better
 30

off trying to be more aggressive with their corporate sustainability efforts during times of

recession. This contradicts Placier Klara’s theory that firms should attempt to improve

sustainability efforts during times of recession in an attempt to gain a competitive advantage over

competitors.

This study has limitations due to the nature of the data. Because the Roberts

Environmental Center only has 2008 data for roughly half of the sectors, sector data from 2009

for was used for many of the industries. When environmental scoring data was available for

2007 and 2009, an average of the two years’ scores was taken and used as the 2008 score.

Furthermore, this thesis will not look at every sector in the business market. A sector analysis of

ten diverse industries will suffice as an accurate sample of the total population for the cross

sectional work. Additionally, two outliers were taken out of the 2008 cross-section regression

analysis in this study. These two companies, Johnson & Johnson and AT&T, both possess

significantly higher market values than the other companies in this study. Such outliers greatly

skew the OLS regression analysis. Lastly, while this ranking system is very methodical and

direct, it does rely on discretion due to evaluating qualitative characteristics, such as plans for the

future. One researcher may judge these plans more harshly than another.

The important takeaways of this thesis pertain to the positive correlation of corporate

sustainability on firm value. It is important to note that this does not mean that superior

sustainability reporting causes an increase in firm value. However, based on the positive

correlation it is a reasonable assumption to conclude that sustainability reporting does not have

negative effects on firm value. Another important aspect of this thesis is the effect of corporate

sustainability reporting on firm value during times of recession. Considering the Great
 31

Recession occurred recently, there has not been a large amount of research done pertaining to the

effects the Recession had on corporate sustainability’s impact on firm value.

In an attempt to expand upon this study, one could look at other financial measurements

such as excess return and long-term ROE growth to judge further effects of effective

sustainability reporting. Additionally, a study that looks at the release of sustainability reports

and the immediate impact on stock price could help prove whether or not sustainability reports

cause an immediate increase or decrease in firm value.

Generally, analyzing the effects that sustainability reporting has on firm value is a

relatively new field that continues to grow rapidly due to the increased importance of corporate

sustainability reporting. Considering stakeholders are placing a larger emphasis on these reports

and the number of firms that release these reports is rapidly growing, these reports may have

much greater effects on firm value in the future. This study should serve as a useful tool in

examining the financial effects of sustainability reports and promoting the positive effects of

sustainability reporting.
 32

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 34

Appendix

Table 1: Summary Statistics, 2008 Cross Section

Variable Observations Mean Std. Dev. Min Max

MV 162 23161.56 30739.69 73.47 124660
EO 162 23.91 16.29 0 66.07
SO 162 41.04 18.05 4.28 77.36
SI 162 45.94 24.16 3.85 100
SR 162 43.16 19 3.77 80.58
SP 162 32.99 15.84 0 69.57
EI 162 49.33 29.28 0 100
ER 162 18.71 15.72 0 68.33
EP 162 8.1 10.4 0 40.91
O 162 38.06 19.31 0 84.3
Auto 162 6.79%
Food 162 11.72%
Electronics 162 11.70%
Forest 162 3.70%
Metals 162 8.64%
Pharmaceuticals 162 11.72%
Telecom 162 6.17%
Chemicals 162 12.96%
Industrial 162 13.58%
Banks 162 12.96%

Table 2: Summary Statistics, 2006-2010 Panel

Variable Observations Mean Std. Dev. Min Max

O 310 46.13 14.57 2.79 74.48
EO 310 34.69 12.86 3.64 66.07
SO 310 47.37 15.5 4.1 76.47
SI 310 52.82 19.71 7.69 100
SR 310 50.09 16.64 1.45 83.77
SP 310 37.54 14.8 4.35 69.57
EI 310 61.97 22.74 1.92 100
ER 310 30.18 13.57 3.33 68.33
EP 310 15.71 10.46 2.08 45.45
MV 310 54018.8 56304.36 0 382421
Banks 310 27.00%
Chemicals 310 21%
Food 310 2%
Electronics 310 16%
Forest 310 6.50%
Metals 310 5%
Pharmaceuticals 310 17%
Telcom 310 5%
 35

Table 3: Panel Data Analysis Full Regression

(1) (2)
VARIABLES mkvalt mkvalt

bvni 0.539*** 0.530***

(0.124) (0.119)
banks_o 9.476
(5.825)
chem_o 0.440
(4.728)
food_o 2.447
(13.80)
electronics_o 2.713
(5.404)
forest_o 14.46**
(6.231)
metals_o -0.697
(4.923)
pharma_o 1.194
(5.317)
_Icompany_2 -45,210** -46,462***
(22,536) (8,010)
_Icompany_3 -56,154** -59,318***
(23,113) (9,546)
_Icompany_4 -45,695* -55,310***
(24,432) (6,952)
_Icompany_5 -51,170*** -51,504***
(8,728) (7,975)
_Icompany_6 -13,539 -11,155
(11,925) (9,742)
_Icompany_7 -52,964** -45,287***
(22,853) (7,886)
_Icompany_8 -57,489** -58,172***
(22,290) (8,387)
_Icompany_9 -97,570*** -57,273***
(29,400) (12,726)
_Icompany_10 -102,096*** -54,672***
(32,360) (13,963)
_Icompany_11 -22,794 -26,462***
(24,494) (10,063)
_Icompany_12 -22,043 -27,681***
(26,194) (10,563)
_Icompany_13 -57,536** -30,318*
(28,309) (15,447)
_Icompany_14 -31,463*** -32,057***
(8,855) (8,176)
_Icompany_15 -53,619** -52,311***
(21,715) (9,262)
_Icompany_16 -45,360 -1,405
(47,232) (37,655)
_Icompany_17 39,334 46,913***
(78,959) (9,961)
_Icompany_18 -64,364** -32,828***
(25,157) (8,106)
_Icompany_19 -22,726 -24,350**
(24,786) (9,484)
_Icompany_20 -41,294* -44,503***
 36

(23,199) (7,499)
_Icompany_21 -62,213*** -64,537***
(23,061) (9,645)
_Icompany_22 -56,812** -56,526***
(22,070) (9,664)
_Icompany_23 -68,022*** -59,750***
(24,009) (8,858)
_Icompany_24 76,559 118,667***
(52,542) (44,929)
_Icompany_25 -50,589*** -49,196***
(10,553) (8,360)
_Icompany_26 34,185*** 34,284***
(6,886) (6,515)
_Icompany_27 -92,852*** -59,623***
(25,056) (8,475)
_Icompany_28 -60,392*** -53,324***
(22,303) (8,257)
_Icompany_29 -1,131 41,091**
(34,615) (19,856)
_Icompany_30 -57,179** -57,806***
(22,272) (8,590)
_Icompany_31 15,172 24,630**
(27,940) (10,696)
_Icompany_32 -129,951*** -57,207***
(27,788) (7,798)
_Icompany_33 79,519*** 80,182***
(8,596) (7,960)
_Icompany_34 -55,416** -30,509***
(24,206) (10,144)
_Icompany_35 -114,677*** -60,935***
(25,020) (8,793)
_Icompany_36 -53,094** -52,525***
(21,794) (8,730)
_Icompany_37 10,835 10,989
(10,448) (10,131)
_Icompany_38 -60,912** -28,240**
(27,435) (12,118)
_Icompany_39 -99,598*** -56,809***
(28,516) (9,614)
_Icompany_40 -55,888** -56,020***
(22,182) (8,832)
_Icompany_41 -64,183** -29,624***
(25,909) (7,700)
_Icompany_42 -54,785* -58,034***
(29,404) (12,112)
_Icompany_43 -46,384* -56,504***
(24,239) (7,278)
_Icompany_44 22,780** 23,550**
(10,152) (9,525)
_Icompany_45 -19,188 -23,293***
(29,272) (7,855)
_Icompany_46 -59,695** -50,541***
(25,165) (6,919)
_Icompany_47 32,837*** 33,589***
(10,763) (10,207)
_Icompany_48 -37,031* -37,836***
(22,336) (8,069)
_Icompany_49 -38,543 -8,869
 37

(24,614) (8,374)
_Icompany_50 -117,501*** -80,152***
(34,981) (21,745)
_Icompany_51 -58,314** -48,845***
(25,869) (6,968)
_Icompany_52 -6,360 -6,469
(10,050) (9,618)
_Icompany_53 -53,978* -8,519
(31,980) (13,830)
_Icompany_54 -62,136*** -53,848***
(23,556) (7,225)
_Icompany_55 -48,531** -33,454**
(24,086) (13,267)
_Icompany_56 -53,179** -44,273***
(25,142) (6,975)
_Icompany_57 -53,007** -53,150***
(21,441) (9,646)
_Icompany_58 -135,807*** -61,201***
(27,990) (7,859)
_Icompany_59 -59,770** -51,159***
(24,339) (7,585)
_Icompany_60 -49,503** -42,297***
(22,662) (8,297)
_Icompany_61 -47,171* -11,801
(27,084) (10,893)
_Icompany_62 -126,460*** -56,968***
(27,580) (8,176)
adjusted_overall 4.251 6.094***
(4.259) (1.613)
_IyeaXadu_2007 -1.119 -1.085
(0.997) (0.975)
_IyeaXadu_2008 -5.925*** -5.727***
(1.023) (0.951)
_IyeaXadu_2009 -4.276*** -4.093***
(1.065) (0.983)
_IyeaXadu_2010 -4.432*** -4.266***
(1.049) (0.968)
Constant 54,095** 49,383***
(21,278) (10,966)

Observations 310 310

R-squared 0.905 0.904
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1

Table 4: F Test of Panel Data Years

test test test

2007=2008 2008=2009 2008=2010
F (1,242) 50.07 7.04 6.41
Prob>F 0 0.0085 0.012
38