Investors are willing to pay $0.7 (£0.5, €0.6) more for a share in a company that gives money to charity, according to a new study by HEC Paris Business School.
When it comes to valuation, it does matter how ethical a business is, according to Augustin Landier, Professor of Finance at HEC Paris Business School. The study by Landier, Jean-François Bonnefon, of Toulouse School of Economics, and Parinitha Sastry and David Thesmar of MIT Sloan, shows that investors value the ethical dimensions of companies they invest in.
The same study reveals that firms that are socially harmful are valued at $9 less than others that are socially neutral.
Landier and his colleagues claim their research sheds new light on the debate over corporate social responsibility and maximising shareholder value, giving weight to the argument that shareholders put some value on companies’ social behaviour.
They ran an experiment where participants bid for shares in three fictional companies that varied significantly in terms of what dividends they paid to individuals and by how much money they added or removed from a charitable fund.
The ethical company donated some shareholder profit to charity. The unethical company proactively took money from the fund to give to shareholders. 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 participants fully understood the bidding mechanism and its consequences, and the results were clear: participants strongly integrated social externalities into their pricing bids,” says Landier. “They were willing to pay $0.7 more for a share in a firm giving one more dollar per share to charities.”
This remained true when researchers ramped up the social externalities: doubling the amount the pro-social company donated saw investors willing to double how much 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.
“Our study is motivated by the classic policy debate on corporate social responsibility,” Landier said. “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’.”
According to these voices, firms should sometimes accept making decisions that hurt 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,” he said.