Corporate social responsibility and financial performance: Evidence from the Johannesburg Stock Exchange, South Africa

Background: Stakeholders are increasingly concerned whether the companies they are involved with act in a socially responsible way. However, stakeholders like employees and shareholders also have a direct financial interest in those companies and need to be assured that company actions bring forth some financial benefit. Aim: The research investigated one of the main questions surrounding the concept of corporate socially responsibility, namely whether a company’s investment in and effort towards corporate social responsibility results in improved financial performance. The purpose of this study was to narrow the gap in the body of knowledge in relation to corporate social responsibility and its relationship to financial performance. Setting: This research investigated whether there was a relationship between being listed on the Johannesburg Stock Exchange (JSE) Socially Responsible Investment (SRI) Index and financial performance. The unit of study comprises 885 company-years of companies listed on the JSE over the period 2009–2014. Methods: Logistic regression was used to find evidence of a relationship between a listing on the JSE SRI Index and financial performance. Results: It is evident that there was no real relationship between inclusion on the JSE SRI Index and financial performance, but there was a direct relationship between the size of a company and having a listing on the JSE SRI Index. Conclusion: A listing on the JSE SRI Index does not have a clear and direct impact on financial performance, but it appeared that larger companies are perhaps better able to invest in corporate social activities and are, as a result, more likely to be listed on the JSE SRI Index

The Market Impact on Shares Entering or Leaving JSE Indices

A company’s entry into (or exit from) a major share index provides a special opportunity to examine price discovery. In an efficient market, we expect the demand curve to remain horizontal and to be unaffected by external events that do not communicate new information to the public, even if demand is affected. However, there is evidence that changes to index composition do impact the value of affected shares. This may be due to the price pressure generated by passively managed investment funds that simultaneously reconstitute their portfolios in order to remain aligned to the index that they are tracking. This study investigates downward sloping demand curves, price pressure and other hypotheses which are related to changes in index composition on the JSE. We calculate abnormal returns using a control portfolio model for shares entering/exiting four major FTSE/JSE indices between 2002 and 2011. In the pre-event window, a long term increasing trend was observed in the share prices of companies that are added to market cap weighted indices, beginning 70 trading days before the effective date. The opposite behaviour was true for index deletions, with some variation in the timing. In the post event window the results show, to some extent, an asymmetric response to share returns; shares entering the index underperform thereafter, whereas those leaving the index out-perform. Although these findings were not significant for all of the indices examined, they do support the price pressure hypothesis of Harris and Gurel (1986).http://www.iassa.co.za/journals/am201