Insider ownership, governance mechanisms, and corporate bond pricing around the world

We investigate the effect of insider ownership on corporate bond yield spreads from 2003 to 2014 using a sample of 10,460 bonds issued by 1,222 non-financial firms from 44 countries. Using this sample, we find on average that greater insider ownership is associated with a higher yield spread. We consider consumption of private benefits as an economic channel through which insider ownership hurts bondholders. Using a global index of shareholder rights, we observe that the positive association between insider ownership and the spread decreases for firms with relatively stronger shareholder rights in which consumption of private benefits is less likely to occur. Furthermore, we report that in firms with more insider ownership the probability of related-party transactions is larger whereas their accounting return on assets is weaker, ceteris paribus. Taken together, the results indicate that bondholders anticipate that greater insider ownership facilitates consumption of private benefits, with implications for the valuation of corporate debt

The Economic Virtues of SRI and CSR

Financial markets and company managers are increasingly acknowledging the concepts of socially responsible investing (SRI) and corporate social responsibility (CSR), but not without reservations. These hesitations are largely attributable to ongoing debates about a potential conflict between social responsibility goals and the traditional financial objectives of investors and companies. This thesis bundles six empirical studies that deepen our understanding of the economic value of SRI and CSR. Several empirical questions underlie these studies, such as: do CSR practices improve a firm’s profitability? Do financial markets value corporate social responsibility? Do SRI criteria constrain investment portfolio optimization, or do they help investors in their hunt for underpriced securities? This thesis shows that SRI and CSR can be studied in new ways to answer these questions. We examine unique SRI stock portfolios with superior return/risk profiles, and provide a fresh look at strategies for investors in SRI mutual funds. By analyzing a wide range of pathways that lead CSR to interrelated measures of corporate financial performance, we further explain whether CSR carries value-relevant information. Taken together, the six studies discuss the channels of transmission from CSR to operating performance, the cost of capital, firm value, analysts’ earnings expectations, and stock return. The conclusions from this dissertation are that (i) integrating SRI criteria into portfolio construction does not negatively affect investment performance; (ii) investors can use information on firms’ eco-efficiency to make investment decisions that improve the return/risk profile of their portfolios; (iii) common CSR attributes, such as corporate environmental responsibility, and human capital management, have a significant association with traditional measures of corporate performance. We recommend making CSR salient to investors in the form of extra-financial information, with an emphasis on environmental, social, and corporate governance themes.Jeroen Derwall (1978) is an Assistant Professor of Financial Management at RSM Erasmus University, and Assistant Professor of Finance at Maastricht University, The Netherlands. He is also co-initiator of the European Centre for Corporate Engagement (ECCE). Before starting his doctoral research at ERIM, he studied at Maastricht University to obtain his Master’s degree in economics. His research has been published in international journals and presented at international academic meetings. His current research interest includes sustainable investment, empirical asset pricing, and mutual funds. His work on SRI has been awarded the 2005 Moskowitz Prize, and the 2005 European Finance & Sustainability Research Award. On behalf of ECCE, he is currently involved with sustainable investment research projects for the Foundation for Strategic Environmental Research (Sweden), and with similar projects sponsored by institutional investors

REIT Momentum and the Performance of Real Estate Mutual Funds

REITs exhibit a strong and prevalent momentum effect that is not captured by conventional factor models. This REIT momentum anomaly hampers proper judgments about the performance of actively managed REIT portfolios. In contrast, a REIT momentum factor adds incremental explanatory power to performance attribution models for REIT portfolios. Using this factor, this study finds that REIT momentum explains a great deal of the abnormal returns that actively managed REIT mutual funds earn in aggregate. Accounting for exposure to REIT momentum also materially influences cross-sectional comparisons of the performances of REIT mutual funds. This study has important implications for performance evaluation, alpha--beta separation, and manager selection and compensation

The Eco-Efficiency Premium Puzzle

There exists a widespread consensus among mainstream academics and investors that socially responsible investing (SRI) leads to inferior, rather than superior, portfolio performance. Using Innovest’s well-established corporate ecoefficiency scores, we provide evidence to the contrary. We compose two equity portfolios that differ in eco-efficiency characteristics and find that our highranked portfolio provided substantially higher average returns compared to its low-ranked counterpart over the period 1995-2003. Using a wide range of performance attribution techniques to address common methodological concerns, we show that this performance differential cannot be explained by differences in market sensitivity, investment style, or industry-specific components. We finally investigate whether this eco-efficiency premium puzzle withstands the inclusion of transaction costs scenarios, and evaluate how excess returns can be earned in a practical setting via a best-in-class stock selection strategy. The results remain significant under all levels of transactions costs, thus suggesting that the incremental benefits of SRI can be substantial

Private Shareholder Engagements on Material ESG Issues

We study private shareholder engagements with 2,465 listed firms about environmental, social, and governance (ESG) issues from 2007 to 2020. We examine the extent to which private engagements address financially material ESG issues and contribute to firm performance. We find that material engagements succeed more often than immaterial engagements and that the targets of successful material engagements significantly outperform their peers by 2.5% over the next 14 months. Further, we find that material engagements are more often associated with improvements in profitability and cost ratios than immaterial engagements. Finally, our evidence indicates that a decrease in CO2e emission intensity accompanies environmental engagements