Can Firms do Well While Doing Good?

Abstract

We investigate the relationship between a firm's degree of social responsibility and its performance. To accomplish this objective, we examine the stock market reaction to the announcement of Fortune magazine's list of 100 Best Companies to Work For over the 1998 to 2003 period. We find significant positive excess returns, which indicate the being included on the list is viewed positively by the stock market. To explain the positive abnormal performance, we regress the excess returns against firm-specific variables. Excess return has a positive relation to the job growth rate, but not to firm rank, on a pre-listing basis. However, additional analysis reveals that firms with a more favorable ranking are relatively small and have a higher job growth rate, low employee turnover, high betas, and extremely positive stock market performance prior to their inclusion on the list. In the year following the publication, sample firms with a favorable ranking have higher sales and gross profit margin than their lower-ranked counterparts. Overall, the results indicate that firms exhibiting a high degree of social responsibility toward their employees are positively rewarded by stock market participants, and that the rankings are somewhat related to pre- and post-survey financial performance.