Investor reactions to sustainability index reconstitutions: Analysis in different institutional contexts

Abstract

The paper examines the effects of institutional environments and the risk levels they engender on investor reactions to announcements of company inclusions in and exclusions from sustainability indices. Analysis of 815 events (484 inclusions and 331 exclusions) from 2009 to 2017 encompassing six markets (three emerging and three developed) on five continents was done using event window methodology. It was found that the institutional context does matter: in markets with riskier institutional environments investors responded more strongly to company inclusions (positively) and exclusions (negatively) as compared to markets with lower-risk institutional environments. The results indicate that from the investor’s standpoint, corporate social responsibility (CSR) has more to do with risk reduction than value creation, which is consistent with a perception of CSR expenditures as a form of insurance protecting the company’s market value.