What Good Does Doing Good do? The Effect of Bond Rating Analysts’ Corporate Bias on Investor Reactions to Changes in Social Responsibility

Oana Branzei, Jeff Frooman, Brent Mcknight, Charlene Zietsma

Research output: Contribution to journalArticle

Abstract

In this study, we explore how investors reconcile information on firms’ social responsibility with analysts’ assessments of future firm risk in the pricing of long-term bonds. We ask whether investors pay attention to small strides toward and/or small slips away from socially responsible behavior, arguing that analysts’ corporate bias toward gains and against losses influences investor reactions to corporate social responsibility. We hypothesize that analysts notice and reward improvements in social responsibility, yet excuse lapses. We find support for this hypothesis, using a unique dataset of long-term bonds that combines lagged measures of firm-level financial and social performance with bond-specific data pertaining to risk of default and pricing. The empirically robust asymmetry in investor responses to small but often cumulative increases versus decreases in corporate social responsibility reveals an under-examined root cause of longer-term, larger-scale distortions in financial market returns regarding corporate social performance. Our findings elaborate earlier behavioral research on how corporate bias influences analysts’ short-term assessments of economic risk, by theorizing why this corporate bias may influence long-term assessments of social risk. Our work also motivates more critical scrutiny of the role analysts play in revising the future risk of today’s social action versus inaction.

Original languageEnglish (US)
Pages (from-to)183-203
Number of pages21
JournalJournal of Business Ethics
Volume148
Issue number1
DOIs
StatePublished - Mar 1 2018

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social responsibility
investor
rating
trend
firm
pricing
behavioral research
role play
financial market
asymmetry
performance
reward
Analysts
Investors
Social responsibility
Bond ratings
Rating
Social Responsibility
cause
economics

All Science Journal Classification (ASJC) codes

  • Business and International Management
  • Business, Management and Accounting(all)
  • Arts and Humanities (miscellaneous)
  • Economics and Econometrics
  • Law

Cite this

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What Good Does Doing Good do? The Effect of Bond Rating Analysts’ Corporate Bias on Investor Reactions to Changes in Social Responsibility. / Branzei, Oana; Frooman, Jeff; Mcknight, Brent; Zietsma, Charlene.

In: Journal of Business Ethics, Vol. 148, No. 1, 01.03.2018, p. 183-203.

Research output: Contribution to journalArticle

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