THE INFLUENCE OF COMMUNITY INVOLVEMENT AND DEVELOPMENT INITIATIVES (CIDs) ON FIRMS’ MARKET VALUE

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1 | P a g e

THE INFLUENCE OF COMMUNITY INVOLVEMENT

AND DEVELOPMENT INITIATIVES (CIDs) ON

FIRMS’ MARKET VALUE

By

ZHEXIAN XUE

S2934035

z.xue.2@student.rug.nl

University of Groningen

Faculty of Economics and Business

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2 | P a g e

ABSTRACT

Community involvement and development initiatives (CIDs) have been regarded as a major component of Corporate Social Responsibility (CSR). According to ISO 26000, CIDs can be achieved through a wide range of practices. This study empirically investigates the influence of CIDs on the market value of the U.S. listed companies. Using data derived from 198 announcements regarding CIDs between 1991 and 2018, the findings suggest that CID implementation is associated with statistically significant positive abnormal returns (ARs) in the U.S. stock market. Based on the market-adjusted model, the estimation of stock market reaction over a selected two-day event window (0,1) (the day of the announcement day and the day following the announcement day) spans from 1.804* to 3.229***1. The stock market reaction, however, is more favourable towards companies that implement CIDs in the remote community instead of the operating community. Moreover, this research demonstrates that choosing an engaging community with high knowledge intensity is necessary for companies to generate higher ARs.

Keywords: community involvement and development; corporate social responsibility;

shareholders; abnormal returns; firms’ market value

Acknowledgment: I would like to express my sincere gratitude to my supervisor Dr. X. Tong, who always being patient and gives me thoughtful comments during each phase of the thesis project. And my co-assessors, Dr. Ir. N. J. Pulles, who also provided useful feedback on my research. I also thank my fellow students, Weilei Zhang and Deyan Emilov Shterev, for suggestions on sample selection and SPSS tips.

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3 | P a g e

List of Figures

Figure 1 Conceptual Model ... 17

Figure 2 Timeline between Estimation Period and Event Window ... 24

Figure 3 Regression Analysis ... 31

List of Tables

Table 1 Keywords in the First Round of Searching ... 20

Table 2 A Comprehensive Set of Keywords ... 20

Table 3 Companies’ General Information ... 21

Table 4 Control Variables ... 25

Table 5 Event Period of Abnormal Returns for the 102 Announcements for Companies That Implemented CID in the Operating Community ... 27

Table 6 Event Period of Abnormal Returns for the 78 CID Announcements for the Companies That Implemented CID in the Remote Community ... 27

Table 7 Event Period Abnormal Returns for the 198 CID Announcements over 28-year Study Period ... 29

Table 8 Regression Analysis based on the 143 CID Announcements ... 30

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5 | P a g e 1. INTRODUCTION

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6 | P a g e environment, fair operating practices, consumer-related issues, and community involvement and development (CID) (ISO, 2011).

Falling under one major component of CSR, initiatives related to CID can be traced back to the colonial programs of the early 1920s (Page, 2014). These community-oriented activities were undertaken to “offset the social discontent caused by the dislocations of colonial economic development” (McEwan, Mawdsley, Banks and Scheyvens, 2017:34). Accordingly, companies implemented such activities to dampen their interference, and consequent disruption, to local communities (Banks, Kuir-Ayius, Kombako and Sagir, 2013). This original intention has been further expanded, and in addition to mitigating companies’ negative influence on local communities, civic engagement today seeks to “educate, politicize and empower communities to better enable them, through collective action, to articulate, demand and achieve their own development visions and goals” (McEwan et al., 2017:35). One example of a CID in action is Jamba Juice (a public juice retailer)’s Jamba Juice Healthy Living grant program for the East Northport market. The retailer offers grants to support nutrition programs, school gardens, and physical education initiatives (Business Wire, 2016). Like Jamba Juice, many companies have strengthened their connection with the communities they serve by incorporating prescribed initiatives into their business models (Hedin and Ranängen, 2017). Although these practices are usually developed and performed in a unidirectional fashion, from companies to civic communities, the outcomes may benefit both actors (Fisher, Geenen, Jurcevic, McClintock and Davis, 2009).

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8 | P a g e To date, scholars have tended to take a broader perspective on CSR-related issues, leaving the sub-dimensional issues under CSR relatively underdeveloped. As a result, the relationships between sub-dimensions or categories of general CSR have received very little attention. CID is an exception, but research on this dimension mainly addresses the mining industry (Trendafiova et al., 2017; Peloza and Shang, 2011). In terms of analyzing CID, the corporate point of view tends to focus on how practices on CID can add value to the community, instead of the practical application (how practices on CID bring a positive impact for the corporate) (Dobers, 2009; Idemudia and Osayande, 2016). There is a need to investigate CID from the practical perspective and, more specifically, to explore how the implementation of CID practices can influence the company as an economic entity. This thesis will elaborate more on this.

In light of the above discussion, the research questions asked in this thesis are as follows: 1. What impact does the implementation of corporate CIDs have on firms’ market value? 2. How does the community’s knowledge intensity influence the relationship between the implementation of corporate CIDs and firms’ market value?

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9 | P a g e 2. LITERATURE REVIEW

2.1. Community Involvement and Development (CID) under CSR

CSR initiatives cover a wide range of activities which can be implemented by companies (ISO 26000, 2011). Nevertheless, companies with the intention of investing in CSR are not necessarily able to address a wide range of activities at the same time. Indeed, as mentioned by Arena et al. (2018), choosing one or a limited sub-category activity (or activities) under CSR is more or less shaped by the characteristics of the current era, especially digitalization. Digitalization blurs the interface between companies and the communities that they serve, with a quick flow of information possible between the two entities (Alua, 2010).

Digitalization makes “the organizational boundary more permeable to community influence” (Arena et al. 2018:346). Influenced by the impact that digitalization has brought to the community, scholars today are particularly interested in researching the field of CID, which is considered as a major component of the broad concept of CSR (Hedin and Ranängen, 2017).

Community-related CSR initiatives performed by companies are assumed to be enacted with the specific intent of improving the welfare of the communities in which they operate (Banks et al., 2016). Based on this explanation, all businesses should be able to perceive and recognize their long-term interest in the sustainability of the communities in which they operate (ISO, 2011). Specifically, a business entity should consider itself as a stakeholder in its community; it seeks to achieve win-win outcomes in its community due to its dependence on the community and its affection for the community (ISO, 2011). Accordingly,

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10 | P a g e business of a company. “Upstream refers to anywhere that contributes inputs to the business (including where workers reside), while downstream refers to the pathway of outputs

(products and discharges)” (Esteves, 2008:40). From this perspective, the range of the community is broadened, incorporating both the operating region and the remote region influenced by the business of a company. As noted by Banks et al., (2016), the CID initiatives implemented by a company in its remote region mainly occur in a context that significantly lacks infrastructure and services. This is because that most companies lend their help to communities in real need (Esteves, 2008). For example, as demonstrated in PR Newswire (2017), Realogy (a real estate company) is dedicated to providing affordable houses for under-developed communities far away from its operating community. To be noticed, this study uses both perspectives to define community.

Unlike broader CSR studies, studies on the topic of CID mainly use qualitative methods. More specifically, single or multiple case studies are commonly used to research this topic. Such study manners may be due to the difficulty in developing generalizations, as multiple activities regarding CID are implemented by different companies across different

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11 | P a g e potential for community development. They suggested that the emphasis of sports-related programs should be shifted towards the building capacity of communities (e.g., the building of a community stadium). Moreover, given its popularity and universality, the sport itself can be used as a tool to unite with residents in order to achieve community development. This literature review suggests that heterogeneity exists in community-related practices, with there being different tools that a company may apply to facilitate and accelerate the progress of the CID practices. As the literature details a wide range of practices, this thesis will aim to collect a variety of samples of CID practices spanning from different industries. This will allow for generalizations to be developed under the condition of quantitative research method applied by this research. Moreover, there is no mention in this literature about how community-related contribution can offer returns and influence the companies’ financial performance (firms’ market value in this thesis). As a result, this research will aim to fill these gaps.

2.1.1. Specific CID Practices

Philanthropy is considered a traditional way for companies to engage in CID, and it tends to be passive and independent of a company’s core operations (McEwan et al., 2017; Mzembe and Meaton, 2014). However, to secure legitimacy within a civic region and even incorporate CID into their business policy, companies should consider engaging in broader community-related CSR initiatives (Muthuri, Moon and Idemudia, 2012). This could include community involvement, employment creation, technology development, wealth and income

development, education and cultural development, and health promotion, to name a few (ISO 26000, 2011). Compared with traditional philanthropy, these interventions are more complex, as they are calling for the transformation of the company’s business model (Rangan, Chase and Karim, 2015). This can potentially lead to disagreements due to shareholders and

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12 | P a g e conducted by Hindustan Unilever (Rangan et al., 2015). Instead of using its traditional last-mile delivery model, which is the wholesaler-to-retailer distribution, Unilever recruits local villagers, providing them with microfinance loans, and training them to sell the company’s products. The reason that Unilever arranges their business in such a way is that they believe they can not only help local villagers, but also sell their products through civic engagement. In this regard, Unilever considers the interests of local stakeholders (i.e. villagers and

governments), and this may help the company gain legitimacy to operate. However, there are newly developed business conditions that raise concerns surrounding the company’s

shareholders and previous business partners (e.g. local wholesalers and retailers). Such issues suggest, therefore, that it is not guaranteed that the firm’s market value and more profit are further gained following the transformation of the business model through the incorporation of CID practices. This is also the question that this thesis tries to answer: what is the

relationship between the community involvement and development initiatives (CIDs) and the firms’ market value?

2.2. The relationship between CSR and Corporate Financial Performance (CFP) As explained in the introduction, there is a research gap when it comes to the influence of CID practices on CFP (firms’ market value in this research). This section will, therefore, primarily review the literature in order to examine the relationship between general socially responsible programs and CFP.

The relationship between socially responsible programs and CFP has been studied

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13 | P a g e correlation, between the two (Orlitzky et al., 2003). As Saeidi, Sofian, Saeidi, Saeidi and Saaeidi (2015: 341) noted, “the findings are rather inconclusive and misleading.” Saeidi et al (2015) went on to note that these contradictory results could be explained by other

contingency factors, such as the industry, business environment, economic condition, and regulatory environment (Peloza, 2009). These moderating or mediating elements have, however, so far been neglected in many researches. Alafi and Hasoneh (2012) recently conducted a case study to explore the mediating relationship between socially responsible programs and CFP in the financial service industry in a developing country. The results indicate that customer satisfaction fully mediated the relationship between socially

responsible programs and CFP. This result is consistent with the findings of another study conducted by Galbreath and Shum (2012), with their study going further by including reputation as another mediating factor. They suggest customer satisfaction and a company’s reputation should be combined when investigating the relationship between socially

responsible programs and CFP. This is based on the fact that companies can gain benefits both in reputation and customer satisfaction by shaping stakeholders’ inferences after implementing such practices (Wood, 2010). This research will follow such a research route, as it will not only investigate the direct relationship between CID initiatives and firms’ market value (one dimension of CFP), but take the influence of the contingency factors into consideration as well.

2.3. Theory and Hypotheses Development

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14 | P a g e market value by analyzing the network relationship that exists between a company and its stakeholders and shareholders.

Stakeholder theory has been used to examine the direct relationship between socially responsible behaviors and corporate market value (Arena et al., 2018; Orlitzky et al., 2003). The theory suggests that external stakeholders form a kind of environment around a company that needs to be managed to secure a company’s return and commitment of its shareholders (Berman, Wicks, Kotha and Jones, 1999). When decision-making includes stakeholders’ interests, a company is less likely to suffer from resistance from stakeholders when executing its daily operations (Wang et al., 2016). There are two reasons for this: (1) the resources belonging to a certain community are managed and controlled by local organizations (i.e. multiple stakeholders), and (2) if a company makes irresponsible decisions concerning the interests of the community, these stakeholders can unite to impede the operational activities of a company by isolating them from important resources (Salancik and Pfeffer, 1978). Therefore, companies can sustain their stable operation if they pursue responsible decision-making in communities. Notably, companies with stable operations are more likely to receive helpful responses from shareholders. This is due to shareholders having enhanced confidence in the company’s performance, both in the present and the future (Bhattacharya and Sen, 2003). These companies can attract shareholders to purchase the companies’ stocks as a long-term investment, which leads to an obvious gain in a firm’s market value (Wang et al., 2016).

More recently, the term moral reputation capital has been developed by scholars to indicate the possible advantages of socially responsible behaviors regarding shareholder value (Godfrey, Merrill and Hansen, 2009; Merrill and Hansen, 2009; Muller and Kräussl, 2011). Generally, a high frequency of implementation of socially responsible practices increases a company’s moral reputation capital. A high level of such capital can be

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15 | P a g e its normal operation and avoid potential crashes (Godfrey et al., 2009). It has also been shown by Wang et al. (2016) that companies with socially responsible practices can form a buffer of goodwill that reduces their exposure to potential risks when negative events occur. Companies with a high profile in terms of such behaviors, therefore, are better equipped to boost the shareholders’ confidence, and consequently, encourage them to secure their investment in the long run. This shareholder confidence and secure investment ultimately have a positive impact on companies’ stock price and market value. It appears therefore that CID, as a major component of socially responsible behavior, can be positively related to the market value of the company that performs such activities. For this reason, the following hypothesis is proposed:

H1: CID initiatives are positively related to the market value of companies.

Since the 20th century, scholars have begun to realize the role that contingency factors play in explaining the direct relationship between socially responsible behaviors implemented by a company and the company’s CFP (Ullmann, 1985). Specifically, attention has been paid to context. For example, one company performing the same socially responsible practice, and with the same pooling resources, may experience an inconsistent report on the company’s financial return when practiced in different contexts (Barnett, 2007). In order to unpack this, the contingency factors should be explored in order to explain the heterogeneity they bring to the direct relationship mentioned above (Tang, Hull and Rothenberg, 2012). It has been suggested that the business environment, as one of the external contingency factors, is critical in determining the extent to which a company can benefit from its socially responsible

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16 | P a g e applied in this research, because, aside from its operating community, companies can also implement CID practices in a remote community (Vanclay, 2003). This research aims to put forward a novel differentiating factor, namely a community’s knowledge intensity, which can be treated as an embedded characteristic of the community (Wang and Choi, 2013). Inspired by Wang and Choi (2013), the community’s knowledge intensity refers to the percentage of higher-educated residents in a specific community for a given period. In this thesis, high education level refers to those that have achieved an education to degree level or above.

As discussed earlier, socially responsible behaviors can result in favorable returns for companies as these behaviors help bridge the relationship between the company and

important stakeholders in the community (Brammer, Brooks and Pavelin, 2006). Moreover, the visibility of a particular firm, and their socially responsible contribution, is regarded as a critical factor in triggering a positive response from stakeholders (Wang and Qian, 2011). Company visibility is achieved when residents have an understanding of the social activities performed by a company (Wang and Qian, 2011). Company visibility is an important asset for a company, as it demonstrates the community’s perceived understanding of what the company does, and whether it has a positive local impact (Wang et al., 2016). As such, it is easier for companies with high visibility to draw more attention and receive a positive response from the stakeholder (i.e. the residents in the community) (Wang et al., 2016). Auger, Devinney and Louviere (2007) argued that when a highly educated member of the community is exposed to implementation of socially responsible practice by a certain company, the company will be considered socially conscious. Indeed, by identifying such companies as high profile, highly educated individuals will pay more attention to them (Ramasamy and Yeung, 2009). Furthermore, residents with higher educational level are more likely to have a positive relation in terms of invest (Lease and Schlarbaum, 1977), and

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17 | P a g e which company’s stock they are willing to buy (Mohr et al., 2001). This is a result of their cognitive reasoning, where they perceive the company as performing well in terms of social responsibilities. Ultimately, they are willing to invest as the demonstrated socially

responsible behavior is in line with their expectations regarding long-term investments.

According to the definition of community’s knowledge intensity given previously, a significant number of residents with a high level of education increase a community’s knowledge intensity in percentage terms (Wang and Choi, 2013). Then, in a high knowledge intensity community, there is the possibility that more residents will positively perceive the company’s practices (this study assumes the residents live in the community in which companies implement CID initiatives) (Ramasamy and Yeung, 2009). As a result, the company can gain more visibility from the community, which further encourages positive responses from the community residents (Wang et al., 2016). Subsequently, such responses will turn into favorable returns in terms of stock price, positively contributing to the

company’s market value (Backhaus, Stone and Heiner, 2002). Thus, the second hypothesis is as follows:

H2: The relationship suggested in H1 is positively moderated by the community ’s knowledge intensity.

Figure 1 displays the relationship based on two hypotheses.

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18 | P a g e 3. DATA AND SAMPLE DESCRIPTION

A set of initial keywords were identified to collect valid samples, from Academic LexisNexis2 database. The database contains full-text of news and documents from different sources of newspapers and wires (e.g. The Wall Street Journal, PR Newswire and Dow Jones News Service). These initial keywords were chosen based on the community-related descriptions in ISO 26000 (2011) standards, and the work of Frynas (2005). The former provided the precise definition and principles of community-related initiatives, as well as detailed classification and explanation on each activity concerning CID initiatives; while the latter gave more insight on possible involved practices based on real-life cases. The definition extracted from ISO 26000 (2011:34) is as follows:

“All businesses should recognize their long-term interest in the sustainability of the communities in which they operate. Every business is a stakeholder in its community; it depends on the community and also affects its development. By providing employment, all businesses can make an important contribution to reducing poverty and promoting economic development.”

It is the words contained in this definition, such as long-term interest, sustainability and employment, that are used to develop the keywords. The first batch of keywords was presented in Table 1. Ten announcements concerning CID were downloaded via Academic LexisNexis, and my thesis supervisor and I checked the validity of these samples together. The validity checking was mainly based on the content from ISO 26000 (2011). During the second round of searching, the keywords were formulated based on the ISO 26000 (2011), along with words that frequently appeared in the samples from the first round (e.g. oil, gas, investment, education). Notably, the companies classified into the oil or gas industry acted as initiators to implement CID practices (Hedin and Ranängen, 2017). Furthermore, the

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19 | P a g e keywords in the second round also included verbs related to the action of certain CID practice implementation (e.g. conduct, launch and engage with). The complete set of keywords were adjusted and cumulated based on the previous rounds of samples and can be found in Table 2. I searched the headlines and lead paragraph of publications by arranging the keywords across different combinations within five words, for example, in same sentence as the keywords, or in the same paragraph as (these options concerning different keywords combination can be selected through Academic LexisNexis). The chosen announcements were from US

newspapers and wires including The Wall Street Journal, PR Newswire and Dow Jones News Service. There was no prescribed ‘specify date’ limitation when searching, because

community-related CSR practices have risen intensively in the past thirty years (ISO 26000, 2011). These chosen announcements reflected a broad scope of community, as companies are not limited to its operating community and can implement CID practices in a remote

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20 | P a g e Table 1 Keywords in the First Round of Searching

Keywords in first round

community development or community involvement or local community or long-term interest or sustainable or sustainability or employment or job or youth*

Table 2 A Comprehensive Set of Keywords3

Keywords in second round

(gas or community or community involvement* or oil or community or community involvement* or CSR or social or social reporting or local community or community interest* well-being or civic engagement* youth or micro-credit schemes or donation or grant or education or schools or

community* or sport or sustainability or local community or building or construction* or hospitals or program or healthcare or grant or community* or technology or upgrade or updating or innovation or network or solar or system or community* or housing or affordable housing or community* or job or job creation or employment or training or local community* or economic or economic development or poverty reduction or community or interest or sustainability* or volunteer or community* or invest or investment or philanthropy or resources*) Near5 or In same sentence as or In same paragraph as (develop* or engage with* or commit* or pledge* or conduct* or support* or contribute* or launched* or serve)

The final sample consists of 198 publications spanning 28 years, covering 152 identified companies from different industries. All of these companies are listed companies in the U.S. stock market. The information concerning these companies and their CID initiatives are assorted in the excel file in the following format: Company name, Permno code, Event date, standardized industry code, announcement title, Community location, Scope and Knowledge intensity. An example can be found in Panel A, Table 3. Panel B, Table 3 displays the

descriptive statistics for the 198 unique samples for the fiscal year preceding the event year of the publication of the CID announcement (the information concerning total assets, employees, sales, and operating income was searched through the Orbis4 database). Notably, the

descriptive statistics on knowledge intensity are based on the narrowed samples (143), due to

3_{Note: the keywords are derived from Frynas (2005), ISO 26000 (2011) and frequently appeared words in CID}

samples.

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21 | P a g e missing observations regarding the percentage of the level of highly educated residents

(knowledge intensity) in a certain community. The findings show that the samples are wide in variation and cover an array of different types of firm, both in terms of the number of

employees and in financial characteristics (Jacobs, 2014). This variety adds weight to the generalization offered by the final result of this study.

The second part of the study aims to investigate the moderating effect of knowledge

intensity, which refers to the percentage of higher-educated residents in a specific community for a given time period (Wang and Choi, 2013). The data concerning this information has been mainly searched through the United States Census database5.

Table 3 Companies’ General Information Panel A: An Example of Sample Company Information

Company Permno Event date SIC Announcement title Community

location Scope6 (operating or remote) Knowledge Intensity (%) HUNTIN GTON BANCSH ARES INC 42906 201703222 6020 Huntington Bank Commits $150 Million to Ohio Affordable Housing in 2017-2018 to Help Those Most Vulnerable and in Need

OHIO Operating 22.7

Panel B: Descriptive Statistics of All Sample Firms

Total assets ($) Employees ($) Sales ($) Operating

income ($) Knowledge Intensity (%) Median 20161144 34198 6080788 900575 30,5 Mean 171768468,2 85071,32 36478314,4 12736820,6 30,5 SD 465113872,8 96320,08 53416635,6 41403095,4 7,4 Max 2231472659 290000 163786000 374310000 65,7 Min 10536 13 518 -1543008 13,1 5_{https://factfinder.census.gov/faces/nav/jsf/pages/community_facts.xhtml}

6_Note:_{The information concerning companies’ operating or remote community can be found on the}

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22 | P a g e 4. METHODOLOGY

Event study method is used in this thesis to examine whether an identified publication of a CID announcement affects the market value of a company. The method of the event study can be defined as “a useful method widely used by empirical researchers in several business disciplines such as finance, law and economics to measure the effect of a certain economic event on the value of a firm” (Engels and Szabo, 2017:23). Event study is a popular research methodology that has been widely applied in various studies within operations and supply chain management literature (Hendricks, Hora and Singhal, 2014; Jacobs and Singhal, 2017; Jacobs, Singhal and Subramanian, 2010; Xia, Singhal and Zhang, 2016). It assumes that the impact of a single event should be immediately reflected in the condition of a company; namely, the stock price or market value of a company. According to Engels and Szabo (2017), there are two advantages of observing a company’s market value following an event. First, it is possible to assess what kind of initiatives will contribute to the company’s stock price or market value. Second, it is possible to consider what kind of factors incentivize investors’ belief on the effect of a particular event.

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23 | P a g e window refers to “the time period over which the security prices are analysed” (Engels and Szabo, 2017:23). The short event window is finally set in this study from [-1,1] based on the efficient market hypothesis. It assumes that “stock prices adjust quickly to impound the wealth effects of any activity” (Modi, Wiles and Mishra, 2015:10). This indicates that a longer event window may disrupt the final results (Kothari and Warner, 2007). As a result, the stock price of an individual company should remain sensitive to events, and the highly changeable stock prices can reflect this sensitivity. Aside from setting the event window, another parameter, known as the estimation window, should also be set based on subjective choice. The companies included in the sample are all listed in the U.S. stock market, and this stock market is sophisticated and limited in restrictions (Wang and Chen, 2017). Therefore, a relatively long period of estimation could explore the predictive power of the market-adjusted model (this model is used to test the abnormal returns and will be elaborated at next

paragraph). This research looks into the period of 200 in order to produce an estimation. Although this goes against the default of the period of 100 that is used in Wharton’s database (Wharton Research Data Service7), it is in line with Wang and Chen (2017)’s study which also looks at how the U.S. capital market responds to socially responsive behaviors

conducted by companies. Moreover, a trading day gap is included between the estimation window and the event window, which is 50 days in this case (Wharton, 2018). This setting is based on the fact that information may leak to the market at an earlier date than the published announcement (Wang and Chen, 2017). Figure 2 displays the construct of the estimation period and event window.

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24 | P a g e

Estimation period: [-251, -51] TD gap: [-51, -1] Event window: [-1, 1]

Figure 2 Timeline between Estimation Period and Event Window

Finally, the ‘market-adjusted model’ is used in this research to estimate the abnormal returns (ARs). This model uses “the returns of the market portfolio return Rm,t over the event

period as the estimated normal return” (Ding et al., 2018:336). Moreover, the ‘market-adjusted model’ is applied as an option by many other recent types of research (Brandon-Jones, Dutordoir, Neto and Squire, 2017; Ni, Flynn and Jacobs, 2014; Paulraj and De Jong, 2011). In addition, the ARs for each company, relating to the samples, is automatically calculated by Wharton Research Data Service. And the ARs are calculated as a company’s actual stock return (ex post return after the event took place) minus the normal return for given event window (Brandon-Jones, Dutordoir, Neto and Squire, 2017). For each firm i on event day t, the AR is

ARi,t = Ri,t – E(Ri,t).

To be noticed, the meaning of ARi,t, Ri,t, E(Ri,t) are the ARs, actual stock returns and normal

returns respectively.

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25 | P a g e multivariate regression with the cumulative abnormal returns (CARs) for the selected event period. The results can generate a relatively reliable event period (e.g. Day [0,1] or Day [-1,0]) by picking the period in which there is a higher level of CARs.

This research comes up two control variables, i.e. Firm size and Industry type, the information concerning two control variables is presented in Table 4.

Table 4 Control Variables

Control variables

Measurement Reference

Firm size

By applying the natural logarithm of total asset of the company in the fiscal year ending prior to the announcement year. The predicted sign of the coefficient is positive Xia et al., 2016 (2016). Industry type By classifying the industry type of the company into manufacture industry and service industry respectively.

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26 | P a g e 5. FINDINGS

5.1 General Analysis

For general analysis, the samples are divided into two parts, the operating community and the remote community. The ARs are calculated based on both parts of the samples being

analyzed separately. As mentioned in the methodology section, the thesis chooses an event window of Day (-1,1) when doing the analysis based on the findings. This decision is

consistent with other studies (Ding et al., 2018). By using this event period, the trend for ARs in the stock market can be viewed more easily (Modi et al., 2015). Table 5 and 6 both show the stock market reaction for the one day preceding the announcement day (Day -1), the day of the announcement (Day 0), the day following the announcement (Day 1), and the selected two-day event period (Day [0,1] and Day [-1,0]). Table 5 presents the information on DARs (daily abnormal returns) and CARs (cumulative abnormal returns) based on CID activities implemented in the operating community. Meanwhile, Table 6 derived the information on DARs from samples in the remote community. As seen in Table 5, there is only one statistically significant ARs on the selected event period Day (0,1). However, as shown in Table 6, the statistically significant ARs appears at Day -1, 1, and Day (0,1). This may lead to the conclusion that the stock prices react more strongly to a company that implements CID practices in the remote community. Notably, at Day -1 (table 6), the ARs are significantly different from zero in negative terms. This unexpected phenomenon may be explained by the uncertainty of investors (due to the leakage of information) because of the long distance from a companies’ location to the remote community of investment. This uncertainty can cause the negative impact on stock prices. Table 6 (remote community) indicates that there are

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27 | P a g e whether in operating or remote communities, companies may experience an obvious gain in ARs in stock prices in the following event period Day (0,1). Indeed, a significant level is reached at 10% (t=1.804*) and at 5% (t=2.265**) in the operating and remote regions. The results may also suggest that the selected event period Day (0,1) may be more reliable than other event periods when conducting a CID event study research. Overall, the findings indicate that a company will gain higher market value when implementing CID practices in a relatively remote community compared to its operating region.

Table 5 Event Period of Abnormal Returns for the 102 Announcements for Companies That Implemented CID in the Operating Community

Abnormal returns

Day -1 Day 0 Day 1 Day (0.1) Day (-1.0)

Mean -0.0026 0.0023 0.0018 0.0041 -0.0002 t-statistic -1.319 1.389 1.183 1.804* -0.101 Median -0.0022 0.0007 0.0002 0.0018 -0.0011 Z-statistic -1.147 1.228 0.950 1.540* -0.361 % Positive 0.44 0.54 0.51 0.54 0.47 Z-statistic# _-0.134 _0.817 _0.618 _0.817 _-0.308

***, **, * denote significant level at 1%, 5%, and 10% levels respectively for two-tailed tests. Z-statistics for medians are obtained using Wilcoxon signed-rank test.

Z-statistic# _{for % Positive are obtained using binomial sign test.}

Table 6 Event Period of Abnormal Returns for the 78 CID Announcements for the Companies That Implemented CID in the Remote Community8

Mean -0.0028 0.0032 0.0018 0.0050 0.0004 t-statistic -1.587* 1.953** 1.226 2.265** 0.176 Median -0.0017 0.0013 0.0002 0.0018 -0.0011 Z-statistic -1.336 1.734* 1.139 1.959** -0.092 % Positive 0.44 0.56 0.51 0.59 0.53 Z-statistic# _-0.134 _0.904 _0.618 _0.973* _0.759

8_{Note: The total announcements for Companies that implemented CID in the operating and the}

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28 | P a g e 5.2 Analysis of Hypothesis 1

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29 | P a g e Table 7 Event Period Abnormal Returns for the 198 CID Announcements over 28-year Study Period

Mean -0.0019 0.0042 0.0023 0.0065 0.0023 t-statistic -1.004 2.750*** 1.389 3.229*** 1.101 Median -0.0007 0.0016 -0.0007 0.0025 -0.0006 Z-statistic -1.068 2.660*** 0.678 2.591*** 0.464 % Positive 0.46 0.58 0.48 0.54 0.51 Z-statistic# _-0.241 _0.957** _-0.382 _0.817 _0.618

5.3 Analysis of Hypothesis 2

To test the moderator effect on the above-mentioned relationship in Hypothesis 1, the thesis combines the independent variable and the control variables to test the following regression model:

CARi=+1FirmSizei+2IndTypei+i,

Where CARi is the two-day (Day [0,1]) cumulative abnormal returns for firm i, and i is the error term; 1FirmSizei (Firm size) and 2IndTypei (Industry type) are two control variables and the detailed information concerning two of these variables can be found in methodology part.

In the event study, the moderator can be used as the independent variable in the regression model, which in this thesis is knowledge intensity. Table 8 presents the linear regression results. Model 1 contains the moderator (knowledge intensity) and one control variable (firm size). Model 2 incorporates the moderator and both of the control variables (firm size and industry type). Due to the missing observation in the percentage of highly educated residents in a community, there are fewer samples (143 in total) used in the regression analysis in model 1 and 2 (Xia et al., 2016). Furthermore, some samples refer to more than one

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30 | P a g e weighted average of the percentage of the level of highly educated residents if the CID activities are launched across more than one community. According to the results, the

coefficient of knowledge intensity is positive in both models, with the significant level of 5% in both models (reporting 2.163** and 2.148** respectively). Notably, both models are statistically significant at a 10% level (2.626* and 1.791*). The result indicates that the knowledge intensity positively moderates the relationship in Hypothesis 1.

Table 8 Regression Analysis based on the 143 CID Announcements

Variables Predicted

sign

Actual sign Model 1

Coefficient Model 2 Coefficient Knowledge intensity + + 0.184 (2.163) ** 0.183 (2.148) ** FirmSize + - -0.035 (-0.410) -0.032 (-0.379) IndType + + 0.030 (0.354) Model F-value 2.626* 1.781* R2 _0.037 _0.038 Adjusted R2 _0.023 _0.017

***, **, * denote significant level at 1%, 5%, and 10% levels respectively for two-tailed tests; Model 2 for the full model with one moderator and two control variables (provided with Italics).

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31 | P a g e

Figure 3 Regression Analysis

0 10 20 30 40 50 60 70 -0,1 -0,05 0 0,05 0,1 0,15 0,2

Regression analysis

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32 | P a g e 6. DISCUSSION

The findings show that the stock market reacts positively to published announcements of CID. This can be explained by the enhanced confidence of shareholders regarding the favorable companies in which they have invested (Bhattacharya and Sen, 2003; Wang et al., 2016). By performing CID practices and by managing relationships with stakeholders, companies can gain more access to community-based resources for their own use (Salancik and Pfeffer, 1978). Furthermore, the U.S. stock market, with its force and sophistication, alongside its relatively small number of restrictions, mainly relies on its self-regulation mechanism (Wang and Chen, 2017). This means that shareholders need a mechanism to secure their investment decision, and as I argued earlier in the thesis, moral reputation capital, which is introduced by Godfrey et al. (2009), can be regarded as such a mechanism. A firm implementing CID initiatives can ultimately gain a positive moral reputation in the market, which protects its operation against a crash, and also attracts more shareholders and investors (Godfrey et al., 2009; Merrill and Hansen, 2009; Muller and Kräussl, 2011).

However, there is some research that suggests the stock market does not react positively. Engels and Szabo (2017) also conducted an event study based on the announcements of socially responsible programs and suggested that "stock prices do not increase significantly following the release of positive news articles or announcements" (Engels and Szabo, 2017: 33). By examining their research further, as well as their announcement samples, the

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33 | P a g e from such behaviors does not generate a coherent set of practices (Varga, 2015). For

shareholders, they may feel such practices are too vague to evaluate because of being broad in nature, especially following a sapped confidence in investment. However, with the CID initiatives that were launched and deployed in one or more communities, the scope of

initiatives is specified. Moreover, based on the definition of ISO 26000 (2011), the particular activities of CID are also specified. Both of two specifications strengthen the certainty of the CID practices and further boost the confidence of shareholders regarding the practice itself, as well as the company who implemented it. Second, the news announcements from Engels and Szabo (2017) cover the period from 2011 to 2016, while this thesis use announcements spanning from a relatively long period, from 1991 to 2018. It has been suggested by Flammer (2013), who split the investigation period (the event date) when calculating the ARs, that the increase in ARs following an event weakens over time. This may lead to the possible

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34 | P a g e Table 9 Abnormal Returns in Two Investigation Periods

Abnormal returns Day (0,1)

Investigating period

1991-2010 2011-2018

Means 0.0094 0.0032

t-statistic 2.109** 1.790*

***, **, * denote significant level at 1%, 5%, and 10% levels respectively for two tailed tests.

The findings also suggest a notable difference in ARs when the scope of CID

implementation is changed. On event day (Day 0), the ARs are significantly different from zero when companies implemented the CID initiatives in the remote region, instead of the operating region. This result may be explained by the increased investor or shareholder awareness that is gained over time (Dawkins and Lewis, 2003). Dawkins and Lewis (2003) have argued that shareholders today can be more prudent when executing investments. Consistent with the work of Vanclay (2003), this research puts forward a broad way to define the community, incorporating both operating and remote region. When deciding to invest a remote community, most companies lend their help to communities in real need (Esteves, 2008). Remote regions under the topic of CID are usually characterized as having a weak local government, harsh living conditions or a misalignment between social and economic planning (Esteves, 2008). Performing CID initiatives in such a region requires a

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35 | P a g e certain company truly incorporates such CID practices into its business agenda and strategic policy, and these are not implemented just on the spur of the moment. Therefore, the response from the shareholders may be stronger when it comes to initiatives in the remote community as opposed to the operating community. This in part due to the idea that CID in the operating region is viewed more like a symbolic implementation, as well as a compromise when faced with local pressure (McEwan et al., 2017).

Finally, the findings suggest that the contingency factor, knowledge intensity, positively contributes to the direct relationship; namely the influence of CID initiatives on the firms’ market value. As elaborated in the previous section of this thesis, the residents with a higher educational level are more conscious of companies projected as holding high profiles in CID (Auger et al., 2007). In addition, residents with higher educational level are more likely to have a positive relation in terms of invest (Lease and Schlarbaum, 1977), and community-related socially responsible behaviors is regarded as a critical criterion in influencing residents on which company’s stock they are willing to buy (Mohr et al., 2001). Another explanation for knowledge intensity’s positive contribution is that residents can use their past experiences when assessing a company performing CID practices. Given that the

achievement of an event occurs after-the-fact (Jacobs, 2014), residents largely depend on previous experience when deciding on which company’s stock they are willing to buy. It is the residents with a higher educational level that are more conscious of investment behavior, and in particular, stock buy-in behavior, and regard it as a habit (Lewellen et al., 1977). Based on their past experiences during an earlier investment period, the residents may have already learned of the positive influence of CID on stock prices, and, therefore are more willing to invest in a company with CID contributions.

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36 | P a g e high awareness of fair trade, responsible SC, and socially responsible issues. Notably, the "customers" in the research of Engels and Szabo (2017) refers to the customer in general, which means no specific attribute has been given to them. In this research, however, the customers are explicitly residents with a higher educational level. Therefore, for further research, it may be interesting to investigate what kind of companies, whether it be the producers of consumer goods or something else, are chosen first by residents with a higher educational level planning to invest.

7. CONCLUSION AND FURTHER RESEARCH

Applying the event study methodology, this thesis examines the stock market reaction to announcements published by companies that have implemented CID initiatives. Based on the samples of 198 CID events from 1991 to 2018, this thesis aims to answer the question of whether it is worthwhile for companies to implement CID initiatives, and even to incorporate it into their business model.

In general, the implementation of CID initiatives contributes positively to the market value of the companies. However, this contribution can be more robust in the early period (before 2010) as opposed to the more recent period (2010 to the present day). It has been found that the knowledge intensity in a particular community has positively moderated the relationship stated above. Furthermore, the stock market reacts more strongly to a company that has implemented the CID initiatives in a remote community as opposed to the operation community.

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37 | P a g e examination restricts a broader view of CID activities, and thus limits the research scope of CID. As such, a quantitative research methodology was used in this research to explore multiple activities by expanding the research samples. This study includes all possible activities of CID in the research samples by applying criteria specified in ISO 26000 (2011). Furthermore, the existing literature rarely focused on how the stock price or market value of a certain company responds to the implementation of CID. When investigating the reaction of a company’s stock price or market value following a certain event, scholars mainly conducted their research under a CSR model. This does not go far enough, and results in a kind of saturation for CSR studies (Arena et al., 2018). There is a need for further research focusing on the sub-dimensional properties of CSR (e.g. CID). Moreover, given the mixed results regarding the relationship between CSR and firms’ market value in previous studies, CSR may be too broad to generate consistent results when relating it to the firms’ market value. Therefore, it is more valuable to study the specific activity under CSR, in this case CID, and to examine the relationship between the selected activity and the firms’ market value.

This study also contributes to the practice of CID. Based on the findings stated above, it is worthwhile for a company to implement CID initiatives, because such a practice can

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38 | P a g e formalization of CID implementation and guarantee the outcome to some extent. A second way that a company can maximize the benefits is by investing in the CID activities in a remote region (incorporating CID initiatives into its business model) instead of the operating region. This can be explained by the enhanced confidence that the investors may gain with regards to the company. Finally, the decision made by a company on which community to engage with can also influence the expected ARs. Proven by this research, choosing an engaged community, with a high knowledge intensity, is necessary for a company to generate a higher increase in stock prices in real terms.

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THE INFLUENCE OF COMMUNITY INVOLVEMENT AND DEVELOPMENT INITIATIVES (CIDs) ON FIRMS’ MARKET VALUE