The value of adopting the Equator Principles.

The value of adopting the Equator Principles.

An event study of the market value of adopting a new guideline.

Author: K.R. Koster Student Number: 1198300 Date: 31-08-2007

Coordinator: prof. dr. L.J.R. Scholtens Rijksuniversiteit Groningen

Faculty of economics

Table of contents

1

Introduction... 3

2

Relevant literature ... 5

2.1

The origination of the Equator Principles... 5

2.2

The Equator Principles, what and why?! ... 6

2.2.1

The Equator Principles, what? ... 6

2.2.2

The Equator Principles, why? ... 8

2.2.3

Criticism of the Equator Principles... 9

2.3

Adopting and implementing the Equator Principles... 10

2.4

Connection to World Bank and IFC guidelines... 11

2.5

Revision of the Equator Principles ... 12

2.5.1

The revision of the Equator Principles, why?... 12

2.5.2

Implementation of the revised Equator Principles... 13

2.5.3

Content of revised Equator Principles ... 13

2.6

Relevant previous research ... 15

3

Methodology & Sample selection ... 17

3.1

Sample selection ... 17

3.2

Methodology ... 18

4

Hypotheses & Results ... 22

5

Conclusion ... 27

1 Introduction

This paper is about the Equator Principles and its influence on the value of companies adopting these principles.

The Equator Principles are a set of guidelines to steer financial institutions in the field of project financing. To adopt the Equator Principles a financial institution declares that it has already implemented or will implement internal policies and processes consistent with the Equator Principles.

The primary goal of these principles is that projects around the world, which are financed by financial institutions that have adopted the principles, are developed in a responsible way both socially and with respect to the environment. This means that negative impact with respect to these points should be avoided. If this is not possible then it should be limited to a minimum or compensated for.

This implies that if one wants project financing from a financial institution that has adopted the Equator Principles, but is not willing to or able to comply with the social and environmental policy and procedures according to the Equator Principles, no loan will be provided by a financial institution that adopted the Equator Principles.

Since the introduction of the Equator Principles there have been over fifty financial institutions that have adopted these principles. Together they operate in over 100 countries.

The Equator Principles have become the global standard in the financial industry, regarding how to approach social and environmental issues in project financing. Despite the increasingly important role of the Equator Principles in the area of project financing, adopting and implementation of the principles still are voluntarily, not mandatory.

In this paper you will find research to find out if adoption of the Equator Principles has influence on the value of the financial institution concerned, and if this is positive or negative. To do this, the market value of nominal stocks of the financial institutions concerned will be used to measure value effects. These possible value effects will be measured using event study methodology.

Two hypotheses will be tested in this context. The main hypotheses being: adoption of the Equator Principles has no effect on the value of the adopting financial institutions. Hypotheses 2 is: There is no difference in abnormal returns between financial institutions that initially adopted the Equator Principles, compared to financial institutions that adopted the Equator Principles later.

2 Relevant literature

This paper is about the influence of an event on the market value of financial institutions. The event in question is the declaration of adoption of the Equator Principles. This section first ensures familiarization with the Equator Principles based on the official website (http://www.equator-principles.com) and relevant press releases. Additionally, relevant previous research will be discussed.

Section two consists of six parts. The first part is about the origin of the Equator Principles. Reasons why financial institutions adopt the Equator Principles and more about the goals of the principles themselves will be discussed in the second part of this section. Elaboration on adoption and implementation of the Equator Principles can be found in part three. Part four is about the connection and relationship (or absence of those) of the Equator Principles with some other guidelines and standards concerning the financing world. Part five offers information about the latest revisions of the Equator Principles. Finally, part six discusses previous research.

2.1 The origination of the Equator Principles

Banks working in the project finance sector have been wanting a global standard that could be applied across all industry sectors for environmental and social policies and guidelines for several years.

The first step towards achieving such a goal was made in October 2002. A small number of banks and the World Bank Group’s International Finance Corporation (IFC) came together in London to talk about this. At this meeting the banks decided that they would try to develop a banking industry framework of how to handle environmental and social risks in project financing (project financing is a method of funding in which capital is provided to the borrower, the main source of repayment and security for the lender being the revenues generated by the project of the borrower). This framework was to be based on the environmental standards of the World Bank and the social policies of the IFC.

first set of Equator Principles as a result. As a consequence of the meeting, these were launched in Washington, DC on the fourth of June 2003.

2.2 The Equator Principles, what and why?!

The Equator Principles are the first set of global guidelines to help financial institutions assess specifically environmental and social risk in the field of project financing in any industry. In addition to this, having the accomplishment as an end, that projects around the world financed by financial institutions that have adopted the Equator Principles are developed in a way both socially and environmentally responsible.

Of course the principles are also valid for the participating financial institutions themselves. In section 2.2.1 the Equator Principles are summarized. Section 2.2.2 explains why financial institutions adopt the principles and in section 2.2.3 criticism on the Equator Principles is discussed.

2.2.1 The Equator Principles, what?

Since the revision of the set Equator Principles in July 2006 (for more information about the revision, see section 2.5) there are ten principles. They declare under what circumstances loans will be provided directly to projects by financial institutions that have adopted the Equator Principles. Here follows an overview of the ten principles.

- First the project is categorized in terms of risk, in accordance with internal guidelines based upon environmental and social screening criteria of the IFC.

- The third Equator Principle states that the Assessment process mentioned in Principle 2 should be in compliance with the relevant host country laws, regulations and permits with respect to social and environmental matters.

Projects located in non-OECD (Organization for Economic Co-operation and Development) countries and projects located in OECD countries, but which are not among High-Income countries as defined by the World Bank Development Indicators Database have to satisfy overall compliance with, or justified deviation from applicable IFC Performance Standards and EHS Guidelines.

High-income OECD countries usually meet or exceed these standards. Therefore, as long as projects in these countries comply with domestic law this is considered an acceptable substitute for the below mentioned requirements in Principles 4, 5 and 6, that borrowers from non-High Income countries additionally have to meet. Nevertheless, these projects are still categorized and reviewed as noted in Principles 1 and 2. Principles 4, 5 and 6 therefore are only applicable to non-OECD countries and OECD countries not designated as High-Income, as defined by the World Bank Development Indicators Database.

- All borrowers to whom Principle 4 applies, whose projects are medium and high risk projects construct an Action Plan. This plan consists out of an agreement with the lending bank on how to mitigate and correct potentially harmful social and environmental influences, and how to monitor this. Failure to comply with this agreement could ultimately result in cancellation of the loan.

- Borrowers who need project financing for medium and high risk projects consult with affected communities and other stakeholders and discloses information to the public concerning risks and possible negative social and environmental consequences of the project.

- Principle 6 obliges borrowers, for all applicable Category A and B projects, ongoing consultation, disclosure and community engagement throughout construction and operation of the project. Additionally, the borrower is to create a transparent grievance mechanism as part of the management system allowing the borrower to receive and facilitate resolution of concerns and grievances about the project’s social and environmental effects raised by affected communities.

- Principle 8 states that for Category A and B projects borrowers must comply with covenants with respect to financing documentation. This concerns compliance with laws, regulations, permits and the Action Plan. Additionally, to provide periodic reports and, finally, to decommission facilities in accordance with an agreed decommissioning plan. Financial institutions will help the borrower in case of lack of compliance, however, abiding failure to comply could ultimately lead to cancellation of the loan.

- To guarantee ongoing, accurate monitoring and reporting over the life of a loan which is to be shared with the financial institutions that have adopted the Equator Principles, the borrower is required to appoint an environmental and/or social expert.

- Finally the 10th principle obliges the financial institutions, that have adopted the Equator Principles, themselves to report, at least annually, about their implementation processes and experience. This principle was added when the Equator Principles were revised.

The above principles are applicable to all new projects with capital costs totaling 10 million US dollars or more. In the initial draft of the Equator Principles this was 50 million US dollars. Existing projects will be taking into account when for example expansion or changes in the project’s scale or scope might result in having significant additional environmental and/or social impacts.

An official oversight of the Equator Principles can be found in the appendix.

2.2.2 The Equator Principles, why?

Why do financial institutions decide to adopt the Equator Principles? Financial institutions adopting the Equator Principles will be evaluating environmental and social issues by one and the same standard, increasing transparency and saving the trouble of differently based assessments. This homogeneity also saves time and therefore money.

This is also the case concerning implementation of projects. In addition to this, it is easier to asses, document and monitor credit risk and reputation risk inflicted by financing in projects. Ultimately, this means more certainty and less risk with concern to approaching potential projects to finance.

Unity in policy regarding project financing also enables financial institutions to learn from each other, together continuously improving the best way to tackle project finance problems.

In the end, handling decisions according to the Equator Principles, which have become the most important guidelines in the field of project financing, also increases the reputation of these financial institutions compared to those ignoring these guidelines.

Using more stringent demands in the view of providing loans could result in a decline of business. However, since the implementation, now almost four years ago, there has not been such a decline because of the adoption, application or implementation, according to the Equator Principles financial institutions.

On the contrary, heads of participating financial institutions have praised and advocated for the Equator Principles. Risk control, learning from other financial institutions and as a consequence improved abilities play an important role for them.

Not everybody shares this enthusiasm about the Equator Principles. While generally being well received, some project sponsors have the opinion that the principles are too stringent. NGOs, on the other hand, criticize the Equator Principles as still being too weak.

2.2.3 Criticism of the Equator Principles

Several parties have expressed their feelings about the Equator Principles, the implementation of them and the way they are carried out. This section does not attempt to be a complete overview of all possible complaints and criticism on the Equator Principles, but merely discusses some examples of the criticism over the last years.

consultant confirmed this. However, a NGO assessment claimed over one hundred breaches of the principles.

Besides this example, several NGOs are of the opinion that the principles are a decent theoretical concept, but in practice they are not lived up to, like in the BTC case. Financial institutions fight this statement by publishing summaries of their Equator Principles screening, including the number of projects turned down because of lack of compliance with the principles.

Something else concerns the IFC Standards on which the Equator Principles are based. Some stakeholders are concerned that banks might try to lobby IFC to weaken their standards. However in 2006 IFC policies were revised and strengthened, in alignment with this action, in July 2006, the revised edition of the Equator Principles were launched.

The final example concerns one of the initiating banks of the Equator Principles. Some NGOs state that ABN AMRO finances a substantial, negative environmental impact. This is based on the estimated indirect CO2-emissions, of ABN AMRO, being approximately the same as the annual CO2-emissions of the Netherlands and almost 1% of the total annual worldwide CO2 -emissions. Although ABN AMRO announced steps to reduce its direct CO2-emissions, NGOs are especially worried about indirect emissions, because global banks can play a large role in that area.

2.3 Adopting and implementing the Equator Principles

Adopting the Equator Principles is equivalent to a declaration of a financial institution, wishing to adopt the principles, that it either already has implemented or will implement internal policies, procedures and processes consistent with the Equator Principles.

2.4 Connection to World Bank and IFC guidelines

The new IFCs Performance Standards represent a weakening of standards according to some stakeholders. The financial institutions that have adopted the Equator Principles do not agree. Rather than weakening standards the new standards in fact improve, by focusing on the grass roots implementation of the policies and not solely on the process. The proof of this will be demonstrated in the implementation process, with the financial institutions committing themselves to implement the principles in a manner consistent with their public comments, while having no negative effect on the Equator Principles.

The World Bank and IFC Environmental, Health and Safety (EHS) Guidelines, including possible adjustments and developments concerning these guidelines, are watched closely by the financial institutions that have adopted the Equator Principles. These financial institutions take part in the process of public comment to make sure that updates of the EHS standards match industry practice.

Presently the IFC is using two sets of complementary EHS guidelines consisting of all the environmental guidelines contained in Part III of the World Bank's Pollution Prevention and Abatement Handbook (PPAH) which went into official usage on July 1, 1998. In addition, a series of environmental health and safety guidelines published on the IFC website between 1991 and 2003, are also utilized. The concepts of cleaner production and environmental management systems will be accommodated in a set of new guidelines, devised to replace the current PPAH and IFC guidelines, which where issued in July 2006.

Where no sector specific guideline exists for a particular project then the PPAHs General Environmental Guidelines and the IFC Occupational Health and Safety Guidelines (2003) are applied and adapted accordingly.

IFC uses a set of environmental and social policies called "Performance Standards" that are geared to its private sector operating context. IFC and World Bank share standards that are uniform in regard to their environmental and social objectives.

However, the World Bank and IFC have worked very hard together to ensure that IFCs new standards are fully compliant with the Bank's. They share the same goals for the environment as well as people and communities that they are involved with.

2.5 Revision of the Equator Principles

In July 2006 the revised Equator Principles became effective. In this revised edition of the Equator Principles some of the principles were adjusted and one principle was added.

In general, the revision incorporates stronger and clearer requirements for the financial institutions that have adopted the Equator Principles, as well as for their borrowers.

When it became clear that the Equator Principles required updating, the financial institutions of the Equator Principles decided to take advantage of the fact that a broad range of interested stakeholders were willing to share their experiences over the past three years. These comments, provided through several meetings and conference calls, have greatly improved the final draft, despite their diversity. NGO stakeholders, however, complained that the revised edition still was far from optimal with respect to the issue of implementation of the principles.

Section 2.5.1 elaborates on the reasons why the Equator Principles were revised, while section 2.5.2 discusses relevant matters concerning implementation and transitional issues. Finally, the contents and adjustments with respect to the original set of Equator Principles are discussed in section 2.5.3.

2.5.1 The revision of the Equator Principles, why?

Besides the source of revision mentioned above, the revised set of Equator Principles was also influenced in some other ways. This includes learning from implementation experience and using comments from a variety of external stakeholders to its advantage over the last three years. In addition to this, there was an external comment process for the final draft of the revised Equator Principles with clients, NGOs and Official Agencies (e.g., Export Credit Agencies). As a consequence of this revision, the Equator Principles have now incorporated, and are now again fully consistent with, the environmental and social “Performance Standards” of the IFC.

2.5.2 Implementation of the revised Equator Principles

The revised set of Equator Principles became effective July 6, 2006. However, due to reviewing and approving procedures, some projects applying for financing before this date, that have been accepted after this date, somewhat fall in a sort of gap. The financial institutions of the Equator Principles therefore decided that, in these cases, certain projects initiating due diligence between July 6, 2006 and January 6, 2007 may still make use of the preceding set of Equator Principles and IFC Safeguard Policies on which these principles are based.

From January 7, 2007 and onwards the revised Equator Principles, including the new IFC Performance Standards, will be employed if applicable.

2.5.3 Content of revised Equator Principles

The focus of the Preamble of the revised set of Equator Principles lies on the key policy statement. This implies that potential borrowers who will not, or are unable to act in accordance with the social and environmental policies, as well as the procedures that implement the Equator Principles will not be provided with loans by the financial institutions that have adopted the Equator Principles.

One of the objectives of the Equator Principles is to make sure that any project with a significant environmental or social influence will be covered, whilst avoiding transactions that contain the small business aspects of banking. To this end, the project finance threshold was lowered from $50 million to $10 million in the revised edition of the principles.

A capacious revision did not concern an alteration of the principles, but an addition to the principles. Non governmental organizations were unsatisfied regarding provided information with respect to implementation of the Equator Principles and transparency, including better reporting by the financial institutions that have adopted the Equator Principles. This induced the financial institutions to add a new principle on reporting. This principle requires all financial institutions that have adopted the Equator Principles to individually report publicly, at least annually about their Equator Principles implementation processes and experience.

The most important changes made in the revised edition compared to the initial version of the Equator Principles include the following:

- The size of the project necessary to be subject to the Equator Principles was lowered from 50 million US Dollars to 10 million US Dollars.

- Not only do the principles apply to project financing now, but also to project finance advisory activities.

- Upgrades and expansions of existing projects with additional environmental and/or social impacts are covered more specifically.

- The process of how to apply the Equator Principles to projects in countries with high standards of environmental and social issues has been streamlined.

- Each financial institution that has adopted the Equator Principles is obliged to report on their progress and performance in implementing and applying the Equator Principles, at least annually, the tenth Principle.

- More stringent and better environmental and social standards, including more robust public consultation standards.

As a final remark concerning revision, it should not be forgotten that the Equator Principles concern all industry sectors, therefore it was unnecessary to include industry sector standards specific to one industry sector.

2.6 Relevant previous research

In this section some previous event studies concerning social and environmental

responsibility and the adoption of some sort of voluntary guidelines are discussed.

Fernández-Rodríguez et al. (2004) analyze how the Spanish market reacts to firms announcing compliance with the code of best practice. Their results suggest a positive relationship with respect to announcements of compliance with the code of best practice and the market value of the announcing firms. Rubach and Picou (2006) examine what stock price reactions are primarily attributable to institutional investors result from announcements of enactment of corporate governance guidelines by firms. Their results show that good governance matters. The described announcements lead to increased stock prices following the announcements. An immediate reaction was found for firms that provided at least a part of the guidelines’ substance and a delayed reaction occurred even for firms only referencing the guidelines’ enactment. Besides this, firms with tighter relationships with their stakeholders were rewarded by the announcement of guidelines.

Concerning social responsibility and ethical matters, D.L. Gunthorpe (1997) examines how the market reacts to unethical business practices. She finds statistically significant negative abnormal returns for firms, upon the announcement that a firm is under investigation or in any way engaged in unethical behaviour. Suggesting that firms get penalized for their unethical actions.

Halme and Niskanen (2001) did research on the influence of environmental investments, over the period 1970-1996, on the market value of firms from the Finnish forest industry. They find an instantaneous negative market reaction, increasing when the investment of a corresponding firm increases. However, after this negative reaction a fast price recovery is observed. This supports the notion that environmental investments are not negative net present value investments.

responsibility provides value. Firms in industries under critique in the Seattle WTO failure case suffered a decline in market capitalization if they were not known for being social responsible. On the other hand, firms in the same industries who are perceived as being socially responsible did not suffer from a statistically significant decline in market capitalization.

Curran and Moran (2007) examine the financial impact of firms being environmentally and socially responsible. They use inclusion and deletion from the FTSE4Good UK Index as a proxy measure for good or poor corporate social responsibility. They find that positive announcements towards corporate social responsibility lead to positive effects on daily returns, as do negative announcements with respect to corporate social responsibility lead to negative effects on daily returns. However, these price movements are statistically insignificant. They conclude that a firm’s presence in the index as a proxy for upholding corporate social responsibility does not result in statistically significant returns for firms.

When it comes to the event study methodology, McWilliams et al. (1999) claim that event studies alone are inadequate to assess the effect of strategic decisions on firm performance. According to them, they provide, at best, estimates of the short run impact on shareholders, neglecting other corporate stakeholders. Additionally, small changes in research design influences results. Contradictory findings can arise from differences in research design and implementation. Researchers have found and reported positive, negative and neutral results with respect to the effect of corporate social responsibility on financial performance. McWilliams and Siegel (2000) claim that misspecifications result in biased estimates of impact on financial performance. They find that with a properly specified model corporate social responsibility has a neutral impact on financial performance.

3 Methodology & Sample selection

To find out whether adopting the Equator Principles has value, and if so, a positive or negative value, event study methodology will be employed. Event study methodology is widely used in finance to detect the possible presence of abnormal returns or results.

Several guides to perform an event study have been published in the past or can be found on the internet. Brown and Warner (1985), and MacKinlay (1997) are examples of such guides. In this chapter, Brown and Warner (1985) will be used as guide of how to perform an event study. Before the methodology can be applied, it must be established what the sample consists of and how this is determined. Therefore, this will be elaborated on in section 3.1. Followed by section 3.2, in which the methodology will be discussed.

3.1 Sample selection

In order to test my hypotheses, data of stock prices was gathered using DataStream. The collected stock prices from DataStream are adjusted for dividends and stock splits. Therefore dividends and stock splits do not affect returns and results.

Days on which the stock market was closed are, of course, not included in the sample to prevent a lot of zero return days, which would reduce average returns and average abnormal returns.

Because of the continuing and ongoing adoption by financial institutions of the Equator Principles it is necessary to choose a concrete date after which no financial institutions that have adopted the Equator Principles will be included in the sample of my research. Only financial institutions that have adopted the Equator Principles before the first of January 2006 are included in the sample. Rendering a mixed sample of financial institutions geographically and moment of adoption.This leaves 351 financial institutions. Returns of the stock of financial institutions that do not have stock prices registered in DataStream, for whatever reason, for example because they do not have publicly held stock, are excluded out of the sample. Leaving 30 companies. The skewness of the daily returns of the sample is 0,252 and the kurtosis of the daily returns of the

1

sample is 0,643 approximately rendering a normal distribution, so we can treat the sample as if it were a normal distribution.

Average 0,0005

Standard Deviation 0,0074

Kurtosis 0,643 Skewness 0,252

Table 1: Descriptive statistics of the estimation window, of the aggregated daily returns.

3.2 Methodology

Like mentioned before, event study methodology will be employed in this study. One of the underlying ideas of an event study is that, given the economic concept of efficient markets, the influence of an unexpected event the on the value of a company should immediately be reflected in security prices. Impact of our unanticipated event, adopting the Equator Principles, will be measured using relevant security prices.

Three assumptions are made. First, markets are efficient, which means stock prices immediately reflect all available, relevant information. Second, the event, which possible influence is measured, is unanticipated, which means any abnormal returns found are the result of a reaction to the event, in the event period. Finally, there are no other factors that can be the cause of any abnormal returns found. Clearly, if this is the case then abnormal returns found can be caused partly by the event and partly by any of these factors.

The first published event study dates back to the beginning of the 1930s. Until the end of the 1960s event study methodology improved significantly, when Ball and Brown (1968), as well as Fama, Fisher, Jensen and Roll (1969) introduced the methodology that is essentially the same as it is used today. Since then this methodology has been refined for specific use and availability of data has improved.

First, non-normality, which comprises deviations from normality with respect to the daily stock return for an individual security, as well as the daily excess returns. However, according to The Central Limit Theorem [Billingsley (1979)] the distribution of the sample mean excess return converges to normality as the number of securities increases, if the excess returns in the cross-section of securities are independent and identically distributed drawings from finite variance distributions.

Of each financial institution, and thus, security included in the test, two hundred and fifty samples are taken from DataStream, yielding 249 daily returns. The two hundred and fifty sample size that will be used in our research is enough to let the distribution of the results converge to normality. As a consequence, non-normality of daily stock returns has no significant influence on the tests. Second, non-synchronous trading can lead to biased and inconsistent ordinary least squares (OLS) estimates. However, using alternative techniques for parameter estimation do not lead to improvement of these estimates.

Finally, there are several issues concerning the estimation of the variance. However, the models being used are accurate parameter estimators and expanding the models does not improve this a lot, besides bringing other complications.

In this paper, the abnormal returns will be calculated using three models. First, the mean-adjusted returns model.

t i

A_, is defined as the excess, or ‘abnormal’, return of security i at day t. is defined as the

observed arithmetic return for security i at day t and, finally,

t i

R_,

i

R

is the average of security i’s

daily returns in the (-244, -6) estimation period, as stated in formula (2).

' , ,t it i i R R A = − (1)

∑

− − = = 6 244 ' , 239 1 t t i i R R ₍₂₎

The market-adjust returns model will be used as an alternative way of measuring excess returns. When there is data missing in the estimation period, parameter estimation excludes the day of the missing return, as well as the return for the following day.

t m

R , being the return on the relevantly chosen market index for day t.

Finally, the OLS market model will also be used as an alternative excess returns measure.

(4) ' , , ,t it ˆi ˆi mt i R R A = −

α

−

β

i

α

ˆ and are OLS values from the estimation period, these values will be calculated using Eviews, other calculations were done using Excel.

i

β

ˆ

The above models are less complex than multi-factor models, however e.g. Brown and Warner (1980) find that these more complex multi-factor models do not find significantly more accurate results compared to the additional complexity of the models.

An estimation period of 239 days, yielding 238 daily returns, will be used before the event period which lasts 11 days, consisting out of 5 days before the event day and 5 days after de event day to capture excess returns around the announcement of the event.

Excess returns found, according to the above methodology, will be tested for statistical significance with respect to the relevant hypothesis using SPSS and Excel. This is achieved by dividing the average, daily, excess returns by the estimated standard deviation. The standard deviation is estimated from the time-series of the mean excess returns.

) ( ˆ t t S A A t= (5)

is the test statistic for event day t, which is 0 in our event study. A_t is the average of A_i,_t:

t A = _N1

∑

= t N i t i A 1 , (6)

∑

=− − = =

−

=

6 244 2

238

/

)

(

(

)

(

ˆ

t t t t

A

A

A

S

(7) With

∑

− = − = = = 6 244 239 1 t t t A A (8)

Finally to test hypotheses 2 we require a t-test with two populations.

m

S

n

S

Yt

Xt

t

2 2 2 1

+

−

=

(9)

4 Hypotheses & Results

As discussed in the chapter concerning relevant literature, previous relevant research has seen different kind of results. Positively correlated results, neutral results, positively statistically insignificant results and temporary results.

Table 2 displays the average abnormal returns and corresponding T-values for each event day, for each different model used. The models that need a market index in the estimation or calculation of the abnormal returns were done twice where possible. Once with a main index, usually the eminent, main index of a stock exchange, and once with a financial index. In this way abnormal returns are corrected for the possibility that financial stocks outperformed the general market in our sample period. The main hypotheses being: adoption of the Equator Principles has no effect on the value of the adopting financial institution. As can be seen in table 1.

Model Event day Average AR T-Value

Mean Adjusted Returns Model -5 0,0078 1,05

-4 0,0036 0,49 -3 0,0004 0,05 -2 0,0004 0,05 -1 0,0010 0,13 0 0,0059 0,79 1 0,0055 0,74 2 0,0048 0,65 3 0,0026 0,36 4 0,0038 0,51 5 0,0053 0,71

Market Adjusted Returns Model -5 0,0009 0,23

(Main indices) -4 0,0022 0,56 -3 -0,0020 -0,51 -2 -0,0005 -0,13 -1 0,0019 0,50 0 0,0027 0,71 1 0,0051 1,32 2 0,0007 0,19 3 0,0043 1,12 4 0,0015 0,38 5 0,0029 0,74

Market Adjusted Returns Model -5 0,0023 0,83

-2 -0,0001 -0,05 -1 -0,0021 -0,77 0 -0,0002 -0,08 1 0,0004 0,13 2 0,0005 0,16 3 0,0059 *2,11 4 0,0023 0,82 5 0,0009 0,33 Market Model -5 -0,0002 -0,02 (Main Indices) -4 0,0016 0,16 -3 -0,0019 -0,18 -2 -0,0015 -0,14 -1 0,0021 0,20 0 0,0028 0,26 1 0,0043 0,41 2 -0,0014 -0,13 3 0,0061 0,58 4 0,0018 0,17 5 0,0019 0,18 Market Model -5 0,0029 0,96 (Financial Indices) -4 0,0020 0,68 -3 0,0046 1,52 -2 0,0002 0,08 -1 -0,0024 -0,78 0 0,0004 0,12 1 -0,0002 -0,07 2 0,0008 0,28 3 0,0064 *2,15 4 0,0034 1,14 5 0,0018 0,61

Table 2: Abnormal returns (AR) and corresponding T-values. The first column denotes the respective model. The second column denotes the respective event day T = X. The third column denotes the aggregated abnormal return. The fourth column denotes the T-value belonging to the respective abnormal return value. T-values that have statistically significance on a 95% level are marked with a *. The T-tests performed are two-sided.

that, despite our assumption that markets are efficient, markets are in fact not efficient and that it takes time (three days) for the information to be incorporated in the stock prices.

Back to Hypotheses 1:

adoption of the Equator Principles has no effect on the value of the adopting financial institutions. As a consequence of the above mentioned results, Hypotheses 1 has to be rejected when using two of our models [respectively: market adjusted returns model (using financial indices) and market model (financial indices)]. Positive abnormal returns are generated in the event period, shortly after the event takes place.

Based on the mean adjusted model, the marked adjusted returns model (using main indices) and the marked model (using main indices) Hypotheses 1 is accepted, since there are no statistically significant abnormal returns detected with those models.

For the second hypotheses: there is no difference in abnormal returns between financial institutions that initially adopted the Equator Principles, compared to financial institutions that adopted the Equator Principles later, please take a look at table 3.

Model Event day AR STDEV T-Value

Mean Adjusted Returns Model -5 0,0227 0,0091 *2,4811

-4 0,0017 0,0098 0,1702 -3 0,0072 0,0098 0,7400 -2 0,0307 0,0098 **3,1420 -1 -0,0053 0,0098 -0,5441 0 0,0159 0,0098 1,6327 1 -0,0047 0,0098 -0,4806 2 0,0172 0,0098 1,7668 3 -0,0141 0,0098 -1,4421 4 0,0061 0,0098 0,6227 5 0,0292 0,0098 **2,9922

Market Adjusted Returns Model -5 0,0111 0,0043 *2,6051

Market Adjusted Returns Model -5 0,0114 0,0028 **4,0665 (Financial Indices) -4 0,0020 0,0028 0,6934 -3 -0,0018 0,0028 -0,6532 -2 -0,0040 0,0028 -1,4355 -1 0,0045 0,0028 1,5979 0 -0,0060 0,0028 *-2,1177 1 0,0005 0,0028 0,1832 2 -0,0059 0,0028 *-2,1021 3 -0,0006 0,0028 -0,2244 4 -0,0066 0,0028 *-2,3276 5 0,0042 0,0028 1,5067 Market Model -5 0,0054 0,0031 1,7659 (Main Indices) -4 0,0025 0,0031 0,8057 -3 -0,0030 0,0031 -0,9843 -2 0,0032 0,0031 1,0465 -1 -0,0005 0,0031 -0,1677 0 0,0024 0,0031 0,7673 1 -0,0004 0,0031 -0,1147 2 -0,0033 0,0031 -1,0795 3 -0,0060 0,0031 -1,9650 4 0,0013 0,0031 0,4353 5 0,0081 0,0031 **2,6585 Market Model -5 0,0108 0,0043 *2,5148 (Financial Indices) -4 -0,0018 0,0043 -0,4167 -3 0,0028 0,0043 0,6585 -2 -0,0035 0,0043 -0,8190 -1 0,0022 0,0043 0,5074 0 -0,0042 0,0043 -0,9881 1 -0,0007 0,0043 -0,1629 2 0,0007 0,0043 0,1538 3 -0,0050 0,0043 -1,1635 4 -0,0017 0,0043 -0,3994 5 0,0081 0,0043 1,8825

As can be seen in table 3, for every model there is at least one event day on which an abnormal return is observed which has statistical significance on a 95% or even 99% level. Coming back to our second hypotheses “there is no difference in abnormal returns between financial institutions that initially adopted the Equator Principles, compared to financial institutions that adopted the Equator Principles later”, we have to reject this hypotheses based on all models on the significance levels as displayed in Table 3. The event days T = -5, T = -2 and T = 5 are the most common days on which the two populations show significant differences in abnormal returns. On T = -5 and T = 5 occur the most significant abnormal returns in favor of the financial institutions that adopted the Equator Principles on the fourth of June 2003 compared with financial institutions that adopted the Equator Principles later.

I will give two possible explanations for this phenomenon. First, it is possible that when it became known the Equator Principles were going to be instated shareholders became enthusiastic about this and stock prices increased. After the event day more shareholders became enthusiastic about the stocks because of the adoption of the Equator Principles and prices increased more. However, like mentioned in section 2.2.3 criticism came upon the Equator Principles. As a consequence, the same enthusiasm among shareholders did not occur again for the later adopting financial institutions. It should be noted that, again, the assumption of efficient markets must be dropped to make this explanation be valid.

5 Conclusion

In this study research was done about the market value of adopting the Equator Principles. To accomplish this, available stock prices were taken from DataStream. Using event study methodology research was done to find out if statistically significant abnormal returns were achieved in the event period.

The results are not clear. Three models were used, with different data to estimate the abnormal returns as good as possible. The results are different for the different models and different data. The Hypotheses 1: “adoption of the Equator Principles has no effect on the value of the adopting financial institutions” is accepted using the mean adjusted returns model, the market adjusted returns model (using main indices) and the market model (using main indices). However, Hypotheses 1 has to be rejected when using the market adjusted model (using financial indices) and the market model (using financial indices), since statistically significant, positive, abnormal returns are generated at day T = 3 in the event period.

These results are similar to results found in Fernández-Rodríguez et al. (2004), who find a positive relationship between the announcement of compliance with the best practice code in Spain, Rubach and Picou (2006) also found a positive relationship between announcements of enactment of guidelines and market value, but also to D.L. Gunthorpe (1997) in adverse direction. On the other hand Curran and Moran (2007) found no statistically significant market value for corporate social responsibility, as in this research with some of the models

Hypotheses 2 “there is no difference in abnormal returns between financial institutions that initially adopted the Equator Principles, compared to financial institutions that adopted the Equator Principles later” has to be rejected looking at the results in Table 3. For every model there is at least one event day on which an abnormal return is observed which has statistical significance on a 95% or even 99% level.

Two possible explanations for this phenomenon are first of all differences in shareholder enthusiasm. In this case meaning that shareholders first became enthusiastic about the Equator Principles, but over time learned that they did not make much of a difference and therefore new announcements of adoption of the Equator Principles did not yield the same enthusiasm. To make this explanation a valid one the assumption of efficient markets must be dropped.

Second, the sample size of the financial institutions that adopted the Equator Principles on the fourth of June 2003 is small. As a consequence the resulting excess returns compared to financial institutions adopting the Equator Principles after the initial instatement might be more of accidental nature.

So perhaps McWilliams et al. (1999) are right. Event studies alone are not capable of accurately assessing value effects of strategic decisions of a firm, like for example adopting the Equator Principles. Combined with the fact that small changes in research design can have significant influence on the results. In this study it is obvious that the choice of model, as well as the chosen indices as proxy for the Rm have significant consequences for the results.

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