Table 1.
Definition of the variables
| Variable | Measure |
|---|---|
| Aggregate social performance (SP) | Aggregate (composite) measure of social performance, which combines strengths and concerns (SP = Str−Con) |
| Strengths (Str) | Aggregate measure of strengths |
| Concerns (Con) | Aggregate measure of concerns |
| Systematic risk (betadcapmw) | The market beta derived from the CAPM using the previous year’s daily excess returns for each firm-year observation |
| Systematic risk (betad4ffw) | The market beta derived from the four-factor Carhart (1997) model using the previous year’s daily excess returns for each firm-year observation |
| Idiosyncratic risk (IVcapmdw) | The annualized standard deviation of the residuals derived from the CAPM model estimated using the previous year’s daily excess returns |
| Idiosyncratic risk (IV4ffdw) | The annualized standard deviation of the residuals derived from the four-factor Carhart (1997) model estimated using the previous year’s daily excess returns |
| Firm’s total risk (voldw) | The annualized standard deviation from the daily stock returns over the past year |
| Firm size (lnmkteq) | The natural logarithm of the market value of common equity at the most recent fiscal year end to account for the highly skewed nature of this variable |
| Book-to-Market (B/M) ratio (bmw) | The ratio of the book-to-market value of common equity as of the most recent fiscal year end |
| Financial leverage (netlevw) | We follow Bates et al. (2009) by using a net leverage measure calculated as the ratio of long-term debt minus cash & marketable securities to the market value of common equity using values for the most recent fiscal year end |
| Expected return (rmedinfw) | The expected return is proxied by the implied cost of equity capital (rmedinfw) calculated using the implied cost of capital (ICC) methodology (see the Appendix). We also consider the annualized return from the previous year’s daily stock returns (ret1y). The ICC is a much less noisier measure of expected returns than realized returns. Therefore, we use rmedinfw in our regressions as proxy for expected returns |
| Stock liquidity (both level and risk) | The level of liquidity (avgturnover) is proxied by the average daily share turnover (daily shares traded divided by daily shares outstanding), and the liquidity risk is proxied by the coefficient of variation (cvturnover) of this measure over the previous year. The Amihud illiquidity measure (illiq) is computed as in Amihud (2002) |
| Cash flow risk | Dispersion of analyst forecasts: the cross-sectional standard deviation of either one-year-ahead earnings forecasts (dispeps1w) or long-term growth in earnings forecasts (displtg). We expect a positive relation between the dispersion of analyst forecasts and firm risk because a higher dispersion in earnings forecasts implies greater disagreement between analysts about forecasted earnings Standard deviation of the return on assets (ROA): the standard deviation of ROA (sdroa5yw) is computed over the five previous years up to the fiscal year end date of each firm-year observation |
| Investment-to-asset ratio (Investmentw) | We use three proxies for investment: capital expenditures divided by total assets (capex), R&D expenditures divided by total assets (rd), and advertising expenses divided by total assets (ad). Investment-to-asset ratio is the sum of these three variables divided by total assets |
| Expected growth in earnings (expgrthw) | The mean annualized five-year earnings growth rate from I/B/E/S (where available, otherwise estimated as the implicit growth in forecasted earnings from year 1 to year 2) |
| Default risk | Altman’s (1993) Zscore: where NWC is net working capital (current assets—current liabilities), RE is retained earnings, EBIT is earnings before interest and taxes, MVEquity is the market value of total equity (common and preferred stocks), BVTL is total liabilities (current and long-term liabilities), and TA is total assets. A higher value of the Zscore indicates a lower likelihood of default |
| Size of investor base (inv_basew) | The number of common ordinary shareholders divided by common shares outstanding |