eThesis - Kauppakorkeakoulun sähköiset gradut

PURPOSE OF THE STUDY The goal of the thesis is to study the financial market effect when companies adopt sustainability reporting. I study if there is a change in financial media news publicity, analyst coverage, or in valuation, as the earlier research is limited, and it has focused mainly on the stock returns of socially responsible companies.

DATA AND METHODOLOGY I use a data set of years 2004-2009 of a broad European stock index STOXX Europe 600. I pick the index members that begin sustainability reporting with GRI framework from GRI organization. I compare companies that begin sustainability reporting to their non-reporting peers. First, the increase of news articles in financial newspapers The Economist and Financial Times from LexisNexis database is studied. Next, the change in analyst coverage and recommendations from the I/B/E/S database is studied. Finally, the change in valuation multiples Price/Book (P/B) and Price/Earnings (P/E) with Thomson Financial data is studied.

RESULTS Companies that begin sustainability reporting experience a significant increase of news visibility when compared to their non-reporting peers. The financial media is interested in sustainable operations. However, the significance disappears when companies are divided to precise industry groups due to high deviation in the news article data and small industry-specific sample sizes. On the other hand, there is on average no distinct change in analyst coverage, or in the analyst recommendations for companies that begin sustainability reporting. Analysts seem to find the reporting data difficult for valuation purposes due to e.g. lack of quantitative financial data. The valuation multiples grow more for the new reporters on the index level, but industry-specific comparisons do not show significant increase for the majority of groups. Still, some limited positive growth of multiples is witnessed. The most positive industry-specific finding reveals how the consumer sector that is easily vulnerable to stakeholder and media critique achieves the greatest benefit in terms of enhanced news visibility, analyst recommendations, and valuation when firms in this sector begin sustainability reporting.