The relation between sustainability performance and stock market returns: An Empirical analysis of the Dow Jones Sustainability Index Europe

This paper investigates the relation between corporate financial performance (CFP) and corporate sustainability performance (CSP). This is done by first analyzing a sample of European stocks that were added to or deleted from the Dow Jones Sustainability Europe Index (DJSI Europe) over the period 2009–2013, and second by analyzing a sample of European stocks that were recognized as industry group leaders in CSP by the DJSI Europe over the same period. The impacts are measured in terms of (abnormal) stock returns. For the first analysis no strong evidence could be found that the announcement of the inclusion and exclusion events has any significant impact on stock return. However, on the day of change (CD) and in the period following CD, index inclusion (exclusion) stocks experience a significant but temporary increase (decrease) in stock return. These results seem to support Harris and Eitan’s (1986) price pressure hypothesis, which postulates that event announcement does not carry information and any shift in demand and hence the corresponding price change is temporary. From the second analysis, on industry group leaders, it can be concluded that the market rewards firms with high CSP. In the period after the day of change, industry group leader stocks experience a permanent and significant positive growth in stock returns. This conclusion can be supported by the resource based perspective, which posits that firms capable of investing heavily in CSP have greater underlying resources which in turn should produce higher financial performance (Alexander and Bucholz, 1978; Waddock and Graves, 1997; Clarkson et al., 2006).