The effects of social ratings on firm value

• We examine the shareholder value effects associated with the announcements of corporate social responsibility (CSR) ratings.
• Ratings announcements generate a positive stock market reaction regardless whether the rating is good or bad.
• The overall CSR rating has no effect on shareholders’ wealth.
• Some specific CSR dimensions are value enhancing (e.g. respect for human rights in working place) and others value destroying (e.g. community involvement).

This paper examines, in a short-term perspective, the effects of Vigeo social ratings announcements on the firm's shareholder value. From an event study on a large sample of European firms, we show that the announcement of ratings generates a strong positive stock market reaction regardless of whether the rating is good or bad. This finding underlines the relevance of ratings and reveals the value effects of corporate social responsibility (CSR). We also find that the overall rating has no impact on shareholders’ wealth. We highlight that specific CSR dimensions drive the value effects. Some are value enhancing and others value destroying. Our study complements the literature on the complex links between socially responsible practices and firm value. It gives arguments to measure properly the benefits and risks associated with non-financial factors, and to integrate them into asset pricing models and allocation processes.

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