The mispricing of socially ambiguous grey stocks

•We compare the relative pricing of socially ambiguous “Grey” stocks to other stocks.•“Grey” stocks are overpriced relative to “Bad” or “Neutral” stocks.•The market seems to over-reward the socially responsible actions in “Grey” firms.•The overpricing is also observed in “community” and “environment” sub-dimensions.•The overpricing is not driven by “Sin” stocks or “Controversial” industries.

The study examines how stock market prices the stocks of socially ambiguous “Grey” firms, who are socially responsible in certain corporate social responsibility (CSR) dimensions while being socially irresponsible in other dimensions. Using firm data from 1992 to 2011, we find that the value-weighted “Grey” portfolio earns an annual abnormal return up to 3.6% relative to “Neutral” portfolio that consists of neither socially responsible nor irresponsible firms. Interestingly, “Community” and “Environment” sub-dimensions of CSR are the main drivers for the overpricing. The overpricing phenomenon is robust and is not driven by small firms, the “Sin” stocks or “Controversial” industries.