Market Valuation of Ethics: How Valuation Multiples are Affected by Investors’ Ethical Perception

Abstract: Previous research has focused on the correlation between CSR and returns, whilst considerably less efforts have been undertaken to investigate whether CSR affects a company’s valuation. Therefore this paper focus on investigating the correlation between these two variables. This is done by comparing valuation multiples of constructed indices consisting of bad and socially responsible companies to relevant benchmarks chosen by industry and geographical characteristics. The Socially Responsible Index (SRINDEX) consists of the 53 best companies concerning CSR reputation, whilst the Bad Brake and Sakkestad Index (BBSINDEX) consists of 39 companies where the opposite is true. Matched pairs analyses are performed to investigate differences over a 20-year period. It is found that there are variations in valuation multiples (P/E, P/B and EV/EBITDA) due to investors’ ethical perception, and that these come in the form of premiums for both the SRINDEX and BBSINDEX. This indicates that managers can, ceteris paribus, maximise company value either through outstanding CSR efforts, or by completely neglecting CSR.