Harvard research links SASB disclosures and accuracy of stock prices

Academic research recently published by Harvard Business School suggests that the voluntary disclosure of material sustainability information could have an impact on the more efficient pricing of company stocks, relative to the stock prices of the capital markets as a whole.

The study has found that the disclosure of more firm-specific sustainability information, as defined by Sustainability Standards Board (SASB) standards, is reflected on the firm’s stock price resulting in “lower stock price synchronicity”.

George Serafeim, co-author of the paper and Jakurski Family Associate Professor of Business Administration at Harvard, told RI about this academic concept: “If you have lower synchronicity, in most cases you also have lower market beta, which is a concept that many practitioners understand.”

Beta is a measure of volatility which looks at the risk exposure and fluctuations of a stock or portfolio as compared to the market as a whole.

The study, entitled Stock Price Synchronicity and Material Sustainability Information, written with Jody Grewal and Clarissa Hauptmann,took a sample of 1,333 US-listed companies and analysed sustainability data from 2007 to 2014.

Serafeim explained that the stock price of more ESG-transparent companies “tends to move much more because of firm-specific information” as oppose to move following “market and industry information”.He added: “So, the less the stock’s returns of a company co-move with market and industry returns, the lower the synchronicity.”

The research paper points out that investors with “higher information processing capabilities”, typically institutional investors and socially responsible funds, are more effective at incorporating sustainability information in stock prices.

The paper states: “Our first measure is the percentage of institutional investors holding the outstanding shares of each company, as institutional investors are more likely to be able to process the valuation implications of new types of information, such as sustainability information, compared to retail investors.”

The paper continues: “The second proxy is the percentage of shares outstanding held by funds labeled as socially responsible […] We find that both measures significantly moderate the association between sustainability information and stock price synchronicity.”

Asked about the overall aims of Harvard’s independent study, Serafeim said that it tries to address the need to update the financial accounting infrastructure, upon which capital markets have been built, by incorporating ESG metrics.

“Our study shows that if the value creation process of the investee company is not understood, then the stock price of the company might not be priced efficiently,” Serafeim added.