Value-Relevance of Corporate Social Responsibility: Evidence from Short Selling

We examine whether short sellers, as informed investors, take into consideration corporate social responsibility (CSR) performance and disclosure in the areas of environmental, social, and governance (ESG) sustainability in making investment decisions. We find that firms' market value and future financial performance, measured by price per share, return on equity, and return on assets, are lower, whereas operating risk, measured by the standard deviation of return on equity and the standard deviation of return on assets, is higher for firms with low composite ESG scores. We detect a negative association between ESG scores and short selling, indicating that short sellers avoid firms with high ESG scores and tend to target firms with low ESG scores. We conclude that investors consider firms' ESG scores as value relevant in making investment decisions and thus management should integrate CSR into strategic decisions and corporate reporting.