Monthly Lunch Seminars

Firms are increasingly concerned about mitigating the harm of sociopolitical (SP) firm risk events, with a focus on enhancing outcomes for profits, stakeholder relationships, and firm value. Risk management becomes salient when brands attempt to connect with trending SP issues through public relations and marketing campaigns, but their efforts can backfire by challenging social justice or provoking unanticipated consumer activism. Firms with the best intentions can clash with social norms and expectations.

Chen Jing, Dokyun Lee, Shuba Srinivasan, and Susan Fournier, researchers at BU’s Questrom School of Business, investigate the impact of SP firm risk events on stakeholders’ reactions on social media and firm value and explore strategies to mitigate potential downsides. They use natural language processing methods to label SP social media posts and then apply the difference-in-differences with multiple time periods method to estimate the relationship between mitigation efforts and firm outcomes. The results show that high-effort responses are associated with favorable stakeholder social media reactions, including volume and sentiment. Furthermore, for firms with strong brand equity, closer relationships with wrongdoers, or good performance in ESG or diversity, high-effort responses are associated with even more favorable social media reactions. By contrast, high-effort responses have no association with firm value, except for firms with strong brand equity. Lastly, for firms with distant relationships with wrongdoers, high-effort responses can even backfire. Their findings offer contributions and managerial implications in the context of branding and crisis management for academicians and practitioners.

The paper applies panel regression analysis on 600 public companies, 70 percent from the US and 30 percent from the EU, between October 2019 and February 2023 from sectors comprising Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Healthcare, Industrials, Information Technology, Materials, Real Estate, and Utilities. The EU sample incorporates developed European countries, including Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

The study shows significant relationships between several governance factors and firm performance and risk: Higher accruals (a typical measure of low earnings quality) are associated with lower net income. Independent audit committees show a negative relation with financial performance but are not significantly related to corporate risk. Having a financial expert on the Board is positively related to net income. The involvement of individuals or entities closely connected to the companies in various transactions, including asset transfers, loans, and loan guarantees, is negatively related to financial performance measured by gross margin.

The findings highlight the different perspectives on governance practices between US and EU companies. While higher accruals are negatively related to financial performance in the US, they are positively associated with performance in the EU. Also, while having a financial expert on the Board is positively associated with performance in the US, it is negatively related to gross margin in the EU. The transactions by related individuals and entities and audit committee independence significantly negatively affect firm performance only in the US. This presentation was given by Irena Vodenska, BU Professor of Finance.

There is a long-standing debate about whether firms should maximize profits or also target broader environmental, social, and governance (ESG) objectives. If ESG objectives are targeted, which ones are most important? A key question is: What are the preferences of the shareholders who own the firm? This project will measure shareholder preferences about traditional ESG-related objectives as well as an understudied aspect of ESG: how shareholders want firms to act in imperfectly competitive markets. It will also measure the extent to which shareholders have preferences for promoting consumer welfare in imperfectly competitive markets, such as by lowering prices or avoiding “shrouded fees.”

Keith Ericson, BU Professor of Markets, presented his research.

Read the paper here.

PhD candidate Alicia Zhang discussed her research on this topic. She has constructed logistic regression models to predict whether an energy generation asset will be retired or built on time. These models use an optimization technique that embodies the concept of general-to-specific modeling and estimated on historical data from the U.S. Energy Information Administration (EIA). The research explores which political, regulatory, market, and technological factors are influential to the timing of a plant retirement or addition, as well as the magnitude of this influence. This research is part of IMAP’s Corporate Carbon Risk project.

Finnie zeroed in on how to talk about climate so that people in the financial sector will listen, emphasizing the importance of moving investments to clean energy. Using her #1 principle, “Talk About It,” Finnie said that it’s important to talk about finance-relevant issues like: building a grid to accommodate increased demand from electrification; insurers refusing to issue new policies in entire states; the cost of NOT addressing climate change, including NOAA’s quarterly index of $1 billion dollar climate disasters in the US (total 2022 damages $165.1 billion). Finnie closed by outlining a series of truths to keep in mind when talking to finance professionals about climate change.

This project examines the predictive ability of ESG risk disclosures. We use a textual analysis-based approach to derive measures assessing firms’ material ESG risk disclosures with respect to two benchmarks: SASB recommendations, discerned through analysis of the Materiality Map applied to the risk factors section of firms’ 10-Ks; and industry best practice, discerned using the ESG risks disclosed by the majority of the industry’s largest firms. Descriptively, we document (i) considerable variation in the degree to which firms’ ESG disclosures are consistent with SASB recommendations; (ii) that firms disclose as material a large number of ESG risk factors deemed immaterial per the SASB recommendations; and (iii) that firm disclosures of material ESG risks are more consistent with industry best practice. We find that two left-tail ESG outcomes—subsequent year ESG penalties and incidents—are predicted by firm material ESG risk disclosures that are consistent with industry best practice, but not by disclosed ESG risks deemed as material per the SASB framework. Overall, the results suggest that for left-tail ESG outcomes, the strongest predictive ability lies within ESG items outside of (within) those denoted as material per SASB (per industry market leaders).

Michelle Amazeen and Chris Wells, both from the BU College of Communication, discuss their research looking at native advertising in the media, content created by news organizations that looks like editorial content, but is actually corporate advertising. Native advertising is used by corporations to influence public perception about a topic. This is happening across the globe as a way for news organizations to earn revenue. Disclosures are required, but often disappear when shared on social media. Concerns about native advertising are that it deceives audiences and harms journalistic integrity. The research focuses on which fossil fuel companies are using native advertising and their claims of sustainability, as well as what they’re saying about climate change.

Scholars have reported problems with well-known studies on ESG research and more are being investigated. Does this imply that ESG research is prone to publication bias? What does it suggest for our use of published findings? In my session, I will present some of the problems that have been uncovered. Then, I hope to lead a conversation on the implications for the study and application of ESG.

We bring investors with preferences for green assets to a general equilibrium setting in which they also prefer consuming green goods. Their preferences for green goods induce consumption premia on expected returns that counterbalance the green premium stemming from their preferences for green assets. Because they provide a hedge when green goods become expensive, brown assets command lower consumption premia, and green investors allocate a larger share of their portfolios towards them. Empirically, the green-minus-brown consumption premia differential reached 30-40 basis points annually and contributes to explaining the limited impact of green investing on polluting firms’ costs of capital.
Read Draft Paper 

Physical climate risks increasingly impact firms. While scholars have investigated how firms mitigate their impact on climate change, we know little about how firms adapt to climate change. The study builds a novel dataset that compiles information on the adaptation strategies of publicly traded companies across the globe and merges it with climate science data. Using this dataset, we examine whether, how, and under which conditions firms adapt to physical climate risks. The study finds that the average adaptation rate across firms and climate risk drivers is low. Firms facing higher climate risks are more likely to adapt and do so with a broader range of adaptation strategies (which include both risk management and business strategies). The impact of climate risks on firms’ adaptation strategies increases over time, particularly for business strategies. It also finds that firms’ adaptation to higher climate risks is influenced by climate change and risk management awareness.

We will examine an alternative measurement approach towards ESG topics: the use of textual analysis applied to various corporate filings and disclosures as a way to quantify firms’ exposure to these risks, and actions being taken to address them.

We know many corporations are setting targets for their future corporate carbon emissions, yet also know that not all past targets were achieved.  We are developing a methodology to determine the level of risk associated with these future goals by comparing the goals with the other investment and operations plans published by each entity.