THE MISPRICED GREYS MISPRICING IN SOCIALLY AMBIGUOUS STOCKS

Abstract

The study uses a novel way to categorize stocks based on their Corporate Social Responsibility (CSR) performance and finds that stocks of ‘Grey’ companies – companies that are socially responsible in certain dimensions but are socially irresponsible in other dimensions – are underpriced by the market. In particular, we find that portfolios that go long on ‘Grey’ companies exhibit a statistically significant positive alpha that is persistent throughout different sample sizes and sample periods. Furthermore, the study also finds that the degree of underperformance is moderated when these companies have bigger market capitalizations and are more visible. This suggests that the underperformance is a result of investors’ neglect of ‘Grey’ companies, a phenomenon that we believe is a side-effect of the increasing popularity of Socially Responsible Investing (SRI). Additionally, the study shows that there is no particular dimension of CSR that is responsible for this underpricing, suggesting that with regards to CSR, companies are evaluated based on multiple dimensions.