DOES SOCIAL IMPACT AFFECT FINANCIAL RETURNS IN INTERNATIONAL EQUITY MARKETS?

Abstract

This paper aims to evaluate if social impact affects the financial returns on microfinance institutions (MFIs), by studying over 600 microfinance institutions from emerging markets in 18 countries. The results suggest that social impact is indeed a significant factor in predicting MFI returns on equity (ROE), but the exact relation between the two is less conclusive. Decreases in poverty headcount ratio are associated with decreases in ROE, suggesting a trade-off between profitability and social impact. However, changes in household consumption per capita are also documented to vary positively with ROE, suggesting that high social impact and profitability can go hand-in-hand. I provide postulates on how and why such relations could exist, and posit that poverty headcount ratio is a social outreach instead of a social impact factor. Nevertheless, there is much more to do to understand the complex relation between ROE, social impact, and social outreach. Lastly, my analysis at the country level finds no evidence among developing countries that social impact is rewarded more in countries with lower GDP per capita.