Long-Term Investors Reduce Volatility, Improve Corporate Responsibility

Virginia Tech researchers have linked long-term shareholders to improved corporate citizenry and higher stock valuations—but profits take a small hit.

(May 6, 2013) – It's the million-dollar question: Does "responsible investing" benefit one's bottom line as well as one's conscious?

Three researchers out of the Virginia Polytechnic Institute (Virginia Tech) took on this question for public equities, and found the answer is yes.

"Our results are simple to summarize: firms with longer investor horizons invest more in stakeholder capital, which increases stock valuations not as a result of higher cash flow but rather as a result of lower cash flow risk," wrote Ambrus Kecskes (an assistant professor), Professor Sattar Mansl, and doctoral candidate Phuong-Anh Nguyen. All three work in Virginia Tech's department of finance.

The authors found that firms with greater long-term investor ownership boosted stakeholder capital investment by roughly 10%. Further, these stocks had higher valuations (market-to-book) by roughly 5%. However, according to the study, this gain in value was due to reduced volatility, not higher profits. Stocks held largely by long-term investors showed approximately 5% lower profit, sales, and cost volatility.

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Future stock returns for these long-held corporations were 1.3 percentage points lower than those of stocks dominated by short-term investors.

The study was based on a data set of publicly traded US firms covering the years 1991 through 2009. Kecskes, Mansl, and Nguyen divided investors into short-term and long-term, depending on the frequency that they turned over securities. Corporate responsibility scores from analytics firms KLD measured the extent to which each corporation invested in "stakeholder capital", producing positive outcomes for their employees, environments, and communities.

"We conclude that firms with longer investor horizons invest more in stakeholder capital, which increases shareholder value as a result of a decrease in risk," Kecskes, Mansl, and Nguyen wrote. "Taken as a whole, our findings suggest that long-term investors can ensure that firms do well for their shareholders by doing good for their other stakeholders."

Read the full study, "Can Firms Do Well for Shareholders by Doing Good for Stakeholders? The Importance of Long-Term Investors," here.