Institutional Reforms and Investor

Reactions to CSR Announcements: Evidence from an Emerging

Economy

Bindu Arya and Gaiyan Zhang

University of Missouri–St Louis

ABSTRAK

This study contributes to the limited established empirical research on the impact
and relevance of corporate social responsibility (CSR) in the capital markets of
emerging economies. We conducted an event study to demonstrate how the timing
of CSR announcements by firms that have aligned their strategies to newly instituted
social regulations in South Africa influenced stock prices. Using a unique dataset of
publicly listed South African enterprises that undertook CSR initiatives during the ten
year period from 1996 to 2005, we found that investor reactions to CSR
announcements concluded during the late phase of institutional reforms are viewed
positively by investors. Furthermore, CSR announcements
of substantive monetary value result in significantly higher shareholder returns.

INTRODUCTION

An examination of the vast body of corporate social responsibility (CSR) literature

reveals that corporations adopt socially responsible policies in order to secure
legitimacy or competitive differentiation (Bansal and Hunter, 2003; Waddock and
Graves, 1997). Some management scholars have turned their attention to
investigating the role of institutions in enabling and constraining socially responsible
behaviour (Campbell, 2007). This research suggests that governments that enact CSR
laws are effective in establishing social expectations about responsible corporate
behaviour and in promoting the idea that corporations play an important role in
addressing social problems (Aguilera et al., 2007).
Business organizations operating in different nations are embedded in distinct insti-
tutional environments and experience different degrees of coercive pressures to
engage in CSR (Maignan and Ralston, 2002). Developed economies such as France,
Germany and Finland and emerging economies such as South Africa have enacted
specific CSR regulations (Buhmann, 2006). In developed economies, sociologists have
documented the varying degrees of compliance with which US corporations
implemented equal

Address for reprints: Bindu Arya, 1003 SSB Tower, College of Business Administration,
University of Missouri–St Louis, One University Boulevard, St Louis, MO 63121, USA
([email protected]).
B. Arya and G. Zhang

opportunity policies enacted in the 1960s (Edelman, 1992). In emerging economies,

the institutional environment changes dramatically as governments introduce a
variety of new laws (Chung and Beamish, 2005; Dieleman and Sachs, 2008). In the
early stages of institutional reforms, political, legal and societal changes in institutions
create significant institutional volatility and uncertainty (Wright et al., 2005). Given
the uncertainty asso- ciated with the promulgation of CSR regulations, it can be
expected that diverse organizational responses to social reform policies would be
observed. With the passage of time, as the new institutional regime becomes the
predominant driver of social change, normative and mimetic institutional pressures
are likely to promote greater isomorphism in corporate social strategies to achieve
legitimacy.
With few exceptions (McWilliams and Siegel, 2001), scholars in the CSR literature
have directed limited attention to examining the impact of CSR on the market value of
firms. Conceptual research by Mackey et al. (2007) suggests that in order to
understand the relationship between CSR and firm market value, it is critical to
examine the supply and demand conditions for investment opportunities in firms that
embrace social change. Their work notes that time can affect the supply and demand
for socially responsible investment opportunities. For example, new CSR laws in an
economy are likely to influence the number of firms making social policy changes, which
will bring about a shift in the supply for socially responsible investment opportunities.
Marketing campaigns highlighting the social responsibility successes of firms can
increase the investor demand for investments in such firms. However, no study to
date, that the authors are aware of, has investigated how timing impacts shareholder
response to CSR initiatives in general, and in a dynamic emerging economy context,
in particular.
This study explores the performance effects of CSR initiatives in response to institu-
tional reforms in South Africa. Despite being the third largest emerging economy in
terms of stock market capitalization ( Jefferis and Okeahalam, 1999), little is known
about how the numerous CSR laws enacted since 1994 are driving enterprises to
contribute to the government goals of economic inclusion of the poor. Historic
apartheid policies in South Africa created a racially skewed economy, and there are
increasing expectations that the private sector has a vital role to play in the process of
social transformation. One feature of the CSR laws introduced to catalyse the
economic inclusion of previously disadvantaged South Africans requires the transfer of
equity stakes in white owned South African companies to black investors. For the
purposes of this study, we define CSR initiatives as equity transfer transactions designed by
white owned South African companies that put enterprise shares in the hands of new black owners to
contribute to the correction of historic socio-economic imbalances in the economy.
In this paper, we investigate whether CSR initiatives by early mover South African
corporations have a positive or negative impact on their stock prices, compared with
late reformers. We argue that during the early phase of institutional reforms,
uncertainty regarding the impact of such initiatives will lead investors to react
negatively to CSR announcements. As institutions evolve, however, shifting societal
views of the corporate role in addressing social problems increases the likelihood that
investors will interpret CSR announcements as a move in a desirable direction. To
address this question, we analyse stock price reactions to CSR announcements by
white owned South African firms. Using secondary data on equity transfer
transactions of publicly listed South.

Investor Reactions to CSR

African firms during the ten year period from 1996 to 2005, we examined whether the
timing and monetary value of CSR initiatives influence stock prices.
South Africa represents a unique context to test investor reactions to CSR
announce- ments in response to institutional change for the following reasons. First,
institutional reforms in South Africa enabled black investors to take equity stakes in
white owned corporations. Since 1994, equity transfer transactions worth 160 billion
Rand (about US$26 billion) have been concluded (BusinessMap Foundation, 2005).
Second, earning announcements have been shown to significantly increase trading
activity for Johannes- burg Stock Exchange ( JSE) listed firms (Prather-Kinsey, 2006). A
semi-strong efficient stock market permits a meaningful analysis of investor response
to CSR announcements. Third, equity transfer transactions were concluded through
the so-called ‘Two Waves’ (Empowerdex, 2006), making it possible to analyse
whether proactive social change by enterprises that participated in the first wave was
advantageous or disadvantageous for their economic prosperity, compared to the
companies of the second wave.

INSTITUTIONAL REFORMS IN CONTEMPORARY SOUTH AFRICA

South Africa’s institutional environment in 1994 was quite unique, compared with
other emerging economies, as it had several features of a capitalist, market economy
but simultaneously faced monumental problems of social exclusion due to historic
apartheid policies. Apartheid became institutionalized law in South Africa in 1948
(Butler, 2004) and prohibited black people from owning property or businesses.
Moreover, apartheid promulgated skilled labour shortages, imposed inequalities in
access to education for black South Africans, and reduced the mobility of the working-
force population, creating barriers to a well-functioning labor market (OECD, 2006).
Political and financial sanctions instituted by United Nations member countries
kept international institutions out of the domestic capital market in South Africa
(Malherbe and Segal, 2000). At the same time, economic sanctions truncated the
access of South African mining houses to international capital markets, precluding
their transformation into global mining specialists. Initially, large South African mining
houses began diver- sifying by producing mining equipment and commodities. With
the divestment of many foreign multinationals in the 1980s, South African
conglomerates further diversified into consumer goods and food products (Chabane
et al., 2006).
To redress past socio-economic imbalances, numerous CSR laws that cover various
elements of empowerment, namely, equity ownership, affirmative action, training,
small business support, and procurement of goods and services, have been enacted
since the African National Congress was elected in 1994 (Visser, 2005). Widespread
policy changes by the South African government put pressure on enterprises
operating in this economy to initiate major social changes, such as transferring equity
stakes to black investors (Pacek and Thorniley, 2004). The greater openness of the
economy caused by the fall of apartheid reduced the appeal of conglomerate
holdings, which were pursued in the absence of alternate investment options
(Malherbe and Segal, 2000). Some South African corporate giants quickly began
undoing past horizontal and vertical integration strategies, while other white owned
corporations were slow to adopt corporate social reform.

With the intent of providing implementation guidelines, the Mineral and Resources
Development Act of 2002 and the Broad-Based Black Economic Empowerment
(BBBEE) Act of 2003 were enacted. Effective agreements between the government
and several industries such as construction, financial services, ICT (information,
communi- cations and telecommunications), mining, and tourism led to the
development of industry-specific Charters. Charters are legally binding commitments made by
the industry to extend equal opportunities and benefits from the industry to previously disadvantaged
South Africans. Charters place substantial CSR requirements on firms, with targets linked
to specific timeframes (BusinessMap Foundation, 2006).
Thus, it appears that the institutional environment in South Africa evolved through
two phases since the enactment of CSR regulations in 1994. The first phase from 1994
to 2001 can be viewed as the early phase of institutional reforms, because the
govern- ment sought to encourage corporate participation in the process of
incorporating the socially disfavoured into the mainstream. Calitz (2001) notes that
although South African reforms were gradualist, it was evident by 2001 that first
generation reforms needed to be supplemented with incremental second generation
reforms, in order to develop institu- tional capacity for reform. We believe that
normative levers such as the Mineral and Resources Development Act of 2002,
followed by the BBBEE Act of 2003 (Visser, 2005), heralded the late phase of
institutional reforms.

THEORETICAL DEVELOPMENT AND HYPOTHESES

Corporate Social Responsibility in Emerging Economies

Visser (2008) notes that emerging economies present a distinctive set of CSR agenda
challenges, which are collectively quite different from those faced in the developed
world. This is because social and environmental crises are usually most acutely felt in
emerging countries. At the same time, CSR research demonstrates a wide variability in
the CSR issues being tackled by emerging economies in Asia (Chapple and Moon,
2005) and Latin America (Araya, 2006). Since institutional context and culture can play
an impor- tant role in determining appropriate CSR priorities and initiatives, Visser
(2006) notes that models such as Carroll’s (1991) widely cited CSR Pyramid, developed
in an Ameri- can context, may not be relevant for emerging economies. The CSR
Pyramid identifies and speculates that each of the four components of CSR, namely,
economic, legal, ethical and discretionary responsibilities, would be prioritized
differently by corpora- tions. It proposes that firms generally prioritize economic aspects
( profitability), while less emphasis is put on the legal aspects (obeying the law) of CSR.
The ethical (being fair) and discretionary (contributing resources to the community)
aspects of CSR have even lower priority.
Visser et al. (2006) note that this model would not be a useful indicator of the relative

emphasis assigned to various social responsibilities by corporations operating in

Africa. For example, initiatives to medically treat employees with HIV/AIDS can reflect
equal importance to economic, ethical and philanthropic, or discretionary
responsibilities. Other scholars concur with Visser et al.’s view that such models fail to
capture the complexity of CSR in emerging economies, which face unique
challenges (Hamann, 2006). They emphasize that CSR in emerging economies cannot
purely be about voluntary business initiatives. Instead, the government has an
important role in moti- vating socially responsible behaviour in corporations.
However, because government enforcement is often constrained in emerging
economies, CSR commits businesses to comply with not only the letter, but also with
the spirit, of the law.
In the past decade, many emerging economies have passed national legislations on
CSR related issues. Although CSR is understood as doing more than what is required by
law, legal scientists contend that government regulation of CSR plays a considerable
part in formulating the substance of social initiatives, and providing guidance for CSR
implementation (Buhmann, 2006). Such legislation allows governments in emerging
economies to demand or encourage corporate actions that move socio-economic
devel- opment goals up the CSR agenda. In fact, Blowfield and Frynas (2005) argue
that even though CSR is viewed as a bridge connecting the arenas of business and
development in emerging economies, its contribution to poverty alleviation and other
development goals depends on the values promoted by the government.

Corporate Social Responsibility in South Africa

CSR in Africa has attracted increasing interest, debate, and investment over the past
decade (Hayes, 2006). Some scholars describe CSR initiatives in this continent as a
‘transplant from the developed world’, since multinational enterprises and African
cor- porations trying to position themselves as global players continue to implement
policies adopted by their subsidiaries in developed economies to their operations in
Africa (Gruner, 2002). Others note that the effectiveness of African corporation-
sponsored CSR activities should not be judged in terms of what is acceptable in
developed economies, since the contexts in which companies in Europe/North
America operate are dramati- cally different from those in Africa (Hamann, 2003).
CSR is particularly pertinent in South Africa, where apartheid has created pressing
development challenges. Government laws have sought to involve corporations in
pro- moting social cohesion and addressing problems of the historical exclusion of
black communities from the mainstream economy. In fact, South Africa has been at
the forefront among countries in the African continent in terms of incorporating CSR
issues into legislation. Since standards established by laws have a strong influence on
establish- ing the social expectations around which firms structure their behaviour
(Buhmann, 2006), CSR laws can shape corporate social action.

Initially, the core business practices, framed by South Africa’s colonial and apartheid
history, were relatively resistant to socially motivated change, despite the enactment
of CSR policies (Hamann and Kapelus, 2004). Moreover, government capacity for
enforcement was seriously limited, which reduced the effectiveness of legislation as a
driver for CSR (Visser, 2006). The weak influence of law during the early stages of
reform created a wide variation in the strategies implemented by South African firms
in response to CSR legislation. Over the past decade, however, the South African
govern- ment has made significant progress in strengthening the enforcement of the
human rights and CSR aspects of its legislation (Visser, 2005). Specifically, it has
encapsulated its transformation agenda in a scorecard to measure company
performance against a range of CSR criteria (Hamann and Kapelus, 2004). Since
performance on these issues is a prerequisite for companies to obtain a number of
state-issued licences, South African firms have undergone significant transformation
with regard to the definition and man- agement of CSR. A recent case study of the
ABSA Group Limited, one of the top four banks in South Africa, indicates that with the
strengthening of state apparatus, CSR- related issues are considered much higher in
the management hierarchy and firms are using a variety of techniques to ensure a
greater fit with the new institutional require- ments (Arya et al., 2008).
The above discussion highlights the importance of viewing the institutional environ-
ment in emerging economies as a dynamic context where institutional risk and
volatility fluctuates and shifts (Chung and Beamish, 2005). Hence, adding a dynamic or
temporal component might be crucial to gaining a deeper understanding of the
consequences of CSR strategies in such economies.

Market Value and Timing of CSR Initiatives

According to recent conceptual research seeking to identify the boundaries of CSR,

only corporate initiatives that increase social welfare and improve a firm’s
relationship with relevant stakeholder groups should be interpreted as CSR activities
(Barnett, 2007). Prior research indicates that corporate resource allocations that aid
social welfare are instru- mental in improving a firm’s relationships with a variety of
key stakeholders, such as customers (Brown and Dacin, 1997) and potential
employees (Turban and Greening, 1997). Corporations that provide evidence of the
gains to social welfare brought about by their CSR initiatives may be able to shape
shareholder perceptions over time. At the same time, the failure of CSR processes to
produce ample results can lead to negative stakeholder reactions.
The new institutional environment in emerging economies intensifies the pressure
for change in enterprises (Hoskisson et al., 2000). However, most firms are likely to
prefer staying committed to the status quo for three main reasons. First, inadequate
enforce- ment of laws, due possibly, among other factors, to a lack of sufficiently
qualified personnel (Child and Tsai, 2005), will diminish the influence of coercive
pressures. Second, since corporate involvement in national socio-economic
transformation in emerging economies is still nascent, new norms and beliefs are
neither embedded nor well understood, which makes it less compelling for firms to
proactively adopt social reform policies. Third, the difficulty in assessing the societal
impact of compliance at this stage also makes responsiveness to new social legislation a
less salient issue. Since issues of low salience are unlikely to threaten firm legitimacy
(Hoffman, 1999), one strategic choice for corporations is non-compliance with social
reform policies.
The second strategic response of firms is the proactive adoption of new CSR policies.
Some firms may adopt social reform policies in order to gain legitimacy. For
example, firms with historically low social responsiveness legitimacy may view proactive
change as an opportunity to reorient their image by signalling to stakeholders their
new commit- ment to social issues (Bansal and Roth, 2000). Others, such as large,
reputable corpora- tions, may be ethically motivated to adopt CSR reform policies
because they believe it is the right thing to do.

In South Africa, CSR adoption became an unavoidable imperative for enterprises

seeking to do business with the government and others that depended on licenses
issued by the state (BusinessMap Foundation, 2005). Proactive firms made a business
decision to invest in equity transfer transactions to position themselves at the
forefront of CSR, in order to retain and expand their business. Yet, in the early stages
of institutional transitions, institutional uncertainty, compounded with uncertainty
regarding the impact of CSR initiatives, is likely to raise investor scepticism regarding
sustenance and growth of corporate revenues and profits. For example, a widely held
perception in South Africa when the African National Congress came into power in
1994 was that black managerial talent is sparse (BusinessMap Foundation, 2005).
Hence, investors may interpret the transfer of equity to black groups by South African
firms as replacing well-qualified white managers with lesser-qualified black managers.
The greater the fear of firm mismanage- ment due to skills gaps after such initiatives,
the greater the likelihood that investors will react negatively to CSR announcements.
Institutional theory states that social norms diffuse through populations over time
(DiMaggio and Powell, 1983). In emerging economies, Child and Tsai’s (2005) study
notes that relational frameworks, such as joint business–governmental committees
that involve the active engagement of strategic decision-makers from regulatory
agencies and corporations, greatly aid in conveying expectations about the social
policies firms are expected to follow. An important channel through which
organizations learned accept- able CSR norms in South Africa were industry-specific
Charters. As a result, normative pressures for CSR initiatives became relatively
stronger compared to those encountered during the early phases of institutional
reforms.
As institutions evolve, the belief that the private sector must help in the national
imperative of socio-economic transformation is likely to become increasingly
internalized by managers. Such cognitive processes can exert increasingly strong
pressure on corpo- rations promoting CSR initiatives. Also, as emergent institutions
enter their mature phase, they gain a cognitively based legitimacy that weakens
institutional risks for all investors (Henisz and Zelner, 2005). Moreover, as public
awareness regarding new CSR standards of firms is heightened (through active
publicity efforts and institution of rewards for corporations that successfully address
problems of social exclusion), the demand for investment in firms that have aligned
corporate strategies to social regula- tions is likely to increase. The market’s perception
of CSR initiatives should be associated with a positive change in future firm
performance. Particularly, announcements in the late phases of reforms should be
viewed positively by the market. Thus:

Hypothesis 1: In emerging economies undergoing institutional reforms, early

adopters of CSR initiatives will realize lower shareholder returns compared with
late adopters.

Market Value and Monetary Value of CSR Initiatives

Early studies that draw on neo-institutional theory view the legal environment as a
coercive threat that pushes organizations to conform to laws and imposes sanctions
for non-compliance (DiMaggio and Powell, 1983; Scott, 2002). Other scholars argue
that the initial ambiguity of new laws reduces perceptions of such coercive threats,
making it unlikely that instantaneous changes in organizational behaviour will appear
with the enactment of new laws (Edelman, 1992). Studies in developed economies
have shown how some organizations may adopt outwardly compliant structures to
demonstrate their attentiveness to legal mandates, while decoupling structural
symbols from substantive practices (Oliver, 1991).
Given the higher levels of ambiguity associated with new CSR laws in emerging
economies, not only are firms unlikely to invest in social reforms at the same pace, but
it is also likely that the efforts of early CSR adopters will be largely symbolic in nature.
For example, Mellahi’s (2007) study of the impact of new human resource
management laws in Saudi Arabia reveals that private sector organizations engaged in
window-dressing activities by recruiting local Saudis in order to meet legal quotas but
did not involve them effectively in organizations. In South Africa, after the
promulgation of CSR laws, early mover white owned companies that transferred
equity to black investors were criticized by some as benefiting only a few black elite
groups and by others as merely being a front for white investors. Fronting practices
include window-dressing (in which case black people were introduced to enterprises
on the basis of tokenism) and other initiatives where economic benefits gained as a
result of the black economically empowered status of the enterprise did not flow back
to the black people as specified in the relevant legal documentation (DTI, 2006). Since
ceremonial action marginalizes the role of law on organizational behaviour (Edelman
and Suchman, 1997), the disclosure of symbolic corporate behaviour should reduce
public trust (Barnett, 2007) in CSR initiatives. The negative effect of symbolism is likely
to cause adverse market reactions to announcements of early CSR initiatives.
During the late phase of institutional reforms, as organizations try to understand
what
the new regulations require through interactive processes, such as participation in
inter- organizational communities, a taken-for-granted definition of compliant
behaviour emerges (Edelman and Suchman, 1997). Emergent institutional norms
regarding CSR should amplify the impact of CSR laws on organizational responses.
Moreover, as societal expectations regarding CSR increase, the value of the status quo
for organiza- tions declines (Barnett, 2007). To avoid losing ground, corporations must
aggressively allocate resources to promote social reform.
Substantive initiatives directed at social reform may allay earlier public fears that
corporations might be pursuing symbolism over substance, while credibly
demonstrating corporate commitment to social change. For example, Chabane et al.
(2006) illustrated how early CSR initiatives in South Africa that transferred small stakes
to black investors sidelined historically disadvantaged black people in business
structures and confined them to non-operational, public relation positions. In
contrast, the transfer of a large stake by a white owned corporation to black investors
is more likely to be viewed as genuine effort by current management to contribute to
social reform. Since such assess- ments improve the trustworthiness of the firm and
enhance its relationships with key stakeholders, it can be expected that CSR
announcements of greater monetary value will promote a positive stock market
reaction.

As success stories highlight how substantive CSR initiatives have helped society and
aided the national goals of the social inclusion of disadvantaged groups, a larger pro-
portion of investors may become interested in investing in such firms. Since there are
only finite and imperfect substitutes for a given stock’s characteristics, the market
value of these firms will increase as demand becomes greater than supply. This
advantage will be prominent as institutions mature. Thus:

Hypothesis 2: In emerging economies undergoing institutional reforms, the greater

the monetary value of CSR initiatives, the greater the shareholder returns for late
adopters.
DATA AND METHODS

The primary purpose of this study was to examine the abnormal equity returns
around the CSR initiatives of publicly listed South African enterprises during the early
and late phases of institutional reforms during the ten year period from 1996 to 2005.
We used the event study method, a method typically applied in finance, to this end.
This method has also been used in the field of management: Alexander and Buchholz
(1978), Arthur and Cook (2004), and Carow et al. (2004), to name a few. The event
study is based on the assumption that new information introduced to the market will
trigger immediate reac- tion from investors. In this study, an event is a firm’s
announcement of equity transfer transactions or corporate social responsibility
adoption, labelled CSR adoption. To the extent that market participants expect the
announcement to increase (decrease) future cash flows of the firm or reduce
(increase) the risk of the firm’s stock, positive (negative) equity returns are expected
for the firm.
As the first step, we identified CSR events by collecting information on CSR initiatives
between 1996 and 2005 from the BusinessMap Foundation BEE Database, a unique
database of black economically empowered companies and their deals. Only
announce- ments that translated into action were defined as CSR events and included
in our study. To calculate abnormal equity returns, we required the firms to be
actively traded on the Johannesburg Stock Exchange ( JSE). The multivariate test also
required the availability of firm characteristics, such as age, size, long-term debts,
and industry.
Short window lengths for the event study have been recommended by researchers
in order to minimize the influence of other factors on the relationship being analysed
(McWilliams and Siegel, 1997). Even within short windows, however, confounding
events may occur. As noted, we examine a 3-day window in this analysis (the day
before, the day of, and the day after the event). Examining the day before and the day
after the event allows for the inclusion of possible leaks of information or lag time in
investors’ reactions, respectively, while minimizing the potential for confounding
events. If another announcement by the same firm was released the day before, the
day of, or the day after the announcement, the event was excluded. As the longest
event window in our empiri- cal analysis is five days before and five days after the
announcement date, we kept only those events where ‘event’ firms had no other
informative corporate news during the [-5,5] window around the CSR announcement.
This provides the cleanest examination of the announcement and equity returns
relationship. The final sample consisted of 71 events.
Table I describes the distribution of events by year and by industry. Generally, the
events were fairly spread out over 10 years. However, 10 events occur during 1999 and
TABEL 1
23 during 2004, indicating the two peaks of CSR adoption waves. Chabane et al. (2006)
noted that unbundling deals by white owned corporations increased dramatically from
1997 to peak in 1999. The first peak of CSR adoptions in this study coincides with this
observation.
 The second phase of CSR adoption was characterized by additional normative levers.
The implementation of the BBBEE Act in 2003 provided much needed clarity for
corporations seeking to transfer equity to black investors. Chabane et al. (2006) observed
that the number of BEE deals in 2004 increased 29 per cent from the year before. This
coincides with the second peak of CSR adoptions in 2004. A wide range of industries
have adopted CSR over the past 10 years, among which financial firms, industrial firms,
and mining corporations account for a majority of the deals.
To isolate the pure announcement effect on the company’s stock returns, it is impor-
tant to control for the market return. Following Campbell et al. (1997), we calculated the
announcement abnormal returns (AR) using the market model methodology. The
parameters of the market model are estimated by statistically modelling the relation
between a firm’s equity return over a one year period and the market equity return for
the same time period. In this study, we used the return on the JSE All Share Index
(ALSI), a value-weighted diversified portfolio, to proxy for the market return of the South
African stock market. The one-year period is modelled with an end date of 50 days prior
to the event date. Estimating the relationship between each firm’s equity returns and a
diversified portfolio of stocks essentially controls for any external shocks or trends in the
stock market. Appendix 1 provides more details on the event study methodology.
We calculated abnormal returns for each of the 11 days surrounding the event date and
cumulative abnormal returns (CAR) over the two event windows ([-1,1] and [-5,5]),
where the [-1,1] window indicates the 3-day period including the day before the event,
the event day itself, and the day following the event. The 11-day event window [-5 to +5]
was used to account for the possibility of information leakage prior to the announcements
and capture any price adjustments that may occur over the few days subsequent to the
announcements. A standard parametric significance test was also performed. The test
statistic is for the null hypothesis that the abnormal return or cumulative average excess
return is equal to zero. In addition to the statistical tests for average abnormal returns, we
also report the proportion of positive abnormal equity returns.
Table II reports summary statistics for major firm and event characteristics. The
average age for the firms in our sample is 26 years, with an average equity market value
of 10,065 million Rand. The average leverage and volatility of firms are 22.7 and 47.3
per cent, respectively. The cumulative abnormal equity returns for the ‘event’ firm one
year prior to the event range from -38 to 25.2 per cent. As part of the typical CSR deal,
16.44 per cent of equity was sold to black organizations, with 30 per cent of the deals (21
events) occurring in the first wave and 10 per cent of the deals involving multinational
corporations. In 21 of the 71 cases, the firm has more than one event in the sample
period. There are a total of 12 firms in the mining sector. The average GDP growth rate
for the event year is 3.3.
Table III reports the time series average of the pair-wise correlations among the main
variables. Note that LAge and LEsize, which are the natural logarithms of Age and Esize,
are used in the correlation table and the multivariate regressions. Several points are
noteworthy. First, LAge is positively correlated with Mining and MNC, but significantly
negatively correlated with Early. Second, Stake is positively correlated with Lev at the 5 per
cent level. Lastly, the correlation between Early and Momentum is negative and significant,
suggesting that the cumulative abnormal returns before the announcement date tend to
be lower for early adopters than late adopters. So it is important to control for the
momentum of the stock price of the studied companies prior to the announcements.

RESULTS
The Effect of Timing on Equity Returns
 The results of the study are presented in Table IV. For the full sample, we observed a
positive average abnormal stock return of 0.86 per cent for the [-1,1] window, which,
however, is not significant. To test our Hypothesis 1, we divided the sample into two
groups according to when the firms concluded their CSR initiatives (early adopter and
late adopter). Here, the differences are more apparent. For firms that undertake CSR
initiatives during the initial phase of institutional reforms, we have 21 observations, with
a mean abnormal stock return of -1.23 per cent for the 3-day window and -4.44 per cent
for the 11-day window. The fraction of negative CAR is very high. This result suggests
that shareholders perceive that CSR initiatives during the initial phase of institutional
reforms reflect unfavourable information regarding the general conditions of firms. The
negative sign points to a negative effect.
The market response to CSR announcements during the late phase of institutional
reforms, however, sharply differs. For the sample of 50 firms that undertook the equity
transfer transactions during the late phase of institutional reforms, the mean abnormal
stock return is 1.65 per cent for the 3-day window, 2.30 per cent for the 11-day window,
and significant at the 5 and 10 per cent levels respectively. The fraction of positive CAR
is greater than 50 per cent. These results indicate that investors perceive CSR initiatives
favourably in the late phase of institutional reforms.
TABEL2
The two effects are significantly different, as indicated by the t-statistic of -2.89 for the
3-day window in Table V. The median difference of -1.44 per cent is also statistically
significant at the 5 per cent level (z = -2.11), measured by Wilcoxon statistics. Moreover,
the mean and median differences for the 11-day windows are significant at the 1 and 5
per cent levels, respectively.
Consistent with Hypothesis 1, we find in the full sample a negative and significant
coefficient on the dummy variable, Early, indicating that early adopters have lower equity
returns than late adopters. Taken together, the evidence from Tables IV and V indicates
that CSR initiatives adopted in the initial and late phase of institutional reforms are
interpreted by investors in a sharply different way. The results provide support for the
first-mover disadvantage argument.
The Effect of Value of Equity Transfer Transactions
To test whether the South African enterprises that undertake higher monetary value CSR
initiatives realize a higher equity return (Hypothesis 2), we regress the 3-day abnormal
equity return on the value of equity transfer transactions, proxied by Stake, controlling
for the timing of transactions. We expected a positive coefficient on Stake. Because the
early-adopter sub-sample has a small sample size of 21, the parametric regression relying
on asymptotic approximations may not be appropriate here. Consequently, we turned to
the non-parametric bootstrap regression method, which allows us to estimate the sampling
distribution of a statistic empirically without making assumptions about the form of the
population. Details of the bootstrap method are provided in Appendix 2.
We computed the mean and standard errors of coefficient estimates from the boot-
strapped samples. Then t-statistics for coefficient estimates were calculated based on
bootstrapped standard errors. For comparison purposes, we used the non-parametric
bootstrap method for the early adopter and late adopter sub-samples, as well as for the
full sample. The results are summarized in Table VI.
We found that the coefficient on Stake is positive and significant, as was expected. This
indicates that high-value CSR initiatives are associated with significantly higher abnor-
mal returns than low-value CSR initiatives. This is consistent with our second hypoth-
esis. Next, we examined whether the cross-sectional relationship differs across early and
late adopters. To this end, we split the sample to two sub-samples according to the timing
of the transaction. For early adopters, we expected a negative coefficient on Stake to
reflect unfavourable investor perception on high-value CSR initiatives in the initial wave.
For late adopters, we expected a positive sign to reflect positive investor reaction to
high-value CSR initiatives in the second wave. We found that the coefficient on Stake is
positive and significant for the late adopter, but the monetary value of a CSR initiative
appears to have no relation with the equity returns for early adopters.
TABEL 3

For robustness, we repeated the analysis by adding the control variable, Momentum,
which is constructed as the cumulative abnormal equity returns for the one year prior to
the event, in the regression model. We used this to proxy for stock price momentum and
market anticipation prior to the announcement, following Lang and Stulz (1992). On
one hand, this variable was used to control for the market momentum of the stock price
of the ‘event’ company before the announcement, if the company is using such a strategy
to signal its value to investors. On the other hand, this variable controls for market
anticipation if the information is released to the market prior to the actual announcement
day. We expected the coefficient on Momentum to be positive, because positive CAR
before the announcement is more likely to lead to positive abnormal returns on the
announcement day. Results are reported in Table VI. As expected, the coefficient on
Momentum is positive, but is only significant for the early-adopter sub-sample. Results for
our major variables, Early and Stake, are qualitatively the same for the full sample and the
sub-samples after controlling for Momentum. In sum, Table VI confirms our second
hypothesis that firms undertaking CSR initiatives with high monetary value realize
significantly higher shareholder returns than those with low value. This effect is signifi-
cant for late adopters.
Cross-Sectional Analysis
To gain further insight into firm characteristics and the market reaction, we
conducted a multivariate regression analysis for the information effect of equity
transfer transactions
CAR j = a0 + a1Early j + a2Stake j + XControls j + e j
where for each observation j, the dependent variable is the cumulative abnormal
returns for the 3-day event window. As a robustness check, we also used the 11-day
event window (Car11d) as a dependent variable. The variables of concern are
Early and Stake. Because there are wide variations in terms of firm characteristics, such
as Age, ESize, Lev and Vol, Mining, MNC, Multiple and Momentum, we included these
variables to control for other cross-sectional differences that may have an impact on
the market reaction. We also used the macroeconomic variable, GDP, i.e. the annual
real GDP growth rate of South Africa for the ‘event’ year, to control for investor
demand.
Table VII presents the results for the full sample. Results are similar for both Car3d
and Car11d as dependent variables. Significant effects of Early and Stake still hold after
controlling for other firm characteristics. Momentum is positively related with Car3d and
Car11d, but is only significant at the 10 per cent level for Car11d. Age and Esize are
significantly related with Car3d, but the significance disappears for Car11d. Notably, Lev
and Vol are significantly and negatively related with both Car3d and Car11d, suggesting
that firms with lower leverage and lower equity volatility are more likely to benefit from
CSR initiatives. Other control variables, such as GDP, Mining, MNC and Multiple are
found to be insignificant.
TABEL4
DISCUSSION
This study explored CSR initiatives in South Africa subsequent to the end of
apartheid and prohibitive economic sanctions by United Nations member countries
in 1994. As a research site, South Africa offers a unique empirical context in which
to investigate CSR in the largest emerging economy in the African continent
with several fairly well developed features of a capitalist, market economy co-existing
with historic problems of social exclusion. Theoretically, this article makes three key
contributions.
First, it contributes to the CSR literature in general, and to the emerging literature on
the institutional theory of CSR (Campbell, 2007), in particular. It highlights how changes
in social behaviour in response to institutional reforms (domestic CSR regulations in this
case) influence the performance of firms operating in an emerging economy. While
neo-institutional researchers have found that firms facing uncertainty are likely to imitate
the decisions of other firms (Greve, 2000), our analyses suggest that not all emerging
economy firms facing uncertainty are equally likely to imitate the CSR decisions of first
mover firms or are able to generate strategic benefits from CSR initiatives. Recent work
by Delios et al. (2008) in the area of international expansion decisions has demonstrated
that integrating ideas from the economics-based competitive rivalry theory and the
sociology-based information theory of mimetic behaviour have greater explanatory
power. Future research designs that give attention to both competitive and non-
competitive motives of imitative CSR initiatives will contribute to a more fine-grained
understanding of the strategic effects of CSR.
Second, this study contributes to the international business (IB) literature by showing
how institutions matter for the domestic social strategies of corporations operating in a
less studied emerging economy. This work provides evidence that companies are
rewarded by investors when they make a commitment to comply with new CSR stan-
dards in countries where governments are requiring corporations to contribute to a
better society. While government actions can help create a unique CSR climate, IB
scholars have paid surprisingly little attention to the implications of the CSR regulations
for positive social change initiatives by corporations. The few existing studies that do so
primarily focus on the environmental behaviour of multinationals operating in econo-
mies undergoing institutional upheaval (Child and Tsai, 2005; Christmann and Taylor,
2001). Attempts to establish a relationship between other types of corporate social
behaviour and the consequences of such social initiatives for domestic firms operating in
these institutional environments are virtually non-existent. However, as countries
enforce CSR laws, scholars have noted that there is an increasing need to examine how
institutions influence the development of stakeholder attitudes towards CSR (Doh and
Guay, 2006). This paper is a first step in that direction.
Third, in contrast to most prior studies that take a static view of institutional reforms
in emerging economies, this study captures the rapidly changing relationship between
institutions and organizational social responses. By focusing on this dynamic interaction,
this study demonstrates that the market value of CSR varies as institutions evolve.
Moreover, certain features of CSR initiatives (in this case, the monetary value of the stake
transferred) might influence their wealth impact. By shedding light on the institutional
conditions that generate benefits for firms adopting CSR initiatives in the presence of
regulations, our study contributes to emerging research that recognizes the importance
of exploring conditions for predicting first-mover advantage from adopting CSR initia-
tives (Sirsly and Lamertz, 2008). For salient social issues, we would speculate that capital
markets in developed economies are more likely to reward first movers. To glean a better
understanding of the strategic use of CSR (McWilliams et al., 2006; Siegel and Vitaliano,
2007), it is critical that future empirical tests also be conducted in developed economy
settings to uncover whether early-adopter or follower roles lead to better strategic
positions.

Empirically, this study makes two main contributions. First, it extends the corporate
social performance literature that has traditionally been conducted using accounting
measures of performance. By examining stock market reactions following CSR
announcements, this study contributes to the limited established empirical research on
the impact of CSR and its relevance in the capital market in emerging economies.
Second, by relying on a long sample period (1996–2005), we were able to track how
institutional transitions in this emerging economy influence market reactions to CSR
initiatives. Hence, our work departs from existing work in emerging economies, which
largely takes a static approach.
Some of the limitations of our research should be mentioned. First, CSR initiatives
may take place outside the realm of the Johannesburg Stock Exchange ( JSE). Because
our tests relied on financial data, we excluded CSR initiatives for which we were unable
to obtain financial data and stock return data from the JSE. This resulted in a relatively
small sample. Future work could overcome this limitation by including both publicly
listed and private South African corporations.
Researchers may question why our study does not control for other parameters that
might affect investor demand (e.g. number of black organizations, net worth of black
organizations). To explain this, it is important to understand the unique nature of
financing mechanisms utilized by black investor groups to conclude equity transfer
transactions in South Africa. Typically, black investor groups did not put up any money
or assume any risk or debt (Malherbe and Segal, 2000). The funder (a bank or an insurer)
would lend funds to a vehicle company created by black investor groups or black
consortiums (loose agreements between a group of black investors, unions, and individu-
als). Much of the equity in the listed company initiating the CSR initiative was issued to
the black investor group at no cost. If shares of the listed company increased in value
beyond some threshold, the increase in value was shared with the black investor group.
Since vehicle companies have no assets or debt, we did not control for net worth of black
organizations. Though a separate vehicle company is created for each equity transfer
transaction, there is no way to track whether these are active. Also, because black
consortiums are not registered entities, we did not control for the number of black
organizations.
Testing our hypotheses in the context of a single country allowed us to hold the
environment constant. Yet, the uniqueness of the Broad Based Black Economic Empow-
erment (BBBEE) policies in South Africa weakens the generalizability of our findings.
Despite this limitation, we believe our main finding concerning the value maximizing
impact of time for CSR adoption in response to CSR legislation will hold true across
a wide range of other social issues, such as working conditions and human rights in
emerging economies. Although differences in exogenous and indigenous forces may lead
to significant inter-firm variations in CSR adoption in response to new CSR laws across
emerging economies, we expect that investor demand will be greater during the late
phase of institutional reform when shareholder value will be maximized.
Future work may possibly explore the value effects of CSR initiatives addressing other
areas in emerging economies in Latin America, Asia, and the African continent, where
governments are creating an enabling environment by enacting CSR laws. Since CSR
adoption plays an important role in winning business for South African firms, and CSR
targets are increasingly being measured by accredited verification agencies, these firms
may be more likely to pursue substantive implementation than firms in other emerging
economies. An interesting extension of this study would be to conduct a cross-country
study that explores how rating systems enforced by accredited agencies alleviate the
problem of symbolic CSR investments.

CONCLUSION
Management scholars have called for greater attention to be directed towards under-
standing the interconnections between institutions and socially responsible corporate
behaviour. Towards that end, we have attempted to capture the complex relationship
between regulations and CSR in a less studied emerging economy context. In developed
economies, capital markets are viewed to be important pressure points for corporate
social action. We find that the market value of CSR in emerging economies varies as
institutions evolve. The ambiguity of new laws and scepticism about their value initially
limit the incentives that capital markets can create for CSR initiatives. However, once
normative and cognitive beliefs come to be institutionalized, corporate virtue is rewarded
by capital markets.
By examining investor response to CSR initiatives, this study demonstrates that
changes in the institutional environment can influence stakeholder expectations about
the responsibilities of corporations to the broader society, and shifting societal views of
the corporate role, in turn, influence corporate action to address social problems. Our
results of positive market reaction to late movers reveal that institutional reforms create
increased awareness of and support for CSR in South Africa. This also suggests that the
institutional environment has prompted changes in corporate social action that are
making important contributions to addressing social problems in South Africa.

APPENDIX 1: EVENT STUDY METHOD

We use standard event study method to estimate abnormal returns and make inferences.
Equation (A1) below is used to estimate the relationship between a given firm’s return
(Rit) and the market portfolio return (Rmt), where i represents the firm and t represents
time in trading days.

Rit = ai + bi Rmt + ei (A1)

where bi represents the estimated relationship between the market return and the firm
return.
Once the normal or expected shareholder return is estimated, equation (A2) was used
to compute the abnormal returns (AR) resulting from a CSR adoption announcement.
AR is calculated as the difference between the observed return and the estimated return
from the market model.

ARit = Rit − (ai + bi Rmt ) (A2)