Asymmetry in Stock Market Reactions to Changes in Membership of the Dow Jones Sustainability Index

Abstract

This article empirically explores investors’ response to firm sustainability efforts as evidenced by inclusion or exclusion from the Dow Jones Sustainability Index (DJSI) using the event study method. The DJSI selection process is posited to mimic a relative performance evaluation tournament generating an incremental amplified sustainability valuation signal. While the extant literature has treated effects of DJSI additions and deletions as being theoretically symmetrical but opposite in direction, we hypothesize that expectation of such opposing symmetry of response is unwarranted. Deletion from the DJSI is conditional on initial inclusion in the DJSI, and investors are therefore likely to perceive deletion as an indicator of a failed strategy or investment and react non-positively. The results suggest that markets on average reacted negatively to DJSI inclusion and non-positively to exclusion as hypothesized, and corporate social responsibility leadership by highly leveraged firms is viewed less favorably.