Stock Market Reaction To The Global Financial Crisis

We analyse with an event study approach the stock market reaction to one of the most important episodes in the global financial crisis (Lehman Brothers filing for chapter 11). Our inquiry on abnormal returns of about 2,700 stocks around the event date documents that the shock induces investors to incorporate insights from (or re-adjust the pre-event expected impact of) corporate social responsibility (CSR) ratings in stock evaluation in a sort of "flight to CSR quality". The main CSR domains with significant effects on abnormal returns (corporate governance and product quality) are exactly those in which the defaulted company presented weaknesses according to its ex-ante CSR ratings. We also document that the reaction to the Lehman event extends beyond the event date and that investors rationally attribute more value to the direct information on strengths and weaknesses in each CSR rating domain than to affiliation/non affiliation to the CSR stock market index (FTSE KLD 400 Social Index). A more general result of our paper is that investors seem to discover, after the event, that CSR ratings provide original information which is not captured by traditional financial rating indicators.