Lawrence Technological University
College of Management

A Study of the Market’s Reaction to Superior Sustainability
Reporting as Demonstrated by the Financial Performance of
Publicly Traded Companies

Presented in partial fulfillment of the requirements
for the degree of
Doctor of Business Administration
Derek A. D’Angela 3315101

3315101

2008
Copyright 2008 by
D'Angela, Derek A.

All rights reserved
ABSTRACT
Recent ethical lapses by business organizations and their management suggest that
traditional governance requirements have had less than the desired effect. Legislated
disclosure alone is insufficient as it provides reactionary guidance that fails to address
performance issues since rules can be circumvented and financial data can be tweaked to
reflect its most favorable presentation. The research evaluated sustainability reporting as
an additional resource for reporting on ethical performance and addressed the question of


COPYRIGHT

Copyright © 2008 by DEREK A. D’ANGELA. All rights reserved
Sustainability Reporting Impact on Financial Performance iv

Sustainability Reporting Impact on Financial Performance v

ACKNOWLEDGMENTS
I would like to express my thanks and appreciation to the many individuals who
have supported me in the completion of my doctoral work. I would especially like to
thank my chair, Dr. Patricia Castelli, for her generous time and commitment. Her
guidance and support were of significant benefit and enabled me to maintain the focus
necessary to complete the program culminating with the execution of this study.
I am also very grateful for having an exceptional doctoral committee and wish to
thank Dr. Frank Castronova, Dr. Vernon Hoffner and Dr. Jacqueline Stavros for their
continual support and contribution to shaping this research. I truly appreciate the time
they took from their already full schedules to provide their particular insight to enhance
the character of the work.
I wish to express my gratitude to the many other individuals who directly
participated or indirectly supported my work during this program including Mike Rinkus,
Dr. Tom Marx, the members of DBA Cohort 1 and the faculty and staff of Lawrence
Technological University. I would also like to offer a sincere thank you to the
individuals who laid the foundation for my interest and success in this program, including
the professors and staff of Eastern Michigan University, Hillsdale College and from my
earliest days at University Liggett School.
Finally, I want to acknowledge the revolutionary thinkers from whom I have
inherited the ethical and free market principals that inspire my research.
Sustainability Reporting Impact on Financial Performance vi


3.2 Research Question and Hypotheses 60
3.3 Reliability and Validity 63
3.4 Population and Comparison Groups 66
3.5 Selection Procedures 68
3.6 Data Collection 74
3.7 Data Analysis 75
3.8 Summary of the Research and Design Procedures 78
CHAPTER 4 ANALYSIS OF DATA 80
4.1 Introduction to the Analysis 80
4.2 Research Question and Hypotheses 81
4.3 Organization of Data Analysis 84
4.3.1 Historical Securities Prices 85
4.3.2 Calculation of Beta 85
4.3.3 Calculation of Growth 88
4.3.4 Calculation of Beta and Growth by Sector 90
4.3.5 Calculation of Mean and Application of Statistical Tests 91
4.4 Presentation of Descriptive Characteristics of Datasets 94
4.5 Summary of the Analysis of Data 100
Sustainability Reporting Impact on Financial Performance viii

CHAPTER 5 FINDINGS AND CONCLUSIONS 102
5.1 Introduction 102
5.2 Findings 103
5.2.1 Historical Securities Prices 103
5.2.2 Findings Relative to Beta 104
5.2.3 Findings Relative to Growth 105
5.2.4 Calculation of Beta and Growth by Sector 107
5.2.5 Calculation of Mean and Application of Statistical Tests 108
5.3 Conclusions 111
5.4 Future Research 117

corporate failures and the resulting concern over corporate ethics (Brower, 2006). The
issue however is not a new one, rather it is the result of a series of abuses over the past 20
years including Wall Street stock-trading scandals in the 1980s and the savings-and-loan
collapse in the 1990s (Martinson and Ziegenfuss, 2000). More recently, corporate
accounting scandals and rapid growth in executive compensation have raised concern
among the public regarding the ethical behavior of corporations and their management.
And new developments surrounding the questionable practice of backdating option grants
creates even greater public demand for increased controls and disclosure (Brower, 2006).
The fact that ethical lapses continue to occur suggests that traditional manners of
responding to such crises have had less than the desired effect. New regulation generally
emerges from a developing crisis, is very costly and eventually will begin to experience
diminishing returns (Tafara, 2006). Compliance programs, like those required under
Sarbanes-Oxley, also have had some effect but fail to address the core issue; if an
organization seeks to reduce the occurrence of unethical conduct it must build an ethical
culture (Gebler, 2006). This raises an interesting dilemma, because ethics is a human trait
and is demonstrated at the individual level (Drucker, 1981). Therefore, a business in
Sustainability Reporting Impact on Financial Performance 2
itself is not ethical; rather it is the individuals within the organization who must exhibit
ethical behavior.
As the leaders of the organization, management must assume responsibility for
establishing the framework for an ethical culture and themselves demonstrating ethical
behavior. To create an effective internal control system, companies must first have good
people and then ensure those people remain good (Buhariwalla, 2006). As such, business
leaders must create a business environment and nurture a corporate culture that
encourages ethical performance.
Recent scandals involving organizations such as Enron, WorldCom, HealthSouth,
Adelphia, Tyco, and even the New York Stock Exchange have represented examples of
ethical failures (Shultz, 2003). Rather than focus on these lapses, attention might be
given to organizations practicing effective governance and which offer enhanced
transparency to their business operations and performance. This perspective is consistent

Sustainability Reporting Impact on Financial Performance 4
corporate influence grows, internal and external stakeholders are beginning to require
social and environmental reporting in addition to financial reporting (Ballou, Heitger and
Landes, 2006). This requires sophistication by business leaders to address emerging
issues but also a respect for the impact of their enterprise on others.
1.2 Key Variables

The topic of ethical leadership was explored as a complement to governance
efforts. Since ethical leadership is an abstract issue, the paper explored the subject to
develop a more robust understanding of ethical considerations demonstrated through the
use of sustainability reporting as a means of evaluating financial performance.
Specifically, the research evaluated whether companies that demonstrate ethical
leadership through best in class sustainability reporting performed better than their peers
in terms of value creation. The study assessed the impact of sustainability reporting as
the independent variable to determine whether sustainability reporting had an influence
on firm value. The statistical hypotheses tested are outlined in Section 1.6: of this paper
titled Research Question.
The study focused on two key dependent variables in assessing value:
1) The risk of the firm’s stock based securities as measured by its relative volatility
versus the marketplace
Sustainability Reporting Impact on Financial Performance 5
2) The return of the firm during a five-year period as measured by its stock price
growth during the period being evaluated
These variables were selected due to their inclusion as key variables in the Capital
Asset Pricing Model. The CAPM model asserts that the market demands a higher return
from a firm based upon the relative volatility of the firm’s securities (Kester et al., 1992);
the more volatile the security the greater its risk and therefore the higher its required rate
of return or growth. Volatility is expressed in terms of a beta value that determines the
relative covariance of a specific security to the market; growth is measured as the
appreciation of the security’s value during the same period of time.

targets is a key factor in sustainable development (ERB, 2007) and may serve to reinforce
the control structure of the organization and support ethical decision-making. Finance
plays an especially important role as it relates to sustainability because economic
production has an impact on the environmental performance of the firm and financial
development is linked with economic development (Scholtens, 2006).
Sustainability Reporting Impact on Financial Performance 7
1.3 Market Assimilation and Reporting
Public confidence in the reliability of financial reporting enables securities
markets to transact effectively (GAO, 2006). The Efficient Market Hypothesis asserts
that at all times a security's market price fully reflects the true, rational value of the
security (Fama, 1970). This infers that there is an appropriate price for the security and
that the price reflects that true value (Ogden, Jen and O’Conner, 2003). The market price
is set based upon the information available. For this reason, information availability and
transparency is very important, if all market participants do not have equal access to
information price variances may occur. Important information includes the anticipated
cash flows of the firm, associated risk and discount rate. This information allows
informed participants to make decisions about the firm's prospects and enables a fair
price to be set through trading by these informed parties. Three forms of market
efficiency are discussed as weak form, semi-strong form and strong form (Fama, 1970).
In a weak form, the security's price is reflective of historical prices; value must be
derived based upon the historical assessment of the firm by the market. This provides
little visibility to the firm's future prospects but does provide a trended historical
perspective to evaluate the firm.
In a semi-strong form, the security's price is reflective of information that is
available to the public, value is derived from information on recent performance and
detailed evaluation of the firm is possible given certain financial and performance metrics
and ratios. This enables evaluation of management decisions and results of operations
Sustainability Reporting Impact on Financial Performance 8
including use of capital and changes in cash flow. Information may be available through
SEC filings, releases and public comments.

decisions. Information is evaluated to determine the appropriate value for a security
given its recent performance and future prospects. Among the considerations is the
perceived risk of the security. The model provides a basis for evaluating the trade-off
between greater risk and expected returns (Blume and Friend, 1973). CAPM assesses the
required return associated with assuming the risk of an investment (Burton, 1998).
Sustainability reporting provides additional feedback to the marketplace regarding
individual firm performance and addressed risk by acknowledging the long-term impact
of the company’s operations.
The Capital Asset Pricing Model is useful in explaining the returns of established
common stocks (Blume and Friend, 1973). The research focused on the common stocks
of publicly traded companies over a five-year period to evaluate performance. The model
asserts that the risk premium for any asset is linearly related to its covariance with the
Sustainability Reporting Impact on Financial Performance 10
broader market (Burton, 1998). This covariance, commonly referred to as the beta
coefficient, provided a measure of the securities volatility. The market requires higher
rates of return as volatility increases (Kester et al., 1992); this is reflected in the expected
growth of the security. Given their status as key variables in the Capital Asset Pricing
Model, risk and return served as the dependent variables for evaluating the research
question.
1.5 Purpose of Study

The focus of this study was to evaluate the market’s reaction to additional
disclosure around sustainability. The study took the positive approach to test whether
companies that engage in reporting beyond legislated financial disclosure, to provide
transparency to their operations, realized a premium in the marketplace. Sustainability
was treated as a manifestation of ethical leadership in which long-term value is balanced
with short-term objectives and the interests of multiple stakeholders. This was in contrast
to focusing on the identification of unethical companies. Unethical companies do not
promote their lack of ethics and once that lack of ethics is discovered the firm’s value is
destroyed. The research sought to establish transparency and enhanced disclosure as best

Student’s T-test was used to compare the means of the two datasets relative to beta while
the Kolmogorov-Smirnov Two Sample test was used to compare the relative distributions
of the growth values for the two datasets. In each case the study sought to determine
whether significant differences existed between the two datasets. This descriptive
information along with the root calculation of the key metrics provided the basis for
evaluation of the topic. In order to ascertain whether or not a relationship may actually
exist between sustainability reporting and financial performance the study tested the
following two hypotheses:
Hypothesis 1:
H
0
: The mean value of risk (beta) of the group of Top Sustainability reporters was
greater than or equal to the mean value of risk of the sample of S&P 500
organizations for the period of January 1, 2002 to December 31, 2006
H
1
: The mean value of risk (beta) of the group of Top Sustainability reporters was
less than the mean value of risk of the sample of S&P 500 organizations for the
period of January 1, 2002 to December 31, 2006
Hypothesis 2:
H
0
: The growth of the group of Top Sustainability reporters was less than or equal
to the growth of the sample of S&P 500 organizations based upon the distribution
Sustainability Reporting Impact on Financial Performance 13
of return (growth) values for the for the period of January 1, 2002 to December
31, 2006
H
1
: The growth of the group of Top Sustainability reporters was greater than the

Corporate Social Responsibility views the organization as imbedded in the
community and suggests success is predicated on compliance with the shared values
within the society (Brooks, 2005).
Ethical Leadership involves the consideration of the interests of other
stakeholders in determining policy and interests beyond the short-term interest of the
individual or individual firm (Resick et al., 2006 pg. 357).
Global Reporting Initiative (GRI) is an initiative begun in 1997 with the intention
of improving transparency and supporting sustainable enterprise (GRI, 2006).