2004 Moskowitz Prize Lloyd Kurtz Nelson Capital Management SRI in the Rockies Keystone, Colorado October 9, 2004

2004 Winning Studies Moskowitz Prize Winner –Orlitzky, Marc, Frank L. Schmidt, and Sara L. Rynes. "Corporate social and financial performance: A meta- analysis." Organization Studies, 24, Honorable Mention –Bollen, Nicolas P.B. and Mark A. Cohen. "Mutual Fund Attributes and Investor Behavior." Working Paper, May 24, 2004.

Orlitzky’s Meta-Analysis Summary of Key Findings Orlitzky’s Hypotheses The Literature Meta-Analysis Detailed Results

Summary of Key Findings The corporate social responsibility (CSR) literature is more meaningful and coherent than most researchers realize. Statistically significant relationship between CSR and corporate financial performance (CFP). These relationships are very unlikely to be spurious or caused by publication effects.

Orlitzky’s Hypotheses There will be a statistically significant relationship between CSR and CFP. The two factors will mutually reinforce one another. The correlation will be shown to be due to: –Improved managerial competency –Improved corporate reputation Much of the variance in studies will be due to: –Sampling or measurement error –Different data sources

The Literature Numbers in parentheses show # of Moskowitz Prizes and Honorable Mentions. Financial Academics (5) Journal of Finance Working Papers Financial Practitioners (2) Financial Analysts Journal Journal of Investing Management Researchers (4) Academy of Management Journal Journal of Business Independent Organizations (1) World Resource Institute Env. Protection Agency Economists American Economic Review The Economic Journal Research Firms Innovest, IRRC, Inst. Shareholder Services

What is Meta-Analysis? Complex statistical technique. Goal: “Make sense out of nonsense.” Aggregates many studies. Widely used in medical research. Use in management/financial research is new. “Such after-the-fact, or retrospective, analysis falls pretty low on the scale of scientific reliability. But sometimes it provides good clues about where problem areas may lie.” - Time magazine, 9/3/01

Meta Analysis and Vioxx

Confirmed Serious CV Thrombotic Events Observed in VIGOR 50 mg Source: FDA Advisory Committee Presentation, 2/8/01

Meta-Analysis of COX-2s in 2001 “The annualized myocardial infarction rates for COX-2 inhibitors in both VIGOR and CLASS were significantly higher than that in the placebo group of a recent meta-analysis of 23,407 patients in primary prevention trials (0.52%): 0.74% with rofecoxib (P =.04 compared with the placebo group of the meta-analysis) and 0.80% with celecoxib (P =.02 compared with the placebo group of the meta-analysis). The available data raise a cautionary flag about the risk of cardiovascular events with COX-2 inhibitors.” –Source: Journal of the American Medical Association. 286(8):954-9, 2001 Aug (Merck’s own meta-analysis did not show this effect.)

Final Warning [In an FDA-funded study by Kaiser Permanente] “heart attack rates tripled for patients taking Vioxx in doses higher than 25 milligrams per day, according to the study. Lower doses of the drug also increased the risk of a heart attack, ‘but not significantly so,’ the study indicated. Merck defended the safety of its $2.5-billion-a- year drug and questioned the study." –Source: Reuters, 8/27/04

The End “Merck &. Co., Inc. today announced a voluntary worldwide withdrawal of VIOXX® (rofecoxib), its arthritis and acute pain medication. The company's decision, which is effective immediately, is based on new, three-year data from a prospective, randomized, placebo- controlled clinical trial...” –Source: Company press release, 9/30/04

Bringing Meta Analysis to CSR Large body of quantitative work Controversy over: –Definitions of key variables –Methodology McWilliams and Siegel: Misuse of event studies –Interpretation of results Griffin and Mahon: “25 years of incomparable research” Margolis and Walsh: Research is generally weak, but see positive relationship “Despite the intensity of study directed at it, the relationship between CSP and corporate financial performance (CFP) remains in dispute.” – Barnett and Salomon, 2003

The Results – Hypothesis #1 Hypothesis 1: There will be a statistically significant relationship between CSR and CFP. Supported: –CSR explains 24% of the variance in CFP. –File Drawer Analysis: 1,037

The Results – Hypothesis #2 Hypothesis #2: The two factors will mutually reinforce one another. Supported: –By using time lags, Orlitzky finds that CFP is a predictor of future CSR. –But CSR also predicts CFP. –“Taken together, these findings suggest a virtuous cycle with quick cycle times or concurrent bidirectionality.”

The Results – Hypothesis #3 Hypothesis #3: The correlation will be shown to be due to: –Improved managerial competency –Improved corporate reputation Supported: –Both internal (competency) and external (reputation) measures of CSR predicted CFP. –Of the two, the reputation effect was stronger.

The Results – Hypothesis #4 Hypothesis #4: Much of the variance in studies will be due to: –Sampling or measurement error –Different data sources Supported: –Sampling and measurement issues accounted for 24% of the variance across studies. –Reputational measures were better predictors of CPF than social audits (e.g., KLD ratings). –Impact of CSR on CFP was stronger with accounting measures than market measures.

Contacting the Authors Moskowitz Prize Winner Dr. Mark Orlitzky Sr. Lecturer The University of Auckland Business School Commerce C Building 18, Symonds Street Auckland, New Zealand Honorable Mention Nicholas Bollen Vanderbilt Owen Graduate School of Management st Avenue South Nashville, TN

Further Information

Citations Barnett, Michael, and Robert Salomon. “Throwing a Curve at Socially Responsible Investing Research: A New Pitch at an Old Debate.” Organization & Environment, September Bollen, Nicolas P.B. and Mark A. Cohen. "Mutual Fund Attributes and Investor Behavior." Working Paper, May 24, Griffin and Mahon. "The Corporate Social Performance and Corporate Financial Performance Debate: Twenty-Five Years of Incomparable Research." Business & Society, March Margolis, Joshua, and James Walsh. People and Profits?: The Search for a Link Between a Company's Social and Financial Performance. Lea Publishing, 2001 McWilliams, Abagail, and Donald Siegel. "Event Studies in Management Research: Theoretical and Empirical Issues." Academy of Management Journal, Orlitzky, Marc, Frank L. Schmidt, and Sara L. Rynes. "Corporate social and financial performance: A meta-analysis." Organization Studies, 24, 2003.