Corporate sustainability and asset pricing models: empirical evidence for the Brazilian stock market

Abstract

The paper investigates the impact of corporate sustainability on asset prices. For that purpose, we develop a novel corporate sustainability factor and test the extent to which this factor is priced in an augmented four-factor version of the traditional Fama & French (1993) asset pricing model. The corporate sustainability factor is based on a zero-investment portfolio which is long in stocks with high sustainability and short in stocks with low sustainability. We use data on the Brazilian stock market to estimate alternative model specifications with different combinations of four explanatory variables: the corporate sustainability premium, the market risk factor premium, the size factor premium and the book-to-market factor premium. Our results indicate that corporate sustainability is priced and helps to explain the variability in the cross-section of expected stock returns.

Corporate Governance and Capital Asset Pricing Models

“…Lastly, and with great influence in this paper, Azevedo et al (2016) proposed the insertion in three-factors CAPM of the corporate sustainability factor. The authors added weighting of sustainability index to French's (1993, 2015) methodology, considering high and low sustainability companies.…”

“…Similarly, some studies presented in the literature related the stock return with corporate governance (Gompers et al, 2003;Ferreira & Laux, 2007;Nguyen, 2011;Martins & Paulo, 2014). Analogous to the study of Azevedo et al (2016), and considering the relationship testified in the literature between corporate governance and asset price, this paper assumes a model that embodies in its estimate a factor of corporate governance. For Ferreira and Laux (2007), the delimitation and incentives are the practices that governance exerts that influence stock prices, a relationship they saw as relevant to the finance area.…”

“…Complementary to this, and explicitly based on the literature, corporate governance has an impact on stock returns. Thus, to test the proposed relationship, and based on the methodology adopted by Azevedo et al (2016), the inclusion of corporate governance as a factor was considered in parts. In other words, considering the factors studied, a different combination of factors that compose Fama and French's (2015) model was created for analysis and, for those, the corporate governance factor was aggregated.…”

“…Several prior studies have related stock returns to factors such as risk, volatility, and governance (Ferreira & Laux, 2007;Nguyen, 2011;Mendonça et al, 2012;Azevedo, Santos, & Campos, 2016). Among these, there are studies that investigate the relationship of corporate governance levels with several factors that may or may not impact it.…”

“…The described relationship between corporate governance and stock returns, as well as stock prices, are relevant to the investigation of corporate governance as an explained factor in financial assets pricing models. Azevedo et al (2016) added to Fama and French's (1993) CAPM three-factors an enterprise sustainability factor, which was presented as an important explainer in asset pricing models. Likewise, this research intends to investigate the relationship between enterprise sustainability and return, with a focus on binomial corporate governance and return.…”