A company’s moral behavior has an effect on its market capitalization. This is the conclusion reached by four researchers — including Augustin Landier, a professor at HEC Paris – who conducted an online experiment involving 750 participants. On average, the people surveyed said that they would be willing to pay .7 dollars extra per share to invest in a company that donated one dollar per share to philanthropic organizations. If, on the other hand, a company increased its dividends by “depriving” charities of a dollar per share, the investors would reduce their investment by .9 dollars per share. The study seems to prove that investors make decisions based on their values, and not only on their desire to make a profit.Jean-Francois Bonnefon, Augustin Landier, Parinitha Sastry, David Thesmar, Do Investors Care About Corporate Externalities ? Experimental Evidence, HEC Paris Research Paper No. FIN-2019-1350, September 23, 2019.

Three questions for Augustin Landier, HEC professor of finance

How did you obtain your results?

This experiment was conducted via Mechanical Turk, a crowdsourcing platform run by Amazon where workers can be recruited to perform tasks virtually. The 755 participants, who were paid, had to respond to situations that pitted their financial gain against moral considerations. We designed this game to reflect the ethical dilemmas an investor might face. The goal was to see whether participants were ready to reduce their profits in order to invest in a company that demonstrated more exemplary behavior.

Your study involved imaginary situations. Can the same conclusions be applied to “real life”, particularly to financial markets?

That’s a good question, whether the experiment has “external value”. Our participants faced a real financial issue. It wasn’t imaginary for them, because they had signed on to the platform to make money. They were paid two dollars per experiment, plus a variable supplement of around two dollars more. Studies have shown that participants in this kind of experiment really make an effort to respond, even when the financial rewards are minimal. One example is the study ‘What motivates effort ?” by Stefano DellaVigna and Devin Pope, published in 2018.  We also repeated the experiment with our students, and had similar results. For the moment, though, these tests have only been conducted with amateur investors. It would be interesting to repeat the experience with a cross-section of professionals.

What do you think is the main lesson to be learned from this study?

We tested two kinds of contexts. In the first scenario, the fact that a participant invested in a “generous” company indeed had an impact on the amounts received by an NGO. In the second case, there was no such impact. The participant knew that another investor would do this in his place. Nevertheless, the results were about the same in both contexts. This shows that an investor responds more to ethical principles than to considerations of impact. It’s a bit like someone who refuses to buy shares in Total. This person knows that someone else who is less scrupulous will invest in Total in his place, so his choosing not to invest will have no real impact, but he feels he has been true to his values.

Augustin Landier
Professor of finance at HEC Paris and with a Ph.D in economics from MIT, he has also taught at the Toulouse School of Economics, New York University, and the University of Chicago. His research focuses on behavioral finance and asset management. He was awarded the Turgot prize in 2011 and the “best young economist” prize in 2014.

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