Responsibility, Regulation and Asset Pricing

Responsibility, Regulation and Asset Pricing: This paper investigates whether Corporate Social Responsibility is a risk factor important for asset pricing. We use monthly measures of “responsibility” based on returns of portfolios of more responsible versus less responsible stocks to create responsibility factors, and we present empirical evidence that our responsibility risk factors contribute to explaining cross sectional variation in expected equity returns. Our findings are robust to several methods of defining the factor and provide pricing information independent of the classic market, size, value and momentum factors.

Short selling, regulatory flip flops and uncertainty: After seventy years with no changes to short sale regulation, the United States Securities and Exchange Commission intervened three times with regulatory action from July 2007 through October 2008, with interventions ranging from loosening constraints, to banning naked shorting on a small set of stocks to banning covered shorting on a much wider set of stocks. While classical models make predictions about how individual stock prices react to short sale constraints, they offer little insight into how regulatory changes and regulatory uncertainty about short sales affect the wider market. In this paper we investigate the spillover effect of the SEC regulatory flip flops on the U.S. market as a whole by examining the impact of changes from the perspectives of asset pricing and asset allocation. Using a multi-factor asset pricing model, we find that all three regulatory changes significantly impact risk premia, with impacts differing across priced factors. However, the impact of regulatory actions on out of sample returns for a broad long only investor is less clear cut, ranging from no impact for the first two regulatory actions to a significant welfare cost of up to 10% of wealth over the September 2008 ban.