Shareholder Value Effects of Ethical Sourcing: Comparing Reactive and Proactive Initiatives

Abstract

With the advent of responsible business, ensuring social responsibility in sourcing is of interest to both academics and practitioners. In this study, we examine one way of achieving this goal: ethical sourcing initiatives (ESIs). ESIs refer to a firm’s formal and informal actions to manage sourcing processes in an ethical and socially responsible manner. While ESIs have been established as an important part of corporate social responsibility, it is unclear whether, how, and when this corporate effort is economically beneficial. We conduct an event study estimating the shareholder value effect of 159 publicly traded firms’ ESIs and find that the stock market reacts positively to ESIs in general. We also compare market reactions under different conditions including reactive versus proactive ESIs, and their interactions with initiative timing, firm size, and financial risk. Additionally, we find that ESIs are associated with long-term stock price and operating performance. Overall, our findings clarify the potential economic benefits of corporate ESIs and encourage buying firms to take these initiatives selectively according to business contexts.