(An) unlikely link: socially responsible investment funds and the defense industry

Abstract

This study investigates the effects of negative screening announcements by European Socially Responsible Investment (SRI) funds on the stock price of targeted firms and their ecosystem. Utilizing event study methodology based on the market model, the research analyzes a sample of 177 firms spanning 15 countries. Contrary to the hypothesis that stock prices would universally decline post-announcement, the result varied across the sectors. While non-weapons manufacturers’ stock dropped temporarily, weapons manufacturers’ stock price dropped significantly from the release date and lasted up to 30 days. The significant stock price decline in the defense industry sector suggests that industry characteristics such as bilateral monopoly and high capital intensity contribute to risk pooling difficulties. The finding offers empirical evidence of the negative impact of socially responsible investment funds on the defense industry ecosystem and each firm’s stock price and behavior.