The primary objective of the survey investigates the reaction of the Finnish stock market when there are CSR announcements of pulp and paper companies in the market. By so doing, all the announcements tested first on the forestry and paper sector index, and this is the sector index where both company's trade. After that, the company's announcements are also tested separately on its stock as well as the shares of the other company, to see the reaction of the other company's market value due to the announcement of its competitor's announcements.
Moreover, the news was categorised into three CSR dimensions, that is ESG. However, each different aspect is tested against the sector index to see the reaction of the market when the companies published the environmental, social and governance news. The formulated problem of the ESG is as; Is there any chance for an investor to make an abnormal return on Helsinki Stock Exchange when an announcement related to environmental, social and governance responsibilities (CSR)?
Furthermore, when there is an announcement in the market, it can either be a good announcement or bad announcement regarding the type of news the companies break into the market. The news was collected between the period of 2004 – 2014 mainly from the companies' main websites based on their press releases. However, upon the researchers' discretion, of 63 announcements included, 43 were classified as good news, and the remaining 20 is bad news. So, all the good news, as well as the bad news, will be tested against the sector to see the reaction of the market.
The division of the hypothesis is in four main sections.
1. All the announcement tested on F&P index, UPM and Stora Enso.
2. Company level announcement tested on the firms and the Sector index (F&P) 3. All the announcements were divided into ESG and tested on the F&P sector index
4. The effect of the announcement released either good or bad were tested on the Sector index.
According to MacKinlay (1997), event study null hypothesis (H0) is that the event does not have any statistically significant effect on the returns (this is in line with strong-form market efficiency).
However, if the opposite is true, the null hypothesis is rejected. Because strong-form market efficiency does not hold according to previous studies, and that there is an effect on price when
there is new information, at least on the event day, the first set of the hypothesis will be formed based on semi-strong form market efficiency.
3.1 Hypothesis – Total industry level announcements
Hypothesis 0: The announcement of CSR news of the pulp and paper companies affect the returns of Forestry and paper sector index on the event day.
Hypothesis 1: The announcement of CSR news of the pulp and paper companies affect the returns of UPM's on the event day
Hypothesis 2: The announcement of CSR news of the pulp and paper companies affect the returns of Stora's on the event day.
3.2 Hypothesis - Companies level CSR
The company-level hypothesis studies the reaction of the announcements on the businesses own stocks. The same announcements are also tested against the competitor's stock returns, and it will also be tested with the stock returns of the sector index. The hypotheses are as follows:
Hypothesis (a): The CSR announcement of UPM have an impact on the returns of UPM on the event day.
Hypothesis (b): The CSR announcement of UPM have an impact on the stock returns of Stora's on the event day.
Hypothesis (c): The CSR announcement of UPM have an impact on the stock return of the Forestry and paper sector index on the event day.
It is likely to expect some reactions from the announcement of UPM news on the industry index as well as on the competitor's stock price since UPM is among the biggest firms in the industry.
Nevertheless, Stora Enso is also a significant contributor to the sector so its announcements will as well have an impact on the returns on the industry index.
The corresponding hypotheses related to announcements of Stora Enso are:
Hypothesis (d). The CSR announcements of Stora affect the returns of Stora on the event day.
Hypothesis (e): The CSR announcement of Stora affect the returns of UPM on the event day.
Hypothesis (f): The CSR announcement of Stora affect the stock return of the Forestry and paper sector index on the event day.
3.3 Hypothesis – ESG
As it has been established above, all the news collected were categorised into environmental, social and governance announcement to test the robustness of the results further. Each category was only tested against the forestry and paper sector index but not on the individual stock returns. This test will reveal the market reaction from the industry point of view. Hence the following hypotheses were formulated.
Hypothesis (g): Environmental CSR announcements of pulp and paper companies affect the forestry and paper sector index on the event day
Hypothesis (h): Social CSR announcements of pulp and paper companies affect the forestry and paper sector index on the event day.
Hypothesis (i): Governance CSR announcements of pulp and paper companies affect the forestry and paper sector index on the event day.
3.4 Hypothesis – Good/Bad CSR news
Hypothesis (j): Good CSR announcements have an impact on the forestry and paper sector index on the event day.
Hypothesis (k): Bad CSR announcements affect the forestry and paper sector index on the event day.
In all, there are 14 hypotheses to be tested in this study. The abnormal returns of all the hypotheses will be examined, and then the reaction of the market will be determined on the event day as well as the different length of periods preceding and following the event day. This is done by also calculating the cumulative abnormal returns of the news effect. If the null hypothesis is accepted, this means that the market is of semi-strong form and that new information is instantly incorporated into the prices (Fama, 1972). Therefore, there shouldn't be any cumulative abnormal returns, but if the null hypothesis is rejected, then the opposite is true. Based on this the CAAR hypothesis is that all the test that will be conducted will have no cumulative abnormal returns.