Exploring social capital in the EU financial industry – evidence from risk and return

Purpose – This study aims to investigate the relationship between social capital and stock returns of European Union’s (EU) financial companies, focusing on their resilience during financial crises. Design/methodology/approach – A sample of 140 EU financial companies was analysed, with portfolios rebalanced yearly based on their Refinitiv social scores. This study used a buy-and-hold strategy from 2002 to 2021 and utilised the Nofsinger and Varma (2014) two-alphas model to assess crisis and non-crisis periods. Findings – The authors provide evidence that investments made by EU financial companies to increase their social capital are not delivering higher financial performance. The authors also reject any possible positive contribution of social capital to the financial industry’s resilience during periods of financial shocks. The results are robust across various additional tests and different variable specifications, calling for financial companies to carefully assess the possible outcomes of their social engagement and adopt a more sharedvalue- oriented approach. Research limitations/implications – Implications for the financial industry, investors, financial regulators and policymakers are discussed. Limitations of the study and future lines of research are carefully disclosed in the main text. Originality/value – The authors extend the research on social capital and financial literature by providing evidence on social capital in the EU financial industry that challenges a significant portion of the existing literature and common beliefs. This fosters debate on the actual value, measurement and drivers of social capital in the financial industry and calls for further studies in the field. Keywords Social capital, EU financial sector, Social and environmental responsibility, ESG, Social trust