Institutional investors and corporate social responsibility

Abstract

Institutional investors appear to have selective preferences regarding corporate social responsibility. They appear indifferent to the presence of positive environmental (E) and social (S) indicators, but underweight stocks with negative ES indicators. This asymmetric pattern is particularly strong for longer-horizon institutions. Our empirical analyses indicate that this pattern is likely driven by economic incentives as the presence of negative ES indicators reflect downside risks: higher stock return skewness and probability of eventual bankruptcy and/or delisting. Positive ES indicators seem irrelevant in this context. Time-varying economic incentives also drive the dynamic pattern of institutional ownership of stocks with static negative indicators due to their controversial products (e.g., tobacco and firearms).