Sustainable Investments

Paper Session

Saturday, Jan. 7, 2017 8:00 AM – 10:00 AM

Sheraton Grand Chicago, Chicago Ballroom VI
Hosted By: American Finance Association
  • Chair: Harrison Hong, Columbia University

Socially Responsible Investing: Good is Good, Bad is Bad

Ravi Bansal
,
Duke University
Di (Andrew) Wu
,
University of Pennsylvania
Amir Yaron
,
University of Pennsylvania

Abstract

This paper provides a comprehensive analysis of risks and returns of socially responsible investing (SRI) utilizing firm-level data on corporate social responsibility ratings. We demonstrate that firms with high ratings have significantly higher, albeit temporary and time varying, alphas than those with low ratings. In an event study setting, we find that reductions in firms' social responsibility ratings lead to significantly lower cumulative abnormal returns that dissipate after the second year. We then provide evidence indicating that these differences are induced by time-varying, wealth-dependent shocks to investors' preferences, which result in highly rated stocks behaving in a fashion akin to luxury goods. The alpha difference between stocks with high and low ratings are significantly more pronounced during good economic times, and is significantly correlated with both luxury consumption from NIPA and the sales growth of luxury-good retailers.

Impact Investing

Brad Barber
,
University of California-Davis
Adair Morse
,
University of California-Berkeley
Ayako Yasuda
,
University of California-Davis

Abstract

We study investments in impact funds, defined as venture or growth equity funds with dual objectives of generating financial returns and positive externalities. Being an impact fund elevates a fund’s marginal investment rate by 14.1% relative to a traditional VC fund, even more for funds focused on environmental, poverty, and minority/women issues. Europeans and UNPRI signatories have sharply higher demand for impact. Three investor attributes – household-backed capital, mission-oriented investors, and investors facing political/regulatory pressure to invest in impact – account for the higher impact demand. In contrast, legal restrictions against impact (e.g., ERISA) hinder 25% of total demand.

Do Institutional Investors Drive Corporate Social Responsibility? International Evidence

I. J. Alexander Dyck
,
University of Toronto
Karl Lins
,
University of Utah
Lukas Roth
,
University of Alberta
Hannes Wagner
,
Bocconi University

Abstract

This paper assesses whether the environmental and social (E&S) performance of firms worldwide is driven by shareholders—an important channel to study because it is their money being spent. Across 41 countries, we find that institutional ownership is positively associated with firm-level E&S performance with multiple tests suggesting this relation is causal. We test whether investors are motivated by their local social norms towards E&S issues. Investors increase firms’ E&S performance when they come from countries where there is a strong community belief in the importance of E&S issues, but not otherwise. Overall, our results indicate that institutional investors drive firms’ E&S performance around the world and transplant their local social norms in that process.

Peer Effects of Corporate Social Responsibility

Jie Cao
,
Chinese University of Hong Kong
Hao Liang
,
Singapore Management University
Xintong Zhan
,
Erasmus University Rotterdam

Abstract

We investigate how firms react to their peers’ commitment to and adoption of corporate social responsibility (CSR), using a regression discontinuity design that relies on the passing or failing of CSR proposals by a small margin of votes during shareholder meetings. We find the marginal passage of a close-call CSR proposal as well as its implementation are followed by the adoption of similar CSR practices by peer firms. Stock returns around the voting dates are lower for peers in a competing relationship if the CSR proposal was passed, but are higher for peers in an alliance partnership. Our evidence suggests that both herding and social utility mechanisms exist in explaining the peer effects of corporate social responsibility.
Discussant(s)
Rossen Valkanov
,
University of California-San Diego
Laura Starks
,
University of Texas-Austin
Inessa Liskovich
,
University of Texas-Austin
Ing-Haw Cheng
,
Dartmouth College
JEL Classifications
  • G3 - Corporate Finance and Governance