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Why Do Firms Invest in Corporate Social Responsibility and Does it Matter?

Paper Session

Friday, Jan. 5, 2018 2:30 PM - 4:30 PM

Loews Philadelphia, Commonwealth Hall A2
Hosted By: American Finance Association
  • Chair: I. J. Alexander Dyck, University of Toronto

Investor Tastes, Corporate Behavior and Stock Returns: An Analysis of Corporate Social Responsibility

Chuan Yang Hwang
Nanyang Technological University
Sheridan Titman
University of Texas-Austin
Ying Wang
Central University of Finance and Economics


Utilizing the revealed preference of institutions, we classify institutions into socially responsible institutions (SRI) and non-socially-responsible institutions (NSRI) by the value weighted Corporate Social Responsibility (CSR) scores of their portfolio holdings. Stocks that experience an increase in SRI ownership (SRIO) tend to increase CSR, especially for those with high current CSR. We also find that increased SRI holdings are associated with negative excess stock returns when the SRI holding information first becomes public, which is consistent with the hypothesis that an anticipated increase in CSR harms shareholders. Our evidence also reveals important differences between hedge funds and other institutional investors. In particular, we find that hedge funds are less likely to be classified as SRI, and that hedge fund holdings tend to be associated with lower CSR growth even when they are classified as SRI.

ESG Shareholder Engagement and Downside Risk

Andreas Hoepner
University College Dublin
Ioannis Oikonomou
University of Reading
Zacharias Sautner
Frankfurt School of Finance & Management
Laura Starks
University of Texas
Xiaoyan Zhou
University of Oxford


We show that shareholder engagement on environmental, social and governance (ESG) issues creates value by reducing downside risk, measured using lower partial moments and value at risk. We document this effect by exploiting proprietary access to the complete engagement database of one of the world’s largest institutional shareholder activist. The risk effect of ESG engagement varies across engagement themes. It is effective when governance or strategy topics are addressed, and if changes in firms’ environmental policies (especially on climate risk) are coupled with governance improvements.

Employee Satisfaction, Labor Market Flexibility, and Stock Returns Around The World

Alex Edmans
London Business School
Lucius Li
London School of Economics
Chendi Zhang
University of Warwick


We study the relationship between employee satisfaction and firm performance around the world, using lists of the “Best Companies to Work For” in 14 countries. Employee satisfaction is associated with superior long-run returns, current valuation ratios, future profitability, and earnings surprises in flexible labor markets, such as the US and UK, but not rigid labor markets, such as Germany. These results are consistent with employee satisfaction improving recruitment, retention, and motivation in flexible labor markets, where firms face fewer constraints on hiring and firing and employees have greater ability to respond to higher satisfaction. In rigid labor markets, legislation already provides minimum standards for worker welfare and so additional expenditure may exhibit diminishing returns. The findings have implications for the differential profitability of socially responsible investing strategies around the world – in particular, the importance of considering institutional factors when forming such strategies.

Leviathan Inc. and Corporate Environmental Engagement

Po-Hsuan Hsu
University of Hong Kong
Hao Liang
Singapore Management University
Pedro Matos
University of Virginia


In a 2010 special report, The Economist called the resurgence of state-owned mega-enterprises, especially those in emerging economies, “Leviathan Inc.”, and criticized their poor governance and low efficiency. We show that state-owned enterprises engage more in environmental issues and are more responsive to salient environmental events. The effect is more pronounced in energy firms located in emerging economies and countries with higher energy risks, and with direct ownership held by domestic government rather than sovereign wealth funds. Market value does not suffer from such engagement. These results suggest that “Leviathan Inc.” may be better positioned at dealing with environmental externalities.
Adair Morse
University of California-Berkeley
Craig Doidge
University of Toronto
Tracy Wang
University of Minnesota
Karl Lins
University of Utah
JEL Classifications
  • G3 - Corporate Finance and Governance