Working Paper: CEPR ID: DP14098
Authors: Nick Gantchev; Mariassunta Giannetti; Rachel Li
Abstract: Using a novel dataset of negative news coverage of the environmental and social (E&S) practices of firms around the world, we show that customers and investors can provide market discipline and impose their ethical standards on firm policies. Investors sell firms with heightened E&S risk, especially if they are from E&S conscious countries or hold portfolios with high sustainability ratings. Similarly, heightened E&S risk is associated with a drop in firms’ sales in E&S conscious countries. This behavior of E&S conscious investors and customers leads to declines in stock prices, which push firms to improve their E&S policies in the years following negative realizations of E&S risk. Overall, our results indicate that customers and shareholders are able to impose their social preferences on firms, suggesting that market discipline works.
Keywords: Corporate Social Responsibility; Institutional Investors; Culture; Environment; Corporate Governance
JEL Codes: G15; G23; G30; M14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| heightened ES risk (I12) | reduced institutional ownership (G32) |
| reduced institutional ownership (G32) | lower stock valuations (G32) |
| heightened ES risk (I12) | lower stock valuations (G32) |
| negative news coverage (G14) | drop in sales (F61) |
| market discipline (G18) | changes in corporate behavior (G38) |