Passive Investors and Corporate Social Responsibility: a Risk-Management Perspective

41 Pages Posted: 23 Aug 2016 Last revised: 22 Sep 2018

See all articles by Wenxuan Hou

Wenxuan Hou

University of Edinburgh - Business School

Xiaoyu Zhang

Norwegian School of Economics (NHH) - Department of Finance

Date Written: August 20, 2016

Abstract

This paper develops a risk-management view of CSR by arguing that CSR provides insurance-like effects in adverse corporate events. Since passive investors have diversified away most idiosyncratic risks, we predict that they demand less CSR as a strategic approach to manage risks. Using the annual Russell 1000/2000 index reconstitution as an instrument for passive investor ownership, we find that firms with higher passive fund ownership exhibit significantly lower CSR engagement. The effects are more pronounced among better-diversified passive investors and firms that are not in CSR-sensitive industries. We also find that passive investors hold back CSR activities through the channel of "voice" by reducing the number of socially responsible investment (SRI) proposals. Overall, the findings shed light on the risk-management function of CSR and provide original evidence that passive investors imprint their preference on firm policy.

Keywords: passive institutional investors, corporate social responsibility, portfolio diversification

JEL Classification: G22, G23,G30, G32, G34, M14

Suggested Citation

Hou, Wenxuan and Zhang, Xiaoyu, Passive Investors and Corporate Social Responsibility: a Risk-Management Perspective (August 20, 2016). Available at SSRN: https://ssrn.com/abstract=2827052 or http://dx.doi.org/10.2139/ssrn.2827052

Wenxuan Hou

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom

HOME PAGE: http://www.wenxuanhou.com

Xiaoyu Zhang (Contact Author)

Norwegian School of Economics (NHH) - Department of Finance ( email )

NHH, Helleveien 30
Bergen, 5045
Norway

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