Socially Responsible Investors, Firm Value and Firm Risk

Abstract

This paper studies the association between ownership by socially responsible investors (SRIs) and firm outcomes. In particular, we examine their impact on firm value and firm risk. Since the inclusion of environmental, social, and governmental (ESG) issues in investment decisions is not directly observable, we define SRIs as signatories to the United Nation supported Principles for Responsible Investing (UN PRI). We argue that these investors possess a unique multi-attribute value function, which not only facilitates active, long-term monitoring, but also creates greater interest alignment between them and other stakeholders of the firm. We find that SRI ownership of listed European companies is linked with greater firm value and lower firm risk. Inferences are derived from panel data analysis based on 9,444 firm-year observations over a sample period from 2008-2017. Our findings are robust to a battery of robustness tests and lend support for a possible causal relationship between SRI ownership and firm outcomes. This study is relevant for the ongoing debate about regulation on sustainable finance and investing in Europe.

Keywords: SRI, Firm Value, Firm Risk, Ownership Structure, Corporate Governance, Monitoring

JEL Classification: G30, M14