Institutional ownership and workplace misconduct: Evidence from federal labor law violations

Abstract

We examine shareholder influence over workplace misconduct. We find that institutional ownership is negatively associated with portfolio firms’ likelihood to violate federal labor laws. Additional tests using an instrumental variables approach suggests a causal relation. We document evidence consistent with institutional investors’ aversion to poor employment practices being financially motivated: labor law violations are associated with negative stock returns and a higher likelihood of lost or settled employee lawsuits in subsequent years. Moreover, the effect of institutional ownership on workplace misconduct is stronger in portfolio firms with greater reputational concerns. We find results consistent with shareholder monitoring and voice as channels of investor influence. Institutional investors improve portfolio firms’ employment practices via decreased employee workload and increased workforce investments.

Keywords: Institutional Ownership, Employees, Employment Practices, Violation, Misconduct