Institutional Trading around Firms’ Negative ESG Incidents

Abstract

Using transaction-level institutional trades and a firm’s negative ESG incidents, we find
that institutional investors adjust their order flow prior to these non-financial events.
First, their trading is in the same direction of post-event cumulative abnormal returns
and results in abnormal profits. Second, the relationship between institutional order
flow and the subsequent abnormal return is also influenced by the firm’s existing CSR
score, and their trading in high-CSR firms lead to significant profit attenuation. These
findings suggest that institutional investors’ trading decisions are driven by financial
as well as social incentives. We conduct further analysis on firm-level information
asymmetry and shareholder breadth to identify their information advantage for their
profits. A subsample analysis reveals that institutional order flow is negatively related
to their preference for social responsible investment measured by the institution-level
CSR index.

Keywords: Institutional trading; Negative ESG incidents; Corporate social responsibility (CSR); ANcerno; Sustainalytics

JEL Classification: G14; G23; M14