Do Institutional Investors Play a Strategically Ethical Role in the Relation Between Corporate Environmental and Financial Performance?
61 Pages Posted: 2 Mar 2020 Last revised: 20 Jul 2020
Date Written: July 18, 2020
Despite the vast literature on why firms should engage in corporate social responsibility (CSR) and an increasing desire expressed by managers to pursue CSR, many managers have yet to integrate CSR principles in their daily practices due to the lack of a clear link between CSR and corporate financial performance (CFP) and the fear that investors will fire managers for poor CFP. We propose a conceptual framework to illustrate that when three conditions hold, institutional investors moderate a positive relation between CFP and corporate environmental performance (CEP). We explore heterogeneities across institution types to demonstrate the importance of each condition. We also theorize and empirically test the channels through which the moderating effect takes place. Our results have important policy and practical implications because institutional investors own over 70% of U.S. firms, and one out of four dollars under professional management was invested in funds with a CSR orientation by the start of 2018.
Keywords: Corporate social responsibility; Environmental, social, and governance; Sustainability; Institutional investors; Shareholder theory; Stakeholder theory; Delegated philanthropy theory
JEL Classification: D22; G34; M14
Suggested Citation: Suggested Citation