Corporate Social Responsibility and Foreign Institutional Investor Heterogeneity

Abstract

This article examines whether the heterogeneity of foreign institutional investors (FIIs) matters when investing in host firms that are considered to be socially responsible. Exploiting a mandated corporate social responsibility (CSR) regulation and using actual CSR expenditure data, the results of a quasi-natural experiment show that host firms that comply with the CSR mandate attract more FII investment. However, the heterogeneity of FIIs plays a significant role as we find that FIIs from civil law origin countries and, those considered to be independent and long-term investors invest more in mandated CSR firms. Finally, the empirical evidence also indicates that firms that comply with the CSR mandate experience higher long-term market-based valuations in the post-CSR reform period.

Keywords: CSR expenditure, Foreign institutional investors, Legal origin, Independent and long-term investors, Market valuation

JEL Classification: G23, G38, M14