Interested Investors and Intermediaries: When do ESG Concerns Lead to ESG Performance?

58 Pages Posted: 5 Sep 2020 Last revised: 12 Aug 2021

See all articles by Henry L. Friedman

Henry L. Friedman

University of California, Los Angeles (UCLA) - Anderson School of Management

Mirko Stanislav Heinle

University of Pennsylvania - Accounting Department

Date Written: May 19, 2021

Abstract

Interested investors and intermediaries (asset managers) are concerned about corporate managers' actions above and beyond the effects of those actions on cash flows. These interests could relate to environmental, social, or governance performance, payout policy, etc. We examine the implications of such interests, combined with the potential for owners to influence managers, on corporate actions, stock prices, and portfolio decisions. When investors are small and invest directly, free-riding causes their non-monetary interests to have no effect. An intermediary can overcome the free-rider problem that prevents small investors from exerting influence activities. However, the free-rider problem persists as investors optimally choose not to delegate to the intermediary, absent frictions. We show that, due to free riding, intermediaries benefit from mechanisms that allow them to economize on costly influence efforts, such as having interests aligned with managers, negative externalities across portfolio firms, and co-investing with similarly-interested insiders. Our findings have implications for research and policy-making related to asset management, investor activism, and corporate social responsibility.

Keywords: Asset management, investor preferences, asset pricing, corporate social responsibility, impact investing

JEL Classification: G11, G23, G34, M14, M40

Suggested Citation

Friedman, Henry L. and Heinle, Mirko Stanislav, Interested Investors and Intermediaries: When do ESG Concerns Lead to ESG Performance? (May 19, 2021). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Available at SSRN: https://ssrn.com/abstract=3662699 or http://dx.doi.org/10.2139/ssrn.3662699

Henry L. Friedman (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Mirko Stanislav Heinle

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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