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The "Washing Machine": Investment Strategies and Corporate Behavior with Socially Responsible Investors

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  • Gollier, Christian
  • Pouget, Sébastien

Abstract

This paper studies shareholder engagement in companies' strategic decisions. Differences of objective among shareholders arise in our model due to the presence of socially responsible investors. These investors take externalities into account when valuing their portfolio while conventional investors do not. Shareholders may affect corporate behavior via two mechanisms. They can vote with their feet: responsible investors may shy away from firms producing negative externalities, thereby raising their cost of capital. Investors can also engage in activism. Our main contribution is to show that a large activist investor can generate positive abnormal returns by investing in non-responsible companies and turning them into responsible. We call this strategy the \Washing Machine" and show that its successful implementation relies on a long-term horizon and a credible pro-social orientation.

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Bibliographic Info

Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 813.

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Date of creation: Jan 2014
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Handle: RePEc:ide:wpaper:27827

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Keywords: Asset pricing; corporate social responsibility; socially responsible investments; corporate engagement; shareholder activism.;

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  1. Alon Brav & Wei Jiang & Frank Partnoy & Randall Thomas, 2008. "Hedge Fund Activism, Corporate Governance, and Firm Performance," Journal of Finance, American Finance Association, vol. 63(4), pages 1729-1775, 08.
  2. Marco Becht & Julian Franks & Colin Mayer & Stefano Rossi, 2010. "Returns to Shareholder Activism: Evidence from a Clinical Study of the Hermes UK Focus Fund," Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 3093-3129, March.
  3. Hong, Harrison & Kacperczyk, Marcin, 2009. "The price of sin: The effects of social norms on markets," Journal of Financial Economics, Elsevier, vol. 93(1), pages 15-36, July.
  4. Heinkel, Robert & Kraus, Alan & Zechner, Josef, 2001. "The Effect of Green Investment on Corporate Behavior," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(04), pages 431-449, December.
  5. Alex Edmans & Gustavo Manso, 2011. "Governance Through Trading and Intervention: A Theory of Multiple Blockholders," Review of Financial Studies, Society for Financial Studies, vol. 24(7), pages 2395-2428.
  6. Ernst Maug, 1998. "Large Shareholders as Monitors: Is There a Trade-Off between Liquidity and Control?," Journal of Finance, American Finance Association, vol. 53(1), pages 65-98, 02.
  7. Bauer, Rob & Koedijk, Kees & Otten, Roger, 2005. "International evidence on ethical mutual fund performance and investment style," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1751-1767, July.
  8. Alex Edmans, 2009. "Blockholder Trading, Market Efficiency, and Managerial Myopia," Journal of Finance, American Finance Association, vol. 64(6), pages 2481-2513, December.
  9. David P. Baron, 2007. "Corporate Social Responsibility and Social Entrepreneurship," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(3), pages 683-717, 09.
  10. Edmans, Alex, 2011. "Does the stock market fully value intangibles? Employee satisfaction and equity prices," Journal of Financial Economics, Elsevier, vol. 101(3), pages 621-640, September.
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