Culling Black Sheep to Better the Flock: The Positive CSR Outcomes Of Negative Screening

Abstract

This paper explores whether and how negative screening of firms by a prominent institutional investor could lead to broader social welfare benefits. Extending research on negative spillover effects of delegitimizing events, we offer the first systematic study of the effect of censorship, defined as divestments which incorporate public naming and shaming, on non-culpable firms’ corporate social responsibility. Employing a quasi-natural experiment, we show that non-culpable firms proactively respond to the Norwegian Sovereign Wealth Fund’s censorship announcements by improving their corporate social responsibility. Further, we draw on attention- based theory and test a number of mechanisms that moderate the effect of censorship. We find that the effect of censorship is greater in the presence of shareholder activism and higher ownership stakes. Our investigation into the phenomena of censorship unites two separate literatures on negative spillovers and institutional activism. We also show that portfolio membership to be a more relevant category space compared to industry in the presence of censorship, contrary to extant theory on industry categorization. From a policy standpoint, these findings suggest that social investors’ current criticisms toward negative screening and the privileged use of management dialogues alone may be misguided and should be revisited.