Green-selecting: Foreign institutional ownership and corporate green practices

Abstract

To address the widespread skepticism of firms’ environmental commitments, we show that foreign institutional ownership can positively predict the holding firm's real green practices. Exploiting the Stock Connect Programs in China which introduces the minority ownership of foreign institutions, we show that the selected firms significantly increase holdings of green patents, R&D expenses, access to green credits, and decrease carbon emissions. The effect is more pronounced if the foreign institutional investors are from countries with higher ESG standards. Analysis based on propensity-score-matched sample suggests that foreign institutional ownership sends a signal certifying the firm's green orientation, enabling it to access more capital and improve green performance. Overall, our study proposes foreign institutional holdings as a practical indicator of selecting genuinely green stocks.