Institutional Trading around Firms’ Negative ESG Events

Abstract

Using transaction-level institutional trades and a firm’s negative ESG incidents, we find that institutional investors adjust their order flow prior to these non-financial events. First, their trading is in the same direction of post-event cumulative abnormal returns and results in abnormal profits. Second, the relationship between institutional order flow and the subsequent abnormal return is also influenced by the firm’s existing CSR score, and their trading in high-CSR firms lead to significant profit attenuation. These findings suggest that institutional investors’ trading decisions are driven by financial as well as social incentives. We conduct further analysis on firm-level information asymmetry and shareholder breadth to identify their information advantage for their profits. A subsample analysis reveals that institutional order flow is negatively related to their preference for social responsible investment measured by the institution-level CSR index.