Local Shareholders, Corporate Community Responsibility, and Shareholder Value

Abstract

This paper shows that local shareholders lead firms to engage in corporate social activities locally – corporate community responsibility (CCR). Using an extensive U.S. sample, we find that mutual funds investing in local firms tend to increase CCR. Further analyses suggest a causal effect of local shareholders on CCR. Stakeholder theory and socially conscious (community) investing explain the benefits of CCR for local shareholders as well as their firms. Our results indicate that CCR tends to increase firm performance measured with Tobin’s Q and operating cash flow, especially in the consumer-oriented industries where customer relations are critical. In addition, local shareholders (i.e., local funds) of higher CCR firms enjoy greater fund flows. Our study is the first to investigate the role of local shareholders as a driving force of a firm’s community investments.