Socially Responsible Investment: Distributive Experiment Among Investors, Companies, and Society

Abstract

The last decade has witnessed growing public and academic attention being paid to socially responsible investment (SRI) as a new way of enhancing corporate governance and bringing institutional changes in financial markets. However, few studies have focused on interactions between investors and companies or the institutional settings that promote SRI. In this research, the author performed economic experiments that artificially recreate a financial market comprising investors and companies to observe which institutional settings of SRI—information disclosure, reward, and punishment—are effective for governing corporate activities that can harm or benefit society. The results of experiments showed that disclosure of information related to a company’s social value somewhat reduces harmful corporate activities in relation to investor social preferences. However, it cannot exclude free-riding strategies of companies and investors and higher payment gaps among participants that result from such strategies. A rule of rewarding the company most beneficial to the public in addition to information disclosure had a significant effect in limiting public losses and narrowing payment gaps among participants. However, punishing the most harmful company had a stronger and stabilizing effect in limiting public losses and narrowing payment gaps. These experimental results imply that a combination of voluntary information disclosure to appeal to investor social preferences and compulsory punishment of harmful companies is a condition for successful SRI.