The Importance of Financial Misconduct of Institutional Investors on Corporate Social Responsibility

Abstract

This study analyzes the effect of institutional investors with disciplinary history (IDH) on the corporate social responsibility (CSR) activities of investee firms. We use Registered Investment Advisers’ reported violations of laws and regulations to the Securities and Exchange Commission to identify IDH. We find that IDH discourage firms’ engagement in CSR activities and attribute this regularity to institutions’ disregard for social norms. Further, we find that both activist and non-monitoring IDH appear to drive the discouragement of CSR activities but that the investment horizon of investors does not appear to drive our results. We conduct extensive robustness tests to address endogeneity issues by employing two-stage least squares regression, regression discontinuity and difference-in-difference identification strategies. The results continue to hold when we conduct additional robustness tests such as propensity-score matching (PSM) methodology of entropy balancing approach. Overall, our results suggest that institutional investors’ track record of financial misconduct has an economically significant negative impact on investee firms’ CSR activities.