Does Money Talk? Market Discipline through Selloffs and Boycotts
67 Pages Posted: 24 Jun 2019 Last revised: 1 Jun 2021
Date Written: May 20, 2021
Can market discipline affect corporate environmental and social (E&S) policies? Using international data on negative news coverage of corporate E&S risks, we show that E&S-conscious investors divest firms with heightened E&S risk. As a consequence of investors’ reactions, firms with more E&S-motivated investors experience larger temporary declines in valuations and subsequently improve their E&S policies. The improvements in corporate policies are concentrated among firms with more informative stock prices and do not appear to be due to investor engagements, indicating that firms learn about their shareholders’ preferences from stock prices. We also show that following negative realizations of E&S risk, sales in E&S-conscious countries decrease but are not consistently associated with price declines and improvements in corporate E&S policies.
Keywords: Corporate social responsibility; Price Informativeness; Real effects of financial markets; Institutional investors; Sustainability; Corporate governance; Culture
JEL Classification: G15, G23, G30, M14
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