Skip to main content
SpringerLink
Log in

Is Institutional Ownership Related to Corporate Social Responsibility? The Nonlinear Relation and Its Implication for Stock Return Volatility

  • Published:
Journal of Business Ethics Aims and scope Submit manuscript

Abstract

This study examines the relation between corporate social responsibility (CSR) and institutional investor ownership, and the impact of this relation on stock return volatility. We find that institutional ownership does not strictly increase or decrease in CSR; rather, institutional ownership is a concave function of CSR. This evidence suggests that institutional investors do not see CSR as strictly value-enhancing activities. Institutional investors adjust their percentage of ownership when CSR activities go beyond the perceived optimal level. Employing the path analysis, we also examine the mediating effect of institutional ownership on the relation between CSR and stock return volatility. We find that CSR decreases stock return volatility at a decreasing rate through its effect on institutional ownership. Our results remain robust under several different CSR measures and estimation methods.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3

Similar content being viewed by others

Notes

  1. Available at http://www.unpri.org/signatories/signatories/.

  2. Canadian Institute of Chartered Accountants, in their 2010 report of Environmental, Social, and Governance (ESG) issues in institutional investor decision making suggest, “… there has been a fundamental shift in consideration of ESG matters in investment decision making. In particular, in the past, trustees may have argued that it was beyond their fiduciary responsibilities to consider ESG matters in an investment decision. Today, it may be considered a breach of fiduciary duty not to consider such matters” (Canadian Institute of Chartered Accountants 2010).

  3. Institutional ownership also influences accounting conservatism. Ramalingegowda and Yu (2012), for instance, find that higher ownership by institutions that are likely to monitor managers is associated with more conservative financial reporting, and ownership by monitoring institutions leads to more conservative reporting. Accounting conservatism, however, is not our main focus in this paper.

  4. We examine the effect of one-year and two-year lagged CSR on the current year institutional ownership. In addition, to mitigate the problem of low statistical power arising from the stickiness of social scores in KLD data, we measure changes in CSR as changes from year t − 3 to year t − 1.

  5. We conduct a robustness test based on CSR index incorporating governance net counts. Our untabulated results are largely consistent with those based on CSR index excluding governance scores.

  6. We conduct a robustness test based on the CSR raw scores counts rather than CSR index and our untabulated results are largely consistent with those in Tables 4, 5, 6.

  7. CSR may affect institutional stock return volatility directly and/or indirectly via its effect on institutional ownership. Path analysis allows us to examine direct and indirect effect separately. While Granger-causation test helps researchers identify a causal relationship, it does not allow researchers to distinguish direct and indirect effects. We provide Granger-causation analysis in Table 8.

  8. Path coefficients are standardized regression coefficients. Because we need to compare effects across equations and between regressors, we need to standardize the effects. While path analysis is useful because it allows researchers to examine direct and indirect effects simultaneously with multiple independent and dependent variables, it cannot establish absolute direction of causality. Path analysis cannot distinguish which of two distinct path diagrams is more correct, nor can it distinguish whether the correlation between A and B represents a causal effect of A on B, a causal effect of B on A, mutual dependence on other variables C, D, and so forth (Lea 1997). Despite those limitations, the use of path analysis in social science research has allowed researchers to gain additional understanding and insights into various important issues, and therefore theoretical knowledge on the part of the researcher is critical to the successful application of path analysis (Stage et al. 2004).

  9. We conduct a robustness test by excluding financial and utility firms and find qualitatively similar results.

  10. The results without winsorization are qualitatively similar.

  11. The level of institutional ownership may be correlated with the lagged level of institutional ownership. We include the lagged level of institutional ownership at the beginning of the year as an additional control variable in the regressions and rerun our analyses. Our untabulated results are largely consistent with those in Tables 4, 5, 6.

  12. Statistical significance for the indirect effect in Panel B is determined based on statistical significance of the path coefficient on centered CSR index (CSRIDX_C(t − 1)) and centered CSR index squared (CSRIDX_C2(t − 1)) in the first regression and statistical significance of the path coefficient on institutional ownership in the second regression. We take the lesser of the two statistical significance levels.

  13. We find that unlike in the level specification, the direct effect of changes in CSR on changes in stock return volatility is not statistically significant. It appears that the positive relation between the two-year lag of CSR level and the level of stock return volatility in Table 7 is only transitory (static) and therefore does not hold in the change specification.

References

  • Ali, A., Durtschi, C., Lev, B., & Trombley, M. (2004). Changes in institutional ownership and subsequent earnings announcement abnormal returns. Journal of Accounting, Auditing, and Finance, 19, 221–248.

    Article  Google Scholar 

  • Badrinath, S., Gay, G., & Kale, J. (1989). Patterns of institutional investment, prudence and the managerial safety net hypotheses. Journal of Risk and Insurance, 56, 605–629.

    Article  Google Scholar 

  • Barnett, M. L., & Salomon, R. M. (2006). Beyond dichotomy: The curvilinear relationship between social responsibility and financial performance. Strategic Management Journal, 27, 1101–1122.

    Article  Google Scholar 

  • Baron, D., Harjoto, M., & Jo, H. (2011). The economics and politics of corporate social performance. Business and Politics, 13, 1–46.

    Article  Google Scholar 

  • Brammer, S., & Millington, A. (2003). The effect of stakeholder preferences, organizational structure and industry type on corporate community involvement. Journal of Business Ethics, 45, 213–226.

    Article  Google Scholar 

  • Bushee, B. (1998). The influence of institutional investors on myopic R&D investment behavior. The Accounting Review, 73, 305–333.

    Google Scholar 

  • Bushee, B. (2001). Do institutional investors prefer near-term earnings over long-run value? Contemporary of Accounting Research, 18, 207–246.

    Article  Google Scholar 

  • Bushee, B., & Goodman, T. (2007). Which institutional investors trade based on private information about earnings and returns? Journal of Accounting Research, 45, 289–321.

    Article  Google Scholar 

  • Bushee, B., & Noe, C. (2000). Corporate disclosure practices, institutional investors, and stock return volatility. Journal of Accounting Research, 38(Supplement), 171–202.

    Article  Google Scholar 

  • Campbell, J. L. (2007). Why would corporations behave in socially responsible ways? An institutional theory of corporate social responsibility. Academy of Management Review, 32, 946–967.

    Article  Google Scholar 

  • Canadian Institute of Chartered Accountants. (2010). Environmental, social, and governance (ESG) issues in institutional investor decision making. Toronto, ON: Canadian Institute of Chartered Accountants.

    Google Scholar 

  • Chan, L. K. C., & Lakonishok, J. (1993). Institutional trades and intraday stock price behavior. Journal of Financial Economics, 33, 173–200.

    Article  Google Scholar 

  • Chan, L. K. C., & Lakonishok, J. (1995). The behavior of stock prices around institutional trades. Journal of Finance, 50, 1147–1174.

    Article  Google Scholar 

  • Chatterji, A. K., Levine, D. I., & Toffel, M. W. (2009). How well do social ratings actually measure corporate social responsibility? Journal of Economics & Management Strategy, 18(1), 125–169.

    Article  Google Scholar 

  • Chava, S. (2010). Socially responsible investing and expected stock returns. Working Paper. Georgia Institute of Technology. http://www.q-group.org/wp-content/uploads/2014/01/Chava_SRI_v2.pdf.

  • Chava, S. (2014). Environmental externalities and cost of capital. Management Science,. doi:10.1287/mnsc.2013.1863.

    Google Scholar 

  • Cochrane, J. H. (2001). Asset Pricing. Princeton, NJ: Princeton University Press.

    Google Scholar 

  • Cox, P., Brammer, S., & Millington, A. (2004). An empirical examination of institutional investor preferences for corporate social performance. Journal of Business Ethics, 52, 27–43.

    Article  Google Scholar 

  • Cox, P., Brammer, S., & Millington, A. (2008). Pension funds and corporate social performance. An empirical analysis. Business & Society, 47, 213–241.

    Article  Google Scholar 

  • Dam, L., & Scholtens, B. (2012). Does ownership type matter for corporate social responsibility? Corporate Governance: An International Review, 20, 233–252.

    Article  Google Scholar 

  • Dam, L., & Scholtens, B. (2013). Ownership concentration and CSR policy of European multinational enterprises. Journal of Business Ethics, 118, 117–126.

    Article  Google Scholar 

  • Dam, L., & Scholtens, B. (2015). Toward a theory of responsible investing: On the economic foundations of corporate social responsibility. Resource and Energy Economics, 41, 103–121.

    Article  Google Scholar 

  • Del Guercio, D. (1996). The distorting effect of the prudent-man laws on institutional equity investments. Journal of Financial Economics, 40, 31–62.

    Article  Google Scholar 

  • Dhaliwal, D., Li, O., Zhang, A., & Yang, Y. (2011). Voluntary nonfinancial disclosure and the cost of equity capital: The initiations of corporate social responsibility reporting. The Accounting Review, 86, 59–100.

    Article  Google Scholar 

  • El Ghoul, S., Guedhami, O., Kwok, C., & Mishra, D. (2011). Does corporate social responsibility affect the cost of capital? Journal of Banking & Finance, 35, 2388–2406.

    Article  Google Scholar 

  • Fama, E., & French, K. (1997). Industry costs of equity. Journal of Financial Economics, 43, 153–197.

    Article  Google Scholar 

  • Fernando, C., Sharfman, M., & Uysal, V. (2010). Does greenness matter? The effect of corporate environmental performance on ownership structure, analyst coverage, and firm value. Working Paper. http://www.fma.org/NY/Papers/Environmental_Performance_OU_FMA.pdf.

  • Fisman, R., Heal, G., & Nair, V. B. (2008). A model of corporate philanthropy, Working Paper, Columbia University and University of Pennsylvania.

  • Flammer, C. (2013). Corporate social responsibility and shareholder reaction: The environmental awareness of investors. Academy of Management Journal, 56(3), 758–781.

    Article  Google Scholar 

  • Flammer, C. (2015). Does corporate social responsibility lead to superior financial performance? A regression discontinuity approach. Management Science (in press).

  • Gillan, S., Hartzell, J., Koch, A., & Starks, L. (2012). Firms’ environmental, social and governance (ESG) choices, performance and managerial motivation. Working Paper. http://www.business.pitt.edu/faculty/papers/koch3.pdf.

  • Godfrey, P. C. (2005). The relationship between corporate philanthropy and shareholder wealth: A risk management perspective. Academy of Management Review, 30, 777–798.

    Article  Google Scholar 

  • Gompers, P., & Metrick, A. (2001). Institutional investors and equity prices. Quarterly Journal of Economics, 116, 229–259.

    Article  Google Scholar 

  • Goss, A., & Roberts, G. (2011). The impact of corporate social responsibility on the cost of bank loan. Journal of Banking & Finance, 35, 1794–1810.

    Article  Google Scholar 

  • Graff-Zivin, J., & Small, A. (2005). A Modigliani–Miller theory of altruistic corporate social responsibility. Topics in Economic Analysis & Policy, 5, Article 10.

  • Harjoto, M., & Jo, H. (2011). Corporate governance and CSR nexus. Journal of Business Ethics, 100(1), 45–67.

    Article  Google Scholar 

  • Heinkel, R., Kraus, A., & Zechner, J. (2001). The effect of green investment on corporate behavior. Journal of Financial and Quantitative Analysis, 36, 431–449.

    Article  Google Scholar 

  • Hong, H., & Kacperczyk, M. (2009). The price of sin: The effect of social norms on markets. Journal of Financial Economics, 93, 15–36.

    Article  Google Scholar 

  • Ioannou, I., & Serafeim, J. (2014). The impact of corporate social responsibility on investment recommendations: Analysts’ perceptions and shifting institutional logics. Strategic Management Journal,. doi:10.1002/smj.2268.

    Google Scholar 

  • Jo, H., & Harjoto, M. (2011). Corporate governance and firm value: The impact of corporate social responsibility. Journal of Business Ethics, 103(3), 351–383.

    Article  Google Scholar 

  • Jo, H., & Harjoto, M. (2012). The causal effect of corporate governance and corporate social responsibility. Journal of Business Ethics, 106(1), 53–72.

    Article  Google Scholar 

  • Kim, Y., Park, M., & Wier, B. (2012). Is earnings quality associated with corporate social responsibility? The Accounting Review, 87, 761–796.

    Article  Google Scholar 

  • Kim, Y., & Statman, M. (2012). Do corporations invest enough in environmental responsibility? Journal of Business Ethics, 105, 115–129.

    Article  Google Scholar 

  • Konar, S., & Cohen, M. (2001). Does the market value environmental performance? Review of Economics and Statistics, 83, 281–289.

    Article  Google Scholar 

  • Lea, S. (1997). Path analysis. University of Exeter. Retrieved from http://www.ex.ac.uk/~SEGLea/multvar2/oldwelcome.html.

  • Mackey, A., Mackey, T., & Barney, J. (2007). Corporate social responsibility and firm performance: Investor preferences and corporate strategies. Academy of Management Review, 32, 817–835.

    Article  Google Scholar 

  • Margolis, J. D., Elfenbein, H. A., & Walsh, J. P. (2007). Does it pay to be good? A meta analysis and redirection of research on the relationship between corporate social and financial performance. Working paper. Harvard Business School. http://stakeholder.bu.edu/Docs/Walsh,%20Jim%20Does%20It%20Pay%20to%20Be%20Good.pdf.

  • Margolis, J. D., & Walsh, J. P. (2001). People and profits? The search for a link between a company’s social and financial performance. Mahwah, NJ: Lawrence Erlbaum Associates.

  • McGuire, J. B., Sundgren, A., & Schneeweis, T. (1988). Corporate social responsibility and firm financial performance. Academy of Management Journal, 31, 854–872.

    Article  Google Scholar 

  • McWilliams, A., & Siegel, D. (2000). Corporate social responsibility and financial performance: correlation or misspecification? Strategic Management Journal, 21, 603–609.

    Article  Google Scholar 

  • McWilliams, A., & Siegel, D. (2001). Corporate social responsibility: A theory of the firm perspective. Academy of Management Review, 26, 117–127.

    Google Scholar 

  • Merton, R. (1987). A simple model of capital market equilibrium with incomplete information. Journal of Finance, 42, 483–510.

    Article  Google Scholar 

  • Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. American Economic Review, 48, 261–297.

    Google Scholar 

  • Moskowitz, M. (1972). Choosing socially responsive stocks. Business and Society Review, 10, 71–75.

    Google Scholar 

  • Navarro, P. (1988). Why do corporations give to charity?”. Journal of Business, 61, 65–93.

    Article  Google Scholar 

  • O’Barr, W., & Conley, J. (1992). Fortune and foley: The wealth and power of institutional investing. Homewood, IL: Business One, Irwin Publishing.

    Google Scholar 

  • Orlitzky, M., & Benjamin, J. (2001). Corporate social responsibility and firm risk: A meta-analytic review. Business and Society, 40, 369–396.

    Article  Google Scholar 

  • Orlinzky, M., Schmidt, F., & Rynes, S. (2003). Corporate social and financial performance: A meta-analysis. Organizational Studies, 24, 403–411.

    Article  Google Scholar 

  • Potter, G. (1992). Accounting earnings announcements, institutional investor concentration, and common stock returns. Journal of Accounting Research, 30, 146–155.

    Article  Google Scholar 

  • Prior, D., Surroca, J., & Tribo, J. (2008). Are socially responsible managers really ethical? Exploring the relationship between earnings management and corporate social responsibility. Corporate Governance: An International Review, 16, 160–177.

    Article  Google Scholar 

  • Porter, M. E., & Van der Linde, C. (1995). Toward a new conception of the environment-competitiveness relationship. Journal of Economic Perspectives, 9, 97–118.

    Article  Google Scholar 

  • Ramalingegowda, S., & Yu, Y. (2012). Institutional ownership and conservatism. Journal of Accounting and Economics, 53, 98–114.

    Article  Google Scholar 

  • Roman, R., Hayibor, S., & Agle, B. (1999). The relationship between social performance and financial performance. Business and Society, 38, 109–125.

    Article  Google Scholar 

  • Rupert, D. (2004). Statistics and finance: An introduction. New York, NY: Springer.

    Book  Google Scholar 

  • Saiia, D. H., Carroll, A. B., & Buchholtz, A. K. (2003). Philanthropy as strategy: When corporate charity “Begins at Home”. Business and Society, 42, 169–201.

    Article  Google Scholar 

  • Scholtens, B. (2008). A note on the interaction between corporate social responsibility and financial performance. Ecological Economics, 68, 46–55.

    Article  Google Scholar 

  • Sen, S., & Bhattacharya, C. B. (2001). Does doing good always lead to doing better? Consumer reactions to corporate social responsibility. Journal of Marketing Research, 38, 225–243.

    Article  Google Scholar 

  • Sharfman, M. P., & Fernando, C. S. (2008). Environmental risk management and the cost of capital. Strategic Management Journal, 29, 569–592.

    Article  Google Scholar 

  • Sias, R. W. (1996). Volatility and the institutional investor. Financial Analysts Journal, 52, 13–20.

    Article  Google Scholar 

  • Spicer, B. H. (1978). Investors, corporate social performance, and information disclosure: An empirical study. The Accounting Review, 53, 94–111.

    Google Scholar 

  • Stage, F., Carter, H., & Nora, A. (2004). Path analysis: An introduction and analysis of a decade of research. Journal of Education Research, 98, 5–13.

    Article  Google Scholar 

  • Turban, D. B., & Greening, D. W. (1996). Corporate social performance and organizational attractiveness to prospective employees. Academy of Management Journal, 40, 658–672.

    Article  Google Scholar 

  • Ullmann, A. A. (1985). Data in search of a theory: A critical examination of the relationships among social performance, social disclosure, and economic performance of U.S. firms. Academy of Management Review, 10, 540–557.

    Google Scholar 

  • Waddock, S., & Graves, S. (1997). The corporate social performance-financial performance link. Strategic Management Journal, 18, 303–319.

    Article  Google Scholar 

  • Wang, H., Choi, J., & Li, J. (2008). Too little or too much? Untangling the relationship between corporate philanthropy and firm financial performance. Organization Science, 19, 143–159.

    Article  Google Scholar 

  • Wright, S. (1921). Correlation and causation. Journal of Agricultural Research, 20, 557–585.

    Google Scholar 

  • Wright, S. (1923). The theory of path coefficients: A reply to Niles’s criticism. Genetics, 8, 239–255.

    Google Scholar 

Download references

Acknowledgments

Harjoto acknowledges the 2015–2017 Denney Academic Chair from the Denney Endowment, Julian Virtue, Rothschild Endowment, and the Funds for Excellence for financial support and release time for this research project. Parts of this paper were completed while Jo was visiting Korea University and Kim was visiting Hong Kong Polytechnic University.

Author information

Authors and Affiliations

  1. Pepperdine University, Malibu, California, 90263-4100, USA

    Maretno Harjoto

  2. Santa Clara University, Santa Clara, California, 95053, USA

    Hoje Jo & Yongtae Kim

Authors
  1. Maretno Harjoto
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Hoje Jo
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Yongtae Kim
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Maretno Harjoto.

Appendices

Appendix 1

See Table 11.

Table 11 Definitions of institutional ownership, CSR measures, and stock return volatility
Full size table

Appendix 2

See Table 12.

Table 12 Definitions of control variables for institutional ownership and return volatility
Full size table

Appendix 2

See Table 13.

Table 13 Definitions of control variables for CSR
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Harjoto, M., Jo, H. & Kim, Y. Is Institutional Ownership Related to Corporate Social Responsibility? The Nonlinear Relation and Its Implication for Stock Return Volatility. J Bus Ethics 146, 77–109 (2017). https://doi.org/10.1007/s10551-015-2883-y

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10551-015-2883-y

Keywords

Search

Navigation