Abstract
Building on the premises that institutional ownerships vary in their impact on corporate social responsibility (CSR) decisions and that geographic proximity facilitates the valuation of benefits from CSR, we hypothesize that local long-term institutional ownership is a driver for corporate social performance, in particular positive CSR (CSR strengths). Using a panel data of S&P 500 firms over a 15-year window, we show that long-term institutional ownership that varies in geographic proximity to the focal firm does have a heterogeneous impact on CSR. Whereas both local and non-local long-term institutional ownership has a similar negative effect on CSR concerns, only local long-term institutional ownership has a positive effect on CSR strengths. The positive relation between local long-term institutional ownership and CSR is stronger in firms that are more involved in dealing with soft information which is difficult to quantify from a distance, such as those with high levels of research and development and intangible assets.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Code availability
Available upon request.
Notes
Financial (SIC 6000-6999) and regulated utility firms (SIC 4900-4999) are not included in our sample.
KLD used ticker as an identifier for the firms it covered prior to 1995 and switched to CUSIP as firm identifiers since 1995. To minimize the possibility of misidentified firms when combining data with Compustat, which uses CUSIP as firm identifiers, we work with data starting from 1995. In 2010, KLD made significant changes caused by the change in KLD ownership. As a result, data gathered before and after 2010 data are not fully compatible. For this reason, we limit our data from 1995 to 2009, just as Harrison and Berman did (2016).
The reported positions are those in which the institution owns more than 10,000 shares or with over $200,000 in market value.
Bushee (2001) kindly provides the institutional investor classification data (1981–2009) on his website:
The seven areas are environment, community, corporate governance, diversity, employee relations, human rights, product quality and safety.
We define High10 with an above-10% threshold to identify firms in areas with high concentration of financial institutions, our results continue to hold and are similar to what we report in the paper with the threshold being 11% and 12%.
Index funds belong to long-term institutional ownership because of their long investment time horizon.
We thank Bin Wang for providing the data set.
We also construct another sample including all firms after adjusting for any changed headquarters and re-estimate the relation between LLTIO and CSR. All the results are available upon request.
These robustness checks include alternative definition of CSP (Choi and Wang 2009) and LLTIOs (within-state and 250-mile distance), subsample analysis (pre- and post-2002 Sarbanes–Sox periods), and controlling for time-varying industry fixed effects. We do not include these results to save space.
References
Agrawal AK (2012) Corporate governance objectives of labor union shareholders: evidence from proxy voting. Rev Financ Stud 25:187–226. https://doi.org/10.1093/rfs/hhr081
Attig N, Brockman P (2017) The local roots of corporate social responsibility. J Bus Ethics 142:479–496. https://doi.org/10.1007/s10551-015-2757-3
Attig N, Cleary S (2014) Managerial practices and corporate social responsibility. J Bus Ethics 120:1–16. https://doi.org/10.1007/s10551-014-2273-x
Bae KH, Kang JK, Wang J (2011) Employee treatment and firm leverage: a test of the stakeholder theory of capital structure. J Financ Econ 100:130–153. https://doi.org/10.1016/j.jfineco.2010.10.019
Bae SC, Chang K, Yi HC (2018) Does corporate social responsibility (CSR) matter to loan pricing? New evidence from syndicated loan market. Rev Quant Financ Acc 50:261–299. https://doi.org/10.1007/s11156-017-0630-4
Baik B, Kang JK, Kim JM (2010) Local institutional investors, information asymmetries, and equity returns. J Financ Econ 97:81–106. https://doi.org/10.1016/j.jfineco.2010.03.006
Barnea A, Rubin A (2010) Corporate social responsibility as a conflict between shareholders. J Bus Ethics 97:71–86. https://doi.org/10.1007/s10551-010-0496-z
Beyer A, Larcker D, Tayan B (2014) Study on how investment horizon and expectations of shareholder base impact corporate decision-making. National Investor Relations Institute and the Rock Center for Corporate Governance May 2014. https://www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-survey-2014-investment-horizon.pdf
Brav A, Jiang W, Partnoy F, Thomas R (2008) Hedge fund activism, corporate governance, and firm performance. J Financ 63(4):1729–1775
Brickley JA, Lease RC, Smith CW (1988) Ownership structure and voting on anti-takeover amendments. J Financ Econ 20:267–291. https://doi.org/10.1016/0304-405X(88)90047-5
Bushee BJ (1998) The influence of institutional investors on myopic R&D investment behavior. Acc Rev 73:305–333
Bushee BJ (2001) Do institutional investors prefer near-term earnings over long-run value? Contemp Account Res 18:207–246. https://doi.org/10.1506/J4GU-BHWH-8HME-LE0X
Campbell J (2007) Why would corporations behave in socially responsible ways? An institutional theory of corporate social responsibility. Acad Manag Rev 32:946–967. https://doi.org/10.5465/amr.2007.25275684
Carroll AB (1979) A three-dimensional model of corporate performance. Acad Manag Rev 4:497–505. https://doi.org/10.5465/amr.1979.4498296
Chaganti R, Damanpour F (1991) Institutional ownership, capital structure, and firm performance. Strat Manag J 12:479–491. https://doi.org/10.1002/smj.4250120702
Chang K, Kang E, Li Y (2016) Effect of institutional ownership on dividends: an agency-theory-based analysis. J Bus Res 69:2551–2559. https://doi.org/10.1016/j.jbusres.2015.10.088
Chen X, Harford J, Li K (2007) Monitoring: which institutions matter? J Financ Econ 86:279–305. https://doi.org/10.1016/j.jfineco.2006.09.005
Choi J, Wang H (2009) Stakeholder relations and the persistence of corporate financial performance. Strat Manag J 30:895–907. https://doi.org/10.1002/smj.759
Coffey BS, Fryxell GE (1991) Institutional ownership of stock and dimensions of corporate social performance: an empirical examination. J Bus Ethics 10:437–444. https://doi.org/10.1007/BF00382826
Collier J, Esteban R (2007) Corporate social responsibility and employee commitment. Bus Ethics 16:19–33. https://doi.org/10.1111/j.1467-8608.2006.00466.x
Connelly BL, Hoskisson RE, Tihanyi L, Certo ST (2010) Ownership as a form of corporate governance. J Manag Stud 47:1561–1589. https://doi.org/10.1111/j.1467-6486.2010.00929.x
Coval J, Moskowitz T (2001) The geography of investment: informed trading and asset prices. J Polit Econ 109:811–841. https://doi.org/10.1086/322088
Cox P, Brammer S, Millington A (2004) An empirical examination of institutional investor preferences for corporate social performance. J Bus Ethics 52:27–43. https://doi.org/10.1023/B:BUSI.0000033105.77051.9d
Dam L, Scholtens B (2013) Ownership concentration and CSR policy of European multinational enterprises. J Bus Ethics 118:117–126. https://doi.org/10.1007/s10551-012-1574-1
Dougherty ML, Olsen TD (2014) Taking terrain literally: grounding local adaptation to corporate social responsibility in the extractive industries. J Bus Ethics 119:423–434. https://doi.org/10.1007/s10551-013-1643-0
Eccles RG, Krzus MP (2010) One report: integrated reporting for a sustainable strategy. Wiley, Hoboken
El Ghoul S, Guedhami O, Kwok CC, Mishra DR (2011) Does corporate social responsibility affect the cost of capital? J Bank Financ 35:2388–2406. https://doi.org/10.1016/j.jbankfin.2011.02.007
Fahlenblach R, Low A, Stulz RM (2010) Why do firms appoint CEOs as outside directors? J Financ Econ 97:12–32. https://doi.org/10.1016/j.jfineco.2010.01.003
Ferreira MA, Matos P (2008) The colors of investors’ money: the role of institutional investors around the world. J Financ Econ 88:499–533. https://doi.org/10.1016/j.jfineco.2007.07.003
Fieseler C (2011) On the corporate social responsibility perceptions of equity analysts. Bus Ethics 20:131–147. https://doi.org/10.1111/j.1467-8608.2011.01616.x
Fisman R, Heal G, Nair V (2005) Corporate social responsibility: doing well by doing good? Working Paper. University of Pennsylvania
Galaskiewicz J (1997) An urban grants economy revisited: corporate charitable contributions in the twin cities, 1979–81, 1987–89. Admin Sci Quart 42:445–471. https://doi.org/10.2307/2393734
Gill A (2008) Corporate governance as social responsibility: a research agenda. Berk J Int Law 26:452–478
Gillan S, Starks L (2003) Corporate governance, corporate ownership, and the role of institutional investors: a global perspective. J Appl Financ 13:16–17
Goss A, Roberts G (2011) The impact of corporate social responsibility on the cost of bank loans. J Bank Financ 35:1794–1810. https://doi.org/10.1016/j.jbankfin.2010.12.002
Graves SB, Waddock SA (1994) Institutional owners and corporate social performance. Acad Manag J 37:1035–1046. https://doi.org/10.5465/256611
Hadani M, Goranova M, Khan R (2011) Institutional investors, shareholder activism, and earnings management. J Bus Res 64:1352–1360. https://doi.org/10.1016/j.jbusres.2010.12.004
Hillman AJ, Keim GD (2001) Shareholder value, stakeholder management, and social issues: what’s the bottom line. Strat Manag J 22:125–139. https://doi.org/10.1002/1097-0266(200101)22:2%3c125:AID-SMJ150%3e3.0.CO;2-H
Husted B, Jamali D, Saffar W (2016) Near and dear? The role of location in CSR engagement. Strat Manag J 37:2050–2070. https://doi.org/10.1002/smj.2437
Ioannou I, Serafeim G (2012) What drives corporate social performance? The role of nation-level institutions. J Inter Bus Stud 43:834–864. https://doi.org/10.1057/jibs.2012.26
Jensen K, Kim J, Yi H (2015) The geography of US auditors: information quality and monitoring costs by local versus non-local auditors. Rev Quant Financ Acc 44:513–549. https://doi.org/10.1007/s11156-013-0416-2
Jo H, Harjoto MA (2011) Corporate governance and firm value: the impact of corporate social responsibility. J Bus Ethics 103:351–383. https://doi.org/10.1007/s10551-011-0869-y
Jo H, Harjoto MA (2012) The causal effect of corporate governance on corporate social responsibility. J Bus Ethics 106:53–72. https://doi.org/10.1007/s10551-011-1052-1
John K, Senbet LW (1998) Corporate governance and board effectiveness. J Bank Financ 22(4):371–403. https://doi.org/10.1016/S0378-4266(98)00005-3
Johnson RA, Greening DW (1999) The effects of corporate governance and institutional ownership types on corporate social performance. Acad Manag J 42:564–576. https://doi.org/10.5465/256977
Kabongo JD, Chang K, Li Y (2013) The impact of operational diversity on corporate philanthropy: an empirical study of US companies. J Bus Ethics 116:49–65. https://doi.org/10.1007/s10551-012-1445-9
Kang J, Kim J (2008) The geography of block acquisition. J Financ 63:2817–2858. https://doi.org/10.1111/j.1540-6261.2008.01414.x
Knyazeva A, Knyazeva D, Masulis RW (2013) The supply of corporate directors and board independence. Rev Financ Stud 26:1561–1605. https://doi.org/10.1093/rfs/hht020
Korschun D, Bhattacharya CB, Swain SD (2014) Corporate social responsibility, customer orientation, and the job performance of frontline employees. J Mark 78:20–37. https://doi.org/10.1509/jm.11.0245
Landier A, Nair VB, Wulf J (2009) Trade-offs in staying close: corporate decision making and geographic dispersion. Rev Financ Stud 22:1119–1148. https://doi.org/10.1093/rfs/hhm042
Lev B, Petrovits C, Radhakrishnan S (2010) Is doing good good for you? How corporate charitable contribution enhance revenue growth. Strat Manag J 31:182–200. https://doi.org/10.1002/smj.810
Lorek KS, Stone MS, Willinger GL (1999) The differential predictive ability of opaque and transparent firms’ earnings numbers. Q J Bus Econ 38:3–19
Mahapatra S (1984) Investor reaction to a corporate social accounting. J Bus Financ Acc 11:29–40
Mahoney L, Roberts RW (2007) Corporate social performance, financial performance and institutional ownership in Canadian firms. Acc Forum 31:233–253. https://doi.org/10.1016/j.accfor.2007.05.001
Marquis C, Glynn MA, Davis G (2007) Community isomorphism and corporate social action. Acad Manag Rev 32:925–945. https://doi.org/10.5465/amr.2007.25275683
Mazutis DD, Slawinski N (2015) Reconnecting business and society: perceptions of authenticity in corporate social responsibility. J Bus Ethics 131:137–150. https://doi.org/10.1007/s10551-014-2253-1
Mcguire JB, Dow S, Argheyd K (2003) CEO incentives and corporate social performance. J Bus Ethics 45:341–359. https://doi.org/10.1023/A:1024119604363
McWilliams A, Siegel DS (2011) Creating and capturing value: strategic corporate social responsibility, resource-based theory, and sustainable competitive advantage. J Manag 37:1480–1495. https://doi.org/10.1177/0149206310385696
McWilliams A, Siegel D, Wright P (2006) Corporate social responsibility: strategic implications. J Manag Stud 43:1–18. https://doi.org/10.1111/j.1467-6486.2006.00580.x
Muller A, Whiteman G (2009) Exploring the geography of corporate philanthropic disaster response: a study of Fortune Global 500 firms. J Bus Ethics 84:589–603. https://doi.org/10.1007/s10551-008-9710-7
Neubaum DO, Zahra SA (2006) Institutional ownership and corporate social performance: the moderating effects of investment horizon, activism, and coordination. J Manag 32:108–131. https://doi.org/10.1177/0149206305277797
Oliver C (1991) Strategic responses to institutional processes. Acad Manag Rev 16:145–179. https://doi.org/10.5465/amr.1991.4279002
Peterson M, Rajan R (2002) Does distance still matter? The information revolution in small business lending. J Financ 57(6):2533–2570. https://doi.org/10.1111/1540-6261.00505
Price JM, Sun W (2017) Doing good and doing bad: the impact of corporate social responsibility and irresponsibility on firm performance. J Bus Res 80:82–97. https://doi.org/10.1016/j.jbusres.2017.07.007
Puncheva-Michelotti P, Hudson S, Michelotti M (2018) The role of proximity to local and global citizens in stakeholders’ moral recognition of corporate social responsibility. J Bus Res 88:234–244. https://doi.org/10.1016/j.jbusres.2018.03.027
Stein J (2002) Information production and capital allocation: decentralized versus hierarchical firms. J Financ 57:1891–1921. https://doi.org/10.1111/0022-1082.00483
Strauss-Kahn V, Vives X (2009) Why and where do headquarters move? Reg Sci Urban Econ 39(2):168–186
Tirole J (2010) The theory of corporate finance. Princeton University Press, Princeton
Tonello M, Rabimov SR (2010) The 2010 institutional investment report: trends in asset allocation and portfolio composition (November 11, 2010). The conference board research report, no. R-1468-10-RR, 2010. https://ssrn.com/abstract=1707512
Useem M (1988) Market and institutional factors in corporate contributions. Calif Manag Rev 30:77–88. https://doi.org/10.2307/41166548
Useem M (1996) Shareholders as a strategic asset. Calif Manag Rev 39:8–27. https://doi.org/10.2307/41165874
Weber M (2008) The business case for corporate social responsibility: a company-level measurement approach for CSR. Eur Manag J 26:247–261. https://doi.org/10.1016/j.emj.2008.01.006
Funding
Not applicable.
Author information
Authors and Affiliations
Contributions
Not applicable
Corresponding author
Ethics declarations
Conflict of interest
Not applicable.
Availability of data and transparency
Public and commercial data.
Ethics approval
Not applicable.
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Appendices
Appendix 1: Definitions of variables
Variable | Name | Variable definition |
|---|---|---|
CSR related | ||
CSR strength scores | CSR STR | Sum of adjusted Community, Diversity, Employee Relations, Environment, and Product strength scores (Source: KLD database); how adjusted strength scores are calculated are given in “Appendix 2” |
CSR concern scores | CSR CON | Sum of adjusted Community, Diversity, Employee Relations, Environment, and Product concern scores (Source: KLD database); how adjusted concerning scores are calculated are given in “Appendix 2” |
Net CSR scores | NET CSR | Sum of net adjusted Community, Diversity, Employee Relations, Environment, and Product strength scores (Source: KLD database); how adjusted net strength scores are calculated are given in “Appendix 2” |
Finance variables | ||
Log (total assets) | LogTA | Log of total assets [at] (source: Compustat) |
Leverage | Leverage | Debt to total asset ratio [(dltt + dlcc)/at] (source: Compustat) |
Return on asset | ROA | Net income divided by total assets [(ni/at)] (source: Compustat) |
Tobin’s Q | Q | Market value of assets divided by book value of assets [(prcc_f*csho + at-ceq)/at](source:Compustat) |
Fixed asset ratio | FA/TA | Fixed assets divided by total assets [ppent/at](source: Compustat) |
R&D intensity | R&D/TA | R&D expense divided by total assets [xrd/at]; missing R&D expense is treated as zero (source:Compustat) |
Advertising intensity | ADV/TA | Advertising expense divided by total assets [xad/at]; missiong advertising expense is treated as zero (source: Compustat) |
Log (firm age) | Logage | Log (1 + firm age); firm age is measured as fiscal year minus the first year that the firm is appeared in Compustat |
Institutions related | ||
Total institutional ownership | IOR | Total institutional ownership for a firm in a given fiscal year; Total institutional shares/total number of share outstanding (source: Thomson Reuters’ 13F) |
Long-term institutional ownership | LTIO | Long-term institutional share/total number of shares outstanding; Dedicated and Quasi institutions are treated as long-term institutions (source: Thomson Reuters’ 13 F & Professor Brian Bushee’s web site: http://acct3.wharton.upenn.edu/faculty/bushee/) |
Dedicated institutional ownership | DIO | Dedicated institutional share/total number of shares outstanding; (source: Thomson Reuters’ 13 F & Professor Brian Bushee’s web site: http://acct3.wharton.upenn.edu/faculty/bushee/) |
Quasi-indexer institutional ownership | QIO | Quasi-indexer institutional share/total number of shares outstanding; (source: Thomson Reuters’ 13 F & Professor Brian Bushee’s web site: http://acct3.wharton.upenn.edu/faculty/bushee/) |
Local institutional ownership | Localown | Local institutional shares/total number of shares outstanding; Institutions are defined as “local” if the distance between the firm’s and the institution’s headquarters is 100 miles or less (source: Compustat; Thomson Reuters’ 13 F) |
Local long-term institutional ownership | LLTIO | Local long-term institutional shares/total number of shares outstanding; Institutions are defined as “local” if the distance between the firm’s and the institution’s headquarters is 100 miles or less (source: Compustat; Thomson Reuters’ 13 F) |
Local dedicated institutional ownership | LDIO | Local dedicated institutional shares/total number of shares outstanding; Institutions are defined as “local” if the distance between the firm’s and the institution’s headquarters is 100 miles or less (source: Compustat; Thomson Reuters’ 13 F) |
Local quasi-indexer institutional ownership | LQIO | Local quasi-indexer institutional shares/total number of shares outstanding; Institutions are defined as “local” if the distance between the firm’s and the institution’s headquarters is 100 miles or less (source: Compustat; Thomson Reuters’ 13 F) |
Non-local long-term institutional ownership | NLLTIO | Non-local long-term institutional shares/total number of shares outstanding; Institutions are defined as “local” if the distance between the firm’s and the institution’s headquarters is 100 miles or less (source: Compustat; Thomson Reuters’ 13 F) |
High10*LLTIO | High10 * LLTIO | High10 is 1 if LLTIO is 10% or higher, else zero. High10 multiplied by local long-term institutional ownership (LLTIO) (source: Compustat; Thomson Reuters’ 13 F) |
Appendix 2: Detailed definitions of KLD CSR variables
We follow definitions in Jo and Harjoto (2011, 2012) with a slight change.
CSR strength and concern scores |
|---|
Com Str(Con) (i, t) = [sum of all community strength (concern) score for firm i at year t divided by maximum number of community strength (concern) score during year t] |
Div Str(Con) (i, t) = [sum of all diversity strength (concern) score for firm i at year t divided by maximum number of diversity strength (concern) score during year t] |
Emp Str(Con) (i, t) = [sum of all employee relations strength (concern) score for firm i at year t divided by maximum number of employee relations strength (concern) score during year t] |
Env Str(Con) (i, t) = [sum of all environment strength (concern) score for firm i at year t divided by maximum number of environment strength (concern) score during year t] |
Pro Str(Con) (i, t) = [sum of all product strength (concern) score for firm i at year t divided by maximum number of product strength (concern) score during year t] |
CSR STR(CON) (i, t) = Com str(con)(i, t)+ Div str(con) (i, t)+ Emp str(con)(i, t) + Env str(con) (i, t)+ Pro str(con) (i, t); combined CSR strength (concern) score |
Net CSR scores |
|---|
Net Com(i, t) = [(sum of all community strength score for firm i at year t) − (sum of all community concern scores for firm i at year t)]/[maximum score of community strength at year(t) + maximum score of community concern at year (t)] |
Net Div(i, t) = [(sum of all diversity strength score for firm i at year t) − (sum of all diversity concern scores for firm i at year t)]/[maximum score of diversity strength at year t + maximum score of diversity concern at year t] |
Net Emp(i, t) = [(sum of all employee relations strength score for firm i at year t) − (sum of all employee relations concern scores for firm i at year t)]/[maximum score of employee relations strength at year t + maximum score of employee relations concern at year t] |
Net Env(i, t) = [(sum of all environment strength score for firm i at year t) − (sum of all environment concern scores for firm i at year t)]/[maximum score of environment strength at year t + maximum score of environment concern at year t] |
Net Pro(i, t) = [(sum of all product strength score for firm(i) at year(t)) − (sum of all product concern scores for firm(i) at year(t))]/[maximum score of product strength at year(t) + maximum score of product concern at year(t)] |
NET CSR(i, t) = Net Com(i, t) + Net Div(i, t) + Net Emp(i, t) + Net Env(i, t) + Net Pro(i, t); combined Net CSR score |
Rights and permissions
About this article
Cite this article
Chang, K., Kabongo, J. & Li, Y. Geographic proximity, long-term institutional ownership, and corporate social responsibility. Rev Quant Finan Acc 56, 297–328 (2021). https://doi.org/10.1007/s11156-020-00895-9
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11156-020-00895-9
Keywords
- Institutional ownership
- Long-term investment horizon
- Corporate social responsibility
- Geographic proximity
- Soft information