Institutional investors, corporate social responsibility, and stock price performance

The launch of the United Nations Global Compact Principles for Responsible Investment (PRI) in 2006 prompted the Japanese government to emphasize corporate social responsibility (CSR) in investment policies and put pressure on institutional investors to monitor environmental and social performance. We find that institutional ownership is positively related to the probability of improved social performance as measured by CSR ratings in the environment category for Japanese firms. Conversely, we find that these ownership variables are not significantly related to the likelihood of improved social performance as measured by ratings for social engagement, corporate governance, or employee relations. Improved ratings in the environment category do not generate excess stock returns in the period following the PRI launch. These results suggest that soft law aimed at institutional investors can enhance responsible business practices without destroying shareholder value, and that national government initiatives are an effective supplement to guidelines established by international organizations. We provide evidence of the influence of shareholder preference on CSR, and further contribute to the debate on the relation between corporate social and financial performance, in a research setting less vulnerable to endogeneity and reverse causality problems than other similar studies.