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The "Washing Machine": Investment Strategies and Corporate Behavior with Socially Responsible Investors

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  • Gollier, Christian
  • Pouget, Sébastien

Abstract

This paper studies shareholder engagement in companies' strategic decisions. Differences of objective among shareholders arise in our model due to the presence of socially responsible investors. These investors take externalities into account when valuing their portfolio while conventional investors do not. Shareholders may affect corporate behavior via two mechanisms. They can vote with their feet: responsible investors may shy away from firms producing negative externalities, thereby raising their cost of capital. Investors can also engage in activism. Our main contribution is to show that a large activist investor can generate positive abnormal returns by investing in non-responsible companies and turning them into responsible. We call this strategy the \Washing Machine" and show that its successful implementation relies on a long-term horizon and a credible pro-social orientation.

Suggested Citation

  • Gollier, Christian & Pouget, Sébastien, 2014. "The "Washing Machine": Investment Strategies and Corporate Behavior with Socially Responsible Investors," TSE Working Papers 14-457, Toulouse School of Economics (TSE).
    • Handle: RePEc:tse:wpaper:27826
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    Cited by:

    1. Eleonora Broccardo & Oliver D. Hart & Luigi Zingales, 2020. "Exit vs. Voice," NBER Working Papers 27710, National Bureau of Economic Research, Inc.
    2. Michele Fioretti & Victor Saint-Jean & Simon C Smith, 2022. "The Voice: The Shareholders' Motives Behind Corporate Donations during COVID-19 (former title: Selfish Shareholders: Corporate Donations during COVID-19)," SciencePo Working papers hal-03386585, HAL.
    3. Opp, Marcus & Oehmke, Martin, 2020. "A theory of socially responsible investment," CEPR Discussion Papers 14351, C.E.P.R. Discussion Papers.
    4. Krüger, Philipp, 2015. "Corporate goodness and shareholder wealth," Journal of Financial Economics, Elsevier, vol. 115(2), pages 304-329.
    5. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2021. "Sustainable investing in equilibrium," Journal of Financial Economics, Elsevier, vol. 142(2), pages 550-571.
    6. Philippe DESBRIERES, 2017. "L’investissement conforme à la Charia est-il socialement responsable ?,Is Shariah compliant investment socially responsible?," Working Papers CREGO 1171001, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
    7. Pedersen, Lasse Heje & Fitzgibbons, Shaun & Pomorski, Lukasz, 2021. "Responsible investing: The ESG-efficient frontier," Journal of Financial Economics, Elsevier, vol. 142(2), pages 572-597.
    8. Krahnen Jan & Rocholl Jörg & Thum Marcel, 2023. "A Primer on Green Finance: From Wishful Thinking to Marginal Impact," Review of Economics, De Gruyter, vol. 74(1), pages 1-19, April.
    9. Gillan, Stuart L. & Koch, Andrew & Starks, Laura T., 2021. "Firms and social responsibility: A review of ESG and CSR research in corporate finance," Journal of Corporate Finance, Elsevier, vol. 66(C).
    10. Borgers, Arian & Derwall, Jeroen & Koedijk, Kees & ter Horst, Jenke, 2015. "Do social factors influence investment behavior and performance? Evidence from mutual fund holdings," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 112-126.
    11. Jonghyuk Bae & Natalya Khimich & Sungsoo Kim & Emanuel Zur, 2023. "Can Green Investments Increase Your Green? Evidence from Social Hedge Fund Activists," Journal of Business Ethics, Springer, vol. 187(4), pages 781-801, November.
    12. Chen, Tao & Dong, Hui & Lin, Chen, 2020. "Institutional shareholders and corporate social responsibility," Journal of Financial Economics, Elsevier, vol. 135(2), pages 483-504.
    13. Rohleder, Martin & Wilkens, Marco & Zink, Jonas, 2022. "The effects of mutual fund decarbonization on stock prices and carbon emissions," Journal of Banking & Finance, Elsevier, vol. 134(C).
    14. Broccardo, Eleonora & Hart, Oliver D. & Zingales, Luigi, 2021. "Exit vs. Voice," Working Papers 302, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    15. Rob Bauer & Dirk Broeders & Annick van Ool, 2023. "Walk the green talk? A textual analysis of pension funds’ disclosures of sustainable investing," Working Papers 770, DNB.
    16. Koedijk, Kees & ter Horst, Jenke & Borgers, Arian & Derwall, Jeroen, 2015. "Do Social Factors Influence Investment Behaviour and Performance? Evidence from Mutual Fund Holdings," CEPR Discussion Papers 10740, C.E.P.R. Discussion Papers.
    17. Bradford Cornell, 2021. "ESG preferences, risk and return," European Financial Management, European Financial Management Association, vol. 27(1), pages 12-19, January.
    18. Rui Albuquerque & Yrjö Koskinen & Chendi Zhang, 2019. "Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence," Management Science, INFORMS, vol. 65(10), pages 4451-4469, October.
    19. Moisson, Paul-Henri, 2024. "Social Responsibility, Consequentialism and Public Policy," TSE Working Papers 24-1521, Toulouse School of Economics (TSE).
    20. Olivier David Zerbib, 2022. "A Sustainable Capital Asset Pricing Model (S-CAPM): Evidence from Environmental Integration and Sin Stock Exclusion [Asset pricing with liquidity risk]," Review of Finance, European Finance Association, vol. 26(6), pages 1345-1388.
    21. Lee, King Fuei, 2023. "The Role of Catering Incentives in ESG Disclosure," MPRA Paper 120930, University Library of Munich, Germany.

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    More about this item

    Keywords

    Asset pricing; corporate social responsibility; socially responsible investments; corporate engagement; shareholder activism;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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