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Why do institutions like corporate social responsibility investments? Evidence from horizon heterogeneity

Journal of Empirical Finance. February 1, 2019

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Why do institutional investors improve firms’ engagement in corporate social responsibility (CSR) investments? We show that CSR activities are driven by institutional investors with long investment horizons, and that this is due to the reputation insurance that CSR spending provides. Specifically, longer horizon investors benefit more from such insurance, and so do their agents, the investment managers that interact with portfolio firms. Additional tests show that this positive relationship between shareholder horizons and CSR is enhanced by market myopia, managerial agency risks, and motivated investors. We address the endogeneity concerns by employing Russell 1000/2000 index switches as sources of exogenous variation in shareholder investment horizons. The influence of shareholder horizons on CSR is also related to social norms. Our main results hold for all but one category of CSR and appear to be driven by CSR strengths.