Do passive investors influence corporate social responsibility? A risk-management perspective

Abstract

This paper examines the impact of passive investors on Corporate Social Responsibility (CSR) through the lens of a risk-management view of CSR, which emphasizes its insurance-like effects in adverse corporate events. Since passive investors have diversified away most idiosyncratic risks, we predict that they demand less CSR as a strategic approach to manage risks. Using the annual Russell 1000/2000 index reconstitution as an instrument for passive investor ownership, we document evidence consistent with our prediction. The negative effect is more pronounced among better-diversified passive investors and firms that are not in CSR-sensitive industries. We further show that passive investors hold back CSR activities through the channel of “voice” by reducing the number of socially responsible investment (SRI) proposals.