The reaction to CSR controversies by institutional investors

Abstract

Despite the importance of Corporate Social Responsibility (CSR) firm controversies, little is known about their effect on institutional investors. We study the most important institutional investors worldwide: pension funds and mutual funds. The separation between fund management and ownership raises the need to examine how fund managers and fund participants react to investee-firms’ CSR controversies. Considering the conventional/Socially Responsible Investment (SRI-fund nature, we find that investee-firms’ controversies diversely affect fund performance, depending on the controversy type. Furthermore, participants and managers of SRI pension and SRI mutual funds display a passive behavior toward controversies. These attitudes are consistent with enduring behavior and continuity investment policies, such as amending/controlling CSR-firm controversies. In contrast, conventional pension-fund and conventional mutual-fund participants seem guided by traditional investment rules to deal with unsatisfactory situations and respond to controversies after managerial decisions regarding these events with negative reactions. Finally, firms developing CSR-engagement strategies may soften market and managerial reactions toward controversies. Nonetheless, symbolic CSR-engagement practices arouse participants’ responses. JEL CLASSIFICATION: G11, G23, M14