Market Discipline, Social Preferences, and Corporate Policies
Using a novel dataset of negative news coverage of the environmental and social (E&S) practices of firms around the world, we show that customers and investors can provide market discipline and impose their ethical standards on firm policies. Investors sell firms with heightened E&S risk, especially if they are from E&S conscious countries. Similarly, heightened E&S risk is associated with a drop in firms’ sales in E&S conscious countries. This behavior of E&S conscious investors and customers leads to significant declines in stock prices, which push firms to improve their E&S policies in the years following negative realizations of E&S risk. Overall, our results indicate that customers and shareholders are able to impose their social preferences on firms, suggesting that market discipline works.
Corporate social responsibility, Corporate governance, Environment, Social values, Culture, Institutional investors
SMU Cox School of Business Research Paper Series