Does social performance influence breadth of ownership?

• Author: Jeong‐Bon Kim,Zhenbin Liu,Bing Li
• Date: 01 October 2018
• Published date: 01 October 2018
• DOI: http://doi.org/10.1111/jbfa.12341

DOI: 10.1111/jbfa.12341

Does social performance influence breadth

of ownership?

Jeong-Bon Kim1Bing Li1Zhenbin Liu2

1Departmentof Accountancy, City University of

HongKong, 83 Tat Chee Avenue,Kowloon Tong,

HongKong

2Departmentof Accountancy and Law, Hong

KongBaptist University, 34 Renfrew Road,

Kowloon,Hong Kong

Correspondence

ZhenbinLiu, Department of Accountancy and

Law,Hong Kong Baptist University,34 Renfrew

Road,Kowloon, Hong Kong.

Email:zhenbinliu@hkbu.edu.hk

Abstract

This study examines the hitherto unexplored question of whether

and how a firm's social performance influences the breadth of that

firm's share ownership. We predict and find that firms with higher

corporate social responsibility (CSR) ratings attract more institu-

tional investors (especially long-term, low-stake and green institu-

tional investors) and more individual investors. This finding is con-

sistent with the notion that investors are more interested in firms

with higher CSR ratings and thus prefer to hold stocks of such firms.

We also find that firms with higher CSR ratings are associated with

higher stock liquidity, lower cost of equity capital, more equity and

debt issuance, and greater investment, and that sin stocks are asso-

ciated with a lower investor base, which further corroborates our

prediction. Our results are robust to potential endogeneity, the use

of alternative model specifications, and an alternative proxyfor CSR

performance.

KEYWORDS

breadth of ownership, corporate social responsibility (CSR), green

investor, investorbase, liquidity, stock

1INTRODUCTION

Over the past decade, corporate social responsibility (CSR) has received increasing attention from the public and the

popular press in general,and academicians and the investment community in particular. This increasing interest in CSR

is due, in part, to the public's growing awareness of environmental, social, governance, ethics and sustainability issues.

Of late, we have also witnessed a growing movement or activism toward socially responsible investing (SRI). In 2010,

SRI accounted for about 12.2% of assets under professional management in the US. In response to public demand, a

growing number of firms are voluntarily providing additional CSR disclosures (Dhaliwal, Li, Tsang,& Yang, 2011; Lies,

Patricia, & Robin, 2012; Stephen & Stephen, 2006). Corporations worldwide are increasingly adopting and integrating

CSR as part of their business strategies.

Previous studies examine the economic consequences of CSR in various contexts. A significant number of stud-

ies find that better CSR performance might engender several market benefits (e.g., higher market valuation, lower

cost of capital). However,these studies leave unresolved the question of how CSR investments generate the observed

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2018 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/jbfa JBus Fin Acc. 2018;45:1164–1194.

KIM ET AL.1165

benefits to the firm and other market participants.1As noted by Moser and Martin (2012, p. 801), ‘…despite a sig-

nificant amount of prior [CSR] research …nor do we fully understand how investors and other stakeholders react to

CSR disclosures’.It is unclear what effect, if any, CSR has on investors’ perceptions and subsequent behaviours. More-

over,little is known about how firm CSR performance influences investor decisions to invest in a particular firm's equity

shares.

Tofill this gap, our analysis begins by asking a simple, but not yet explored question: Does a firm'ssocial performance

influence the breadth of that firm's share ownership? Or alternatively, do firms withbetter CSR performance receive

more investment from investors? Wepredict that investors have preferences for firms with better CSR performance,

and thus, such firms attract a larger number of investors, whether more sophisticated institutional investors or less

sophisticated individual investors, therebyincreasing the investor base or breadth of ownership.2

Our prediction on the positive relationship between CSR performance and breadth of ownership is grounded on

two simple strands of argument. First, theories in Fama and French (2007), Heinkel, Kraus, and Zechner(2001), and

Friedmanand Heinle (2016) suggest that some investors may have a taste for better CSR firms. This may result in more

investors being attracted to firms with better CSR performance and a preference for buying and holding stocks of

better CSR firms. Second, the literature shows that good CSR performance could lead to better financial performance.

As a result, better CSR firms may attracta broader range of investors. We therefore hypothesize that firms with better

CSR performance attract more investors, whether institutional or individual, which in turn increases the breadth of

share ownership for such firms.

Totest whether better CSR firms have a wider investor base, we use a firm-level measure of CSR performance: We

measure a firm's CSR performance using the KLD Research & Analytics, Inc. (hereafter,KLD) STATSdatabase. 3Using a

large sample of 26,576 firm-year observations for which KLD ratings are available for the period 1991–2013, we find

strong and reliable evidence that firms with better CSR ratingsin the current year tend to have higher breadth of stock

ownership (as measured by the number of institutional and individual investors) in the following year.Such empirical

findings are consistent with our hypothesis that investors prefer stocks with better CSR performance. Further tests

show that the positive relationship between firm CSR performance and the number of institutional investors is driven

mainly by long-term, low-stake,and green institutional investors.

To alleviate potential endogeneity concerns, in addition to ordinary least squares (OLS) regression analyses, we

also perform our main tests using firm fixed effects regression analyses. We find that the results of the firm fixed

effects analyses are qualitatively identical with the OLS results. Since the firm fixed effects analyses only partially

address potential endogeneity, we further adopt the change model analyses and the two-stage least squares (2SLS)

regressions. We find that the results from these additional analyses are qualitatively identical with our main find-

ings using the OLS regressions, suggesting that our results are unlikely to be driven by potential (uncontrolled)

endogeneity.

We extendour main regression analysis by examining several additional outcomes of good CSR performance. First,

prior literatureshows that increased breadth ofownership leads to higher stock liquidity (Amihud & Mendelson, 1989;

Amihud, Mendelson, & Uno, 1999). If CSR increases a firm's breadth of ownership, we expectthat stock liquidity would

be higher for firms with better CSR performance. Consistent with our expectation, we find a significant positive asso-

ciation between CSR performance in the current year and stock liquidity in the following year. Second, following El

Ghoul, Guedhami, Kwok, and Mishra (2011) and El Ghoul, Guedhami, Kim, and Park(2018), we test the impact of CSR

performance on firms’ equity financing costs and find that better CSR firms have lower cost of equity capital. Third,

1On the other hand, a few studies also find that CSR is either unrelated or negatively related to firm financial performance (Alexander & Buchholz, 1978;

McWilliams & Siegel, 2000; Vance,1975). Hong and Kacperczyk (2009) find that sin (alcohol, tobacco, and gaming) stocks have higher expected returns than

comparablestocks. Moreover, studies on the performance of SRI funds find that there is very little difference between the risk-adjusted returns of SRI funds

andconventional funds (Bauer, Koedijk, & Otten, 2005; Renneboog, TerHorst, & Zhang, 2008). Refer to Moser and Martin (2012) for an excellent commentary.

2Inthis study, we use breadth of ownership and investor base interchangeably.

3TheKLD database is the most comprehensive database available for evaluating firm CSR performance and is widely accepted by academics as a measure of

corporatesocial performance (Chong & Liu, 2013; Dhaliwal et al., 2011, El Ghoul, Guedhami, Kwok, & Mishra, 2011; Galema, Plantinga, & Scholtens, 2008; Hoi

etal., 2013; Kim, Park, & Wier, 2012).