Does Money Talk? Market Discipline through Selloffs and Boycotts

Mariassunta Giannetti, , and Nickolay Gantchev

No 14098, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: 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 or hold portfolios with high sustainability ratings. 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 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.

Keywords: Corporate social responsibility; Institutional investors; Culture; Environment; Corporate governance (search for similar items in EconPapers)
JEL-codes: G15 G23 G30 M14 (search for similar items in EconPapers)
Date: 2019-11
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Citations: View citations in EconPapers (8)

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