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.