Institutional investor cliques and ESG performance: Evidence from Chinese firms

Abstract

Using a sample of Chinese firms, we identify groups of coordinated institutional investors (i.e., cliques) based on their common block stakes and study how their coordination shapes the firm's ESG policy. We document that clique ownership shows a robust and causal positive impact on the firm's future ESG performance. Further tests confirm a positive relationship between ESG and firm value in China. Additionally, we find that clique members coordinate their trades, and the coordination enhances their governance via both voice and exit threats. These results suggest that coordination increases institutional investors' governance impact, which improves their portfolio firms' ESG performance. Consistent with this argument, cross-sectional analyses demonstrate that the positive impact of clique ownership on ESG is greater for firms with weaker governance mechanisms or larger ESG motivations.