Abstract
This study explores how the prior unethical behavior of institutional investors impacts the corporate social responsibility (CSR) activities of the companies in which they invest. To identify such behavior, we focus on violations of laws and regulations by Registered Investment Advisers as reported to the Securities and Exchange Commission. Our findings reveal that these investors discourage firms’ engagement in CSR activities within their investee firms, which we attribute to institutions’ disregard for social norms. Our inferences remain unchanged with alternative identification strategies and more stringent definitions of unethical behavior, suggesting that endogeneity bias and construct validity issues do not explain our baseline results. Additionally, we find that statements by these investors in support of CSR initiatives appear hypocritical, as they fail to mitigate the negative consequences of their ownership on CSR activities. Overall, our study suggests that institutional investors’ prior unethical behavior influences their governance activities, generating negative social externalities.
