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Do Institutions Influence Corporate Behavior? An Analysis of Corporate Social Responsibility by Chuan-Yang Hwang Sheridan Titman Ying Wang. Discussant: K.C. John Wei Hong Kong University of Science & Technology Prepared for NTU conference, December 6-7, 2012. Summary of the results.
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Do Institutions Influence Corporate Behavior? An Analysis of Corporate Social ResponsibilitybyChuan-Yang HwangSheridan TitmanYing Wang Discussant: K.C. John Wei Hong Kong University of Science & Technology Prepared for NTU conference, December 6-7, 2012
Summary of the results • Objective of the paper: To examines whether institutional investor holdings affect corporate investment in social responsibility Finding: • Stocks held by institutional investors (NSRI) not tend to invest in corporate social responsibility (CSR) firms earns substantially higher returns in the next quarter, especially for those high CSR stocks. Hypotheses • (1) excessive investment in CSR is value-destroying and • (2) NSRI ownership stifles high CSR firms’ CRS activities
Summary of the results Results: • Consistent with the two hypotheses. • An increase by NSRI ownership predicts subsequent cutbacks in CRS policies, especially for high CSR and poor performing firms. • If firms fail to cutback CRS, firms reverse some of their earlier gains in stock prices from the increase of NSRI ownership.
The contribution of the paper • This is the first paper to examine and find that institutional investor holdings can affect corporate social responsibility activities. • I find that the results are interesting. • This is an overinvestment plus behavioral story, which is similar to the paper by Titman, Wei, and Xie (2004) on corporate investment and stock returns. • To make the story complete, we need to two conditions: • Managers have the tendency to overinvest in CSR activities • Investors under-react to the implication of CSR overinvestment (i.e., value-destroying)
Comments and suggestions • However, there might be rational explanations (i.e., q-theory): • A firm’s cost of capital (i.e., expected returns) vary from time to time and cross firms, firms tend to invest in CSR activities more when their cost of capital is low, and less when their cost of capital is high. This argument also generates what you observe in your study.
Comments and suggestions • Your research design seems a bit unconventional. • If you want to argue that excessive investment in CSR activities are value-destroying, you have a more direct test. • You first need to establish a negative relation between CSR scores and future stock returns. • Without first establishing this negative relation, it is difficult to argue that your results are due to a causal relation or a spurious correlation. • In addition, you need also to establish that investors are mis-reaction to firm CSR investment: you can study earnings announcement returns.
Comments and suggestions • Your sample period is too short (7 years only, 2003-2009) to make a convincing asset-pricing argument. • Any asset-pricing argument need to study a very long period. Otherwise, it may be due to chances. • In addition, almost all the previous well-documented variables that are supposed to explain stock returns (such as book-to-market, size, volatility, momentum, and return reversal are all insignificant during your sample period. • Surprisingly, the two variables of your interest are both significant: Any convincing explanations. • Minor: Who are US institutions?
Conclusion • It is an interesting paper that studies the effect of institutional holdings on corporate social responsibility investment. • Overall, I like the paper and enjoy reading the paper. • Good luck to the authors.
