Does Socially Responsible Investing Make a Better Society?—A Micro Perspective through Mutual Funds and Their Investee Companies

Abstract

Socially responsible investing (SRI) aims to guide corporate behavior through investing and thus to make a better society since its debut. From a micro perspective, this study aims to empirically examine whether the propensity for SRI of mutual funds promotes the corporate social performance (CSP) of investee companies and to determine what are the mechanisms under this promotion effect and under what circumstances this promotion effect gets stronger. After our main analysis confirms the promotion effect in China, our mechanism analysis shows the following: mutual funds with a high propensity for SRI promote investee CSP, because they promote internal control and demand better disclosure of social responsibility information; the promotion effect of mutual funds as shareholders from within a company can substitute for the effects of a good external environment such as a highly marketized region or a competitive industry. Our heterogeneity analysis further shows that the promotion effect is stronger in state-owned enterprises, where corporate executives are more willing to accept suggestions related to social responsibility and in a good social trust atmosphere, which sheds light on shareholder activism in private and informal manners.