Social Norms and CSR Performance

Some institutional investors (e.g., pensions, universities, and religious, charitable, and not-for-profit institutions) are exposed to social norms and public scrutiny. Prior research indicates that these norm-constrained institutions engage in negative screening and invest less in firms operating in ‘sin’ industries. We examine whether social norms also motivate these institutions to engage in positive screening—where they invest more in firms with better corporate social responsibility (CSR) performance—and CSR-related activism—where they promote improvements in the CSR of existing investees. We find that firms with superior CSR performance have greater ownership by norm-constrained institutions, consistent with positive screening, and we use a natural experiment to establish causality. We also find that increases in the shareholdings of norm-constrained institutions are associated with subsequent improvements in CSR, consistent with activism. Further, we rule out an alternative explanation for our results where the positive screening and activism are ‘profit-driven’ rather than driven by social pressure. Thus, our results suggest that the influence of social norms on stock markets is more pervasive than documented in the prior literature.