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Discussion Paper Details

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Title: Does Money Talk? Market Discipline through Selloffs and Boycotts

Author(s): Nick Gantchev, Mariassunta Giannetti and Rachel Li

Publication Date: November 2019

Keyword(s): corporate governance, Corporate social responsibility, Culture, Environment and institutional investors

Programme Area(s): Financial Economics

Abstract: Using a novel dataset of negative news coverage of the environmental and social (E&S) practices of firms around the world, we show that customers and investors can provide market discipline and impose their ethical standards on firm policies. Investors sell firms with heightened E&S risk, especially if they are from E&S conscious countries or hold portfolios with high sustainability ratings. Similarly, heightened E&S risk is associated with a drop in firms' sales in E&S conscious countries. This behavior of E&S conscious investors and customers leads to declines in stock prices, which push firms to improve their E&S policies in the years following negative realizations of E&S risk. Overall, our results indicate that customers and shareholders are able to impose their social preferences on firms, suggesting that market discipline works.

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Bibliographic Reference

Gantchev, N, Giannetti, M and Li, R. 2019. 'Does Money Talk? Market Discipline through Selloffs and Boycotts'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14098