A Rising Tide Lifts All Boats: The Effects of Common Ownership on Corporate Social Responsibility
Dr. Jody Grewal
Assistant Professor of Accounting
Department of Management and the Institute for Management and Innovation
University of Toronto
Common owners face an incredible investment challenge: managing systematic risk. Because common owners hold shares in multiple firms across an industry, one firm’s actions (or inactions) that affect industry peers are felt more severely by common owners than by non-common owners. Yet, as most research has focused on common owners’ role in orchestrating competitive dynamics among their portfolio firms, empirical investigation into how common owners manage their systematic risk dilemma has been nearly absent. Drawing on research showing that one firm’s corporate social responsibility (CSR) can produce positive spillovers for peer firms, and its irresponsibility can inflict harm on peers, we argue that common owners increase firms’ CSR in an effort to produce spillovers that help manage their systematic risk and multiply their returns. Consistent with our theory, we find that common ownership is positively associated with firm CSR. We then unpack the relationship between common ownership and CSR, finding that increases in CSR are driven by common owners with long-term orientations and are concentrated in stakeholder sensitive industries where CSR spillovers are more likely. We also find that common owners focus their efforts on financially material CSR over financially immaterial CSR. Finally, we use a natural experiment with a quasi-exogenous shock to rule out alternative explanations. Our study contributes to literatures on the antecedents of CSR and outcomes of common ownership, providing a new angle on how common owners shape the strategic outcomes of firms.