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The "Washing Machine": Investment Strategies and Corporate Behavior with Socially Responsible Investors

Gollier, Christian and Pouget, Sébastien (2014) The "Washing Machine": Investment Strategies and Corporate Behavior with Socially Responsible Investors. TSE Working Paper, n. 14-457

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This paper studies shareholder engagement in companies' strategic decisions. Differences of objective among shareholders arise in our model due to the presence of socially responsible investors. These investors take externalities into account when valuing their portfolio while conventional investors do not. Shareholders may affect corporate behavior via two mechanisms. They can vote with their feet: responsible investors may shy away from firms producing negative externalities, thereby raising their cost of capital. Investors can also engage in activism. Our main contribution is to show that a large activist investor can generate positive abnormal returns by investing in non-responsible companies and turning them into responsible. We call this strategy the \Washing Machine" and show that its successful implementation relies on a long-term horizon and a credible pro-social orientation.

Item Type: Monograph (Working Paper)
Language: English
Date: January 2014
Uncontrolled Keywords: Asset pricing, corporate social responsibility, socially responsible investments, corporate engagement, shareholder activism
JEL Classification: G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
H23 - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
Divisions: TSM Research (Toulouse), TSE-R (Toulouse)
Site: UT1
Date Deposited: 09 Jul 2014 17:40
Last Modified: 02 Apr 2021 15:48
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