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.
Asset pricing; corporate social responsibility; socially responsible investments; corporate engagement; shareholder activism;
- G34: Mergers • Acquisitions • Restructuring • Corporate Governance
- H23: Externalities • Redistributive Effects • Environmental Taxes and Subsidies
TSE Working Paper, n° 14-457, janvier 2014