The Role of Mutual Funds in Corporate Social Responsibility

This paper examines the role of mutual funds in corporate social responsibility (CSR). Using a fund level holdings-based CSR score, we find that a mutual fund’s CSR score is positively related to a firm’s future CSR standings. This relationship is not just driven by high-CSR funds selecting high-CSR firms (initial selection effect), but also by improving their CSR standings afterwards (subsequent improvement effect). The effects of mutual funds on firm CSR are more pronounced for firms with higher mutual fund ownership and stronger corporate governance. Furthermore, we find that high-CSR funds are more likely to vote in favor of implementing CSR proposals, and that firms owned by high-CSR funds are more likely to link their CEO compensation to CSR outcomes. These results suggest that the social commitment of mutual funds is an important determinant of a firm’s social performance.