Internalizing Externalities: Geographic Common Institutional Ownership and ESG Performance

【Authors】

WU Xiaohui, LI Jialing & QIN Libin

【WorkUnit】

WU Xiaohui, LI Jialing（Xiamen University, 361005）；QIN Libin（Zhongnan University of Economics and Law, 430073）

【Abstract】

Given the prevalence of common institutional ownership, understanding how geographic common institutional investors improve portfolio firms’ ESG performance is both timely and relevant against the backdrop of China’s push for green capital market development. Over the past two decades, institutional investors have gained increasing influence in China’s capital markets, adopting diversified investment strategies and operational models. Studies on the economic impact of common institutional ownership have gradually expanded from one single type of institutional investors to several types with different characteristics. On this basis, this study analyzes the impact of geographic common institutional ownership on firms’ ESG performance from the perspective of geographic distance. Using a sample of companies that were listed in Shanghai and Shenzhen stock exchanges from 2011 to 2022, we find that geographic common institutional ownership significantly improves ESG performance.
The economic mechanism analysis reveals that this positive effect diminishes as the geographic distance increases. We also find that the stronger social ties listed companies have through geographic common institutional ownership, the more frequent their social interaction is, and the more motivated they are to improve their ESG performance. Furthermore, geographic common institutional ownership is positively correlated to management’s heightened ESG awareness. Heterogeneity analysis shows that such a positive impact on ESG performance is more pronounced when listed companies and their stakeholders are more aware of their social responsibilities and listed companies face greater risks. Finally, the economic consequence test shows that the enhanced ESG performance driven by geographical common institutional ownership is translated into higher investor returns.
This paper contributes to existing literature mainly in the following three aspects. First, it provides a new research perspective on common institutional ownership and identifies the important role of geographic distance in the transmission of negative externalities. It focuses on geographic common institutional investors, that is, institutional investors who simultaneously hold two or more listed companies headquartered in the same geographic area, which is an indicator of common institutional ownership constructed based on different characteristics. Second, it enriches research on the influencing factors of ESG performance. This paper discusses the impact of geographic common institutional ownership on the ESG performance of portfolio companies in the same city from the perspective of geographic distance. Third, it expands the impact of different types of common institutional ownership on corporate ESG performance, and empirically tests the potential mechanism via which geographic common institutional ownership affects corporate ESG performance. These findings reveal the channel through which common institutional investors affect corporate ESG performance and provide new theoretical evidence for promoting the development of green finance.

JEL: G23, G32, Q50

【KeyWords】

Common Institutional Ownership, ESG, Geographic Proximity, Externality