Institutional ownership and labor-related misconduct: Evidence from U.S. federal violations

Event Date: 14 October 2020

Speaker: Dr Xi Li, LSE

Time: 2pm

Abstract

We examine the effect of institutional investors on labor-related misconduct. We find that institutional ownership is negatively associated with firms’ propensity to violate federal labor laws. Additional tests using instrumental variables and regression discontinuity suggest a causal relation. Our evidence sug-gests that institutional investors’ aversion to poor labor practices is mainly motivated by financial rather than social reasons. Although the direct penalty amounts are small, violating firms face a higher likeli-hood of employee lawsuits in subsequent years and experience reputational loss and negative stock returns. Lastly, our findings suggest that institutional investors mitigate poor labor practices via share-holder monitoring and voice.

Published: 10 March 2021