Journal of Business Ethics (2011) 103:143165
DOI 10.1007/s10551-011-0859-0
Institutional Interest in Corporate
Responsibility: Portfolio Evidence
and Ethical Explanation
ABSTRACT. This study examines the extent to which
corporate responsibility influences the demand for shares by
institutions. The study follows Bushee (Account Rev
73(3):305333, 1998) in categorising institutions as dedi-
cated or transient. The demand for shares is organised
according to three factors: a long-term factor, corporate
responsibility; a short-term factor, market liquidity; and a
time-independent factor, portfolio theory. The rank and
importance of the factors for the different types of institu-
tional investor are analysed. For one of two types of dedi-
cated institution, corporate responsibility is as important as
portfolio theory in influencing the demand for shares. For all
dedicated institutions, corporate responsibility influences
the demand for shares more than market liquidity. For two
of the three types of transient institution, market liquidity is
the most important factor in share selection. For all transient
institutions, the least important factor is corporate respon-
sibility. Findings suggest that corporate responsibility posi-
tively and significantly influences the demand for shares by
dedicated institutions. The discussion considers the extent
to which these trends are constitutive of significant shifts in
ethicality within the context of institutional investment.
Looking at this from within a highly institutionalised Anglo
market model, dedicated institutions commitment to
broader and longer-term concerns could be interpreted as a
small but significant step towards a more axiologically
informed ethical business practice. Such a form of engage-
ment calls for sensitive attention to a fuller range of features
deemed to be relevant to investment decisions, as opposed
to more narrow reliance on legislation, codes of practice and
fiduciary principles.
KEY WORDS: share ownership, corporate responsibil-
ity, institutional investment, business ethics
Introduction
The ownership of large corporations by institutions,
such as pension funds and mutual funds, has risen
 Springer 2011
Paul Cox
Patricia Gaya Wicks
dramatically in recent years. These investors have
evolved as major holders of public company shares
within many developed economies (Allen and Gale,
2001; Davis and Steil, 2001). These developments
have prompted researchers to examine the charac-
teristics of different types of institutional investor
(Ryan and Schneider, 2002) as well as the associa-
tion between institutional holdings and corporate
behaviour (Bushee, 1998; Coffey and Fryxell, 1991;
David et al., 1998, 2001; Graves and Waddock,
1994; Johnson and Greening, 1999; Tihanyi et al.,
2003).
One viewpoint is that the growth in institu-
tional holdings of corporate stock has led to a more
concentrated and hence powerful owner base to
counter managerialism (Brown, 1998). For example,
in 2008, UK-domiciled financial institutions owned
40% of the shares of UK public companies (Office
for National Statistics, 2010). Such high levels of
domestic ownership may have reduced the flexibility
of institutions to sell investments without adversely
affecting their value, and resulted in a greater focus
on long-term outcomes such as shareholder activism,
corporate governance and corporate social perfor-
mance (CSP) (Graves and Waddock, 1994; Johnson
and Greening, 1999; Ryan and Schneider, 2002).
This has given rise to the phenomenon of patient,
dedicated investors who buy and hold based on
long-term corporate attributes and developments
(Bushee and Noe, 2000; Porter, 1992).
A different viewpoint is that the rise in interna-
tional investment has reduced the importance of any
single market or subset of stocks and increased the
spread of holdings. For example, the proportion of
shares held by UK pension funds in UK public
companies has fallen from 31.7% in 1990 to 12.8% in
2008, whilst over the same period, overseas own-
144 Paul Cox and Patricia Gaya Wicks
ership of UK public companies has grown from 11.8
to 41.5% (Office for National Statistics, 2010).
Furthermore, clauses in fund management contracts
often constrain the maximum that a single stock can
comprise within a portfolio, as well as the percent of
shares held in any one company. Keeping these to a
low proportion prevents a concentration of holdings
and improves the ability to trade portfolio holdings
quickly and at low cost. Thus, internationalisation
and a greater spread of portfolio holdings may have
reduced the commitment to long-term investment
decisions and encouraged corporate managers to do
the same. This has given rise to the phenomenon of
transient investors that trade intensively (Bushee and
Noe, 2000).
Which of these two perspectives best fits the
evidence, and given this, what are the implications
for our understanding of business ethics within the
context of a highly institutionalised market model?
This study seeks to answer these questions by
drawing on detailed institutional share ownership
data for UK public companies that include both
domestic and overseas shareholders. The data set is
used to categorise institutional shareholders as ded-
icated or transient. The study hypothesises that
different categories of institutional shareholder
will hold different types of shares. A three-factor
share-selection model is constructed in which the
determinants are a long-term factor, corporate
responsibility; a short-term factor, market liquidity;
and a time-independent factor, portfolio theory. A
number of expectations are empirically confirmed.
For one of two categories of dedicated institution
investigated, corporate responsibility is as important
as portfolio theory in influencing the demand for
shares. For all categories of dedicated institution,
corporate responsibility influences the demand for
shares more than market liquidity. The situation
with transient institutions is the opposite. For two of
three categories of transient institution, market
liquidity is the most important factor. For all tran-
sient institutions, the lowest ranking factor in the
demand for shares is corporate responsibility.
This study makes three innovations, two of which
can be further analysed through an ethical perspec-
tive. First, the use of a three-factor model that
incorporates corporate responsibility places it at the
centre of the analysis. It effectively asks how cor-
porate responsibility ranks in importance within
share selection as compared to portfolio theory and
market liquidity factors. The proposal that corporate
responsibility is a mainstream investment consider-
ation for at least some institutional shareholders is
outlined in the Discussion section. In that section,
we highlight some of the controversies involving
claims of corporate social responsibility relevant to
this article, which centre on debates as to the actual
and/or perceived motivations and purposes under-
lying such trends, and the extent to which these
represent significant shifts towards more ethical
practice.
The second innovation is that the research applies
an institutional share selection model to a UK con-
text. The concept of an institutional share selection
model is not new, and has been used by Badrinath
et al. (1989, 1996), Bushee (1998), Coffey and
Fryxell (1991), Creedy (1994), Del Guercio (1996),
Eatkins et al. (1998), Falkenstein (1996), Gompers
and Metrick (2001), Graves and Waddock (1994),
Hessel and Norman (1992), Johnson and Greening
(1999) and OBrien and Bhushan (1990). However,
all this work is performed from a US perspective,
and only includes US shareholders in US companies.
The focus here is all institutional shareholders of UK
companies.
Third, the UK financial market is both highly
institutional and international. For example, the
importance of US investment company branch
offices in the UK and their holdings of UK shares are
evidenced in the data. Five-hundred US institutions
are recorded as owning 15% of all UK shares. The
results of this study therefore speak to other insti-
tutionalised market places, and perhaps the US
market in particular. We highlight some of the
limitations to ethical practice imposed by a highly
institutionalised market model, and explain how
such a model serves to constrain the ways and extent
to which it is possible for investors to critically attend
to the ethical dimensions of financial markets.
The article is structured as follows: The next
section discusses the conceptual background to the
study and outlines the hypotheses. The third section
introduces the data and methods. The fourth section
discusses the findings, including the ethical impli-
cations and controversies raised by the study, and the
fifth section concludes.
 Institutional Interest in Corporate Responsibility
Conceptual background and hypotheses
development
The capital asset pricing model (CAPM) uses a single
factor, beta, to explain the risk and return relation-
ship. If the only stock characteristic that matters is
beta, then stocks with similar betas will be close
substitutes. This should mean there will be no rela-
tionship between the level of demand for a stock
and characteristics specific to the corporate issuer
(Eatkins et al., 1998). Some studies have found that
characteristics specific to corporate issuers do con-
tribute to an explanation of long-run returns. These
include small versus large capitalisation stocks, value
versus growth and momentum factors (Carhart,
1997; Fama and French, 1993).
Studies have also found that factors other than
beta influence the demand for shares. OBrien and
Bhushan (1990) establish a relationship between the
number of analysts following a stock and the level
of institutional ownership in the stock. Del Guer-
cio (1996), Gompers and Metrick (2001) and
Badrinath et al. (1989) identify a positive associa-
tion between the demand for shares and variables
that have appeared in prudence case law. These
include firm size, firm age, dividend yield, stock
price volatility and membership of an index such as
the S&P 500. The suggestion is that institutional
fund managers guided by these factors can later use
them to demonstrate investment suitability in case
of client criticism or class actions. Hessel and
Norman (1992) report that debt and profitability
ratios predict the level of institutional ownership.
Falkenstein (1996) and Creedy (1994) find that
certain institutional shareholders prefer high beta
and idiosyncratic risk. Eatkins et al. (1998) and
Gompers and Metrick (2001) evidence higher
institutional ownership in stocks with higher trad-
ing volume. Coffey and Fryxell (1991), Graves and
Waddock (1994) and Johnson and Greening (1999)
find a positive relationship between corporate so-
cial and environmental performance and the level
of institutional ownership. Thus, investment suit-
ability appears not to be guided solely by the
marginal effect of an investment on the overall
portfolio.
In related work from a corporate perspective,
Bushee (1998) investigates whether short or long-
145
term behaviour adopted by corporate managers is
associated with the extent to which the firm is
owned by transient (short-term), or dedicated
(long-term) institutions. Transient institutions have a
propensity to sell a firm based on short-term cor-
porate developments. This might lead corporate
managers to underinvest in long-term expenditures
such as research and development and corporate
responsibility. Why might such institutions have a
propensity to sell a firm based on short-term cor-
porate developments? One explanation is that if
institutions hold a broad spread of investments so
that there is a small stake in each, research on the
long-term prospects and fundamentals of each line of
stock is not cost effective. Trading becomes driven
by short-term news and earnings (Froot et al., 1992).
A second explanation is the characteristics of the
financial products transient institutions create and
manage. These often offer immediate liquidity e.g.
mutual funds or involve their investment managers
in competition with others e.g. external fund
management of pension fund assets (Acker and
Duck, 2006; Chen and Penacchi, 2001; Chevalier
and Ellison, 1997; Ehrenberg and Bognanno, 1990;
Goriaev et al., 2000; Khorana, 2001; Meyer and
Vickers, 1997). A propensity to sell a firm based on
short-term developments indicates preferences for
low-cost fulfilment of trades and high market
liquidity.
Dedicated institutions have a propensity to see-
through short-term developments, and prefer invest-
ment in shares of firms that allocate greater corporate
resources to research and development, long-range
planning, and meeting the expectations of a multi-
plicity of stakeholders (Bushee, 1998; Hoskisson
et al., 2002; Porter, 1992). One interpretation is that
these institutions are managing investments for
realisation in future decades, for example, charities,
endowment and pension funds (Acharya and
Dimson, 2007).
If there are time horizon differences between
types of institution, then this indicates a relationship
between time horizon related firm-specific factors
and the level of institutional ownership. This study
examines this question by developing and extend-
ing earlier studies by Bushee (1998) and Bushee
and Noe (2000). Institutional shareholders are
categorised as dedicated or transient and a share
146 Paul Cox and Patricia Gaya Wicks
selection model used to examine the demand for
long-term and short-term firm-specific characteris-
tics within their equity portfolios. The long-term
characteristic is corporate responsibility, and the
short-term characteristic is market liquidity.
The institutional framework in which these
investors function, we suggest, severely limits the
ways and extent to which they can engage with
ethical dilemmas and quandaries in their decision-
making. From this perspective, some institutional
investors inclusion of longer-term considerations in
share selection could be interpreted as a form of
experimentation with the possibilities for ethical
engagement open to them within the bounds of the
existing system. This points to the need to critically
examine the extent to which experimentation
within micropolitical contexts (i.e. within individual
investment decisions) succeeds in shifting and even
transforming macropolitical realities (i.e. the over-
arching market system). This is crucial, since it is the
macropolitical system, by virtue of its regulatory
power, which broadly organises possibilities for
ethically informed business practice into a limited
range (Gatens, 2000).
The next section discusses the share-selection
model based on a short-term factor, market liquidity;
a time-independent factor, portfolio theory; and a
long-term factor, corporate responsibility. This is
followed by a discussion of transient and dedicated
institutions.
Determinants of corporate ownership
Liquidity: short-term
Institutional shareholders with short investment
horizons can be expected to prefer low transaction
costs. Profits are made from after-cost returns, and a
short investment time horizon provides a short time
period over which to recover the costs of buying and
selling. Low buying and selling costs are associated
with a high volume of trades (Chan and Lakonishok,
1995; Falkenstein, 1996). Some institutions also
keep the price impact of trading low by setting a
limit on the maximum ownership in any one
company of no more than the equivalent of a few
normal days trading volume (Dyl and Anderson,
2002). Both of these lead to more investment in
more liquid lines of stock. It is often in larger firms
that more of the stock is tradable as there is more
opportunity to trade large amounts at low cost.
Institutions with long investment horizons are
expected to be less influenced by the cost and speed
of trading. When spread over a longer holding
period, the costs of trading are not so important in
relation to the potential accumulation of financial
distributions and capital gain. This suggests that such
institutions may not be averse to higher holdings in
firms with lower market liquidity, which are often
small and mid-size firms (Bushee, 1998). Long-term
and significant holdings may also enrich relations
with corporate managers, create opportunities for
monitoring and influence, and provide valuable
private information for the improvement of long-
term portfolio risk and expected return (Hendry
et al., 2006; Holland, 1998).
Portfolio theory: time independent
Institutional investors, in their role as investment
fiduciaries, are held to the tenets of portfolio theory
(Ignatius, 1999; New Prudent Investor Rule, 2006).
As a result, all institutional shareholders, regardless of
their investment time horizon, can be expected to
incorporate portfolio theory within portfolio con-
struction.
One tenet of portfolio theory is investment risk
which cannot be eliminated by diversification across
different stocks because it is composed of broad
market factors (Rosenberg and Guy, 1995). This risk
is measured by beta, the responsiveness of the price of
a security to a percent change in the overall market of
which it is resident. Portfolio theory predicts that
exposure to beta is necessary to earn a positive
financial return, and so a positive relationship is
expected between investment demand and beta.
Other common factors within portfolio theory
which have in the past explained long-run returns
include value stocks, small capitalisation stocks, and
stocks with greater momentum1 (Carhart, 1997;
Fama and French, 1993). These additional variables
arguably result in at least some degree of higher
expected risk, and so institutional shareholders
relationship with these will depend on their appetite
for risk and expected return and on their investment
beliefs about such factors as sources of expected
return.
Another source of investment risk used to explain
the relationship between risk and expected return is
 Institutional Interest in Corporate Responsibility
stock price volatility, measured by standard devia-
tion. The relationship between the demand for
shares and stock price volatility may be positive or
negative, depending on institutional beliefs about the
variability of returns as an additional source of
investment return. The general expectation is that
investors will be averse to this risk. This is because
there is no general consensus concerning whether
the market rewards investors for holding higher
standard deviation stocks (Falkenstein, 1996).
Corporate responsibility: long-term
The European Union (EU, 2002) defines corporate
social responsibility as a concept whereby compa-
nies integrate social and environmental concerns in
their business operations and in their interactions
with their stakeholders. Interest in corporate
responsibility is based on the principle that business
and society are inter-woven. As such, the environ-
ment, society, workplace, business values and gover-
nance may impact corporate fundamentals, valuation
and investment performance.
An exemplar of the long time horizon associated
with corporate responsibility is climate change. The
2006 Stern Review on the economics of climate
change illustrated the likely impact of not pursuing
corporate responsibility. According to the Stern
Review, if the world does not act to limit carbon
dioxide emissions, then the overall costs and risks of
climate change will be equivalent to losing at least 5%
of global GDP each year, now and forever (Stern,
2006, p. vi). Future climate change policy is likely to
reform inefficient energy systems and remove dis-
torting energy subsidies on which governments
worldwide currently spend around $250bn a year.
Businesses that address climate change through ac-
tions around their corporate responsibility may help
mitigate future risk, capitalise on forthcoming oppor-
tunities, reduce existing inefficiencies and draw
attention to money-saving opportunities (Stern,
2006). However, these factors operate over a long
time horizon; it can take 3040 years for a change in
carbon dioxide emissions to presage a change in cli-
mate (Climate Change Business Forum, 2010).
It requires investment patience to position a
portfolio based on risks that are in the system some
time before they impact. As such, corporate
responsibility can be expected to attract dedicated
institutions more than it will attract transient insti-
147
tutions. This might involve dedicated institutions
seeking both financial returns and also a certain type
of CSP. Significantly, a position on responsible
investment is not considered of itself a violation of
fiduciary duty if it is part of an approach to valuation,
risk and expected return (Cox, 2009; Kurtz, 2005).
Of course, the above analysis necessarily assumes
that when taking into consideration the corporate
responsibility, institutional investors are guided by a
costbenefit analysis, largely centred on the prospect
of future economic gains. This raises questions
concerning the extent to which such a motivation
represents significant shifts towards more ethical
practice, to which we now turn.
The ethics of corporate responsibility motivations
As suggested by Fukukawa et al. in a recent special
issue (Fukukawa et al., 2007), questions about the
foundations, triggers and motives of corporations
processes of the so-called ethicalisation constitutes a
key line of inquiry in the business ethics field. Such
questions seem particularly germane in relation to
responsible investment trends of the kind examined
through this study. Given existing findings which
suggest that performance is fairly equal between
socially responsible and conventional portfolios (Benson
et al., 2006), what might be the motivations and
purposes of investing responsibly? The interest in such
questions is unsurprising, given that the nature of
underlying purposes and motivations may be under-
stood to define the extent to which such shifts are
perceived as significant. Indeed, debates on corpo-
rate responsibility often focus on the extent to which
this trend is representative of either business as usual
or of a fundamental reconceptualisation of the busi-
ness model.
Fukukawa et al. (2007) point out that there is some
consensus on the perceived underpinnings of pro-
cesses of ethicalisation, with the three key driving
forces understood to include altruism on the part
of leaders, strategic attempts to gain competitive
advantage and profit, and external forces such as
changes in legislation and societal norms. The per-
ceived importance given by firms to the second of the
above, namely, a desire for competitive advantage, is
regularly identified as a limitation of the CSR
movement by commentators interested in prob-
lematising the relative amorality (and sometimes
immorality) of prevailing business models (see, e.g.
148 Paul Cox and Patricia Gaya Wicks
Doane, 2005; Kleinberg Neimark, 1995). The aims of
alleged moves towards corporate responsibility have
been problematised for some time, as characterised by
a critical reading of Carrolls (1991, p. 43) landmark
article in which CSR is famously framed as good
business sense and enlightened self-interest, involv-
ing doing well by doing good. Debates focusing on
whether this is a sufficiently significant reframing of
the responsibility of business are, to a large extent,
axiological ones, dealing with fundamental questions
about what matters and what we value in modern
societies.
As many moral theorists, ethical philosophers and
business ethics commentators are at pains to show,
such axiological assumptions and foundations are
themselves constructs, and thus open to problemati-
sation and deconstruction (Hekman, 1995; Jones,
2003; Lewis and Mackenzie, 2000; Tappan, 2006).
For instance, the criterion of maximum profits is not
only an enduring value, but is often presented as
absolute and non-negotiable: All other business
responsibilities are predicated upon the economic
responsibility of the firm, because without it the others
become moot considerations (Carroll, 1991, p. 41).
More to the point, fiduciary duty is such that where
there are significant trade-offs between economic and
other responsibilities, pension fund managers as
investors are legally obliged to prioritise the former.
It is not the intention of the present discussion to
dispute the fiduciary principle per se. Rather, the aim
is to highlight that the ethicality of the trends
investigated in this article is necessarily constrained
by the willingness and ability of the various actors
who form part of the market system to engage in
serious, critical, and explicit debate about what
matters. We return to this question in the Findings
and discussion section, when we analyse our find-
ings in the light of some of the constraints and
opportunities for ethical engagement faced by play-
ers within the highly institutionalised Anglo market
system. Next, we introduce the range of institutional
actors relevant to our study.
Investment institutions as corporate owners
This section discusses transient and dedicated insti-
tutions. Bushee (1998) argues that institutions can be
categorised according to those with short investment
horizons, i.e. transient, and those with long
investment horizons, i.e. dedicated. Ryan and
Schneider (2002) and Johnson and Greening (1999)
produce similar typologies of institutional investors,
and the typology of transient and dedicated institu-
tional shareholders below draws on these.
Transient institutions
Open-end mutual funds. Mutual funds are one class of
short time horizon institution. In a mutual fund,
shares or units may be redeemed on any business
day by the investor selling them back to the fund.
Investors in mutual funds are also usually able to
switch at low cost from one fund to another within
the same fund family. This detail is important because
to meet redemptions and switching between funds,
the portfolio manager either has to have sufficient
cash in the fund or be able to sell assets quickly.
Immediate redemption and switching means that
a mutual fund manager cannot know when a secu-
rity purchased may need to be sold. There can be
significant money flows into and out of mutual funds
as a result of the latest investment return perfor-
mance, so this possibility is very real (Del Guercio
and Tkac, 2002).
A need to buy and sell securities quickly and at
low cost may encourage investment in more liquid
securities and securities whose value is expected to
crystallise in the short-term (Droms and Walker,
1996). Ryan and Schneider (2002) report that mu-
tual funds have the highest portfolio turnover of any
institutional investor. Based on the above, and an
absence of legislation, regulation or industry pressure
for long-term factors such as CSP within share
selection, a preference for market liquidity is above
all expected.
Life insurance funds. Insurance company funds,
comprising mostly life funds, are a second class of
short time horizon institution. Many insurance
companies are either publicly listed in their own
right or divisions of insurance companies or banks
that are publicly listed. As a result, the market for
corporate control may discipline these compa-
nies should their investment holdings substantially
underperform index and peer group benchmarks.
Competition, and the need to take commercial
decisions for profit, may shorten the time horizon
associated with portfolio investment decisions.
 Institutional Interest in Corporate Responsibility
Life funds and mutual funds also share several
investment similarities. In the UK and continental
Europe, many of the best-known mutual fund man-
agers are insurance companies. A life fund often links
to units in a mutual fund so that the investment vehicle
is often the same. Mutual and life funds are mostly
retail products. As a result, investors, both institutional
and retail, are able to compare mutual and life fund
performance cheaply and quickly by browsing widely
published league tables that reveal past fund perfor-
mance over measured time periods and attach an
overall fund rating (Myners, 2001). Money flow into
mutual and life funds is then associated with the
ranking revealed by these league tables.
As with mutual funds, liquidity is also important to
life funds. For example, the UK Financial Services
Authority (FSA) requires unit-linked life policies to
hold securities that are readily realisable, i.e. liquid
(FSA, 2007). This may lead to a preference for larger
stocks with greater trading liquidity, which are listed
on main exchanges. Greater market liquidity may
also be preferred to cover trades needed to meet early
surrender of policies and switching between funds.
This discussion suggests a preference for more
liquid securities and securities more likely to perform
well in the short-term. This fits with the US evi-
dence that portfolio turnover of life funds is more
frequent than pension funds but less frequent than
mutual funds (Ryan and Schneider, 2002). Whilst
the insurance industry trade body in the UK has set a
best practice agenda for corporate responsibility, this
does not have the force of law, and may therefore
have less influence on the demand for shares than
short-term liquidity.
Externally managed pension plans. Pension plan
investment managers who prefer not to expend time
and resources acquiring the knowledge and staff to
invest their own money delegate the management of
plan assets to external investment managers. These
professional managers may also be investing in mu-
tual fund, life insurance, proprietary, foundation,
church and charity funds. Professional managers are
therefore likely to hold many of the same stocks
across the different portfolios they manage, and
possibly apply the same investment timing and
trading. On the one hand, this suggests larger overall
investment positions and a greater price impact of
trading, so that trading will be infrequent and
149
companies selected for their long-term outcomes
(Ryan and Schneider, 2002). On the other hand,
external managers confront investment mandates
that initially run for 3 years, but with a notice period
of 3 months, and portfolio evaluation each quarter
and year end (Davis and Steil, 2001; Lakonishok
et al., 1991). Based upon these evaluations, assets
either remain with the manager or are reallocated to
other money managers. Replacement of managers
following underperformance is a normal part of
external portfolio management and mandates are
often terminated prior to 3 years (Del Guercio and
Tkac, 2002; Ennis, 2001; Lakonishok et al., 1991).
Since external managers are uncertain as to when a
mandate may be lost, they may rationally assume that
dismissal could be after any quarters performance,
and thus invest in stocks that have low trading costs
and whose investment value is expected to crystallise
in the short-run (Myners, 2001).
There is occupational pension scheme legislation
concerning responsible investment. An amendment
in the year 1999 to the 1995 Pensions Act (Statutory
Instrument 1999 No. 1849 and 3259), commencing
July 2000, requires that trustees of occupational and
local government pension schemes disclose in the
Statement of Investment Principles the extent (if at
all) to which social, environmental and ethical con-
siderations are taken into account in the selection,
retention and realisation of investments (Pensions
Act, 1999a, b). This represents a disclosure legislation
only but not a requirement to invest responsibly, and
so short-term factors are still expected to have the
greater influence on the demand for shares.
Hypothesis 1: Corporate ownership by transient
institutions will be greater in companies with
more liquid stocks than in companies with high
corporate social performance.
Dedicated institutions
Other pension plans expend time and resources
acquiring the knowledge and staff to invest their own
money. Over time, inhouse-managed pension plans
have gradually reduced in number, mostly among
smaller plans with fewer assets over which to appor-
tion fixed costs. Many of the largest schemes still
manage their assets inhouse because their scale makes
it less expensive to do so (Herman, 1963). By value,
150 Paul Cox and Patricia Gaya Wicks
approximately one-third of European pension plans
invest their own assets (Davis and Steil, 2001). In-
house investment management is fundamentally
different to contracted-out external management
because assets managed inhouse are invested by sala-
ried employees that are typically responsible only for
their employers money. There are no conflicts of
interest with corporate finance divisions, no man-
dates to win, and no mandates to suddenly lose. With
inhouse staff, the long-term culture and values of the
pension plan can more easily align with the invest-
ment philosophy on which asset allocation and
security selection are based. There is less job tenure
risk, and remuneration is typically lower and less
linked to short-term profit. The nature of the asset
management contract is therefore long term, with
underperformance leading to neither loss of mandate
nor job. This more stable and permanent investment
context is well suited to a long investment horizon.
This is evidenced by the lower portfolio turnover and
investment risk of the inhouse-managed pension
funds (Brown, 1998; Davidson, 1971). Based on the
study by Ryan and Schneider (2002), this institutional
class is sub-divided into public and private sector.
Inhouse-managed public sector pension plans. Inhouse-
managed public sector plans are expected to have the
longest investment horizon (Ryan and Schneider,
2002). These pension plans include local authority
employers, nationalised and previously nationalised
industries, and some federal (central government)
plans. Inhouse public sector plans are free from
competitive pressure and commercial constraint be-
cause their funding is solved at a public level through
the tax system. Long-term strategies, such as those
associated with CSP, are widely evidenced, and
portfolio turnover is lower than any other type of
institutional investor (Monks and Minow, 2001;
Ryan and Schneider, 2002). Some researchers argue
that these pension schemes may serve a range of social,
political, and geographic goals, for example, having
dialogue with large employers to press for better
neighbourhoods in which pension plan members live
(Monks and Minow, 2001; Murphy and Van Nuys,
1994; Romano, 1993). This suggests a range of
motivations and broader values beyond those due to
a strict adherence to fiduciary principles. For this type
of dedicated institution, then, corporate responsibility
is expected to be relatively important.
Inhouse-managed private sector pension plans. There is
often executive presence from the sponsoring em-
ployer on the board of private sector pension plans.
Since many private sector plans are corporate, this
suggests pressure from at least one quarter to maximise
the current market performance of the fund. This may
be true regardless of the benefit type, whether defined
benefit or defined contribution. In a defined benefit
(final salary) plan, the company (sponsor) will draw on
its own income to make additional contributions to
correct a plan deficit. In a defined contribution plan,
whilst there is no legal duty to make additional con-
tributions in an instance of poor plan performance,
unions and plan members may engage with the firm
to such an extent that, to avoid conflict, the company
is pressed to increase employer contributions. Com-
panies are therefore not isolated from existing pension
arrangements they have put in place. Other things
being equal, greater contributions reduce corporate
profit, and therefore executive presence on the pen-
sion plan board may mean greater priority given to
risk, expected return and portfolio performance than
public sector pension plans. This argues that inhouse-
managed private sector pension assets are a second
type of dedicated institution, but one in which long-
term outcomes may be tempered relative to inhouse-
managed public sector pension assets.
Hypothesis 2: Corporate ownership by dedicated
institutions is greater in companies with higher
corporate social performance than in companies
with high market liquidity
and in addition
Hypothesis 3:Corporate responsibility is a more
important factor in share selection for inhouse-
managed public sector pension plans than for
inhouse-managed private sector pension plans.
Methods
Sample
The sample of firms chosen for data collection is that
of the FTSE AllShare index, a market-value-weigh-
ted index representing 9899% of the UK market and
the most widely used UK institutional benchmark.
 Institutional Interest in Corporate Responsibility 151

Ownership data for sample firms was drawn in June
2002 from a corporate ownership database main-
tained by one of the UKs largest company regis-
trars. The registrar continuously updates shareholder
account information for 2000 UK firms via daily
changes in ownership, as recorded by equity trans-
action information on the London Stock Exchange.
The data are used by investor relations departments to
understand investor demographics and by investment
professionals to monitor ownership changes and to
source stock for trading. The database allows for the
creation of investor clienteles. For example, the
database showed that some 2300 different pension
funds held shares in FTSE AllShare companies. It lists
the investor name, country of origin, appointed fund
managers and the number of shares held in each UK
company. Variables for the market liquidity factor are
drawn from The London Stock Exchange and FTSE.
Variables for the portfolio theory factor are drawn
from BARRA, an investment software and research
company. Variables for the corporate responsibility
factor are drawn from Factiva, a Dow Jones & Reuters
product and The Ethical Investment Research Ser-
vice (EIRIS). Almost all non-ownership data are
collected for the prior 18 months and then averaged.
This is relevant because share ownership as at June
2002 is a reflection of investment decisions made
weeks and months before this date. Missing data re-
duced the firm sample number from the initial of 746
to a final of 514. Almost all narrowing of the initial to
final sample occurred as a result of missing informa-
tion about smaller firms.
Dependent variable definition
The dependent variables are designed to capture the
proportion of a company owned by dedicated and
transient institutions. First, all shares held by mutual
funds were pooled per sample firm. Next, all shares
held by life insurance funds were pooled per sample
firm. Greater attention was paid to pension plans. If
the pension plan was in the public sector, then it was
coded public, if a private sector plan, then it was
coded private. If the name of the pension plan and
the name of the asset manager were equal or related,
then it was coded inhouse, (e.g. British Airways
and British Airways Pension Fund), and external in
the absence of any similarity or relationship, (e.g.
BBC and Deutsche Asset Management). To calcu-
late the dependent variables, the pooled number of
shares held by each category of institution to the
total number of shares outstanding per sample firm is
computed. The calculation method is presented in
Table I. The following dependent variables were
created: mutual funds, life insurance funds, exter-
nally managed pension plans, inhouse-managed
public sector pension plans, and inhouse-managed
private sector pension plans.
Independent factors
Market liquidity
Three variables are used to represent the market
liquidity factor: firm size, trading volume and free
float. Firm size (Size) is an indicator of market
liquidity because it enables institutions to trade large
blocks of shares without significantly affecting mar-
ket price (Roth and Saporoschenko, 2001). Short
investment horizon institutions are expected to
prefer a company whose stock has high trading
volume (Trading Volume). Free float (Free Float) is
the proportion of shares tradable within the market
place for a given stock. A higher free float reflects
high stock availability that supports trading in larger

TABLE I
Calculation method of institutional share holding in a firm

P
X
Shares owned by institutionin firmi at timet
Mean Percent Holdingi Shares outstanding in firmi at timet
x1
Mean Percent Holding is the proportion of firm i owned by a category of investment institutions, e.g. mutual funds,
where X is the total number of institutions in the specified category, and firm i is a FTSE All Share security
Shares outstanding are adjusted for free float. Adjusting firms share capital for free float overcomes situations where an
investor owns a proportion of a line of stock that is unlikely to be for sale and so ensures an accurate representation of the
proportion of a firms stock that is available for portfolio investors
152 Paul Cox and Patricia Gaya Wicks
blocks. Firm size is computed as the dollar value of
company assets. Trading volume is computed as
shares traded per month divided by the free float-
adjusted number of shares outstanding. Free float
varies from 0 to 1, with 1 being complete stock
availability, and 0 no stock availability.
Portfolio theory
Three variables are used to represent the portfolio
theory factor: total risk, systematic risk and value.
Each of the proxies is widely used within previ-
ous research on share selection (Creedy, 1994;
Falkenstein, 1996; Gompers and Metrick, 2001;
Hessel and Norman, 1992; OBrien and Bhushan,
1990). All institutions are expected to be averse to
total risk (Stock Price Volatility), though heteroge-
neously so. Systematic risk (Beta) is the risk which
cannot be diversified away for it comprises aspects
that all firms are exposed to, for example, the price
of oil and gas. Since it cannot be off-loaded, inves-
tors are expected to only be prepared to take on this
risk if they are rewarded for doing so. The exact
relationship with systematic risk depends on insti-
tutional investors tolerance for risk. More risk-
tolerant investors will tolerate a higher beta, less
risk-tolerant investors will demand a lower beta.
Empirical studies have so far tended to reveal a po-
sitive relationship between investment institutions
holdings of shares and systematic risk (Badrinath
et al., 1989; Eatkins et al., 1998; OBrien and
Bhushan, 1990). Fama and French (1993) suggest
that long-run returns can also be explained by small
capitalisation and value factors. Firm size is already
included within the Liquidity factor. Value investing
involves identifying efficient firms that are over-
looked or unfashionable, and therefore inexpensive
and undervalued. Yardsticks are used to identify
inexpensive securities with adequate safety margins
versus their intrinsic value. A positive relationship is
expected with Value for it suggests greater return.
Stock price volatility is measured as the variance of
stock price returns over the previous 60 months. Beta
is the slope of 60-month stock returns regressed on the
market. There is no theoretical basis to suggest the best
time period for the calculation of beta; however, the
most frequently used beta estimate in share selection
research has been 60 months (see, e.g. Badrinath et al.,
1989, 1996; Eatkins et al., 1998; Falkenstein, 1996).
The BARRA Value variable is used.
Corporate responsibility
Four variables are used to represent the corporate
responsibility factor: health and safety (Health &
Safety), equal opportunities (Equal Opportunities),
environment (Environment), and non-financial news
stories (Non-financial News). The first three variables
are selected because they represent major stakeholder
categories and follow the theoretical and empirical
CSP literature (Griffin and Mahon, 1997; Wood,
1991). The fourth variable, non-financial news sto-
ries, is included to capture all other stakeholder cat-
egories. A significant body of research contributes
evidence to the case for some degree of systematic
early positioning of an investment portfolio around
CSP.
Equal opportunities and health and safety both
offer perspectives on the work environment. Hansen
and Wernerfelt (1989) and Berman et al. (1999) find
a positive relationship between work environment
quality and financial performance. Dennison (1984)
finds that work environment quality is positively
associated with firm profitability and that changes in
firm profitability follow changes in work environ-
ment quality by 23 years. In their respective studies
Turban and Greening (1997), Albinger and Freeman
(2000), Greening and Turban (2000), and Backhaus
et al. (2002) find a positive relationship between
more responsible firms and employer attractiveness,
suggesting that more responsible firms draw on a
deeper and more talented pool of prospective
employees.
Regarding the natural environment, Buhr (1994),
Orlitzky and Benjamin (2001) and Al-Tuwaijri et al.
(2004) find that high environmental performance
firms have better financial performance. Nehrt
(1996) demonstrates that early timing of environ-
mental strategies significantly contributed to sub-
sequent profit growth in firms. Bragdon and Marlin
(1972) and Riahi-Belkaoui (1976) find a positive
relationship between pollution disclosure and excess
return. Spicer (1978a, b) discovers some support for
a positive relationship between financial perfor-
mance and environmental performance in the pulp
and paper industry. Shane and Spicer (1983) and
Holman et al. (1985) find a negative relationship
between pollution and rates of return.
The inclusion of non-financial news stories is
designed to capture other stakeholder categories. This
might include, for example, corporate community
 Institutional Interest in Corporate Responsibility 153

involvement, family-friendly employer policies, and equal opportunities and health and safety news cat-
human rights and associated supply chain issues. egories were also deselected.
There is a mix of relationships between such vari- Finally, a set of industry dummy variables is de-
ables and financial performance. Orlitzky et al. fined to account for the possibility that the demand
(2003) find a positive relationship between corporate for shares across different industries may be influ-
community involvement and financial performance. enced by the general relationships industries have
Altman (1998) and Saiia et al. (2003) find that cor- with needs for diversification, risk, and expected
porate community involvement is strategic, and return. Industry dummies were created using the
undertaken to enhance financial success. Levy and FTSE Global Industry Classification System which
Shatto (1980), Fry et al. (1982), Useem (1988), File groups listed stocks into ten economic groups: Basic
and Prince (1998) and Brammer and Millington industries, general industries, resource extraction
(2005) find that corporate community involvement industries, cyclical consumer good industries, cyclical
is underpinned, at least in part, by public relations services, non-cyclical goods, non-cyclical services,
motives which may indirectly benefit financial per- utilities, financials, and information technology
formance. In a research on the United Nations (UN) industries. The general industry sector is chosen as
Declaration of Human Rights, Patten (1990) fails to the comparator sector.
find a relationship between corporate signing of the Table II presents a summary of the hypothesised
Global Sullivan Principles2 and financial perfor- relationships for the key factors and variables.
mance. In research on family-friendly policies, Diltz
(1995) finds that the market penalises family-related
benefits such as parental leave and dependent care Estimation technique
assistance. Preece and Filbeck (1999) find lower risk-
adjusted returns on a high family-orientated firm A multiple regression was performed that estimated
portfolio relative to a comparator benchmark, and the relationship between the percent of shares held
Filbeck and Preece (2003) report negative abnormal by a particular class of institutional investor in a
stock returns to family orientated award announce- particular firm and the variables corresponding to the
ments. On balance, there exists more non-negative market liquidity, portfolio theory and corporate
evidence than negative evidence, and therefore a
positive relationship is expected between non-financial
TABLE II
news stories and the demand for shares by dedicated
institutions. Summary of expected relationships on factors
Health and safety, equal opportunities, and envi- and variables
ronment are drawn from the EIRIS. Using the ap-
proach of Graves and Waddock (1994) and Cox Factor and variable Hypothesised relationship
et al. (2007), each text-grade rating for health and Market liquidity
safety, equal opportunities and environment per Size More positive and
sample firm is translated into a number-grade rating Free float significant for
starting at 1 and increasing with greater perfor- Trading volume institutional shareholders
mance. To arrive at a single measure for health and with short time horizons
safety, equal opportunities, and the environment, the Portfolio theory
score on each is normalised so as to give them equal Beta + Extent depends on fund
weight. This generates a possible range of scores Stock price volatility - management style
from 3 to 12. Non-financial news stories data are Value +
drawn from Factiva, a product covering nearly 8000 Corporate responsibility
news sources including Dow Jones and Reuters Non-financial news More positive and
Health and safety significant for institutional
newswires and The Wall Street Journal. Financial
Equal opportunities shareholders with
accounting and earnings-based news categories were Environment long time horizons
deselected. To avoid double counting, environment,
154 Paul Cox and Patricia Gaya Wicks
responsibility factors, including the economic con-
trols. The data as used in the multiple regression
model are summarised and presented in Table III.
The estimation model used is:
COi a bXi; ei;
where COi is the proportion of shares in company i
held by a class of institutional shareholder and Xi are
the factors that explain the share holding. Institu-
tional constraints on short positions and a maximum
long position of 100% cause CO to vary between 0
and 1 and imply that a censored model is the most
appropriate form. When data are censored, instead
of observing y*, we actually observe y, of the form:
y0 if y  0
y y if y  0
To avoid the biased and inconsistent parameter
estimates that can be associated with ordinary least
squares (OLS) estimation, a truncated regression
technique is necessitated. A commonly adopted
solution is to estimate a Tobit model:
yi bXi ei
where an observed dependent variable, yi (which is
equal to yi*) is generated if bXi, + ei > 0 and is
otherwise equal to zero. An OLS model, not
reported, using heteroskedasticity-consistent (White)
standard errors with intercept included is also esti-
mated and has similar results.
Findings and discussion
The discussion of results begins by presenting
descriptive statistics for the sample data.
Table IV reveals that 4700 different institutional
shareholders are recorded in the 514 sample firms.
Looking at the mean fund holding per sample firm,
which reveals the mean ownership for a single insti-
tutional shareholder in a single line of stock, those that
are inhouse-managed public sector pension plans hold
twice as much in each sample firm as any other class of
institution, and those that are externally managed
pension plans half as much as any other class.
Table V presents correlation coefficients for the
independent variables. In the top half of Table V,
the magnitudes of the correlation coefficients suggest
some very limited evidence of multicollinearity, but
at these levels, it is unlikely to present significant
statistical difficulties (Greene, 1993). Variance infla-
tion factors are estimated and in no instance do these
exceed 3. In the lower half of Table V, the corre-
lation coefficients reported provide good justifica-
tion for the consolidation of variables into three
distinct factors. This is because the average correla-
tion between factors is considerably lower than the
average correlation within factors. Looking at the
within-factor correlations, the average correlation of
the three market liquidity variables is 0.26, the three
portfolio theory variables 0.41, and the four corpo-
rate responsibility variables 0.25. Looking among
the factors, the average correlation coefficient of
the liquidity to portfolio theory variables is 0.17, the
portfolio theory to corporate responsibility variables
0.12, and the liquidity to corporate responsibility
variables 0.24.
Tables VI and VII document Tobit estimates for
the independent variables regressed on the extent of
shares held by transient and dedicated institutions in
the sample firms. Both tables have the same layout.
On average, the model explains approximately one-
quarter of the variation in the extent of shares held
by transient institutions and approximately one-fifth
of the variation in the extent of shares held by
dedicated institutions. This finding compares favour-
ably with existing studies in finance and in man-
agement (Coffey and Fryxell, 1991; Del Guercio,
1996; Graves and Waddock, 1994).
Moving from the top to the bottom of Tables VI
and VII, the first section documents the importance
of each of the three share selection factors in terms of
their contribution to adjusted R2. The next portion,
Rank by Size of Contribution, reveals the rank
importance of the factors. This orders and ranks the
factors according to the size of the contribution to
adjusted R2. The adjusted R2 is presented because
corporate responsibility has one more variable than
market liquidity and portfolio theory factors. In or-
der to determine the contribution to adjusted R2 due
to each of the factors, the industry controls were
first of all entered as a block on their own and the
adjusted R2 noted. Next, the three market liquidity
variables were entered in addition to the industry
controls and the adjusted R2 noted. Following this,
the three market liquidity variables were removed,
and the three portfolio theory variables added
alongside the industry controls. The adjusted R2 was
 TABLE III
The data as used in the multiple regression model

Factor Share Liquidity (independent Portfolio theory Corporate responsibility Industries

holding variable) (independent variable) (independent variable) (independent
(dependent variable)
variable)
Definition Proportion Free float Trading Firm Systematic Share Value News Health Equal Environment Industry
of shares volume size risk price stories and safety opportunities dummies
held by type (beta) volatility
of institution
Source Computershare FTSE London Datastream Barra Barra Barra Reuters EIRIS EIRIS EIRIS FTSE
stock factiva
exchange

Companies
Abbey National x x x x x x x x x x x x
Anglo American x x x x x x x x x x x x
Astrazeneca x x x x x x x x x x x x

= 514 companies
Institutional Interest in Corporate Responsibility

Notes. The purpose served by each variable is noted in the row titled Factor. The definition of each variable is noted in the row titled Definition. The data source for each
variable used is listed in the row titled Source.
The dependent variable is the proportion of shares outstanding held by a class of institution in each company. The share ownership data were obtained from Computershare
Analytics, now part of Thomson Financial.
155
156 Paul Cox and Patricia Gaya Wicks

TABLE IV
Summary statistics on share holdings

Total institutions Transient institutions Dedicated institutions

Mutual Life Externally Inhouse- Inhouse-managed

funds insurance managed managed private sector
funds pension public sector pension funds
funds pension funds

Maximum (%) 1.00 1.00 0.30 0.56 0.10 0.27

Minimum (%) 0.00 0.00 0.00 0.00 0.00 0.00
SD 0.16 0.11 0.05 0.05 0.01 0.03
Mean fund holding per 0.01 0.01 0.01 0.005 0.02 0.01
sample firm (%)
No. of funds in sample 4700 1601 746 1840 66 448

TABLE V
(A) Correlation coefficients and (B) within and between factor mean correlation coefficients

(A)

(1) (2) (3) (4) (5) (6) (7) (8) (9)

(1) Size
(2) Free float 0.202**
(3) Trading volume 0.365** 0.202
(4) Value 0.162** 0.155** 0.030
(5) Stock price volatility -0.439** -0.191** 0.077* -0.245**
(6) Stock beta 0.126** -0.020 0.348** -0.246** 0.735**
(7) Non-financial news items 0.005 -0.096* 0.009 -0.127** -0.038 0.003
(8) Health and safety 0.223** 0.083* 0.185** 0.063 -0.031 0.103* -0.006
(9) Equal opportunities 0.603** 0.190** 0.329** 0.181** -0.274** 0.049 0.047 0.396**
(10) Environment 0.631** 0.205** 0.343** 0.249** -0.345** -0.017 -0.057** 0.328** 0.682**

(B)

(1) (2) (3)

(1) Market liquidity 0.26a

(2) Portfolio theory 0.17d 0.41b
(3) Corporate responsibility 0.24f 0.12e 0.25c

*Significant at the 5% level, **significant at the 1% level.

a
Computed as the absolute mean of the three market liquidity coefficients.
b
Computed as the absolute mean of the three portfolio theory coefficients.
c
Computed as the absolute mean of the four corporate responsibility coefficients.
d
Computed as the absolute mean of the nine cross correlation coefficients for market liquidity and portfolio theory.
e
Computed as the absolute mean of the 12 cross correlation coefficients for portfolio theory and corporate responsibility.
f
Computed as the absolute mean of the 12 cross correlation coefficients for market liquidity and corporate responsibility.
 Institutional Interest in Corporate Responsibility 157

TABLE VI
Transient institutions: institutional share selection due to market liquidity, portfolio theory and corporate responsibility

Mutual funds Life assurance funds Externally managed pension funds

Contribution of share selection factor to adjusted R2

Industry 0.01 0.02 0.03
Industry and market liquidity 0.32 0.08 0.17
Industry and portfolio theory 0.14 0.07 0.20
Industry and corporate responsibility 0.10 0.05 0.08
Total Adj. R2 0.36 0.13 0.19
Rank by size of contribution
1st Liquidity Liquidity Portfolio theory
2nd Portfolio theory Portfolio theory Liquidity
3rd Responsibility Responsibility Responsibility
4th Industry Industry Industry
Independent variables
Constant 0.588 (0.076)*** 0.258 (0.042)*** 0.180 (0.043)***
Size 0.003 (0.005) 0.003 (0.003) -0.0001 (0.003)
Free float -0.051 (0.026)** -0.020 (0.003) 0.008 (0.015)
Trading volume 0.044 (0.005)*** 0.014 (0.003)*** 0.005 (0.003)***
Value -0.007 (0.005) 0.002 (0.003) 0.007 (0.003)***
Stock price volatility 0.128 (0.105) -0.330 (0.058)*** -0.365 (0.060)***
Stock beta -0.053 (0.034) 0.083 (0.019)*** 0.123 (0.019)***
Non-financial news -0.005 (0.006) 0.009 (0.003)*** 0.003 (0.003)
Health and Safety -0.004 (0.007) 0.004 (0.004) 0.007 (0.004)*
Equal opportunities 0.015 (0.006)*** 0.005 (0.003) -0.001 (0.004)
Environment 0.003 (0.006) 0.001 (0.004) 0.001 (0.004)

*Significant at the 10% level, **significant at the 5% level, ***significant at the 1% level.

again noted. Finally, the three portfolio theory
variables were removed, and the four corporate
responsibility variables entered alongside the indus-
try controls, and the adjusted R2 noted.
Transient institutions findings
Moving from left to right in Table VI, along the
rows associated with Rank by Size of Contribution,
for two of the three types of transient institution,
market liquidity contributes most to adjusted R2.
This is surprising in that all the institutions examined
in this study are investment fiduciaries, and thus, in a
neutral setting, one might expect portfolio theory to
rank the highest. This indicates greater investment
demand for firms whose stock has low transaction
costs and in which positions can be rapidly bought
and sold. Most of all, this is the case for mutual and
life insurance funds. For all types of transient insti-
tution analysed in this study, the long-term corpo-
rate responsibility factor is lowest in rank, providing
strong support for hypothesis 1. The implication is
that the short time horizon by which transient
institutional investors are constrained for instance,
by virtue of their vulnerability to short-term moni-
toring and assessments severely limits the extent to
which more complex, longer-term, ethical consid-
erations are factored into investment decisions.
The lower half of Table VI reports the coeffi-
cients when the control and independent variables
are entered at once. Industry variables are excluded
for reasons of space. All of the three classes of tran-
sient institution have greater holdings in companies
whose stock has greater market liquidity (Trading
Volume p < 0.01). These preferences point to a
short investment horizon. Externally managed pen-
sion plans have greater holdings in value stocks at
158 Paul Cox and Patricia Gaya Wicks

TABLE VII
Dedicated institutions: institutional share selection due to market liquidity, portfolio theory and corporate responsibility

Inhouse-managed public sector Inhouse-managed private

pension funds sector pension funds

Contribution of share selection factor to adjusted R2

Industry 0.01 0.03
Industry and market liquidity 0.03 0.09
Industry and portfolio theory 0.05 0.17
Industry and corporate responsibility 0.05 0.11
Total Adj. R2 0.08 0.20
Rank by size of contribution
1st Responsibility/portfolio theory Portfolio theory
2nd Liquidity Responsibility
3rd Liquidity
4th Industry Industry
Independent variables
Constant 0.010 (0.007) 0.140 (0.028)***
Size -0.0003 (0.0004) -0.004 (0.002)**
Free float 0.006 (0.002)** 0.018 (0.010)*
Trading volume 0.000009 (0.0005) 0.001 (0.002)
Value 0.0003 (0.0004) -0.001 (0.002)
Stock price volatility -0.028 (0.010)*** -0.267 (0.039)***
Stock beta 0.007 (0.003)** 0.077 (0.013)***
Non-financial news 0.001 (0.0006)* 0.008 (0.002)***
Health and safety 0.001 (0.0006) 0.004 (0.002)
Equal opportunities 0.001 (0.0005)** 0.002 (0.002)
Environment -0.0005 (0.0006) 0.005 (0.002)**

*Significant at the 10% level, **significant at the 5% level, ***significant at the 1% level.

the 1% level of significance. Mutual funds are
economically different from the other institutions in
the sense that the coefficients on Value, Beta and
Stock Price Volatility have the opposite sign to
expectations, though none are statistically significant.
An absence of aversion to stock price volatility in the
mutual fund industry confirms previous work that
mutual funds take relatively high risk (Falkenstein,
1996). The result is also consistent with evidence
that mutual fund managers adapt their portfolio
holdings over time to either consolidate or win
performance relative to results posted by other
portfolio managers, including increasing exposure to
stock price volatility when underperforming (Brown
et al., 1996; Lakonishok et al., 1991).
Turning to the rows associated with corporate
responsibility, the coefficient on Environment is
insignificant for all the three classes of transient
institution. Possibly environmental strategies are the
most forward looking. For each of the three classes
of transient institution, one of the corporate
responsibility variables other than Environment is
always significant and positive. The fact that short-
term orientated institutions are at all interested in
any aspect of CSP highlights the value in disaggre-
gating the construct. At least some components are
perceived to have benefit even to short-term, trad-
ing-intensive institutions.
When the UK FTSE AllShare index constituent
weights were entered into the model, not reported,
there is no statistical significance on the four cor-
porate responsibility variables. This is relevant to the
analysis because it means that if statistical significance
is found it indicates that institutional investors are
tilting their portfolio equity holdings either towards
or away from these variables.
 Institutional Interest in Corporate Responsibility
Dedicated institutions findings
Table VII reports results for dedicated institutions
according to a categorisation of institutions set out in
prior conceptual work by Ryan and Schneider
(2002).
Looking at the rows associated with Rank by Size
of Contribution, and moving from left to right,
corporate responsibility and portfolio theory are
equal first in importance as determinants of the de-
mand for shares by inhouse-managed public sector
pension plans. Corporate responsibility is as impor-
tant as portfolio theory in determining holdings of
shares. For both categories of dedicated institution,
corporate responsibility is more important than
market liquidity, providing support for hypothesis 2.
The rank of corporate responsibility is higher for
inhouse public sector pension plans than inhouse
private sector pension plans, so hypothesis 3 is also
confirmed. This also supports conceptual work by
Ryan and Schneider (2002), which suggests that
public sector pension plans have the longest invest-
ment horizons and greatest interest in long-term
corporate outcomes.
Turning to the lower half of Table VII, the rows
associated with the Independent Variables report
that both classes of dedicated institution have greater
holdings in firms with higher free float (p < 0.05 and
p < 0.10). This facilitates trading larger holdings of
shares, about which there is supporting evidence in
Table III. The negative coefficients on Size suggest
that inhouse-managed private sector pension plans
hold proportionately less in larger firms and pro-
portionately more in smaller firms (p < 0.05). The
coefficients on Trading Volume are not significant.
This is significantly different to the result for tran-
sient institutions, all of which invested more in firms
whose stocks had high trading volume at the 1%
level of significance. It may be that dedicated insti-
tutions have higher holdings in smaller firms due to
preferences for more active ownership. Both Size
and Trading Volume suggest that market liquidity is
not as important to dedicated institutions. The
coefficient on Value is not significant, indicating no
systematic preference for value or growth fund
management styles. The coefficients on the other
portfolio theory variables confirm prior evidence of
aversion to Stock Price Volatility and a preference
for greater systematic risk (Beta).
159
Turning to the rows associated with corporate
responsibility, for each class of dedicated institution
two out of the four variables are always positive and
significant. Only one was significant for each of the
transient institutions. The coefficients on Non-
financial News are positive and significant (p < 0.1
and p < 0.01), indicating preferences by dedicated
institutions for firms that communicate to their
multiplicity of stakeholders. Inhouse-managed pub-
lic sector pension plans also invest more in firms
with better Equal Opportunities (p < 0.05), sug-
gesting preferences for a less liable firm. Finally, the
relationship between corporate ownership by dedi-
cated institutions and the environment is not
straightforward. Inhouse-managed private sector
pension plans prefer it, whilst inhouse-managed
public sector pension plans are neutral towards it. It
may be that, at present, the relationship between a
firms environmental record and its financial per-
formance is complex, and interpreted by investors,
even those with long investment planning horizons,
in different ways.
Of course, the extent to which the pursuit of
corporate responsibility can ultimately be reduced to
discussions involving investment risk and return
raises some pertinent questions about the signifi-
cance of such trends with respect to movements
towards ethical business practice. We now turn to a
discussion of such questions, as perceived through an
axiologically informed critical lens.
Towards ethical business practice?
The findings of this study highlight two key trends
particularly relevant to debates on ethical business
practice. The first is the elaboration of some insti-
tutional investors positioning as patient and dedi-
cated, in differentiation to those transient investors
driven primarily by short-term considerations. The
second is the apparent growing importance of cor-
porate responsibility as a determinant of share
ownership, and yet, as argued earlier, it is possible to
question the extent to which these trends can be
understood as meaningful movements towards eth-
ical business practice. Our contention is that any
such movements are necessarily constrained by the
willingness and ability of the various actors who
form part of the institutionalised market system to
160 Paul Cox and Patricia Gaya Wicks
engage in axiological debates, addressing questions
about underpinning values and motivations. This is a
fundamental aspect of the theory and study of ethics.
Indeed, some critics argue that the popular rhetoric
pertaining to business ethics serves not to illuminate,
but to distract from thorny questions regarding value
choices, priorities, and conflicts of interests:
As much as one would like to believe that all the talk
about business ethics today reflects an increased desire
by business executives and political leaders to examine
the ethical foundations of their activities criti-
cally[by] its very construction, the official discourse
of business ethics precludes such an engagement
[Instead,] it presents as universal the partisan interests
of corporations, by masking the frequent incompati-
bility of social and corporate interests under a rhe-
torical gloss that allows the comfortable cohabita-
tion of social responsibility and corporate profitability.
(Kleinberg Neimark, 1995, p. 88)
Through this critical lens, it is possible to question
the extent to which this studys findings contribute
to such a rhetorical gloss, by positing corporate
responsibility as a significant factor in share selection
and a vehicle for improving long-run financial
rewards for fund management firms and their clients.
Given this, it is necessary to consider the extent to
which the trends evidenced through this study are
enabling and/or constitutive of shifting (if not
wholly transformative) forms of ethical engagement
within the context of institutional investment.
When dedicated institutions, in opposition to tran-
sient ones, make the decision to focus on long-term
rather than short-term goals, this begins to shift the
parameters within which investors can work, and
what they can value. If, as is often claimed, one of
the failures of the business case for corporate
responsibility is its dependence on short and med-
ium-term financial rewards (Carter and Huby,
2005), then the move to include longer-term and
broader concerns as an aspect of the practice of
modern portfolio theory could be perceived as a
welcome, if not sufficient, shift.
Moreover, the fact that institutional investors
appear able to make decisions which take into ac-
count factors other than portfolio theory and
liquidity may be representative of a shift in collective
conceptualisations of the role, place, and nature of
morality in the market. Such shifts may be tentative
and subtle, rather than formalised. Indeed, delays in
legitimising any such shifts are only to be expected,
given that codified ethics, in the form of legal
responsibilities, are always behind the times and/or
playing catch up (Carroll, 1991, p. 41). Hence,
alongside its concern with the extent to which trends
of dedicated versus transient institutional investment
may be indicative of significant shifts in ethical
business practice, this article also speaks to broader
alterations in how the relationship between the
function of markets and issues of ethics is conceived.
Boundaries and limitations of highly institutionalised
market models
Despite some of the trends highlighted in this study,
the fact remains that within a highly institutionalised
market model, the ability of individual investors to
engage fully, actively, and/or creatively with ques-
tions of ethics and morality is seriously constrained.
As shifting conceptualisations of morality-and-the-
market show, social responsibility is a moving tar-
get (Churchill, 1974, p. 266). And yet, the
assumption implicitly made by a deontological,
legalistic approach to ethical decision-making of
the kind which underpins the fiduciary principle and
the legalities of institutional investment is that such
considerations can, in fact, be pinned down, at least
in the short and medium terms. The bureaucratic
and regulatory infrastructure in which institutional
investors operate is likely to be experienced, for all
intents and purposes, as largely solid and indisputable
(see also Rose, 2007). As this study demonstrates,
this would especially appear to be the case for
transient investors who are more vulnerable to the
short-term demands and assessments of their clients.
In contrast, under certain conditions and against
the odds, it may be possible to understand the
market not just as an arena for ethically engaged
social action, but as a source of moral consciousness
and a site for the development of ethical sensibilities
(Zwick et al., 2007, p. 191). Significantly, the spe-
cific conditions which make this possible are absent
from institutional, mediated forms of investment. As
Zwick et al. (2007) explain, private individuals in-
volved in do-it-yourself, online trading increasingly
seek to question and learn about the causal, ethical
effects of their investment choices. Thus, these types
 Institutional Interest in Corporate Responsibility
of investors are legitimately able to bring greater
critical awareness to bear on their investment
decisions. Instead, mediated investment forces the
institutional investor, by virtue of fiduciary respon-
sibilities, to focus on evaluating economic dimen-
sions like percentage growth and return on
investment, while [in the process]conceal[ing] the
type of causeeffect relationships that a direct
experience of market discipline provides (Zwick
et al., 2007, p. 193).
The dominance of prescriptive, legalistic institu-
tional frameworks is not surprising, given such
governance models grounding in ethical perspec-
tives which advocate the utility of rules, procedures,
laws and codes as moral standards (Jones, 2003;
Kjonstad and Willmott, 1995; Ladkin, 2006). As
Jones (2003, p. 238), following Rancie`re (1995),
points out, the elimination of uncertainty and
equation of solid ground with the good are central to
political thought at least since Aristotle. To the
extent that such codified frameworks seek to
eliminate ethical quandaries (Jones, 2003, p. 238,
original emphasis), arguably their usefulness is
dubious at worst and limited at best. Indeed, as Jones
(2003, p. 238) asserts: we must ask if the goal of a
business ethics worthy of the name should be to offer
comfort or whether it should be to call into
question the self-satisfying rules, excuses and alibis
that produce a reassuring sense of comfort.
Conclusions
This study examines market liquidity, portfolio
theory, and corporate responsibility as determinants
of the demand for shares for the following classes of
transient institution: mutual funds, life insurance
funds, and externally managed pension plans; and the
following classes of dedicated institution: inhouse-
managed public sector pension plans, and inhouse-
managed private sector pension plans. The study
hypothesises that a principal difference between
transient and dedicated institutions lies in the iden-
tification of their investment time horizon and the
trading patterns that link to this. The study suggests
that this is revealed by differences in their demand
for shares. The demand for shares is organised
according to three factors: a short-term factor,
market liquidity; and a time-independent factor,
161
portfolio theory; and a long-term factor, corporate
responsibility. The rank and importance of the fac-
tors for the different types of institutional investor
are analysed.
This study uncovers evidence consistent with a
focus on long-term outcomes and a focus on short-
term outcomes. The study firstly finds that for two
of three types of transient institution investigated,
market liquidity is the most important factor in the
demand for shares. For all three types of transient
institution, corporate responsibility is the least
important of the three factors. The study secondly
finds that for one of two types of dedicated institu-
tion, corporate responsibility is as important as
portfolio theory in influencing the demand for
shares. For all dedicated institutions, corporate
responsibility influences the demand for shares more
than market liquidity. This suggests that for dedi-
cated institutions, corporate responsibility is as much
an input into the investment process as market
liquidity and portfolio theory are. Thirdly, dedicated
institutions invest more in companies with more
non-financial news flow, but not necessarily more in
firms with better environmental performance.
We conclude by summarising the implications of
this research for business ethics. To the extent that
the highly institutionalised Anglo market model
necessitates strict adherence to a codified set of
fiduciary principles, institutional investors are limited
in their ability to engage more critically and crea-
tively with the ethical dilemmas, contradictions, and
trade-offs inherent to prevailing business and finan-
cial models. Working within these constraints,
dedicated institutions commitment to broader and
longer-term concerns, such as corporate responsi-
bility, may be understood as a small but significant
step towards the kind of engagement with ethical
dilemmas that Ladkin (2006), for one, advocates.
Such a form of engagement calls for sensitive
attention to a fuller range of features deemed to be
relevant to particular decisions, as opposed to more
narrow, if often more straight-forward, reliance on
legislation and codes of practice. Further research is
indicated into any opportunities for shifting the
boundaries of what is possible within an institu-
tionalised market system, and also into the barriers to
doing so. The phenomenon of dedicated, patient
investors, and the growing importance of corporate
responsibility as a determinant of share ownership,
162 Paul Cox and Patricia Gaya Wicks
would appear to signify such an expansion in
boundaries. Future studies might critically examine
the extent to which these trends are representative of
substantial shifts to the ethical underpinnings of
markets, beyond serving as a form of rhetorical gloss.
Notes
1
This might involve buying stocks with high recent
returns and selling those with low returns over the same
period.
2
These are based on the UN Declaration of Human
Rights.
Acknowledgement
The authors would like to thank two anonymous refer-
ees for their very helpful comments during the period
of revision of this article.
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Paul Cox
Birmingham Business School,
University of Birmingham,
University House, Edgbaston Park Road,
Birmingham B15 2TT, U.K.
E-mail: p.cox@bham.ac.uk
Patricia Gaya Wicks
Department of Management,
School of Economics, Finance, and Management,
University of Bristol,
8 Woodland Road, Bristol BS8 1TN, U.K.
E-mail: patricia.gayawicks@bristol.ac.uk
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