Originally found on Reuters and The New York Times by Svea Herbst-Bayliss
U.S. companies that spend more on social and environmental causes, such as sustainability or charitable donation programs, are more likely to attract hedge funds that challenge their strategy and board, according to a new academic study.
The study’s findings underscore the pressure on companies to balance the interests of Wall Street and Main Street as management fields calls to protect companies’ share price while doing more to tackle social inequality. This tension has intensified in the wake of the COVID-19 pandemic and U.S. protests over racism and policing after the death of a Black man, George Floyd, in police custody.
U.S. companies have about a 3% chance on average of being targeted by an activist hedge fund, but the probability nearly doubles for those who are top spenders on corporate and social responsibility (CSR) programs, according to the study, which analyzed 506 instances of shareholder activism between 2000 and 2016.
“CSR spending can be an indicator (to hedge funds) that there might be some wasteful spending at companies and that maybe top management isn’t focused on the short-term returns,” one of the study’s authors, Pennsylvania State University professor Mark DesJardine, said in an interview.
The research, conducted by DesJardine along with Emilio Marti of Rotterdam School of Management and Rodolphe Durand of HEC-Paris, will be published in the Academy of Management Journal later this year.
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