Local Shareholders, Corporate Community Responsibility, and Shareholder Value.

Abstract

This paper shows that local shareholders lead firms to engage in corporate social responsibility activities locallycorporate community responsibility (CCR). Motivated by the stakeholder theory, we find that mutual funds investing in local firms tend to increase CCR, remarkably in consumer oriented industry. Our identification strategy suggests a causal effect of local shareholders on CCR. Local shareholders and their firms employ CCR as business strategy and benefit themselves financially. Our results indicate that CCR tends to increase firm performance measured with Tobin's Q and operating cash flows, especially in the consumer-oriented industries where customer relations are critical. In addition, local shareholders (i.e. local funds) of higher CCR firms enjoy greater fund flows.