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A Theory of Socially Responsible Investment

  • Series
    Erasmus Finance Seminars
  • Speaker(s)
    Martin Oehmke (London School of Economics, United Kingdom)
  • Field
  • Location
    Erasmus University, Mandeville Building, Room T3-42
  • Date and time

    November 26, 2019
    15:30 - 16:45


Based on a canonical model of corporate financing under agency frictions we characterize how and when socially responsible investors can affect firm behavior and derive an investment criterion, the social profitability index (SPI), to guide scarce socially responsible capital. The SPI highlights the importance of counter- factual social costs that would arise in the absence of socially responsible investors. Accordingly, most existing ESG metrics are not suited to guide investment decisions. Our model also uncovers a complementarity between financial capital and socially responsible capital: The presence of financial investors without regard for externalities can raise welfare relative to a setting with only socially responsible investors.