Equilibrium Corporate Behavior and Capital Asset Prices with Socially Responsible Investorsn Asset Prices and Corporate Behavior

We examine the functioning of financial markets when firms can invest in socially responsible activities that produce an externality at a cost. We examine a model in which some investors are altruistic in the sense that they internalize the assets' extra-financial performance when they value their portfolio. There are two mechanisms by which these pro-social investors can influence firm's decisions. They can vote with their feet, thereby raising the cost of capital of non-responsible firms. They can also try to get the majority of shares to impose their view to the management. We also examine a model in which there exists a large investor who can act strategically to influence the beliefs of atomistic investors about his vote. We show that an increase in the degree of pro-social motivation of the large investor may raise its purely financial profit.