Institutional Trading around Firms’ Negative ESG Incidents

Using transaction-level institutional trades and a firm's negative ESG incidents, we findthat institutional investors adjust their order flow prior to these non-financial events.First, their trading is in the same direction of post-event cumulative abnormal returnsand results in abnormal profits. Second, the relationship between institutional orderflow and the subsequent abnormal return is also influenced by the firm's existing CSRscore, and their trading in high-CSR firms lead to significant profit attenuation. Thesefindings suggest that institutional investors' trading decisions are driven by financialas well as social incentives. We conduct further analysis on firm-level informationasymmetry and shareholder breadth to identify their information advantage for theirprofits. A subsample analysis reveals that institutional order flow is negatively relatedto their preference for social responsible investment measured by the institution-levelCSR index