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    • Third institutional investors may own stocks of firms

    2018-10-29

    Third, institutional investors may own stocks of firms not only because of their social and environmental reputation, but also for their financial performance (Johnson & Greening, 1999). This is because “socially responsible investors are clearly not interested in considering unprofitable investment options or paying a significant penalty for ethical choices, since financial return remains an important consideration” (Michelson et al., 2004, p. 5). Put in another way, “while the emergence of social criteria may influence institutional investment activity, these criteria probably remain subordinate to economic criteria” (Coffey & Fryxell, 1991, p. 439). For instance, in studying the effect of social responsibility on institutional shareholdings, Cox et al. (2004) reported a positive and significant impact of corporate financial performance on institutional ownership and concluded that “financial performance attributes also play an important role in influencing institutional investors” (p. 38). In short, the above discussion indicates that social responsibility is expected to enhance (detract from) firm financial performance, which, in turn, is likely to affect positively (negatively) institutional ownership. In fact, identifying the positive or negative effect is a checkpoint pathway of empirical analysis. This argument is presented in Fig. 1: the effect of corporate social responsibility on institutional investors (relation (c)) through a role of financial performance “mediation” (relation (a×b)). We aim to test empirically our argument through the following hypothesis:
    Sample and variables measurement The sample of this study includes Egyptian firms that are listed in the S&P/EGX Index for corporate social responsibility (ESG Egypt), which is prepared and published by the Egyptian Corporate Responsibility Center (ECRC). The Egyptian government represented by the Ministry of Investment, took the lead in developing the ESG index in Egypt to encourage companies to be more transparent and to disclose their governance, social and environmental practices more clearly to increase their competitive advantage. The index is being developed by a consortium of Standard & Poor׳s, CRISIL and KLD. Standard & Poor׳s assisted the Egyptian Institute of Directors (EIOD) in partnership with the Egyptian Stock Exchange to develop, calculate, publish and maintain an index comprised of a capitalization weighted list of socially responsible companies which are publicly listed for trading on the exchange. The index is based on quantitative factors as well as qualitative ones. Through the process, environmental, social and corporate governance factors will be translated into a series of scores measuring securities in the universe of publicly traded Egyptian companies (ECRC, 2012). The total number of firms in the sample is 38 with 149 observations during the period 2007–2010 and covers 12 different industrial sectors. Table 1 presents the distribution of firms according to their industrial sectors. It may be argued that a sample size of 38 firms may limit the representativeness of the sample and generalizability of the findings. Consequently, different tests were conducted to evaluate the internal and external validity of the sample. First, the sample represents 14.15% of the total listed firms in 2010 (the total number of listed firms in the EGX is 212 firms in 2010). Thus, the proportion of the sample size to the overall population is comparable to previous research in the Egyptian context (see, for example, Wahba, 2008a, 2014). Second, to test for whether the sample of the current study represents all listed firms in the EGX, the average of the total market capitalization during 2008–2010 for all companies listed in the EGX, as well as for those firms constituting the sample, is computed. The average for all listed firms was LE 487.13 billion and reached LE 204 billion for the sample. Given that the sample accounted for 41.8% of the total market capitalization of the entire market during 2008–2010, it can be argued that the sample does represent the population (i.e., all firms listed in the Egyptian Exchange). This is also comparable with prior work such as Abdel Shahid (2003) who used a sample that consists of the 90 most active firms in the Egyptian context. Abdel Shahid revealed that the sample represents 44% of the total market capitalization and is accounted for 87% of the total deals.