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Cambridge Endowment for Research in Finance (CERF)


The Impact of Workplace Relationships on Manager Incentivisation and Fund Performance  

By Elias L. Ohneberg, CERF Research Associate, Cambridge Judge Business School, University of Cambridge 

August 2023

In a 2012 survey by Penn Schoen Berland and Georgetown University, 75% of senior executives responded that they witnessed favouritism at work, and 83% stated that it can lead to the wrong people being promoted. More recently, an article by the New York Times uncovered blatant favouritism by Bank of America’s chief operating officer. His favoured employees received bonuses and promotions, while disfavoured employees were put up for pay reductions. Given the prevalence of favouritism, it is important to understand its effect on employee incentives and on-the-job performance. 

The effects of favouritism on employee incentives and behaviour 

Causal empirical evidence on the effects of favouritism on employee incentives and behaviour has so far been sparse. The field of psychology offers some correlative evidence that personal relationships between supervisors and employees can impact performance appraisals and firing and promotion decisions. Causal empirical research in the field of economics and finance is practically non-existent. Work by Prendergast and Topel (1993), nevertheless, provides theoretical support for a negative effect of favouritism on employee effort provision and forms a basis for my empirical work.  

To investigate the effects of favouritism on employee incentives and behaviour more generally, I study the effect of workplace connectedness on 13,347 portfolio managers in the mutual fund industry over a quarter of a century. The mutual fund industry lends itself well to studying the effect of workplace connections on employee incentives. It is highly human capital intensive and sizable, managing $60.1 trillion worldwide. 

First, I construct a measure that quantifies mutual fund managers' connectedness within their company. Two mutual fund managers are defined to know each other if they have a past work relationship – they have co-managed a mutual fund in the past. Connections between two employees can have different importance. Being more connected to a senior employee is likely more important than to a junior employee. Therefore, the measure places a higher weight on connections to more senior employees. 

To link the notion of favouritism to the connectedness of employees I need to establish that well-connected employees receive some sort of preferential treatment. I do this by investigating whether better-connected employees are treated differently in firing and promotion decisions, controlling for objective performance measures that should impact these decisions. My findings suggest that better-connected mutual fund managers are less likely to be fired for poor performance and more likely to be promoted despite lack of good performance. Surprisingly, my analysis suggests that past performance does not matter at all for well-connected managers. These results are consistent with preferential treatment towards well-connected managers.  

The threat of being fired and the reward of being promoted are important incentive mechanisms. They punish people for shirking and reward them for a job well done. Thus, my finding that past performance has a smaller impact on the promotion and firing probabilities for well-connected managers suggests that the incentive effects typically provided by firings and promotions are hampered. If performance does not matter as much for firing and promotion decisions, do well-connected mutual fund managers exert less effort in managing their funds? This is the next question I investigate. 

To ascertain effort provision by mutual fund managers, I can look at different measures. The job of a portfolio manager is to generate profitable investment ideas and to implement them successfully to generate a high return on investment. Coming up with these investment ideas requires time and effort spent on researching novel investment ideas and implementing them into the portfolio. Instead of exerting effort to generate a novel investment approach, mutual fund managers could simply copy what their peers are doing. Thus, my first measure of effort is how distinctively a mutual fund is managed in comparison to its peer group. I find that mutual funds managed by well-connected managers are less distinct in their sector allocations. This finding suggests that well-connected managers indeed expend less effort in managing their funds. 

Moreover, if well-connected mutual fund managers are exerting less effort in managing their funds, we would also expect their mutual funds to perform worse. Therefore, I next investigate whether mutual funds managed by better-connected managers perform worse than their counterparts. I find that mutual funds managed by better-connected managers exhibit poorer risk-adjusted investment performance than mutual funds managed by worse-connected managers. 

Why is favouritism tolerated? 

My findings, thus far, suggest that connectedness at the workplace can induce favourable treatment in promotion and firing events. This favourable treatment hampers the incentivisation usually offered by these career-altering events, and induces lower effort provision and, ultimately, poorer mutual fund performance. 

Given the negative effects uncovered in the analysis, there is a final question that needs to be addressed. Why is it that mutual fund companies allow this sort of favouritism to exist? It is somewhat puzzling that this value-destroying behaviour is not stopped. There are essentially two reasons why this behaviour would persist. First, there is simply nothing the mutual fund company can do to prevent the favourable treatment of well-connected managers. Second, the mutual fund company does not have an incentive to prevent it. Due to the difficulty of directly empirically investigating the first question, I will focus on the latter. 

To investigate if mutual fund companies have an incentive to tackle favouritism, we have to look at how mutual fund companies make money. Mutual fund companies are compensated through fee revenue. This fee revenue comes directly from annual fees paid by investors to the mutual fund company. Mutual fund fees are typically not tied to performance but instead consist of a fixed annual percentage fee of the money invested in the fund. Therefore, the aggregate fee revenue of a mutual fund is the size of the fund multiplied by the annual percentage fee. I focus my efforts on investigating how the connectedness of mutual fund managers impacts the size and net money inflows into the fund. I find that connectedness does not impact the overall size of the fund or the ability of the mutual fund to attract new money from investors. This would suggest that mutual fund investors are not aware of the negative effects of connectedness on fund performance or are not able to observe the connectedness of fund managers. Furthermore, it offers a rationale as to why mutual fund companies may not prevent the favourable treatment of well-connected managers despite its negative consequences on performance and effort provision, more generally. 

Overall, this study uncovers the notion of favouritism in the mutual fund industry. It shows that connected managers receive advantageous treatment in career-altering decisions unrelated to objective performance measures. This favourable treatment hampers incentivisation mechanisms and induces lower effort-taking by mutual fund managers. Mutual fund companies do not bear the costs of this value-destroying behaviour, however. Instead, mutual fund investors suffer through poorer investment performance. 


Cardy, R. L., & Dobbins, G. H. (1986). Affect and appraisal accuracy: Liking as an integral dimension in evaluating performance. Journal of Applied Psychology, 71(4), 672–678.  

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Kelly, K. (2021, May 14). A ‘Friend of Tom’ or ‘Can’t Be Bothered’: One Man’s Rules at Bank of America. The New York Times. 

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Prendergast, C., & Topel, R. H. (1993). Favoritism in Organizations. Journal of Political Economy, 104, 958–978.  

Tsui, A. S., & Barry, B. (1986). Interpersonal Affect and Rating Errors. The Academy of Management Journal, 29(3), 586–599. 

Tyler, K. (2012, June 1). Undeserved Promotions. HR Magazine.  

2023 Investment Company Fact Book. (2023). Investment Company Institute.

Do Short Sellers Care about ESG? 

By Oğuzhan Karakaş, associate professor of finance at CJBS and CERF fellow

July 2023

Short selling is a financial transaction to profit from prices going down. A short seller borrows an asset and sells it today to, hopefully, buy it back in the future for a lower price. The literature finds that short sellers can forecast firm underperformance and are efficient in processing of public information and uncovering private information. 

In a project titled “What Does Short Selling Reveal About ESG?”, Oğuzhan Karakaş, Pedro Saffi and Mehrshad Motahari analyse whether the short sellers can anticipate negative ESG incidences of firms, and make money from the negative price reactions to the news announcement of such incidences. 

The authors find that short sellers anticipate the bad ESG news months before the corresponding negative ESG incidences occur. This finding corroborates the earlier research findings that short sellers can predict financial misconduct, earnings management, and credit downgrades in firms. The authors find that stock prices decrease following the bad ESG news, particularly companies with above- average ESG scores and abnormally high short selling interest. This suggests that observing the behaviour of short sellers may help identifying greenwashing (a firm’s ESG compliance being overstated, intentionally or unintentionally), which is notoriously difficult to define and detect. 

Short sellers may not be particularly interested in the non-financial effects of the ESG developments in firms. However, their interest in the ESG materiality may prove fruitful for the short sellers’ role in enhancing the market efficiency and in helping the efforts for a more sustainable financial system. 

Green transmission: Monetary Policy in the Age of ESG

By Alba Patozi, Phd candidate, Faculty of Economics, University of Cambridge

June 2023

In the context of the current high interest rate environment, senior central bankers such as Isabel Schnabel from the European Central Bank have pointed out that, despite the large upfront costs, green firms may not be as vulnerable to higher interest rates as previously expected. Her recent speech at the Symposium for Central Bank Independence suggests only a mild impact of rising borrowing costs on the Net-Zero transition and no evidence of funding shortages on green investments (Schnabel, 2023). In my research, I ask: Is this observation true more generally and across time? In other words, are green firms more or less responsive to monetary policy shocks? And if so, what explains their sensitivity (or lack thereof)?

To address these questions I use stock market, credit risk and investment data from a sample of US publicly listed firms, which spans the period between 2008 to 2021. To proxy for firm-level greenness, I collect environmental performance score data from MSCI ESG IVA Ratings.  In its framework, MSCI considers a firm to be green if it aims to limit its exposure to both physical and transitional environmental risks. My findings reveal that green firms are considerably less responsive to monetary policy surprises:  In particular, following a 100 basis point surprise in monetary policy, stock prices of green firms fall by around 10% whereas the stock prices of their brown counterparts fall by around 21%. 

To better understand the underlying drivers of the differential responses of green vs. brown firms to monetary policy shocks, I first look at differences in firm-level characteristics. At first glance, it is not obvious whether differences in characteristics should make green firms less responsive to monetary policy changes compared to brown firms. On the one hand, I document that greener firms are smaller and younger on average, pay lower dividends and are mostly classified as growth companies.  On the other hand, I also show that greener firms tend to be on average less leveraged, more liquid and exhibit a larger distance to default compared to brown firms.  I find that while some of these characteristics are important drivers of monetary policy heterogeneity on their own, they cannot explain the dampened sensitivity of green firms to monetary policy shocks.

Theoretical Framework

I show that this dampened sensitivity is the result of investors' preferences for sustainable investing. On the theoretical front, I consider a stylized framework where investors derive additional utility from their holdings of green assets. This model gives rise to two theoretical predictions. First, investors' preferences for sustainable investing dampen the sensitivity of green asset prices to monetary policy shocks. Consequently, this dampened sensitivity is even more attenuated in states of the world with stronger preferences for sustainable investing. Second, contractionary monetary policy shocks lead to a reshuffling of investor portfolios toward green assets. This result stems from an imperfect substitutability between green and brown assets, leading "green" investors to hold onto their green portfolio positions amidst rising interest rates.

Empirical Findings

On the empirical front, I find evidence in support of both model predictions. To proxy for investors' preferences for sustainable investing, I leverage information from the CRSP survivorship-bias free mutual fund database and identify a set of sustainable index funds (i.e. funds with ESG mandates). In line with the first prediction, I show that green firms held by index funds with ESG mandates exhibit a lower sensitivity to monetary policy shocks compared to green firms held by non-mandated funds.  Furthermore, I find that the heterogeneous response of green firms to monetary policy is more pronounced for green firms held by index funds that are located in: (i) regions with high exposure to natural disaster risk; (ii) US counties where climate change beliefs and risk perceptions are stronger; and (iii) times of heightened climate change concerns. In line with the second prediction, using security holdings data from large US institutional investors, I show that the share of green assets in the portfolios of institutional investors rises in response to contractionary monetary policy shocks. 

Additionally, I go beyond the predictions of the stylised model and investigate whether investors make conscious portfolio rebalancing decisions in response to changes in the interest rate environment. In this vein, I investigate whether there are heterogeneities in the funding behaviour of mutual funds with and without ESG mandates. I find supporting evidence of an "active" portfolio rebalancing channel. Notably, following a 100 basis point surprise increase in the federal funds rate, outflows from institutional non-ESG-mandated mutual funds surpass those from ESG-mandated funds by approximately 7 percentage points. This points to a considerable reluctance of institutional investors to unwind their ESG portfolio positions in the face of adverse macro-financial shocks. 

Policy Implications

These findings have important policy implications. First, they inform the current policy debate on whether the recent monetary policy tightening may discourage green firms' efforts to decarbonise. While green investments have relatively large upfront costs, which leave them highly susceptible to changes in the cost of credit, my results suggest that green firms also benefit from a relatively inelastic investor demand. Second, they shed a new light on the role of monetary policy during the Net-Zero transition: All else equal monetary policy may be less powerful in a world where the share of greener firms in the economy increases, or when preferences for sustainable investing intensify. 

[1] MSCI is an ESG score provider which rates firms according to their environmental performance (E), social responsibility (S) and corporate governance (G).

[2] Green (brown) firms are defined as those in quintile five (one) of the firm-greenness distribution.

[3] Existing literature typically associates these characteristics with higher sensitivity to interest rates. See for example Cloyne et al. (2023), Gurkaynak (2022).

[4] Jeenas (2019) and Anderson & Cesa-Bianchi (2020) attribute a dampened monetary policy sensitivity to firms with higher levels of liquidity and greater distance to default.


Anderson, Gareth, and Ambrogio Cesa-Bianchi. "Crossing the credit channel: credit spreads and firm heterogeneity." Bank of England Working Paper (2020).

Cloyne, James, et al. "Monetary policy, corporate finance, and investment." Journal of the European Economic Association (2023).

Gürkaynak, Refet, Hati̇ce Gökçe Karasoy‐Can, and Sang Seok Lee. "Stock market's assessment of monetary policy transmission: The cash flow effect." The Journal of Finance 77.4 (2022): 2375-2421.

Jeenas, Priit. "Firm balance sheet liquidity, monetary policy shocks, and investment dynamics." Working Paper (2019).

Schnabel, Isabel. “Monetary policy tightening and the green transition”, International Symposium on Central Bank Independence, 10 January 2023, Sveriges Riksbank, Stockholm.

Why Do Investment Companies Abandon Sustainability?

By Yuxia Zou, CERF Research Associate, Cambridge Judge Business School, University of Cambridge

May 2023

Public commitments to sustainability by investment companies have been widely criticized as greenwashing practices (Fletcher and Oliver 2022). By adopting a public sustainability commitment, such as by becoming a signatory to the United Nations-supported Principles for Responsible Investment (PRI), investment companies can attract substantial capital, regardless of their ability to deliver promised financial or sustainability outcomes (Brandon et al. 2022; Liang, Sun, and Teo 2022; Kim and Yoon 2022). However, from 2009 to 2021, PRI lost over 1,100 signatories collectively managing assets of US$10 trillion. In 2022, the closure of ESG funds rose disproportionately compared to conventional funds, and leading investment companies such as Blackrock voted against climate-related shareholder proposals (Chen 2022; Masters 2022). Why and when would an investment company abandon its public commitment to sustainability?

In a recent study, I address this question by analyzing the circumstances under which companies delist themselves from PRI, for reasons other than merger, acquisition, or liquidation. The PRI setting is ideal for answering this question because the PRI signatory status is the most internationally recognized signal for an institutional investor to “publicly demonstrate its commitment to including environmental, social and governance (ESG) factors in investment decision making and ownership” (PRI 2022). Established in 2006, PRI is the world’s largest institutional network of sustainable investors, with almost 4,000 signatories managing combined assets of over US$120 trillion at the end of 2021.

Why and when do companies delist?

This study is based on a dataset covering 1,280 unique mutual fund investment companies from 55 countries during 2006-2021, including 125 delisted companies and 1,155 companies that have remained PRI signatories since joining. The United States has the largest number of signatories and the highest delisting frequency, while Brazil, Mexico, and South Africa have the highest delisting rates among countries with at least five signatories covered in the sample.

Companies tend to delist from PRI when they cannot realize the expected benefits, mainly improving risk-adjusted returns, portfolio-level ESG performance, and fund flows. However, fund flow attraction only becomes a significant factor recently. These companies often have fewer internal resources and weaker external support for sustainable investment, such as managing fewer assets, receiving less support from PRI, and operating in countries with worse environmental performance or less progressive social norms.

These results suggest a non-negligible cost for publicly committing to sustainable investment. Only companies that derive sufficient benefits to cover the cost afford to maintain this commitment. Therefore, a long-term public commitment to sustainable investment can be a signal for companies that are capable of “doing well by doing good”.

Costs and Benefits of Mandatory Sustainability Disclosure Standards

So, what are the costs of publicly committing to sustainable investment? One major cost can be due to PRI’s standardized sustainability disclosure mandate, which signatories commonly claim as a primary delisting reason.

This study finds that the frequency of delisting spiked when PRI released the first mandatory disclosure standards for public consultation between September and October 2011, when approximately ten additional investment companies delisted per month. About three more investment companies left every month when PRI extensively consulted signatories to finalize the disclosure standards between September 2012 and September 2013. As companies have been mandated to provide standardized sustainability disclosures since October 2013, their delisting decisions have become more sensitive to realized benefits, suggesting that companies demand more benefits in improving financial and sustainability performance to maintain their PRI signatory status.

These results document the real effects of mandatory sustainability reporting standards, particularly reporting companies’ usage of market exit as a strategy to avoid regulation (Christensen, Hail, and Leuz 2021). Such behaviours resemble companies’ strategic avoidance actions in going dark or private ahead of the 2002 Sarbanes–Oxley Act (Engel, Hayes, and Wang 2007; Leuz, Triantis, and Wang 2008; DeFond and Lennox 2011). Therefore, mandating standardized sustainability disclosures may act as a catalyst to filter out companies more capable of pursuing dual objectives in financial and sustainability performance, hence policing the sustainable investment industry.

Informational Value of Mandatory Standardized Sustainability Disclosures

Given the significant effect of mandating standardized sustainability disclosures, a natural question to ask next is: Does the standardized information provided by signatories predict future delisting decisions?

The answer is ex-ante unclear because, on the one hand, the disclosures mandated for PRI signatories focus on management control systems, which theoretically play an important role in achieving dual objectives in sustainability and profits (e.g., Henri and Journeault 2010; Eccles, Ioannou, and Serafeim 2014; Flammer, Hong, and Minor 2019). Moreover, standardized disclosures can benefit stakeholders by improving transparency and enabling differentiation across companies, even if the standards do not increase the quantity or quality of information (Brochet, Jagolinzer, and Riedl 2013; De George, Li, and Shivakumar 2016). On the other hand, PRI signatories are not required to audit their reports and may have incentives to misreport because PRI grades their reports and provides the grading scheme along with the disclosure standards (Cho et al. 2015; Pinnuck et al. 2021). Surprisingly, results show that reported management control practices effectively predict future delisting. Companies are most unlikely to delist if they provide internal training on sustainable investment, internally assure their sustainability disclosures, and assign individual accountability for sustainable investment performance to a specialized department head.

Hence, despite the freedom and incentives to misreport, companies subject to mandatory disclosure standards provide valuable information that can effectively predict the duration of their sustainability commitment.

What happens after delisting?

If companies prefer not to bear the costs of publicly committing to sustainable investment, would they become better off after abandoning the commitment, or would the market punish them?

In the short term, delisted companies continue to receive similar fund flows as before, but experience improved net returns one year after delisting. In the second and third years after delisting, these companies see a statistically significant 1% increase in fund flows. Hence, delisted companies become economically better off. Changes in portfolio composition can explain the improvement in returns. Delisted companies become “browner” as they allocate more assets towards sin industries and stocks with more ESG controversies. Specifically, the percentage of sin stocks held by delisted signatories surges from about ten months before delisting and is twice as much as that held by the matched stayed signatories during the delisting month. Therefore, delisting from PRI is not merely ditching a label but reflects real changes in investment decisions.

Collectively, this study highlights the cost of public sustainability commitments. This cost includes compliance costs such as mandatory reporting and opportunity costs for imposing a constraint on companies’ investment activities in maximizing financial performance. As a result, only firms with internal resources and external environment to “do well by doing good” can afford to maintain a public sustainability commitment in the long term. Mandating standardized sustainability disclosures increases commitment costs, providing valuable information to stakeholders and helping screen out companies more capable of pursuing dual objectives in financial and sustainability performance. These findings shed light on the potential consequences of standardized sustainability disclosure mandate in the financial sector on a national or international level, such as the Sustainable Finance Disclosure Regulation (SFDR) by the European Commission and  ESG Investment Product Disclosure by the U.S. SEC (European Commission 2022; U.S. SEC 2022).


Brandon, Rajna Gibson, Simon Glossner, Philipp Krueger, Pedro Matos, and Tom Steffen. 2022. “Do Responsible Investors Invest Responsibly?” Review of Finance 26 (6): 1389–1432.

Brochet, Francois, Alan D. Jagolinzer, and Edward J. Riedl. 2013. “Mandatory IFRS Adoption and Financial Statement Comparability.” Contemporary Accounting Research 30 (4): 1373–1400.

Chen, Elaine. 2022. “ESG Fund Closures Pile Up as Do-Good Investing Takes Back Seat.” Bloomberg.Com, July 21, 2022.

Cho, Charles H., Matias Laine, Robin W. Roberts, and Michelle Rodrigue. 2015. “Organized Hypocrisy, Organizational Façades, and Sustainability Reporting.” Accounting, Organizations and Society 40: 78–94.

Christensen, Hans B., Luzi Hail, and Christian Leuz. 2021. “Mandatory CSR and Sustainability Reporting: Economic Analysis and Literature Review.” Review of Accounting Studies 26 (3): 1176–1248.

De George, Emmanuel T., Xi Li, and Lakshmanan Shivakumar. 2016. “A Review of the IFRS Adoption Literature.” Review of Accounting Studies 21 (3): 898–1004.

DeFond, Mark L., and Clive S. Lennox. 2011. “The Effect of SOX on Small Auditor Exits and Audit Quality.” Journal of Accounting and Economics 52 (1): 21–40.

Eccles, Robert G., Ioannis Ioannou, and George Serafeim. 2014. “The Impact of Corporate Sustainability on Organizational Processes and Performance.” Management Science 60 (11): 2835–57.

Engel, Ellen, Rachel M. Hayes, and Xue Wang. 2007. “The Sarbanes–Oxley Act and Firms’ Going-Private Decisions.” Journal of Accounting and Economics 44 (1–2): 116–45.

European Commission. 2022. “Sustainability-Related Disclosure in the Financial Services Sector.” Text. European Commission - European Commission. 2022.

Flammer, Caroline, Bryan Hong, and Dylan Minor. 2019. “Corporate Governance and the Rise of Integrating Corporate Social Responsibility Criteria in Executive Compensation: Effectiveness and Implications for Firm Outcomes.” Strategic Management Journal 40 (7): 1097–1122.

Fletcher, Laurence, and Joshua Oliver. 2022. “Green Investing: The Risk of a New Mis-Selling Scandal.” Financial Times, February 20, 2022, sec. The Big Read.

Henri, Jean-François, and Marc Journeault. 2010. “Eco-Control: The Influence of Management Control Systems on Environmental and Economic Performance.” Accounting, Organizations and Society 35 (1): 63–80.

Kim, S., and A. Yoon. 2022. “Analyzing Active Fund Managers’ Commitment to ESG: Evidence from the United Nations Principles for Responsible Investment.” Management Science.

Leuz, Christian, Alexander Triantis, and Tracy Yue Wang. 2008. “Why Do Firms Go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations.” Journal of Accounting and Economics, Economic Consequences of Alternative Accounting Standards and Regulation, 45 (2): 181–208.

Liang, Hao, Lin Sun, and Song Wee Melvyn Teo. 2022. “Responsible Hedge Funds.” Review of Finance 26 (6): 1585–1633.

Masters, Brooke. 2022. “BlackRock Warns It Will Vote against More Climate Resolutions This Year.” Financial Times, May 10, 2022.

Pinnuck, Matthew, Ajanee Ranasinghe, Naomi Soderstrom, and Joey Zhou. 2021. “Restatement of CSR Reports: Frequency, Magnitude, and Determinants.” Contemporary Accounting Research 38 (3): 2376–2416.

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U.S. SEC. 2022. “Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices.” Proposed rule S7-17–22. United States Securities and Exchange Commission.


The Effect of Employee Satisfaction on Performance in Mutual Funds

By Elias L. Ohneberg, CERF Research Associate, Cambridge Judge Business School, University of Cambridge

April 2023

Society increasingly emphasises well-being and the importance of a healthy work environment. A survey conducted in 2022 by Gallup highlights that 23% of the working population in the United States are unhappy in their jobs. With the growing movement towards better treatment of employees and the mounting evidence of widespread dissatisfaction in the workforce, it is crucial to explore the potential consequences of employee satisfaction on individual employee behaviour and performance, as well as the overall success of organisations.

Existing theoretical evidence suggests that policies that improve employee satisfaction can increase employee effort and productivity via the norm-gift-exchange model (Akerlof, 1982). Suppose there is a social norm for reciprocating gifts, such that a gift received requires a gift in kind. Employees may view employee satisfaction improving policies as a gift from their employer. As a result, employees increase their effort provision as a gift in kind. 

Despite existing theoretical evidence, causal empirical evidence on the relationship is sparse. Determining the precise impact of employee satisfaction on performance in an empirical study is, unfortunately, far from straightforward. Acquiring and measuring employee-level data on performance and satisfaction is challenging due to data availability and the difficulty of defining a precise measure of employee performance. Measuring employee performance is particularly difficult because different job positions have various desired outputs, making the use of a single performance measure impossible. Consequently, previous research has primarily focused on correlating firm-wide employee satisfaction with aggregate firm performance, typically assessed through balance sheet items or stock performance (Edmans, 2011; Green et al., 2019; Huang et al., 2015; Symitsi et al., 2021). Unfortunately, these aggregated company measures are not well-suited for examining the influence of employee satisfaction on individual performance. Multiple factors contribute to employee performance, including their knowledge, skills, motivation, engagement, support from colleagues, and the organisation’s overall effectiveness. As a result, it is difficult to isolate an individual’s contribution to organisational outcomes and attribute those outcomes to their performance. 

To address this issue and provide a more nuanced understanding, my paper with Pedro Saffi (University of Cambridge) explores the role of employee satisfaction on performance in U.S. active equity mutual funds. Mutual funds serve as an ideal setting for this research because they offer a tangible, quantifiable connection between employee effort and performance. Portfolio managers’ decisions within asset management companies to construct portfolios can be readily and accurately evaluated through fund performance indicators, such as fund returns and volatility. Furthermore, changes in these indicators can be directly linked to a manager’s effort and risk-taking. Similarly, the efforts of marketing and sales employees of asset management companies can be assessed through the fund’s ability to gather assets. 

We use approximately one million employee job reviews matched to 437 asset management companies managing 3,266 funds from 2009 to 2019 from to measure employee satisfaction. This rich dataset allows us to compute satisfaction scores for specific sub-groups within each company’s workforce. We evaluate satisfaction levels for employees in positions directly related to mutual fund performance and those in marketing and sales roles, which should influence the assets under management of the mutual funds. 
Despite our ability to define clear and quantifiable performance and satisfaction measures in our mutual fund setting, we must remain careful in our empirical design. Due to our reliance on review data from, a mutual fund is only included in our sample if at least one employee decided to write a review on Therefore, our sample of mutual funds may be subject to selection bias. Selection bias may arise if mutual funds with an existing employee job review on are fundamentally different to mutual funds without an existing review. To account for this potential bias, we employ a Heckman-Selection model. This model tackles our sample selection bias by directly modelling the probability of a mutual fund’s inclusion in our sample. As an essential instrument in modelling sample inclusion, we use the staggered adoption of Anti-SLAPP (Strategic Lawsuit Against Public Participation) laws across the United States. A SLAPP suit is a lawsuit that aims to censor criticism by burying the defendant in legal costs. Anti-SLAPP laws provide extra layers of protection to reviewers on As a result, the passing of Anti-SLAPP laws increased the number of reviews written and lowered average employee satisfaction scores on (Chemmanur et al., 2019).

Even after adjusting for potential selection bias, we still face another significant problem: reverse causality. The effect we estimate using our empirical techniques might be due to improved mutual fund performance causing higher employee satisfaction. For instance, if a mutual fund performs well, the company may generate higher profits, which could allow the company to increase employee benefits that, in turn, impact employee satisfaction. To mitigate this reverse causality concern, we implement an empirical design that exploits mergers between asset management companies. We assert that an individual mutual fund manager cannot influence whether a competitor acquires the asset management company they work for. Consequently, when a high employee satisfaction firm absorbs a manager employed by a low employee satisfaction firm through the acquisition of their company, the employee experiences an external increase in employee satisfaction unrelated to their personal attributes or performance. In line with this idea, we analyse if mutual funds acquired by companies with higher employee satisfaction exhibit superior performance post-merger compared to those acquired by companies with lower employee satisfaction scores.

Throughout all our empirical designs, we find that the employee satisfaction of individuals in investment roles positively influences mutual fund performance. Moving from the lowest to the highest possible employee satisfaction score on the 5-point scale increases mutual fund risk-adjusted performance by 1.44% per year. Additionally, we demonstrate that higher marketing and sales personnel satisfaction is associated with larger mutual funds. Our findings, thus, underscore the importance of employee satisfaction in shaping the success of mutual funds. More broadly, the insights provided by our study highlight the need for companies to consider employee well-being as a potential driver of organisational performance and growth. Through a better understanding of the role of employee satisfaction on job performance, organisations may expand more resources into developing strategies and policies aimed at fostering a positive work environment, which in turn, may lead to improved outcomes for both employees and their companies. 

This blog is based upon my working paper, co-authored with Pedro A. C. Saffi, Satisfied Employees, Satisfied Investors: How Employee Well-being Impacts Mutual Fund Returns (February 21, 2023). Available at SSRN: or

Akerlof, G. A. (1982). Labor Contracts as Partial Gift Exchange. The Quarterly Journal of Economics, 97(4), 543–569.
Chemmanur, T. J., Rajaiya, H., & Sheng, J. (2019). How does Online Employee Ratings Affect External Firm Financing? Evidence from Glassdoor (SSRN Scholarly Paper ID 3507695). 
Edmans, A. (2011). Does the stock market fully value intangibles? Employee satisfaction and equity prices. Journal of Financial Economics, 101(3), 621–640.
Green, T. C., Huang, R., Wen, Q., & Zhou, D. (2019). Crowdsourced employer reviews and stock returns. Journal of Financial Economics, 134(1), 236–251.
Huang, M., Li, P., Meschke, F., & Guthrie, J. P. (2015). Family firms, employee satisfaction, and corporate performance. Journal of Corporate Finance, 34, 108–127.
Symitsi, E., Stamolampros, P., Daskalakis, G., & Korfiatis, N. (2021). The informational value of employee online reviews. European Journal of Operational Research, 288(2), 605–619.


Limited Shareholder Liability on Corporate Tort Rethink

by Xinyu Hou, CERF Research Associate, Cambridge Judge Business School, University of Cambridge

March 2023

For decades, Manville Corporation (formerly Johns-Manville) concealed the adverse health effects of the asbestos in its products. By 1982, the company was facing over 16,500 lawsuits and filed for Chapter 11 bankruptcy reorganization to resolve the cases. Like other mass tort litigations involving public corporations, none of Manville's shareholders were held personally liable for the damages caused by the company. Although the corporation established a pool of funds exceeding $2 billion to compensate claimants, the mounting claims soon dried out the pool, resulting in only a 5.1% payout rate for successful claimants as of 2019.

Without limited liability, shareholders would have been more cautious before investing in a toxic industry and would have had stronger incentives to monitor the firm. This could have potentially prevented corporations from engaging in practices that harm public health and the environment in a large scale. To clarify, limited liability refers to the legal concept of restricting the amount of liability to the assets of the company, shielding investors from personal liability. The question remains, why should shareholders of entities responsible for damages be absolved of any responsibility?

As we enter an age of innovation where AI, robotics, medical implants, and new materials are transforming our lives, this question becomes increasingly crucial. We should acknowledge that limited liability serves as a crucial safeguard to mitigate the risks of investing in a volatile market, enabling investors to take on risky projects and start new ventures. However, we must also recognize the potential damages that corporations can cause and the need to hold them accountable for their actions. Thus, it is important to strike a balance between limiting liability and holding corporations accountable for the harm.

The Coase theorem suggests that if there are no costs associated with contracting, such as fees for lawyers and accountants and information gathering, it would be optimal to allow voluntary creditors and shareholders to negotiate liability rules. However, since contracting is costly, the default legal rule should be the most likely contract that they would agree on, which is the limited liability rule. If the parties desire to switch to an unlimited liability rule, they could do so. However, if the creditors are tort claimants who are involuntarily involved in cases like Manville's, it is hard to negotiate liability rules ex ante. In this situation, the legal system and policies should consider the interests of both parties, as well as the other stakeholders that might potentially benefit from the firms’ productivities.

In my paper "Limited Liability and Scale," I developed a simple theoretical model to analyze the issue of limited liability. While the paper has a law flavor, it is worth mentioning two notions of fairness that are often considered in the law literature on injuries. The first notion of fairness suggests that injurers should be held accountable for the harm they have caused, even if their actions were not wrongful, a form of "an eye for an eye, and a tooth for a tooth." The second notion concerns compensation that makes the victims whole, which aligns with the Common law tort doctrine. While it would be interesting to discuss the philosophy of these two notions, my paper primarily focuses on the economic efficiency aspect, given that we want firms to conduct proper care while still encouraging innovation and scale.

The model considers a firm’s preferences for care and scale, and it shows that the optimal liability rule is determined by the tradeoff between damages to the tort claimants and benefits to the outside stakeholders, such as consumers, workers, beneficiaries of public services, or members of the community who benefit from job creation and reduced crime rates.  We suggest that increasing liability induces better care but also raises marginal costs, which leads to less-than-efficient scale and even the holdup of a valuable project.  Limited liability improves scale but reduces care, and it tends to be more efficient if the benefit from scale is large enough, i.e., when the outside stakeholders have a larger potential value.  

This implies that a one-size-fits-all approach to liability is not appropriate. For firms with advanced technology and natural monopoly power, the choice of scale does not capture all the benefits and can be too small. In such cases, limited liability can help balance externalities and increase scale. Conversely, for firms operating in highly competitive markets (where products are easily replicable), full liability may be necessary to achieve social efficiency. This finding can also extend to the labor market where firms have varying levels of monopsony power.

This logic can be used to interpret policies. For instance, one reason for corporate income tax can be seen as a safety net for tort claimants. If the only way that the firm is profitable is to generate tort claims, then imposing an income tax that takes away 40% of the upside may improve overall efficiency. The literature has studied policies such as requiring insurance and capital to improve limited liability, which in effect increase actual shareholder liability coverage. The model can be used to analyze the combined impact of these policies and limited liability as well.

In practice, there is still more question to ask: how to allocate liability for firms with multiple shareholders if an extra liability is ideal? One possible solution could be to adopt the "joint and several" unlimited liability rule, which is commonly used in partnerships, where the creditors can go after the deep-pocket investors. This rule works better for closely held corporations but may not be practical for public corporations as it requires significant information gathering and verification.  Additionally, the deep pockets could hide their assets strategically (such as through as trust fund) or find someone without assets to delegate their investments.  Alternatively, a "pro rata" liability rule, which assigns liability proportional to shareholding, could largely solve the information problem. This could be implemented by requiring partial liability coverage on top of the limited liability rule.  However, the question of how to allocate liability becomes more complex when considering shareholders whose interests do not align, as well as bondholders who may also be responsible. These issues are not addressed in the current paper and is left for future studies. 

[1] X. Hou. Limited Liability and Scale, 2023. (paper in progress)
[2] K. J. Delaney. Strategic bankruptcy. University of California Press, 1992.
[4] F. H. Easterbrook and D. R. Fischel. Limited liability and the corporation. The University of Chicago Law Review, 52(1):89–117, 1985.
[5] H. Hansmann and R. Kraakman. Toward unlimited shareholder liability for corporate torts. Yale LJ, 100:1879, 1990.


The Pricing of Foreign Exchange and the Unique Role of US Dollar Risk

By Brandon A. McBride, CERF Research Associate, University of Cambridge Judge Business School

February 2023

Trading in over-the-counter foreign exchange (FX) markets reached $7.5 trillion per day in April 2022 across all FX instruments (BIS, 2022), making it the most actively traded asset class, globally. However, the determinants of exchange rates are still illusive to many in both academic and policy-making circles. Are interest rates the fundamental exchange rate drivers? What role do risk-averse agents play? Can understanding the unique role of the US in the international monetary system better inform our understanding of observed currency prices? These are the questions at the heart of the empirical international finance literature.

FX literature is governed by the central uncovered interest rate parity (UIP) condition, the efficient markets hypothesis of currency markets. UIP states that, given risk-neutrality and rational expectations of agents, expected exchange rate changes must be offset by interest rate differentials. However, Fama (1984) evidenced that, post Bretton-Woods (early 1970s), UIP failed to hold in the data. To reconcile such deviations, the consensus was naturally to relax the unrealistic assumption of risk-neutrality, allowing agents to incorporate risk-averse preferences into the pricing of FX. This, in turn, has led to an international finance research agenda intent on identifying risk factors for which agents demand compensation for bearing their underlying macroeconomic risks, in order to reconcile UIP.

The seminal work of Lustig and Verdelhan (2007) presented a turning point in the FX literature. Their paper was the first to bring the techniques of the asset pricing literature to FX markets, investigating a broad cross-section of currencies, as opposed to bi-lateral time-series studies. This portfolio–sort-based approach has now become the convention in the literature, allowing researchers to incorporate the methods long implemented to study pricing in equity markets; using multi-factor models to capture the variation in the stochastic discount factor (SDF), and provide a risk-based explanation of returns (e.g., Fama and French, 1992).

The SDF is what asset pricing is all about. Throughout the literature, the SDF is a linear model which contains factors. Under some general assumptions, such as the law of one price and no-arbitrage, this SDF is positive, and it represents the observed risk premia in the pricing of FX.

This is captured by the covariation of currency returns with the selected factors, specified to capture shocks that, a priori, are thought to impact exchange rates. It is in the identification, measurement and fundamental understanding of these factors that we gain insight into the drivers of FX prices. Therefore, our question boils down to: which factors are really important?

Lustig, Roussanov and Verdelhan (2011) identify a common two-factor structure, which has formed the baseline risk factors in the literature. The first factor is a level factor, representing the returns to a US investor going long in an equally-weighted portfolio of foreign currencies, which the authors term the Dollar risk factor. The second factor is a carry trade factor, capturing the excess returns investors make to borrowing in low interest rate and investing in high interest rate currencies – a conventional carry trade investment strategy. It is well understood that the carry trade strategy is capturing a premium for investors bearing the risk of FX volatility (Menkhoff et al., 2012). This means that such a strategy pays-off well in good times and poorly in bad times, intuitively causing a more volatile consumption stream that risk-averse agents wish to hedge their bets against. However, the literature is divided on the Dollar risk factor. There appears no consensus on its risk exposures, nor even acceptance of is statistical significance in capturing time-series or cross-sectional variation in FX prices. Could decomposing the underlying risk exposures of this factor allow us to better understand the UIP risk premium component?

The Dollar risk factor has a number of key characteristics. Firstly, in all investment strategies it is the first principal component, capturing most of the variation in portfolio-sorted returns. Secondly, the statistical significance of this factor wavers over varying time-periods, as well as by the magnitude of the sample cross-section. Nucera, Sarno and Zinna (2022) provide the most significant empirical evidence of the importance of the Dollar risk factor to date, highlighting, robust to omitted-variable and measurement-error biases, that the Dollar risk factor is statistically and economically significant in a broad cross-section of FX. Intuitively, this risk premium is compensating for the appreciation of the US Dollar (the short leg of our portfolio strategy) in bad times, which increases the volatility of our consumption. But what drives this risk for which investors demand to be compensated? What are the macroeconomic shocks to the SDF that this risk factor is capturing? What is unique about the US Dollar that it warrants its own risk factor?

The uniqueness of the US and the US Dollar in the international monetary system has been heavily documented throughout the international economics literature, dating back to the early days of Bretton-Woods. The role of the US manifests itself through various channels. The Dollar has a funding advantage, such that safe Dollar bonds have lower returns (Du et al., 2018). There is also a Dollar debt dominance, through which a large, outsized quantity of Dollar-denominated bonds exist relative to the total wealth share of the US (Ivashina, 2015). This reflects the characteristic exorbitant privilege of the US (a phrase first coined by Valéry Giscard d’Estaing, the French Minister of Finance in the 1960s, as France signalled its intent to exchange its US reserves for their gold-backed value, signalling the end of the Bretton-Woods era). As such, the demand for Dollar debt, and particularly the flight-to-safety feature during global downturns (Jiang et al., 2018), allows for the US external portfolio to leverage safe Dollar assets with long risky foreign asset positions (Gourinchas and Rey, 2007). To top it all off, in the face of recent spiralling inflation, we have also observed the impact of the Global Financial Cycle (GFC) phenomenon, through which US monetary policy has a disproportionately outsized role in the macroeconomic outcomes for countries around the world, causing an aggregate excess spillover effect (Miranda-Agrippino and Rey, 2022).

Jiang, Krishnamurthy and Lustig (2022) have developed a structural model to reconcile these unique US features in equilibrium. Their central assumption is that US Treasurys carry a premium, a convenience yield (as evidenced by Jiang et al., 2021), as they are particularly safe and therefore highly valued by foreign investors to hedge against bad times. This emphasises the importance of US-specific shocks, and the global impact of their spillover and contagion effects for foreign countries: the GFC that we observe today, this high degree of co-movement in risky asset prices around the world, is in fact a Dollar Financial Cycle! Furthermore, if this equilibrium is representative, it foreshadows a Triffin (1960) Dilemma of the same style as the Bretton-Woods downfall, with the floating exchange rate regime and free capital mobility mechanism operating under a de-facto Dollar standard with persistent, perpetual asymmetric financial spillovers.

Undoubtedly, there exists a strong theoretical and intuitive basis for the existence of the Dollar as a common risk factor driving FX fluctuations. It naturally explains the general role of the US as the hegemon that we observe in international financial markets. However, we need greater empirical evidence of the central macroeconomic shocks that result in and from this underlying mechanism. Only in better understanding the risks that play-out in the real economy can we determine the risk-return behaviour of agents in financial markets, and provide a better real-world economic foundation on which to develop equilibrium models of FX pricing.


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Fama, E.F. 1984. “Forward and Spot Exchange Rates.” Journal of Monetary Economics, 14(3): 319-338.

Fama, E.F., and French, K.R. 1992. “The Cross-Section of Expected Stock Returns.” The Journal of Finance, 47(2): 427-465.

Gourinchas, P., and Rey, H. 2007. “International Financial Adjustment.” Journal of Political Economy, 115(4): 665–703.

Ivashina, V., Scharfstein, D.S., and Stein, J.C. 2015. “Dollar Funding and the Lending Behaviour of Global Banks.” Quarterly Journal of Economics, 130(3): 1241–1281.

Jiang, Z., Krishnamurthy, A., and Lustig, H. 2018. “Foreign Safe Asset Demand for US Treasurys and the Dollar.” American Economic Association Papers and Proceedings, 108: 537–541.

Jiang, Z., Krishnamurthy, A., and Lustig, H. 2021. “Foreign Safe Asset Demand and the Dollar Exchange Rate.” The Journal of Finance, 76(3): 1049-1089.

Jiang, Z., Krishnamurthy, A., and Lustig, H. 2022. “Dollar Safety and the Global Finance Cycle.” Working Paper.

Lustig, H., and Verdelhan, A. 2007. “The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk.” American Economic Review, 97(1): 89-117.

Lustig, H., Roussanov, N., and Verdelhan, A. 2011. “Common Risk Factors in Currency Markets.” The Review of Financial Studies, 24(11): 3731-3777.

Menkhoff, L., Sarno, L., Schmeling, M., and Schrimpf, A. 2012. “Carry Trades and Global Foreign Exchange Volatility.” The Journal of Finance, 67(2): 681-718.

Miranda-Agrippino, S., and Rey, H. 2022. “The Global Financial Cycle.” In Gopinath, G., Helpman, E., and Rogoff, K. (Volume 6.) Handbook of International Economics. Amsterdam: North Holland, 1-43.

Nucera, F., Sarno, L., and Zinna, G. 2022. “Currency Risk Premia Redux.” Working Paper.

Triffin, R. 1960. Gold and the Dollar Crisis: The Future of Convertibility. New Haven, CT: Yale University Press.


                                                                                                                                                                     Corporate Social Responsibility Committee: International Evidence

This paper is the Winner of the Cambridge Finance Best Student Paper Award 2022

By Yuxia Zou, CERF Research Associate, Cambridge Judge Business School, University of Cambridge

January 2023

During the past few decades, corporate social responsibility (CSR) issues have attracted enormous attention from regulators and the investment community around the world. Until now, the most widely adopted measure is CSR-related reporting, which is believed to be a critical ingredient in achieving broader CSR goals. Another measure that has grown in popularity among publicly listed firms in recent years is the formation of a separate board committee dedicated to CSR-related issues, the CSR committee. The percentage of publicly listed firms worldwide with CSR committees increased from 5.5% in 2002 to 14.2% in 2018. Given the emerging trend in CSR committee adoption worldwide, the natural questions to ask are: What incentives are behind firms’ decision to establish CSR committees? Does having a separate board committee dedicated to CSR issues bring any real effects to a firm’s operations and CSR performance? In a recent study co-authored with Associate Professors Jenny Chu and Xi Li, we address these two questions using a comprehensive dataset on board committees for more than 19,000 publicly listed firms across 96 countries between 2002 and 2018.

We first explore what motivates firms to have distinct CSR committees on their boards. We argue that CSR committee adoption is associated with both country-level and firm-level incentives. At the country level, we predict that the prevalence of CSR committee adoption is positively associated with CSR-related legislations, norms towards environmental and social issues. Consistent with our expectations, we find CSR committees are more prevalent in countries with effective CSR reporting regulation, more stringent environmental policies, and stronger social norms.

At the firm level, we argue that the decision to form a CSR committee reflects the tradeoffs between both internal and external costs and benefits associated with having a distinct CSR committee. Internally, having a separate committee enhances both the advising and monitoring roles of the board. Externally, establishing a CSR committee signals a firm’s sustainability culture and its determination to tackle CSR issues. Such a signal could help attract CSR-conscious employees, customers, and investors, ultimately enhancing firm value. However, having a separate CSR committee is not costless and the costs mostly incur internally. Existing directors may not have the experience or expertise to advise or monitor CSR policies or activities. Even if they do, assigning them to an additional committee may increase their workload. The searching costs arise when firms need to hire suitable directors to sit on the CSR committee, as the pool of candidates might be limited. Information segregation might also occur with a separate committee when directors outside of the CSR committee are not aware of the committee’s activities. This might in turn reduce the usefulness and relevance of advice made by committee members who lack certain firm-specific information.

We find that firms’ decision to adopt CSR committees is shaped by the tradeoffs between the costs and benefits of having a separate committee dedicated to CSR issues. Externally, the adoption decision is more common among firms with higher shareholder and stakeholder demands for CSR activities, such as firms operating in high-polluting industries, experiencing more frequent negative environmental or social incidents, and having a larger proportion of foreign shareholders and customers. Internally, firms with larger, more connected, and less busy boards are more likely to adopt CSR committees as they benefit more from improved task division and enhanced director accountability and face lower searching costs.

Next, we assess the effectiveness of having a separate CSR committee. On the one hand, having a dedicated CSR committee could improve the firm’s CSR performance by enhancing the advising and monitoring role of the board on CSR-related issues. On the other hand, firms may use CSR committees as a window-dressing device in response to CSR-related concerns raised by various stakeholders and to meet investors’ demand. Furthermore, the presence of a separate CSR committee on the board could be a part of a firm’s overall culture that emphasizes sustainability, and it is often correlated with other organizational structures and policies aiming to achieve CSR goals. Therefore, it is unclear whether the CSR committee itself has any impact on the firm’s CSR performance.

Many investors view CSR issues as a risk factor, hence our primary measure of CSR performance is CSR risk, computed as the frequency of negative environmental and social incidents during a year. To further address the endogenous nature of firms’ decision to establish CSR committees, we employ a two-stage least-squares (2SLS) approach by using the connectedness of non-CSR directors with CSR directors at other firms as an instrumental variable (IV). Our 2SLS regression results indicate that adopting CSR committees is not associated with any changes in firms’ CSR risk in the first year following the adoption. However, when we expand the time horizon of the CSR risk measure, we start to observe a negative association in the second year following the adoption, and this negative association becomes statistically significant in the third and fourth years. These findings suggest that the presence of CSR committees reduces firms’ CSR risk in the long run.

Given the effect of CSR committees in decreasing CSR risk, we lastly explore the influence of CSR committees on firms’ operations. We observe that CSR committees are negatively associated with firms’ subsequent profitability, measured by return on assets (ROA), capital expenditures, and sales growth. This negative impact on operations is long-lasting as firms’ profitability and investment are reduced up to four years after establishing a CSR committee.

Together with the results on CSR risk, these findings provide support for the abandonment argument first put forth in the context of CSR reporting. In our context, due to heightened scrutiny by the CSR committees, firms abandon or scale back CSR-controversial business activities and investments to reduce CSR risk. In summary, our consequences analysis suggests that on average, CSR committees bring about real changes at these firms. Establishing dedicated CSR committees helps reduce CSR risk by increasing board scrutiny of firms’ operations and investments.