Can Publicly Disclosed Ethical Exclusions Change Ownership Structures and Firm Behavior?
We investigate the impact of investment portfolio exclusion announcements by a large institutional shareholder, Norges Bank Investment Management (NBIM), on short-term stock price changes, the exclusion behaviors of other investors, ownership composition, and changes in firm behavior. Our findings indicate that market participants respond negatively to the exclusion disclosures with an average abnormal return of -0.5% within a three-day window surrounding the announcement. Announcements due to environmental concerns and socially harmful products are associated with the most negative market reactions. Furthermore, our results show that firms that are excluded from NBIM’s portfolio are on average seven times more often excluded by other institutional investors. In the short term, mostly sovereign wealth funds follow NBIM’s decision to divest while banks and trusts tend to increase their holdings. Despite these shifts in ownership, we observe, on average, no changes in firms’ ESG performance, financial performance, leverage, or sales following the exclusion announcement. However, exclusions that prompt a broader investor withdrawal are associated with significant short-term improvements in ESG performance and a reduction in leverage. This suggests that the exclusion by a notable investor can influence short-term market perceptions and ownership structures but is only successful in changing firm behavior when a wider investor base divests.