Investors’ perception of firms’ ESG focus: Evidence from staggered adoptions of the Benefit Corporations law in the US.

Benefit Corporations (BC) pursue a dual purpose: maximization of profits and generating societal and environmental benefits. BCs are becoming popular across the globe, with BC laws being passed in dif- ferent countries. To date, BC laws have been passed in 43 US states and several countries in Europe and South America. Using the stag- gered adoption of BC law across US states, we examine how investors reacted to this law. We find that investors reacted negatively to the passing of the law. Our results are robust in using alternate measures of abnormal returns and excluding firms in the financial services sec- tor. Moreover, our results are robust regarding entropy balancing the three moments. This suggests that investors in the US do not favor cor- porations adopting a dual purpose (as opposed to a solo focus on profit maximization). We further find that the negative reaction is predomi- nantly for smaller and loss-making firms. Since most of the BCs in the US are, in fact, small in size, investors expect smaller firms to adopt the BC status. We also find that investors’ negative reactions softened after the onset of the COVID pandemic when the focus on ESG saw an exponential increase. As an additional analysis, we are replicating our work in the Italian context, as it was the first European country to adopt the BC law. Our results are significant for stakeholders, including investors, boards, regulators, and analysts