Abstract
PurposeThis paper shows that local mutual funds lead firms to engage in corporate social activities locally - corporate community investment (CCI).Design/methodology/approachUsing an extensive US sample of 3,691 firms for the period of 2005-2018, we find that mutual funds investing in local firms tend to increase CCI. To address endogeneity concerns, we employ an instrumental variable (IV) approach with the S&P 500 Index and Russell 1000/2000 Indexes, which suggests a causal effect of local mutual funds on CCI. Our robustness tests include alternative measures of CCI and local ownership as well as different samples using sole-HQ firms, time lags and a matching sample analysis. In addition, we employ alternative approaches for causality tests.FindingsWe find that mutual funds investing in local firms tend to increase CCI. In addition, our results indicate that CCI tends to increase firm performance measured with Tobin's Q and operating cash flow, especially in the consumer-oriented industries where customer relations are critical. The findings imply that CCI is considered as building reputational and relationship capital in communities (i.e. strategic intangibles related to stakeholders). Local mutual funds can help firms develop such strategic intangibles that promote shareholder value.Originality/valueOur study is the first to investigate the role of local institutional shareholders as a driving force of a firm's community investments.