Nations Global Compact, highlighting the increasing relevance of ESG issues for investment practices. As of April 2017, 1713 sig-natories from over 50 countries representing US$68.4 trillion have signed on to the UNPRI (UNPRI, 2017).Modern RI provides a more dynamic framework within which to conduct a positive, proactive and comprehensive review of aportfolio firm's operations as well as its social and economic impacts. For example, within the ESG incorporation framework, in-stitutional investors can employ the ESG integration approach to better manage risk-adjusted returns by including ESG considerationsin investment processes in an explicit and systematic manner regardless of the inherent “sinfulness” of portfolio firms. Similarly,adopting the “best-in-class” investing approach instead of the exclusionary screening approach, institutional investors may not ex-clude all firms in the “sin” industries from their portfolios. Rather, they include firms in these special industries that are making thegreatest effort to improve their social responsibility. In addition, within the shareholder activism framework, institutional investorsmay adopt the proxy voting approach by using their ownership rights to put more weight on social responsibility and hence influ-encing firm operations in the “sin” sectors. Alternatively, they can use the engagement approach by simply discussing ESG issues withportfolio companies to improve their handling (Friedman and Miles, 2001; Solomon et al., 2002; UNPRI, 2020).While such a comprehensive approach to modern RI allows institutional investors to pursue RI in the “sin” industries for the firsttime, scant research has examined the following questions: Does RI occur in these special sectors. If so, how? What is the impact of RIon these previously excluded sectors? Can both financial goals and social objectives be pursued through RI in these sectors? Such astudy of RI is imperative for the “sin” industries due to their negative impacts on societies (e.g., various health, environmental, andsocial problems). Therefore, an investigation of modern RI in the “sin” sectors could shed new light not only on the role of in-stitutional ownership in these special sectors but also on the mechanism of modern RI in general.The prior mainstream research adopts traditional RI theory with a focus on exclusionary screening and therefore implicitlyassumes that no RI occurs in the “sin” industries. As summarized by Capelle-Blancard and Monjon (2012), most of the existing paperson RI focus on investigating whether the institutional investors adopting the traditional RI approach meet their ethical objectiveswithout compromising financial returns. Specifically, these studies compare the return of sin-industry portfolios with that of theircounterparts to examine whether there is any “sin” stock premium, and the results are mixed. For example, employing a sample oflisted firms in the U.S. over the period from 1962 to 2006, Hong and Kacperczyk (2009) find that “sin” stocks are less held by norm-constrained institutional investors such as pension funds than by mutual and/or hedge funds and generate higher expected returnsthan those of comparable stocks. The result remains unchanged when the analysis is extended to international markets includingCanada, France, Germany, Italy, the Netherlands, Spain, Switzerland, and the UK. In general, this finding suggests that the neglect of“sin” stocks by large institutional investors may significantly affect their cost of capital. In contrast, using a sample of stocks listed onthe FTSE All-World index from January 2002 to December 2013, Adamsson and Hoepner (2015) find no “sin” stock premium at theglobal level and conclude that “sin” stocks perform similar to the markets in most cultural settings. Similarly, Hoepner and Schopohl(2018) investigate the performance implications of the exclusion decisions (based on the sector and norms) of two leading Nordicinvestors and find that these exclusion decisions do not harm fund performance in general.This study aims to complement the literature by investigating the presence and mechanism of modern RI in the “sin” industry aswell as its financial impact on portfolio “sin” stocks. Specifically, this study examines the relationship between ESG-related gov-ernment initiatives and the institutional ownership of casino firms in Macao, the world's gaming capital, and it analyzes the impact ofthis relationship on the equity risk management of these casino firms from March 2010 to June 2015. The investigation of Macao'sgaming sector is of particular interest because this small gambling jurisdiction has grown into the world's largest casino capital, witha gross gaming revenue that is seven times higher than that of Las Vegas in 2013 (Schwartz, 2015). Macao's GDP per capita reachedUS$96,037 in 2014, the third highest in the world (Lin et al., 2017). During the sample period, Macao had six casino firms, and all ofthem were listed on the Hong Kong Stock Exchange (HKSE). These casinos have attracted a large number of investors because theyare the most profitable casinos in the world. Nevertheless, Macao's stock prices have also experienced wild fluctuations over the pastdecade (Bradsher, 2012; Song et al., 2012; Barnato, 2015). Financial risk as measured by stock return volatility has importantimplications for a firm's cost of capital (Leung and Lee, 2006) and stock-based compensation (Hartzell and Starks, 2003), and it ismore relevant for the gaming industry, which is increasingly becoming more capital-intensive (Tsai et al., 2011). Given the growingimportance of institutional investors in the gaming industry (Tsai and Gu, 2007), examining the impact of institutional ownership onstock return volatility in this industry has substantial merit.The previous studies concerning the effects of institutional ownership on the gaming industry do not consider RI at all (e.g., Tsaiand Gu, 2007; Lin et al., 2017). This study fills the gap by first investigating whether and how RI occurs in the gaming industry byexamining the relationship between the four ESG-related government initiatives (including an anticorruption campaign, visa re-striction, smoking bans, and responsible gambling) and institutional ownership. In particular, following Williams (2010), this studydevelops a theoretical framework employing both the comparative and option valuation approaches and the discounted cash flowvaluation method to illustrate how the implementation of four ESG-related government initiatives spurs the institutional ownershipof casino firms in Macao. Second, to account for heterogeneity among institutional investors, we follow Hong and Kacperczyk (2009)to divide the institutional investors into two categories, norm-constrained institutions and natural arbitrageurs, and we examinewhether their responses to the implementation of ESG initiatives are different. We also study whether institutional investors indifferent types of casino firms (local, joint, and foreign) perceive various ESG-related government initiatives differently. Finally, weexamine whether RI can generate any financial gains in this special industry by estimating the mediating effect of institutionalownership on the relationship between the ESG-related government initiatives and the stock return volatility of the portfolio casinofirms.The results show that institutional investors do pursue RI in the “sin” industries as the implementation of all four ESG-relatedgovernment initiatives leads to a significant increase in the institutional ownership of casino firms. Moreover, these institutionalX.M. Fu, et al. Journal of Corporate Finance 64 (2020) 1016572
investors are not one homogeneous group. The norm-constrained institutions are more sensitive to the ESG improvements than thenatural arbitrageurs. Specifically, the former significantly increases their shares of casino stocks when ESG-related initiatives areintroduced whereas the latter does not demonstrate any significant response to the ESG-related initiatives. This finding suggests thatthe norm-constrained institutions are the key performers of RI in this special sector. The analyses on the main drivers of RI suggestthat ESG integration can improve the risk and return profile of institutional investors' portfolios because ESG risks are more likely tomaterialize and externalities not borne by the portfolio companies are more likely to be priced into the value of securities overextended time horizons. The heterogeneous results obtained from local, joint venture, and foreign subsamples provide further evi-dence for the profound role of the norm-constrained institutional investors in RI. They also hint at the important function of financialanalysts in promoting RI.Turning to the mediating effect, the results show that institutional ownership in general has a significantly negative mediatingimpact on the relationship between ESG initiatives and stock return volatility, suggesting that RI is conducive to a lower equity riskfor casino firms. Similarly, the mediating effect varies with different types of institutional ownership as well as different types ofcasino firms. Specifically, a significantly negative mediating effect on the relationship between the ESG initiatives and stock returnvolatility is witnessed for the norm-constrained institutional investors whereas no significant mediating effect is observed for thenatural arbitrageurs. Furthermore, the institutional investors in both local and joint casinos have no significant mediating impact onthe relationship between ESG initiatives and stock volatility. Nevertheless, for foreign casinos, increasing institutional ownership isfound to reduce stock volatility significantly. The mediating effect therefore varies with their responses to the implementation of fourESG-related government initiatives. Finally, a direct effect is observed between smoking bans/responsible gambling and stock vo-latility in the majority scenarios.To check the robustness of our results, we first use the lagged values of regressors and bootstrapping analysis to address thepotential endogeneity problem and the problem of non-normal distribution in mediation tests, respectively. Then, we re-run theregressions for the three subsamples (i.e., local, joint ventures, and foreign) using the norm-constrained institutional ownership andthe natural arbitrageurs' ownership, respectively, to determine if the pattern of RI is maintained. Finally, we supplement our mainresults concentrating on total risk (i.e., the standard deviation of the returns) with additional tests focusing on the idiosyncratic risk(i.e., the standard deviation of the residuals) of casino stocks. Overall, the key findings are robust, providing empirical evidence forthe theory of modern RI and suggesting that norm-constrained institutional investors play a key role in channeling the merits of theESG-related initiatives for casino firms.This study complements the existing literature in the following ways. First, to the best of our knowledge, this is the first study toanalyze the paradox of RI in the “sin” industry by investing its presence and mechanism in that previously abandoned sector. Second,this study supplements the existing literature on the institutional investors' role in building a sustainable and inclusive economy byexploring the transmission mechanism between government ESG-improving initiatives and the performance of portfolio companies.Finally, this study helps to lay the groundwork for further investigation of RI in the “sin” industries.The remainder of the paper is organized as follows. Section 2 presents the theoretical framework. Section 3 introduces themethodology and data. Section 4 discusses the empirical results. Section 5 concludes the paper.2. Theoretical framework2.1. Evolution of RIAs summarized in Sparkes and Cowton (2004), Renneboog et al. (2008), Capelle-Blancard and Monjon (2012), and Schopohl(2017), RI was initially regarded as a form of ethical investment, which refers to the adoption of a negative screening approach toexclude “sin” firms from investment portfolios on religious grounds. So-called “sin” firms mainly include those involved in gamblingand in the production of alcohol, tobacco, and weapons. Ethical investment has its roots in Jewish, Christian, and Islamic traditions.For example, ethical restrictions on investments were based on the Old Testament in medieval Christian times. In the 18th and 19thcenturies, religiously motivated investors such as the Quakers and Methodists associated investments with their religious beliefs byrefusing to profit from the weapon/slave trade and the sinful trade/exploitation of others, respectively. In addition, based on theKoran, Islamic investors avoid investing in firms involved in gambling, pornography, and pork production and in interest-basedfinancial institutions.Since the 1960s, a series of social campaigns such as antiwar/antiracist movements and a heightened sense of environmentalismhave made investors aware of the social and environmental consequences of their investments. Against this backdrop, the religious/ethical grounds for investment strategies were gradually substituted by economic concerns regarding the social costs and negativeexternalities of socially irresponsible corporate conduct. Modern RI emerged to scrutinize firms based on ESG criteria, and new formsof RI strategies such as ESG incorporation and active ownership have gained ground. Specifically, the framework of an ESG in-corporation strategy mainly encompasses two approaches, the integration of the ESG criteria and the positive screening/best-in-classinvesting approach, while the framework of active ownership covers shareholder engagement and proxy voting approaches. An ESGincorporation strategy places more weight on firms that show strong ESG performance when building an investment portfolio whilethe shareholder activism strategy focuses on using ownership rights to influence the corporate behaviors of portfolio firms in a moresocially responsible direction. Both strategies enable RI in the “sin” industries. On the one hand, an ESG incorporation strategyimplies that responsible investors do not exclude all “sin” sectors from their investment portfolios. Instead, they include “sin” sectorfirms that demonstrate good ESG performance and/or make the greatest effort to improve their social responsibility (Solomon et al.,2002; Capelle-Blancard and Monjon, 2012). On the other hand, a shareholder activism strategy allows responsible investors to engageX.M. Fu, et al. Journal of Corporate Finance 64 (2020) 1016573
with firms in the “sin” sectors with the aim of improving their corporate behavior (Friedman and Miles, 2001; Sparkes and Cowton,2004).Since the early 1990s, modern RI has undergone dramatic growth worldwide. Issues such as environmental protection, laborrelations, human rights, and corporate governance have become essential in RI screens. According to the official UNPRI website(https://www.unpri.org/), an increasing number of global institutional investors have committed to the UNPRI, emphasizing thatinvestors will incorporate ESG considerations into their investment processes and promote RI in the market. In April 2006, when theUNPRI was launched, it had 100 signatories that together accounted for US$6.5 trillion assets under management whereas it had1713 signatories representing US$68.4 trillion assets under management in April 2017. In addition, this investment movement is notlimited to specialized financial institutions. Rather, many large institutional investors including pension funds have been joining themodern RI movement. For example, Wen (2009) documents that approximately 80% of UK pension scheme members require theirschemes to report on how they incorporate ESG issues into their investment processes. In addition, Sara et al. (2017) indicate thatsome of the world's largest institutional investors, such as the Government Pension Investment Fund of Japan, Norway's GovernmentPension Fund Global, and the Dutch pension fund ABP, all incorporate ESG factors into their investment processes. Furthermore,according to the European Social Investment Forum (EUROSIF), the majority of RI is performed by large institutional investorswhereas individual investors account for only a small proportion of total RI (EUROSIF, 2010).Overall, the evolution of RI has featured tremendous changes in the following four respects. First, traditional RI focuses onreligious issues whereas the ESG factors are the core of modern RI. Second, traditional RI mainly adopts a negative screening strategywhereas modern RI extends it by encompassing the ESG incorporation and shareholder activism strategies. Third, in terms of theamount of assets under management, traditional RI is on a much smaller scale whereas modern RI has reached a phenomenal size.Fourth, in terms of the main participants, traditional RI is mainly limited to religious groups whereas modern RI has a much broaderset of investors actively involved, including institutional investors (Schopohl, 2017). As a result, RI in the “sin” industries has becomea possible mission under the framework of modern RI.2.2. ESG externalities and intuitional ownershipUnder the framework of modern RI, institutional investors build portfolios with the best-expected risk-adjusted returns by takingaccount of ESG externalities, that is, delivering ESG benefits without compromising financial returns for their beneficiaries (UNPRI,2020; Schanzenbach and Sitkoff, 2020). From an economic perspective, Williams (2010) argues that modern RI addresses variousESG externalities that are closely related to portfolio companies' activities. These externalities may have a material impact on both theshort- and long-term returns of portfolio assets. Therefore, the good management of ESG externalities may result in increased profitswith reduced risk and hence increase shareholder value. Those benefits are sustained by the option values and comparative valuationapproaches as well as the discounted cash flow valuation method (DCFV) that computes the present value of future cash flowsadjusted by risk.Taking low-carbon production as an example, there is a price premium for the low-carbon producers, as consumers are in-creasingly willing to pay more for such environmental friendly products. Meanwhile, fewer carbon taxes or emissions penalties arebeing charged thereby reducing their costs. According to the comparative valuation approach, higher prices and lower costs generatebetter profits in the short-term. Based on the option values approach, such environment-friendly producers would have better futurebusiness opportunities than companies that pollute the environment. Therefore, low-carbon production would also be able to obtainbetter returns in the future. In addition, companies with a poor relationship with their employees, customers, and local communitieswould have to confront more investment risk caused by strike action, consumer boycotts, and regulatory challenges. Furthermore,companies with poor corporate governance would have lower chances of avoiding the occurrence of financial scandals. Based on theDCFV model, these poor ESG-managed companies would have higher risks in the future so that the present value of their future cashflows adjusted by risks would be lower than that of well ESG-managed companies. Consequently, their expected risk-adjusted returnwould also be lower than their counterparts. In short, employing an RI strategy not only adds value for responsible institutionalinvestors (and hence their beneficiaries), but it also creates benefits for society and the environment in both the short- and long-terms.Some meta-analyses provide evidence to support this view (e.g., Orlitzky et al., 2003; UNEP FI, 2006; Mercer and LGT CapitalPartners, 2015). In particular, UNEP FI (2006) makes a global effort to explore how ESG considerations are of importance forcompany valuation and relevant to investment decisions. That comprehensive study is based on twelve reports from more than tenbrokerage houses internationally, covering a wide variety of industries. The main findings confirm that institutional investors canreduce portfolio risk and potentially increase profits if they consider ESG issues in investment decision-making processes. In addition,institutional investors can tap into a growing market by incorporating ESG issues in core investment processes. According to a recentsurvey of 97 institutional investors in 22 countries by Mercer and LGT Capital Partners (2015), the majority of institutional investorsactively consider ESG externalities when making alternative investment allocations because most of them believe ESG improves risk-adjusted returns and is an important aspect of risk and reputation management. Another recent meta-study by Friede et al. (2015)examines ESG and corporate financial performance across over 2000 academic studies published since 1970. They find an over-whelming share of positive results and just 10% of the studies showing a negative relationship, which serves as evidence thatinvestment strategies embedding ESG considerations lead to better performance in the long-run.2.3. Norm-constrained versus natural arbitrageursTo account for heterogeneity among institutional ownership, we follow Hong and Kacperczyk (2009) to divide the institutionalX.M. Fu, et al. Journal of Corporate Finance 64 (2020) 1016574
investors into two categories: (1) norm-constrained institutions such as pension funds, insurance companies, sovereign wealth funds,endowment funds for universities, and charitable organizations; and (2) natural arbitrageurs such as mutual and hedge funds. It isexpected that these two types of institutional investors would respond differently to the implementation of ESG regulations due totheir different characteristics, investment strategies, and techniques. Compared with natural arbitrageurs, norm-constrained investorsare generally subject to greater social norm pressures due to the public nature of their investments, their exposure to public scrutiny,and their diverse constituencies (Hong and Kacperczyk, 2009). Under the traditional RI regime, there was a societal norm againstfunding operations that promoted human vice. Hence, the norm-constrained institutions used to adopt a negative screening strategyto rule out sinful stocks such as tobacco, alcohol, and gaming companies from their investment portfolios. Moving to the modern RIregime, ESG incorporation and shareholder activism have become the mainstream investment philosophy. Instead of excluding theentire sin industry, norm-constrained institutions employ ESG integration, positive screening/best-in-class, shareholder engagementand/or proxy voting approaches to tilt their investment portfolios towards firms with good ESG performance without sacrificing risk-adjusted returns (Sparkes and Cowton, 2004). In addition, norm-constrained institutions usually have long-term investment horizonsand care about all future cash flows (Derrien et al., 2013). This long-term investment structure enables norm-constrained institutionalinvestors to incorporate ESG factors into their investment decision-making in a straightforward manner.However, for natural arbitrageurs, the only parameter relevant to their investment landscape is the financial performanceachieved and not the nature of the relevant investment per se (Meier, 2012). In other words, unlike their counterparts, naturalarbitrageurs are motivated purely by financial objectives (Cahan et al., 2017). In addition, natural arbitrageurs are short-term in-vestors who care only about short-term cash flows and the resale price of their stock (Derrien et al., 2013). They usually follow veryspecial investment strategies that depend on clever timing. Hence, it might be too speculative and risky to integrate non-financiallong-term factors such as ESG externalities into their investment decision-making process. For example, many mutual and hedgefunds work with derivative instruments that relate to entire markets, which usually include businesses that are not ESG-compatible.Strict adherence to ESG rules would exclude the use of market derivatives and, hence, many mutual/hedge funds and techniques. Inparticular, some investment strategies used by hedge funds such as merger arbitrage, distressed securities, dedicated short sales, andglobal macros are not suitable for ESG incorporation. High charges associated with both mutual and hedge funds might furthercomplicate the picture because incorporating ESG criteria might lead to additional costs that ultimately have a negative effect on netperformance in the short-run (Meier, 2012). Therefore, it is expected that the norm-constrained institutions are more sensitive to ESGimprovements than natural arbitrageurs. Specifically, institutions that are subject to social norm pressures would significantly in-crease their shares of casino stocks when ESG-related initiatives are introduced whereas natural arbitrageurs might not demonstrateany significant response to ESG-related initiatives.2.4. The mediating role of institutional ownershipThe relationship between institutional ownership and stock return volatility has been the focus of academic research for morethan two decades (Bae et al., 2004; Chen et al., 2013). The previous studies reveal that different trading behaviors across institutionsmay either keep stock prices close to or drive prices away from their fundamental values, thus decreasing or increasing the stockreturn volatility of firms in their investment portfolio. On one hand, institutional shareholders can mitigate stock volatility andstabilize stock prices by effectively monitoring corporate governance with greater information gathering and fewer assessment errors(Ruiz-Mallorquí and Santana-Martín, 2011). Reinforcing this argument is the point that, governed by the prudent man rule, manyinstitutional investors, in particular, norm-constrained institutions, generally exhibit long investment horizons and low portfolioturnover and are more likely to choose less volatile stocks for safer investment (Del Guercio, 1996; Ferreira and Matos, 2008). On theother hand, transient institutional investors (i.e., natural arbitrageurs) can destabilize stock prices with their short investmenthorizons and aggressive trading strategies. Such institutional investors may engage in noise trading and seek speculative profits byacquiring information advantages or by aiming to meet idiosyncratic portfolio needs (David and Kochhar, 1996; Elyasiani and Jia,2010; Brown and Brooke, 1993), thus exacerbating a firm's stock return volatility.Despite the growing importance of institutional investors in stock volatility, only two studies examine the effect of institutionalownership on stock performance in the gaming industry. Tsai and Gu (2007) find a significantly positive impact of institutionalownership on the performance of casino stocks in the U.S. Similarly, Lin et al. (2017) show that higher institutional ownership isassociated with lower return volatility in Macao casino stocks. To investigate the presence and the implication of RI in the gamingindustry, we examine the mediating role of institutional ownership in the relationship between ESG-related government initiativesand corporate risk as measured by the return volatility of portfolio casino stocks. Stock return volatility can be linked to ESG policiesfor a number of reasons. First, according to the efficient market hypothesis, stock prices reflect all information, including relevantgovernment policy changes. Therefore, it is straightforward to assume that government policies directly affect the financial risk oflisted firms. Second, under the theory of modern RI discussed above, institutional investors are able not only to invest in sin stock butalso to actively pursue RI. This implies that socially responsible institutional investors may respond to ESG-improving governmentinitiatives related to the “sin” sectors. Given the implication of intuitional ownership on firm risk, we conjecture that ESG-relatedregulation would exert significant impact on corporate risk through responsible investing behavior by institutional investors. Spe-cifically, it is expected that the mediating role of norm-constrained long-term institutions is significant and negative whereas that ofnatural arbitrageurs is insignificant.As far as we know, no existing study has examined the mediating effect of institutional ownership within the framework of RI. Asimilar test is performed by Harjoto et al. (2017), who, instead of focusing on RI, examine the relationship between corporate socialresponsibility (CSR) and institutional ownership and the impact of this relationship on stock return volatility. They find that CSRX.M. Fu, et al. Journal of Corporate Finance 64 (2020) 1016575
decreases stock return volatility at a decreasing rate through its influence on institutional ownership. However, RI is different fromCSR as RI provides investors with a framework to incorporate various ESG considerations whereas CSR emphasizes investment targetsby offering a framework from which to evaluate their actual operation in areas of ESG (Sievänen et al., 2013). In addition, as arguedby Hockerts and Moir (2004) and Harjoto and Jo (2011), RI provides a framework for investors to evaluate a firm's response toseveral stakeholders whereas CSR traditionally addresses issues that affect multiple stakeholders such as employees, customers andcommunity members. Therefore, exploring the mediating role of institutional investors within the framework of RI provides analternative avenue to better understand the surge of socially responsible investing and its influence on financial markets.3. Methodology and data3.1. MethodologyFollowing Stage et al. (2004), we use the structural equation modeling (SEM) technique to examine the relationship between ESG-related government policies and institutional ownership and the impact of this relationship on stock return volatility in Macao'scasino sector over the period between March 2010 and June 2015. SEM is applied because it is particularly useful with multipleindicators for latent variables (Holmbeck, 1997; Hoyle and Smith, 1994). Thus, we employ SEM and jointly estimate the followingequations:= + + +Insititutional Ownership X Yi t t i t t, 1 1 1 , 1 (1)= + + + +Return Volatility Institutional Ownership X Yi t i t t i t t, 2 2 , 2 , 2 (2)In these structural equation models, X represents ESG-related government regulation and alternates among the four policymeasures. Y is a set of firm-level control variables identified in the prior literature. We also include a year effect in our estimation andcluster standard error at the firm level. The model is presented in Fig. 1. In particular, “β1” is the coefficient of the ESG-relatedgovernment initiative on institutional ownership in Eq. (1); “β2” is the coefficient of institutional ownership on return volatility in Eq.(2); and “γ2” is the coefficient of ESG-related government initiative on return volatility in Eq. (2). Hence, “β1” tells us whether ESGhas any bearing on the decision making of institutional investors, and “β2” tells us the impact of institutional ownership on stockreturn volatility. The product of “β1” and “β2” captures the mediating effect of the ESG-related government initiative on firm riskthrough its impact on institutional ownership. Finally, “γ2” demonstrates the direct effect of the ESG-related government initiative onfirm risk.The identification of ESG-related government initiatives follows the definitions presented on the official website of the UnitedNations Global Compact (https://www.unglobalcompact.org/what-is-gc/our-work) as well as the examples presented on the officialwebsite of UNPRI (www.unpri.org/pri/what-is-responsible-investment). First, it is stated that firms should properly address en-vironmental issues by supporting a precautionary approach to environmental challenges, undertaking initiatives to promote greaterenvironmental responsibility, and encouraging the development and diffusion of environmentally friendly technologies. The ex-amples of environmental factors include climate change, waste and pollution, resource depletion, and deforestation. Second, focusingon social sustainability, it is stated that firms should identify and manage their impacts on people, including their employees, workersin the value chain, customers and local communities. The examples of social factors include working conditions, local communities,conflict, health and safety, and employee relations and diversity. Third, on governance issues, it is stated that governance is thesystems and processes that ensure the overall effectiveness of an entity – whether a business, government or multilateral institution.Examples of governance factors include bribery and corruption, political lobbying and donations, executive pay, board diversity, andtax strategy. Based on the ESG criteria and examples mentioned above, we identify four ESG-related government initiatives that areclosely linked to the gaming industry in Macao, including a smoking ban, responsible gambling, visa constraints, and an anti-corruption campaign. While a responsible gambling strategy mainly falls into the social aspect of ESG, smoking ban and visa con-straint initiatives are related to both the environmental and social dimensions of ESG. An anti-corruption campaign in the publicsector is associated with all three aspects of ESG. We next discuss each policy and its potential impact on institutional ownership indetail.Instuonal ownershipStock return volalityESG-related government iniaveFig. 1. Responsible investing and firm risk.X.M. Fu, et al. Journal of Corporate Finance 64 (2020) 1016576
3.1.1. Smoking banNaturally, the smoking ban initiative falls into the environmental category of ESG because it helps reduce pollution and hencemitigates the risk of fines for pollution. It is also related to the social aspect of ESG because it helps build a pleasant workingenvironment and better protects the employees' health, which in turn fosters better employee relations and hence limits the negativeimpacts of employee turnover (Inoue and Lee, 2011). Furthermore, the smoking ban initiative helps promote a healthier and morejoyful image of casinos to attract leisure players (Zeng et al., 2014). However, a smoking ban also has a few negative impacts oncasinos in financial terms. First, it may reduce gaming time and consequently lower gaming revenue due to the comorbidity ofsmoking and gambling (McGrath and Barrett, 2009; Hirschberg and Lye, 2010). Second, it may induce customers to move to aneighboring location that has no smoking ban. However, this may not be a great concern for investors in Macao casinos becauseMacao is the only place in China where casinos are legal and nearly 70% of visitors are from mainland China. Moreover, according tothe Statistics and Census Service Bureau of Macao (2015), only 9% of mainland visitors reported gambling as their primary purpose ofvisiting Macao during the sample period.Overall, based on the theoretical framework discussed in Subsection 2.2, it is expected that institutional investors may respondpositively to the implementation of smoking bans because it might mitigate potential strike action and consumer boycotts. It mightalso enhance employee motivation and hence uplifting productivity. Additionally, as a non-smoking healthier environment mayattract more leisure players from mainland China, smoking bans may produce a price premium. Furthermore, companies that strictlyadhere to smoking bans are able to cut their energy bills and avoid the risk of fines for pollution. In short, a smoking ban initiativecould lead to increased profits with reduced risk and hence a higher risk-adjusted return.In Macao, a law restricting smoking in public places was introduced in 2011 to promote public health information about smokingrestrictions based on the Macao Association of Health Policy. Starting in 2012, smoking was prohibited in indoor public places andindoor workplaces as well as on all public transportation. New and more stringent standards became effective on January 1, 2013,mainly for tobacco users at casinos and mass gaming floors. A more restrictive smoking ban was introduced on January 1, 2015, tocover bars, terraces and business open areas, massage lounges and dance halls. To reflect the intensity of the smoking ban, weintroduce the variable SMOKE and assign a value of zero for the period prior to December 2011, when the smoking ban was not inplace; a value of one for the period from January 2012 to December 2012; a value of two for the period from January 2013 toDecember 2013 representing a more restrictive ban; and a value of three for the most stringent standard from January 2015 to theend of the sample period. A higher value of SMOKE is associated with a more restrictive smoking ban.3.1.2. Responsible gamblingGambling is potentially an addictive activity that can cause major harm to problem gamblers, their families and their commu-nities, including depression and physical illness related to stress, increased suicide attempts, unpaid debts and bankruptcies, anddivorces caused by pathological gambling, and strain on public services (Goodman, 1994; Brown and Raeburn, 2001). Governmentgambling jurisdictions have long recognized the social and economic harms associated with gambling, which are similar to thoselinked to tobacco and alcohol, and they have introduced public policies and social laws predicated on harm minimization. Based on acomprehensive literature review, Strauss (2015) points out that the casino industry's CSR strategies largely focus on problemgamblers. To minimize the externality of gambling and its long-term negative effects, in October 2009, the Social Welfare Bureau andthe Gaming Inspection and Coordination Bureau of Macao launched the responsible gambling campaign. Since then, promotionalactivities have been held to educate the public about the danger of gaming addiction and to help gaming participants form re-sponsible attitudes towards gaming. In response to this government initiative, casino operators have implemented certain practices toreduce and prevent potential harm such as revealing information on the risks of gambling and introducing counseling kiosks thatallow problem gamblers to seek help and register for self-exclusion.The responsible gambling initiative was designed to mitigate the negative externality on individuals and society, thereby en-hancing social sustainability, which in turn safeguards the sustainable development of the gaming industry in Macao. Hence, theinitiative falls into the social dimension of ESG. Focusing on its short-term effect, the responsible gambling initiative may have anegative impact on casino firms' revenue as less time and money is spent on gambling in addition to the cost of enforcing thisinitiative at the individual firm level. However, a study conducted by the National Opinion Research Center at the University ofChicago (NORC) shows that less than 4% of gross daily casino revenue is attributed to pathological gamblers whereas the vastmajority of daily revenue for casinos (more than 96%) is generated by non-pathological gamblers (NORC, 1999).Based on the DCFV method, in the long run, the risk-adjusted return would be increased as the responsible gambling initiativehelps address governments' key concerns regarding the gaming industry and hence mitigating regulatory risk. The initiative can alsoenhance the brand and reputation of the gaming sector, which can be translated into better business performance. Given that itsnegative impact on the short-term cash flows of casino firms is rather marginal, it is expected that institutional investors wouldrespond positively to the implementation of the responsible gambling initiative. To proxy for the effectiveness of this policy initiative,we use the rate of Macao residents' awareness of the concept of responsible gambling (RESP) obtained from the “Report onResponsible Gambling” provided by the Institute for the Study of Commercial Gaming at the University of Macau (ISCG, 2013). Ahigher awareness rate among the general public would signal a stronger policy effect.3.1.3. Visa constraintsGovernments sometimes apply strict visa regulations to deter individuals for political, economic, and/or security matters (USOffice of Immigration Statistics, 2010). However, all these regulations present clear effects on people and economic flows, forexample, the arrival of tourists. For example, Song et al. (2012) and Thomas (2012) find that the tight restrictions on travel and visaX.M. Fu, et al. Journal of Corporate Finance 64 (2020) 1016577
requirements hit the tourism industry hard during the recent Olympic Games in China (2008) and the UK (2012), respectively, asmany travelers decided to spend their holidays elsewhere. In particular, Song et al. (2012) emphasize that applying strict visaregulations may have the potential to hamper the productivity of marketing and branding that governments have pursued forreaching their economic goals. A report by the United Nations World Tourism Organization (UNWTO) also shows that ignoring theimpact of visa restrictions on international travel could have serious effects on economic receipts of nations (UNWTO, 2012).Within China, a strict visa requirement is imposed for mainland citizens to visit Macao. Such a need to control the movement ofpeople between regions mainly stems from the sheer size of the mainland population as well as the deep-rooted tradition of gamblingin the Chinese culture (Loo et al., 2008; Tse et al., 2010). In particular, the impact of the gaming boom on the vast inflow of touristsfrom mainland China has imposed many challenges to the sustainable development of Macao. Those challenges include seriousenvironmental degradation and congestion at Macao's heritage sites within the environmental dimension of ESG (Yu, 2008; du Cros,2009) and the increasing cost of living and the deteriorating quality of life within the social category of ESG (Wan and Li, 2013).As mentioned above, mainland Chinese tourists have been the major force of overall tourism growth in Macao, with mainlandChinese visitors representing nearly 70% of total visitor arrivals during the sample period. Most mainland travelers visit Macao underthe Individual Visit Scheme (IVS); however, transit visas may also be used for those going to a third destination. Reportedly, thetransit visa system was being manipulated by high-roller gamblers and their agents to make multiple trips to Macao under the coverof business trips to onward destinations (http://www.ggrasia.com/transit-visa-rules-eased-as-abuses-fell-macau-govt/). Aimed atdeterring some mainlanders from deliberately circumventing the existing Macao entry requirements, the Macao government tigh-tened travel permits for mainland residents by reducing (from seven days to five days) the permitted stay for mainland Chinesepassport holders who transit into the city, effective July 1, 2014. Mainland travelers breaching the new transit visa regime would begranted only a two-day stay if they again enter Macao on a transit visa within 30 days. These new restrictions significantly reducedthe frequency with which individual travelers from the mainland could visit Macao and the duration for which they could stay. At ameeting with the press on June 30, 2015, Mr. Wong Sio Chak, the Secretary for Security in Macao said that the police had estimatedthat the stricter rules would reduce abuses by half within one year. This tightened transit visa rule was relaxed from July 1, 2015,onwards when Macao again allowed mainland Chinese passport holders entering the city to stay for up to seven days (http://www.ggrasia.com/transit-visa-rules-eased-as-abuses-fell-macau-govt/).Obviously, the ESG benefits of visa constraints are relatively centered on local communities. However, their financial impact onlocal casino firms is rather direct and negative. According to the statistics released by the Macau Government Statistics and CensusService Bureau, Macao's casino gaming revenue declined by 34.3% from 2014 to 2015 (The Statistics and Census Service Bureau ofMacao, 2015). Although such decline might have resulted from multiple factors such as the weakness of some sectors of the Chineseeconomy and the anticorruption campaign in the mainland, all casino firms identified visa restriction as one of the key contributors tothe revenue decline in their 2015 annual reports (http://www.dicj.gov.mo/web/cn/information/RelContas/index.html). Therefore,it is expected that only those institutional investors who care more about the local communities would end up with a promising risk-adjusted return using the DCFV method. Others might find such policy less favorable. To capture the intensity of visa control policy,we define VISA, which takes the value of zero for the two periods in our sample with a loose visa policy, specifically, from January2010 to June 2014 and from July 2015 to September 2015, and a value of one for the more restrictive visa regime in between,specifically, from July 2014 to June 2015.3.1.4. Anticorruption campaignAccording to the US National Association of Attorneys General (NAAG), public corruption refers to corruption involving gov-ernment employees at all levels of government, and the consequences of public corruption can reach all aspects of civil society —political, social, and economic. Specifically, public corruption corrodes trust in governments. It also weakens institutional founda-tions and the rule of law, on which economic growth is built, jeopardizing economic growth. Furthermore, public corruption smo-thers individual initiative and ambition, builds anger and resentment, and stimulates economic inequality (NAAG, 2012). Honestgovernment is fundamental to a civil society and therefore, anticorruption in the public sector is related to all three aspects of ESG.Following the conclusion of the 18th National Congress of the Communist Party of China in 2012, a far-reaching campaign againstpublic corruption began in mainland China, carried out under the aegis of Xi Jinping, General Secretary of the Communist Party ofChina. This was the largest organized anti-graft effort in the history of China, whereby corrupt high-level officials and local civilservants alike were investigated and removed from office and faced accusations of bribery and abuse of power. On one hand, Macao isthe only jurisdiction in China that allows casino gambling, and its gaming industry is heavily influenced by the social and economicconditions in mainland China. Therefore, this anticorruption campaign launched in mainland China would benefit long-term stabilityand sustainable economic growth in both mainland China and Macao, in particular, its gaming sector. On the other hand, however,many corrupt mainland officials have reportedly gambled away public coffers on the dice table, and they are believed to have beenthe high rollers who engaged in VIP gambling in Macao, contributing to between 55% and 75% of the overall gross gaming revenue(Zhang and Kwan, 2009; Liu et al., 2015). In their 2015 annual reports, all six listed casino firms in Macao either explicitly orimplicitly indicate that the anticorruption campaign is one of the major factors resulting in a sharp decline of the number of upper-end players and consequently the VIP gaming revenue – which showed a revenue decline of 39.9% year-on-year in 2015. Severalannual reports also indicated that the Chinese government's ongoing anti-corruption campaign has led to tighter monetary transferregulations including the real-time monitoring of certain financial channels, which also negatively affects the number of visitors andthe amount of money visitors can bring from mainland China to Macao (http://www.dicj.gov.mo/web/cn/information/RelContas/index.html). Consequently, in the short-term, the anticorruption campaign could dramatically and negatively affect gaming revenuesand operations in Macao. As both the long-term ESG benefits and the short-term financial drawbacks are quite dramatic, the results ofX.M. Fu, et al. Journal of Corporate Finance 64 (2020) 1016578
the DCFV model might vary across different institutional investors depending on how they weight the corresponding ESG ex-ternalities. To capture the effect of China's anticorruption campaign, we collect monthly data on officials from mainland China facingaccusations of corruption from the website of a nongovernmental organization (www.fanfuzhi.com/gongji.html). We define ANTI asthe number of officials facing prosecution for corruption in mainland China.3.1.5. Other variablesWe use stock return volatility to measure the equity risk of casino firms. Specifically, we follow Li et al. (2011) and Chen et al.(2013) and use the standard deviation of daily stock returns (STDEV) to proxy for firm-level stock return volatility (i.e., total risk), ascalculated below:==STDEVnreturn mean11( )i tni t i1 ,2where returni, t is the daily stock return, meani is the monthly average rate of the stock return, and n is the number of trading days in1 month. To capture non-systemic risk (SD), we also consider idiosyncratic volatility, that is, the standard deviation of the residualsfrom a regression of individual daily return against market return. To measure institutional ownership (IO), we consider the per-centage of outstanding shares held by all institutional investors in a casino company. To account for heterogeneity among institu-tional ownership, we also consider the percentage of outstanding shares held by the norm-constrained institutions (NORM) and thenatural arbitrageurs (NARB), respectively. The data for institutional ownership are collected at the end of each month followingcommon practice. Following the prior literature, we also include TURNOVER and AGE as control variables in our estimation (Harjotoet al., 2017). TURNOVER is the daily stock turnover calculated by dividing the total number of shares traded over a month by theaverage number of shares outstanding for the month, where a quicker turnover generally implies higher volatility and greaterliquidity (Ferreira and Matos, 2008). AGE is the number of years a firm has been listed.3.2. DataOur sample covers all six casino companies operating in Macao that were listed on the HKSE from March 2010 to June 2015.These companies are Galaxy Entertainment Group Ltd. (HK: 0027), SJM Holdings (HK: 0880), Wynn Macao Ltd. (HK: 1128), SandsChina Ltd. (HK: 1928), MGM China Holdings Ltd. (HK: 2282) and Melco Crown Entertainment Ltd. (HK: 6883). Among them, WynnMacao Ltd. and Sands China Ltd. are operated by U.S. multinational casino companies while Galaxy Entertainment Group Ltd. andSJM Holdings are local firms incorporated in Greater China. MGM China Holdings Ltd. and Melco Crown Entertainment Ltd. are jointventures. The sample consists of 348 firm-month observations over the sample period. The data on daily stock returns, daily stockturnover, and the percentage of outstanding shares held by institutions are obtained from Bloomberg.Table 1 presents the main summary statistics for our data. Panel A of Table 1 focuses on the full sample and shows that Macao'scasino firms have an average return volatility (STDEV) of 2.5% for their shares when measured by the standard deviation of dailystock return (i.e., total risk) during the sample period. In comparison, the mean of idiosyncratic risk (SD) is slightly lower, ap-proximately 2.2%, implying that casino firms in Macao mainly confront unsystematic risk instead of systematic risk. Regarding theshareholding structure, institutional investors (IO) on average hold 54% of Macao's casino shares during the sample period of which38% is held by the norm-constrained institutions (NORM) while the remaining 16% is held by the natural arbitrageurs (NARB). Themedian tells a similar story, showing that half of the sample casinos have 62% of institutional ownership, which is mainly attributedto the norm-constrained institutions (50%) instead of the natural arbitrageurs (14%). The numbers suggest that institutional in-vestors, in particular, the norm-constrained institutions, are the major shareholders of Macao casino companies. Our ESG-relatedpolicy indicators show that, on average, approximately 20 officials are reportedly dismissed on corruption charges (ANTI) inmainland China each month during the sample period, and approximately 60% of Macao residents are aware of the ResponsibleGambling Campaign (RESP). A tight visa policy (VISA) was in place approximately 20% of the time in our sample period while therest of the period enjoyed loose visa control. Moreover, the average daily trading volume (TURNOVER) is approximately 20% ofoutstanding shares each month. Finally, these firms have been listed over seven years (AGE) on average on the Hong Kong StockExchange.Focusing on the subsamples of local, foreign, and joint ventures, Panel B shows that both local and foreign casinos have similartotal risk exposure (STDEV, 2.5%) while joint ventures have marginally but significantly lower total risk exposure (2.3%). However,in terms of idiosyncratic risk (SD), their exposures are practically indifferent (2.1% - 2.2%). Turning to the shareholding structure,foreign casinos attract more institutional investors (IO, 64%) than local casinos (60%) while the difference is insignificant. Jointventures have 33% institutional ownership, which is significantly lower than their peers. In addition, foreign casinos attract sig-nificantly more norm-constrained institutional ownership (NORM, 47%) than local (37%) and joint ventures (27%) whereas localcasinos have significantly more nature arbitrageur ownership (NABR, 23%) than foreign ventures (17%) and joint ventures (6%).Local casinos record the highest average daily trading volume (TURNOVER), which is approximately 30% of outstanding shares eachmonth; followed by foreign (17%) and joint ventures (10%). Finally, on average local casinos have been listed approximately 14 years(AGE) on the Hong Kong Stock Exchange whereas foreign and joint ventures have only been listed on that Exchange for four and threeyears, respectively.Fig. 2 compares the change of institutional ownership in six sample casino stocks and the change of institutional ownership in allfirms listed on the HKSE over the sample period. Such comparison reveals a diverging pattern of institutional holdings among casinostocks that is on the rise and a general market that is declining. Specifically, Fig. 2 shows that the mean level of institutionalX.M. Fu, et al. Journal of Corporate Finance 64 (2020) 1016579
Table 1Data description.Panel A: Full Sample Obs. Mean Median Std. Dev. Min. Max.STDEV 348 0.0245 0.0230 0.0096 0.0101 0.0913SD 348 0.0217 0.0209 0.0069 0.0099 0.0609IO 348 0.5428 0.6180 0.3172 0.0000 1.0000NORM 348 0.3814 0.5016 0.2789 0.0000 0.7305NARB 348 0.1614 0.1461 0.1210 0.0000 0.6502SMOKE 348 1.3448 2.0000 0.9937 0.0000 3.0000RESP 348 0.5929 0.6050 0.1203 0.3760 0.7876VISA 348 0.2069 0.0000 0.4057 0.0000 1.0000ANTI 348 0.2010 0.0100 0.2922 0.0000 1.1000TURNOVER 348 0.1986 0.1489 0.0006 0.1688 1.2220AGE 348 7.5057 7.2476 1.0000 5.0000 25.0000Panel B1: Sub-sample mean Local Joint ForeignSTDEV 0.0254 0.0227 0.0249SD 0.0221 0.0208 0.0220IO 0.5984 0.3284 0.6413NORM 0.3701 0.2707 0.4723NARB 0.2283 0.0577 0.1690TURNOVER 0.2953 0.0981 0.1741AGE 13.8438 3.0870 4.3438Obs. 128 92 128Panel B2: Sub-sample mean-difference t-test Local vs. Joint Local vs. Foreign Joint vs. ForeignSTDEV 0.0027** 0.0005 −0.0022*SD 0.0013 0.0001 −0.0011IO 0.2700*** −0.0429 −0.3129***NORM 0.0994*** −0.1022*** −0.2016***NARB 0.1706*** 0.0593*** −0.1112***TURNOVER 0.1972*** 0.1212*** −0.0760***AGE 10.7568*** 9.5000** −1.2568***Notes: STDEV is a measure of total risk, computed as the standard deviation of daily casino stock returns during the corresponding month. SD is ameasure of idiosyncratic risk, computed as the standard deviation of the residuals from a regression of individual daily return against market return.IO is the percentage of outstanding shares held by institutions. NORM is the percentage of outstanding shares held by the norm-constrainedinstitutional investors. NARB is the percentage of outstanding shares held by the natural arbitrageurs. SMOKE is assigned a value equal to zero forthe lack of smoking ban from March 2010 to December 2011, one for the partial ban from January 2012 to December 2012, two for the stricter banfrom January 2013 to December 2014, and three for the complete ban from January 2015 to June 2015. RESP refers to the rate of responsiblegambling awareness of Macao residents. VISA is a dummy variable equal to zero for the loose visa policy from January 2010 to June 2014 and equalto one for the restrictive visa policy from July 2014 to June 2015. ANTI is the number of corrupt officials dismissed per month in mainland Chinascaled by 100. TURNOVER is the ratio of daily trading volume to shares outstanding each month. AGE refers to the number of years a firm has beenlisted.***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively.0%10%20%30%40%50%60%70%2010 2011 2012 2013 2014 2015IO-Casinos IO-HKSEFig. 2. Changes of institutional ownership: casinos vs. HKSE.X.M. Fu, et al. Journal of Corporate Finance 64 (2020) 10165710
ownership for the six listed casino firms was 19% in 2010. It rose considerably to 42% in 2011 and reached 64% in 2015. Such asignificant jump in institutional ownership of casino firms stands in sharp contrast to the general market phenomenon where theinstitutional ownership of all firms on the HKSE witnessed a sizable decline from 65% in 2010 to 58% in 2014 and further to 50% in2015 (HKSE, 2012, 2015). This finding implies that the observed increase in institutional ownership of casino firms might be mainlydriven by these institution’ increased willingness to hold casino stocks because they believe that imposed ESG-related policies couldmake these companies more responsible. We also admit that such finding still cannot explicitly exclude other factors (both relatedand unrelated to the implementation of the ESG initiatives) that could explain the observed patterns.Further considering the dataset, of interest is that the ownership of norm-constrained institutions increased substantially over thesample period, from 5% in 2010 to 45% in 2015. In contrast, the share of natural arbitrageurs barely fluctuated, ranging between12% and 19% during the same period. An interesting example is Norges Bank, the central bank of Norway, which manages one of theworld's largest sovereign wealth funds, the Government Pension Fund Global (GPFG). Its investment in Macao's casino stocks began in2012, the year when the smoking ban and the anti-corruption campaign went into effect. Norges Bank immediately became one of thetop twenty largest shareholders of each of the six casino firms and retained this position until the end of the sample period. Theaverage number of shares held by the GPFG increased by 51%, from 16,842,483 in 2012 to 25,485,384 in 2015. Following this trend,the largest pension fund in the world, the Government Pension Investment Fund (GPIF), which manages and invests in the ReserveFunds of the Government Pension Plans in Japan, began to invest in Macao's casino firms in 2015. The GPIF also became one of thetop twenty largest shareholders of five out of six casino firms (except Melco Crown Entertainment Ltd.), and its average number ofshares reached 12,292,234. This pattern is not observed for the natural arbitrageurs. In general, the finding confirms that, comparedwith the natural arbitrageurs, the norm-constrained institutional investors are much more willing to hold casino stocks following theESG-related regulations.Appendix 1 reports the Pearson correlations among the variables. As expected, ESG-related policy measures are, to variousdegrees, significantly and positively correlated with the measure of institutional ownership. Stock return volatility is significantly andnegatively correlated with both institutional ownership indicators and ESG-related policy measures in the majority scenarios exceptfor NARB. This finding is in line with the theoretical analysis in Section 2.3, suggesting that the natural arbitrageurs are not expectedto stabilize stock prices. ESG-related policy measures are found to be significantly and positively correlated with each other. Overall,concerns about multicollinearity are mitigated because most of the correlation coefficients among the key variables are lower than0.50.4. Empirical results4.1. Main resultsTable 2 reports the baseline estimation of the SEM model that jointly estimates Eqs. (1) and (2) for the full sample of six listedcasinos operating in Macao. In the first regression, we regress institutional ownership on ESG-related government policies and firmcontrol variables, and in the second regression, we regress return volatility on institutional ownership, ESG-related governmentpolicies and firm control variables. Columns (1)–(4) present the results with IO as the measure of institutional ownership. Columns(5)–(8) report the results focusing on the role of the norm-constrained institutional investors (NORM) while Columns (9)–(12)provide the results with an emphasis on the function of the natural arbitrageurs (NARB). For all regression specifications, the t-statistics below the coefficients are based on the standard errors corrected for firm clustering.As shown in Columns (1)–(4) of Table 2, all four measures of ESG-related government initiatives in Panel A are significantly andpositively associated with institutional ownership (IO). This result is not only statistically significant, but it is also economicallymeaningful. For example, the coefficient on ANTI is 0.2618, which is statistically significant at the 1% level, suggesting that a one-unit increase in the number of corrupt officials being prosecuted is associated with a 0.2618 percentage point increase in institutionalownership. This finding is consistent with that of Mauro (1995), suggesting that corruption not only reflects government inefficiencybut also weakens institutional foundations and hence jeopardizes economic growth and exaggerates economic inequality (NAAG,2012). Thus, the anticorruption campaign would positively affect the number of mainland gaming customers and the amount theymight be willing to spend in Macao in the long run because most of the tourists in Macao come from mainland China. Given thedramatic social and economic influence of mainland China on Macao's gaming industry, the finding implies that institutional in-vestors, in general, take additional due diligence steps concerning the risks stemming from one of the key stakeholders of this specialsector. After thorough investigation, they decide to give more weight to the long-term ESG benefits of this anticorruption campaignthan its short-term financial drawbacks in computing the expected risk-adjusted return of investment in Macao's casino stocks.In addition, VISA is found to have a positive and significant impact on the institutional holdings of casino stocks. In particular, theswitch from a loose visa policy to a tight visa control is linked to a 0.1435 percentage point increase in institutional ownership. Thefinding demonstrates that, in general, the institutional investors in Macao casino stocks carefully assess the potential environmentaland social externalities of the soft visa policy on the local community and hence give less weight to the short-term negative financialconsequences of the visa restriction policy when computing the risk-adjusted return on their investment portfolios. This finding issupported by the result of a survey of over 5000 Macao residents conducted by the Tourism Research Centre at the Macao Institute forTourism Studies (IFT), which shows that, in general, local residents are dissatisfied with the environment and local transportation.The survey also includes data and information from other stakeholders and concludes that border clearance, restaurants and dinningare above the optimal carrying capacity range (IFT, 2008).The significant and positive coefficient on SMOKE suggests that more stringent bans on smoking attract more institutionalX.M. Fu, et al. Journal of Corporate Finance 64 (2020) 10165711
Table2Responsibleinvestinginthegamingindustry(baselineresults).(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)IONORMNARBPanelA:IO/NORM/NARB(Dep.Var.)ANTI0.2618***0.2170***0.0448*(4.74)(3.98)(1.65)VISA0.1435***0.1172***0.0263(3.59)(2.98)(1.35)SMOKE0.1621***0.1549***0.0072(10.60)(10.29)(0.86)RESP1.3271***1.3137***0.0134(10.80)(10.98)(0.20)TURNOVER0.6780***0.6397***1.0143***0.9268***0.4486***0.4164***0.7811***0.7092***0.2293***0.2234***0.2332***0.2176***(5.38)(5.03)(8.54)(8.01)(3.61)(3.33)(6.68)(6.30)(3.71)(3.62)(3.58)(3.41)AGE−0.0024−0.0015−0.0072***−0.0063***−0.0047*−0.0040−0.0096***−0.0089***0.0023*0.0025*0.0024*0.0026**(−0.90)(−0.58)(−3.02)(−2.65)(−1.82)(−1.54)(−4.08)(−3.88)(1.82)(1.93)(1.82)(2.04)Constant0.3732***0.3975***0.1776***−0.3811***0.2722***0.2927***0.0785**−0.4831***0.1010***0.1048***0.0991***0.1020**(12.70)(13.86)(5.25)(−4.85)(9.39)(10.38)(2.36)(−6.31)(7.00)(7.54)(5.34)(2.35)PanelB:STDEV(Dep.Var.)IO/NORM/NABR−0.0074***−0.0073***−0.0054***−0.0067***−0.0064***−0.0064***−0.0041**−0.0054***−0.0049−0.0050−0.0047−0.0052*(−5.06)(−5.10)(−3.34)(−4.09)(−4.26)(−4.32)(−2.49)(−3.16)(−1.60)(−1.62)(−1.57)(−1.74)ANTI−0.0009−0.0014−0.0026*(−0.57)(−0.93)(−1.67)VISA−0.0010−0.0013−0.0019*(−0.91)(−1.18)(−1.72)SMOKE−0.0015***−0.0017***−0.0023***(−2.77)(−3.22)(−4.95)RESP−0.0049−0.0067−0.0136***(−1.12)(−1.52)(−3.57)TURNOVER0.0407***0.0406***0.0360***0.0394***0.0386***0.0386***0.0337***0.0370***0.0368***0.0371***0.0316***0.0343***(11.40)(11.50)(9.17)(10.27)(10.92)(11.02)(8.84)(9.86)(10.19)(10.32)(8.60)(9.40)AGE−0.0003***−0.0003***−0.0003***−0.0003***−0.0003***−0.0003***−0.0003***−0.0003***−0.0003***−0.0003***−0.0002***−0.0002***(−4.42)(−4.42)(−3.53)(−4.12)(−4.53)(−4.56)(−3.47)(−4.12)(−3.87)(−3.94)(−2.83)(−3.30)Constant0.0230***0.0230***0.0242***0.0255***0.0220***0.0219***0.0236***0.0254***0.0207***0.0206***0.0237***0.0285***(23.74)(23.96)(22.92)(10.29)(24.27)(24.64)(22.84)(9.96)(23.48)(24.00)(22.15)(11.60)Indirecteffect−0.0019***−0.0011***−0.0009***−0.0089***−0.0014***−0.0007**−0.0006**−0.0070***−0.0002−0.0001−0.0000−0.0001Totaleffect−0.0028*−0.0020−0.0023***−0.0137***−0.0028*−0.0020*−0.0023***−0.0137***−0.0028*−0.0020*−0.0023***−0.0137***R2(IO/NRM/NARB)0.13180.10870.30140.30770.06820.05000.25290.27650.09550.09320.09040.0885R2(STDEV)0.29710.29820.31170.29910.28300.28410.30200.28600.25100.25140.29460.2717R2(Total)0.38240.36690.51330.50890.32110.30890.47010.47500.32220.32080.35800.3359Obs.348348348348348348348348348348348348Notes:Thistablereportsthebaselineregressionresultsestimatedusingthestructuralequationmodeling(SEM)technique.ThesamplecoversallcasinocompaniesinMacaofromMach2010toJune2015.STDEVisameasureoftotalrisk,computedasthestandarddeviationofdailycasinostockreturnsduringthecorrespondingmonth.IOisthepercentageofoutstandingsharesheldbyinstitutions.NORMisthepercentageofoutstandingsharesheldbythenorm-constrainedinstitutionalinvestors.NARBisthepercentageofoutstandingsharesheldbythenaturalarbitrageurs.SMOKEisassignedavalueequaltozeroforthelackofsmokingbanfromMarch2010toDecember2011,oneforthepartialbanfromJanuary2012toDecember2012,twoforthestricterbanfromJanuary2013toDecember2014,andthreeforthecompletebanfromJanuary2015toJune2015.RESPreferstotherateofresponsiblegamblingawarenessofMacaoresidents.VISAisadummyvariableequaltozerofortheloosevisapolicyfromJanuary2010toJune2014andequaltoonefortherestrictivevisapolicyfromJuly2014toJune2015.ANTIisthenumberofcorruptofficialsdismissedpermonthinmainlandChinascaledby100.TURNOVERistheratioofdailytradingvolumetosharesoutstandingeachmonth.AGEreferstothenumberofyearsafirmhasbeenlisted.***,**,and*indicatestatisticalsignificanceatthe1%,5%,and10%levels,respectively.X.M. Fu, et al. Journal of Corporate Finance 64 (2020) 10165712
investors to hold casino shares. This result echoes the findings of Brokenleg et al. (2014) who argue that prohibiting smoking wouldencourage nonsmoking patrons to visit casino restaurants. It is also in line with the result of the 2015 Macao Visitor Profile Surveyconducted by the IFT, which shows that approximately 77% of visitors to Macao favor the smoking ban and that 33% would like toreturn to Macao after the ban while only approximately 5% respond negatively (IFT, 2015). Hence, based on the analyses in Sub-section 3.1, more stringent smoking bans are associated with better employee relations management and better business opportu-nities for casino firms, resulting in increased profits with reduced risk in both the short and long terms. Consequently, such bansencourage institutional investment.Finally, a 1% increase in the public awareness of responsible gambling among Macao residents (RESP) is linked with a 1.3271percentage point increase in institutional ownership for casino shares. This finding is also in line with the analysis in Subsection 3.12.That is, institutional investors would respond positively to the implementation of the responsible gambling initiative. On one hand,this initiative helps mitigate the public's key concerns regarding the gaming industry, consequently to a great extent reducing theregulatory risk facing the gaming industry. On the other hand, its negative impact on the short-term cash flows of casino firms ismarginal because a vast majority of the casinos' daily revenue is derived from non-pathological gamblers (NORC, 1999). Further-more, public awareness of responsible gambling also helps build good stakeholder relationships that could enhance the brands andreputations of the casino firms and translates into better business performance. Thus, the risk-adjusted return in the long run wouldbe increased.Panel B reports the coefficients of the estimation of stock return volatility against institutional ownership, ESG-related policy andfirm control variables. Focusing on the mediating effect of institutional ownership, Columns (1)–(4) show a significant negativecoefficient on IO in all four cases. Given that the coefficients on all four ESG indicators are significantly positive in the same columnsin Panel A, the mediating/indirect effect of institutional ownership is significantly negative, suggesting that RI is conducive to thelower equity risk of casino firms in general. In other words, the finding indicates that, in general, the institutional investors in Macao'scasino firms can help stabilize stock prices when ESG-related initiatives are implemented. It also implies that the majority of theseinstitutions are long-term investors rather than short-term speculators. To sharpen the story, the capital asset pricing model (CAPM)is employed to quantify the implied reduction in the cost of capital. Based on Fama and MacBeth (1973), we develop a modelsuggesting that one unit change in an ESG improvement is equal to the ratio of the product of the corresponding indirect effect(estimated using the SEM method), the market return (based on Heng Seng Index), and the covariance between the return of theindividual stock and the market return, over the standard deviation of market return. The details are presented in Appendix 2. TakingSJM Holdings as an example, the results show that following more stringent anti-corruption, visa constraints, smoking bans, andresponsible gambling policies, its daily cost of equity would be lowered by 0.0023%, 0.0013%, 0.0011%, and 0.0107%, respectively.With regard to the direct effect of the ESG-related policies presented in Panel B of Columns (1)–(4), only Column (3) shows asignificantly negative coefficient on SMOKE, suggesting that the introduction of smoking bans in Macao's casinos reduces the returnvolatility of the casino stocks and hence directly lowers their equity risk. This result is not surprising because “smoking kills” is a well-known phrase; thus, the majority of investors, including individual investors, favor the introduction of smoking bans. The finding is inline with EUROSIF (2010), suggesting that the majority of RI is performed by large institutional investors.Taken together, the results presented in Columns (1)–(4) of Table 2 suggest that, in general, institutional investors pursue RI inMacao's gaming industry by responding positively to the ESG-improving policies after thorough due diligence investigations. TheseESG-related improvements enable institutional investors to strengthen their risk and return profiles, delivering ESG benefits withoutcompromising financial returns and hence spurring institutional investors to hold even larger shares of casino companies. In addition,institutional investors play a significant mediating role in channeling the ESG-improving policies to lower equity risk for portfoliocasino firms. Finally, individual investors in casino stocks favor the implementation of smoking bans.Considering the heterogeneity among institutional ownership, Panel A of Table 2 shows that all four measures of ESG-relatedgovernment initiatives in Columns (5)–(8) are significantly and positively related to the norm-constrained institutional ownership(NORM) whereas three out of four indicators of ESG policies in Columns (9)–(12) are insignificantly linked to the natural arbitrageurs'ownership (NARB). The only exception is the coefficient on ANTI, which is positive and marginally significant at the 10% level. Ingeneral, the result is consistent with the theoretical analysis presented in Section 2.3, suggesting that the norm-constrained in-stitutions are more sensitive to the ESG improvements than the natural arbitrageurs. The former would significantly increase theirshares of casino stocks when ESG-related initiatives are introduced whereas the latter does not exhibit any significant response to theESG-related policies. Their different responses to the implementation of ESG regulations might be due to their different character-istics, investment strategies, and techniques, as detailed in Section 2.3. The finding is also in line with the statistics provided by theUNPRI on the application of ESG criteria in hedge funds, which shows that the assets in hedge funds held by the UNPRI signatoriesonly accounted for approximately 1% of total ESG-certified investments (Meier, 2012).Moving to the mediating effects, Panel B of Table 2 shows that all coefficients on NORM presented in Columns (5)–(8) aresignificantly negative whereas all coefficients on NARB reported in Columns (9)–(12) are insignificant except for the one in Column(12) that is marginally significant at the 10% level. Given that the coefficients on all four ESG indicators are significantly positivewhen NORM is the dependent variable in Panel A, the mediating/indirect effect is significantly negative, suggesting that the norm-constrained institutional investors play a key role in stabilizing the prices of casino stocks when ESG initiatives are implemented. Incontrast, the natural arbitrageurs (NARB) do not display any significant mediating effect. This result is not surprising because it iswell-known in the finance literature that long-term prudent institutional investors (e.g., pension funds, sovereign wealth funds,insurance companies, endowment funds for universities, and charitable organizations) can stabilize stock prices by effectivelymonitoring portfolio firms and by minimizing information asymmetries and agency problems (Ruiz-Mallorquí and Santana-Martín,2011; Shleifer and Vishny, 1986). In contrast, short-term speculators such as hedge funds and mutual funds usually destabilize stockX.M. Fu, et al. Journal of Corporate Finance 64 (2020) 10165713
prices by seeking easy money or quick profits (David and Kochhar, 1996; Brown and Brooke, 1993). In short, the finding confirmsthat these institutional investors are not one homogeneous group. The norm-constrained institutions are found to be the key re-sponsible investors in the gaming industry, and their RI leads to a lower equity risk for portfolio casino firms.Table 3 presents the estimation of the SEM model for the three types of casino firms. Columns (1)–(4) report the results for the twolocal casino firms while Columns (5)–(8) and (9)–(12) provide the results for the two joint ventures and two foreign casinos, re-spectively. Panel A shows that the significant and positive responses of institutional investors to the introduction of four ESG in-itiatives are mostly prominent in local casinos whereas such responses are largely muted for joint ventures. The results are mixed forforeign casinos, depending on the characteristics of the ESG policies. While the significantly positive responses of institutions holdingforeign casino stocks to smoking bans and responsible gambling campaigns basically resemble those of local ones, one notableexception is the significantly negative impact of anti-corruption campaigns and visa constraints on the institutional ownership offoreign casinos. This result might be attributed to the following. For joint ventures, a common view is that it takes time and effort tobuild the right relationship as partnering with another business can be quite challenging. For example, a merging of different culturesand management styles might impose great challenges in terms of integration and cooperation. In this study, both joint ventures werevery young, having been listed on the HKSE for merely three years. Thus, institutional investors might find it difficult to assess theimpact of ESG policies on these young joint ventures, and, consequently, no significant response to the implementation of ESGinitiatives is observed for this group.For the foreign casinos, both are affiliated with the multinational casino companies listed in the US, Sands China Ltd. is asubsidiary of Las Vegas Sands (NYSE: LVS) while Wynn Macao Ltd. is a subsidiary of NASDAQ-listed Wynn Resorts (WYNN).Therefore, unlike their local peers, the two foreign casinos are intensively covered by the Wall Street analysts in addition to thosefocusing on the HKSE. In finance, a large stream of the literature indicates that analyst research is an important input into investors'investment decisions because financial analysts act as important information intermediaries who use their specialized knowledge toprocess and produce both macroeconomic and firm-specific information (Beyer et al., 2010; Lang and Lundholm, 1996; Brennan andHughes, 1991; Merton, 1987). In particular, as indicated in O'Brien and Bhushan (1990), institutional investors seek analyst reportsfor information purposes and for reasons involving their fiduciary responsibilities. Furthermore, as indicated on the official website ofthe New York Stock Exchange (NYSE), dual-listed companies can obtain more sell-side research analyst coverage than companieslisted solely on one exchange (https://www.nyse.com/listings/international-listings). Therefore, institutional investors' perspectiveon the impact of ESG initiatives on the two foreign casinos might be heavily influenced by the Wall Street analysts in addition to thosein Hong Kong. As indicated in Bolton (2014) regarding “Why Wall Street analysts are cautious about Macau”, many Wall Streetanalysts in the casino industry, such as those working for J.P. Morgan, Wells Fargo, and Deutsche Bank, had lowered their target pricefor the U.S.-listed Macao operators such as LVS and WYNN due to their dramatic concern about the heightened regulatory andeconomic uncertainty surrounding operations in Macao. In that article, a Deutsche Bank analyst commented that the VIP “playerpreferred to stay low profile now, especially after the recent anti-graft arrests in Guangdong and Shanxi”. The Financial Times alsopublished an article citing the comments from an analyst at Citigroup after the reversal in visa policy, saying “The transit visa policysignificantly hit premium mass gross gaming revenue since the second quarter of 2014 and this reversal was much needed to rekindlegrowth in the volatile Macao market.” In particular, the US-based Macao casino companies are singled out as examples to demon-strate the impact (Bland, 2015). Therefore, the overwhelming negative opinions of the Wall Street analysts concerning the impact ofanti-corruption campaigns and visa constraints on the financial performance of foreign casinos might trigger the negative response oftheir institutional investors to the implementation of these two ESG policies. In other words, based on the overwhelmingly lowertarget price forecasted by the Wall Street analysts, institutional investors might overweight the foreign casino companies' short-termfinancial losses and downplay the long-term impact of ESG externalities with a mainland concept. Consequently, a significant andnegative link between ANTI/VISA and IO is presented for foreign casinos.In Panel B of Table 3, the coefficients on IO presented in Columns (1)–(8) are barely significant whereas the coefficients reportedin Columns (9)–(12) are significantly negative except for Column (11). This result implies a lack of significant mediating effect ofinstitutional ownership for both local and joint ventures. This result is not surprising because, as reported in Table 1, the averageproportion of norm-constrained institutional ownership in local casinos is only 37% whereas the share of natural arbitrageurs is 23%,which might largely offset the potential stabilizing effect of the former. For joint ventures, the average proportion of norm-con-strained institutional ownership is even less (27%), which might not be sufficiently strong for the exercise of its stabilizing function.The story with regard to foreign casinos is different because nearly half of their shareholders are norm-constrained institutions (47%)whereas the share of speculators is only 17%. Thus, the stabilizing effect of IO is significant in the majority of cases. In short, thefinding confirms that these institutional investors are not one homogeneous group. Casinos with a larger proportion of norm-con-strained institutional investors could enjoy lower equity risk.Turning to the direct effect of ESG-related policies, Columns (3), (7), and (11) show a significantly negative coefficient on SMOKE,confirming that the individual investors prefer the implementation of smoking bans in Macao's casinos, which directly leads to alower return volatility of casino stocks. The coefficient on RESP is significantly positive in Column (12), implying that the launch of aresponsible gambling scheme might directly increase the return volatility of foreign casinos. A possible reason for this result is thatnot many individual investors are familiar with this concept or what it involves. The individual investors in foreign casinos may evenX.M. Fu, et al. Journal of Corporate Finance 64 (2020) 10165714
Table3Responsibleinvestinginthegamingindustry(IO:LOCAL/JOINT/FOREIGN).(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)LOCALJOINTFOREIGNPanelA:IO(Dep.Var.)ANTI0.2485***−0.0872−0.5789***(4.55)(−0.65)(−6.40)VISA0.1385***−0.0448−0.2898***(3.42)(−0.60)(−5.12)SMOKE0.1224***0.04730.2086***(9.01)(0.52)(3.28)RESP1.0714***0.57604.7053***(10.98)(0.48)(5.26)TURNOVER0.08060.04170.3012***0.2293***1.4419***1.4361***1.4397***1.4280***−0.3323−0.4919*−0.5629**−0.8427***(0.78)(0.39)(3.27)(2.82)(8.08)(8.11)(8.02)(8.11)(−1.32)(−1.89)(−2.05)(−3.26)AGE−0.0057***−0.0051***−0.0087***−0.0084***0.04630.0393−0.0032−0.01480.2744***0.2420***0.0647−0.1749**(−2.99)(−2.58)(−5.19)(−5.58)(1.29)(1.37)(−0.05)(−0.16)(17.23)(17.37)(1.55)(−2.45)Constant0.6088***0.6303***0.4803***0.02980.06590.07810.1169−0.1336−0.3872***−0.2698***0.2041*−1.1654***(16.75)(17.16)(13.63)(0.47)(0.70)(0.91)(1.58)(−0.26)(−5.30)(−3.92)(1.85)(−5.49)PanelB:STDEV(Dep.Var.)IO−0.0075*−0.0075*−0.0024−0.0026−0.0026−0.0028−0.0025−0.0030−0.0097***−0.0091**−0.0040−0.0109***(−1.83)(−1.88)(−0.51)(−0.50)(−0.66)(−0.71)(−0.65)(−0.76)(−2.58)(−2.55)(−1.24)(−3.07)ANTI−0.00150.0071−0.0049(−0.54)(1.41)(−1.11)VISA−0.00150.0018−0.0026(−0.77)(0.63)(−1.03)SMOKE−0.0019**−0.0079**−0.0098***(−1.98)(−2.37)(−4.06)RESP−0.01260.00420.0869**(−1.56)(0.09)(2.20)TURNOVER0.0447***0.0447***0.0406***0.0425***0.0182**0.0197**0.0163*0.0207**0.0601***0.0592***0.0557***0.0533***(9.30)(9.41)(7.79)(8.51)(2.09)(2.26)(1.91)(2.39)(5.59)(5.54)(5.51)(4.94)AGE−0.0003***−0.0003***−0.0002*−0.0002**−0.0026*−0.00150.0039*−0.00140.00060.00020.0049***−0.0067**(−2.87)(−2.90)(−1.84)(−2.02)(−1.95)(−1.42)(1.77)(−0.40)(0.46)(0.20)(3.24)(−2.29)Constant0.0207***0.0206***0.0197***0.0246***0.0282***0.0260***0.0231***0.02310.0191***0.0201***0.0082**0.0017(6.85)(6.87)(6.58)(6.54)(7.95)(8.05)(8.43)(1.21)(5.58)(6.80)(2.02)(0.18)Indirecteffect−0.0019*−0.0010*−0.0003−0.00280.00020.0001−0.0001−0.00170.0056**0.0026**−0.0008−0.0512***Totaleffect−0.0034−0.0025−0.0022***−0.0155***0.00730.0019−0.0080**0.00250.00070.0001−0.0106***0.0356R2(IO)0.16890.11550.40930.50310.42080.42040.41980.41960.76260.73990.71090.7423R2(STDEV)0.43370.4350.44930.4430.13030.11530.16280.11160.30160.30060.37540.3205R2(Total)0.51750.48770.66650.71620.48980.48060.5080.47770.81060.79220.79370.7999Obs.12812812812892929292128128128128Notes:Thistablereportstheregressionresultsestimatedusingthestructuralequationmodeling(SEM)technique.LOCAL,JOINT,andFOREIGNrefertothelocal,jointventure,andforeigncasinosinMacao,respectively.ThesampleperiodisfromMach2010toJune2015.IOisthepercentageofoutstandingsharesheldbyinstitutions.SMOKEisassignedavalueequaltozeroforthelackofsmokingbanfromMarch2010toDecember2011,oneforthepartialbanfromJanuary2012toDecember2012,twoforthestricterbanfromJanuary2013toDecember2014,andthreeforthecompletebanfromJanuary2015toJune2015.RESPreferstotherateofresponsiblegamblingawarenessofMacaoresidents.VISAisadummyvariableequaltozerofortheloosevisapolicyfromJanuary2010toJune2014andequaltoonefortherestrictivevisapolicyfromJuly2014toJune2015.ANTIisthenumberofcorruptofficialsdismissedpermonthinmainlandChinascaledby100.TURNOVERistheratioofdailytradingvolumetosharesoutstandingeachmonth.AGEreferstothenumberofyearsafirmhasbeenlisted.STDEVisameasureoftotalrisk,computedasthestandarddeviationofdailycasinostockreturnsduringthecorrespondingmonth.***,**,and*indicatestatisticalsignificanceatthe1%,5%,and10%levels,respectively.X.M. Fu, et al. Journal of Corporate Finance 64 (2020) 10165715
find such a scheme annoying and unfavorable. Again, the result is in line with EUROSIF (2010), demonstrating that the majority of RIis performed by large institutional investors whereas individual investors account for only a small proportion of total RI.4.2. Robustness checksThus far, the empirical results suggest a significant and positive response of institutional investors to ESG-improving policies and anegative mediating effect on stock return volatility. The results also highlight the prominent role of norm-constrained institutionalinvestors in conducting RI and mediating the ESG benefits to casino companies by enhancing their equity risk management. In thissection, we conduct a battery of additional tests to check the robustness of our main findings. First, to further examine whether it isthe norm-constrained intuitions that take the prominent role in RI in the gaming industry, we re-run the regressions for the threesubsamples (i.e., local, joint venture, and foreign) using NORM/NARB to replace IO. The result presented in Table 4 (NORM) is verysimilar to that reported in Table 3 (IO) whereas the result shown in Table 5 (NARB) is completely different – the key coefficients arenot significant in the majority cases. The finding hence confirms that the norm-constrained institutions are the main responsibleinvestors in the gaming industry and that they do perform a mediating role to lower the equity risk of casino companies.To further demonstrate that the reduction in volatility is directly attributed to the direct and indirect effects related to the ESG-related regulations, we supplement our main results based on total risk (STDEV) with additional tests concerning idiosyncratic risk(SD). In doing so, we can better capture the policy effect on unsystematic risk that is endemic to a particular stock. Following Kimet al. (2013), the idiosyncratic risk is calculated as the monthly standard deviation of the residuals of the firm's stock returns regressedon the market return calculated by the Hang Seng Index. The main results presented in Table 6 (IO/NORM/NARB and SD) are in linewith those reported in Table 2, suggesting that after subtracting market volatility, the four ESG indicators continue to load sig-nificantly and negatively on the individual stock return volatility, rendering further support for the risk-mitigating effect of ESG-related regulations. It is worth noting that the impact of the smoking bans on the idiosyncratic risk of the casino companies isinsignificant. The results provided in Table 7 (LOCAL/JOINT/FOREIGN and SD) also mimic those in Table 3, suggesting that casinoswith a larger proportion of norm-constrained institutional investors could also enjoy lower idiosyncratic risk.To address the potential endogeneity problem and to avoid the problem of nonnormal distribution in the mediation tests, wefollow Preacher and Hayes (2004) to re-estimate Eq. (1) and Eq. (2) using the lagged values of the regressors together with boot-strapping techniques. The results are presented in Tables 8 and 9. Focusing on Table 8, the main results in Panel A remain unchanged,confirming that institutional investors do pursue RI in the “sin” industries. The results also confirm the key role of the norm-constrained institutional investors in RI in the gaming industry. With regard to the mediating effect of institutional ownershipreported in Panel B, again, the main results are the same. That is, institutional investors, in particular, the norm-constrained in-stitutions, can mediate the ESG benefits to lower the equity risk of the casino companies whereas the natural arbitrageurs do notdisplay any significant role in this regard. With regard to the direct effect, the coefficient on Lag. RESP listed in Columns (4), (8), and(12) becomes significantly negative. This finding suggests that, in addition to the smoking bans, the introduction of responsiblegambling schemes also directly reduces the equity risk of casino firms in all three scenarios. Similarly, the main results shown inTable 9 are consistent with those reported in Table 3. In general, the various tests discussed above demonstrate that the main findingsare robust.5. ConclusionThe theory and practice of RI has experienced phenomenal growth over the past two decades. The changing face of RI from atraditional ethics-based process to a modern ESG-based approach enables institutional investors to practice RI in the previouslyexcluded “sin” industries. To examine whether and how RI occurs in these special sectors, this study focuses on the response ofinstitutional investors in casino stocks to the introduction of various ESG-related government initiatives (e.g., an anticorruptioncampaign, visa restriction, smoking bans, and responsible gambling). To disentangle the specific drivers of RI in the gaming industry,we follow Williams (2010) in adopting a theoretical framework that encompasses comparative valuation and option values ap-proaches together with the DCFV method. In addition, to identify the key performers of RI in this special industry, we follow Hongand Kacperczyk (2009) in dividing the institutional investors into two categories: norm-constrained institutors and natural arbi-trageurs. We also separate the sample casinos into local, joint ventures, and foreign subsamples to further study the pattern of RI inthis sector. Finally, SEM is employed to investigate whether RI makes financial sense in this special industry. The sample covers all sixlisted casinos in Macao from March 2010 to June 2015.Overall, the results suggest that institutional investors do pursue RI in the gaming industry by increasing their shares in theportfolio casino companies upon the implementation of ESG-improving policies. They also mediate the ESG improvements to theportfolio companies by enhancing the equity risk management of these underlying companies. The results show that institutionalinvestors adopt the ESG integration approach instead of the negative screening method in their investment analysis and decisions,lending empirical support to the theory of modern RI. The finding also suggests that governments' ESG-improving efforts can betransmitted into the economy to enhance firm performance through the engagement of institutional investors worldwide. TheX.M. Fu, et al. Journal of Corporate Finance 64 (2020) 10165716
Table4Responsibleinvestinginthegamingindustry(NORM:LOCAL/JOINT/FOREIGN).(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)LOCALJOINTFOREIGNPanelA:NORM(Dep.Var.)ANTI0.1274*−0.0899−0.5949***(1.78)(−0.77)(−5.80)VISA0.0706−0.0388−0.3012***(1.37)(−0.60)(−4.74)SMOKE0.0916***0.07050.2425***(4.64)(0.90)(3.45)RESP0.9401***0.39794.4929***(6.49)(0.38)(4.41)TURNOVER−0.0755−0.09560.10980.08631.3179***1.3089***1.3256***1.3002***−0.1657−0.3276−0.3872−0.6782**(−0.56)(−0.71)(0.82)(0.72)(8.51)(8.50)(8.52)(8.50)(−0.58)(−1.12)(−1.28)(−2.30)AGE−0.0029−0.0025−0.0055**−0.0059***0.02490.0155−0.0400−0.02400.2654***0.2326***0.0321−0.1693**(−1.15)(−1.01)(−2.26)(−2.62)(0.80)(0.62)(−0.76)(−0.31)(14.70)(14.87)(0.70)(−2.08)Constant0.3949***0.4060***0.2878***−0.13010.08420.10140.1415**−0.0399−0.5585***−0.4399***0.0892−1.2802***(8.31)(8.68)(5.62)(−1.39)(1.02)(1.36)(2.21)(−0.09)(−6.74)(−5.69)(0.73)(−5.29)PanelB:STDEV(Dep.Var.)NORM−0.0009−0.00110.00220.0034−0.0031−0.0034−0.0026−0.0036−0.0089***−0.0086***−0.0039−0.0096***(−0.29)(−0.33)(0.66)(0.95)(−0.69)(−0.76)(−0.60)(−0.80)(−2.72)(−2.70)(−1.36)(−3.10)ANTI−0.00320.0070−0.0046(−1.24)(1.40)(−1.08)VISA−0.00240.0018−0.0025(−1.30)(0.63)(−1.02)SMOKE−0.0024***−0.0078**−0.0096***(−2.97)(−2.35)(−4.00)RESP−0.0186***0.00400.0790**(−2.78)(0.09)(2.05)TURNOVER0.0440***0.0443***0.0396***0.0416***0.0185**0.0201**0.0163*0.0212**0.0618***0.0609***0.0564***0.0559***(9.06)(9.19)(7.90)(8.59)(2.08)(2.26)(1.85)(2.39)(5.80)(5.76)(5.64)(5.29)AGE−0.0002**−0.0002**−0.0002−0.0002*−0.0027**−0.00160.0038*−0.00140.0003−0.00000.0048***−0.0064**(−2.47)(−2.54)(−1.63)(−1.75)(−1.99)(−1.48)(1.72)(−0.41)(0.26)(−0.01)(3.18)(−2.21)Constant0.0165***0.0163***0.0179***0.0249***0.0283***0.0262***0.0232***0.02340.0178***0.0187***0.0077*0.0020(7.75)(7.74)(8.39)(6.60)(7.96)(8.04)(8.36)(1.22)(4.96)(6.03)(1.93)(0.21)Indirecteffect−0.0001−0.00010.00020.00320.00030.0001−0.0002−0.00140.0053**0.0026**−0.0010−0.0433**Totaleffect−0.0034−0.0025−0.0022***−0.0155***0.00730.0019−0.0080**0.00250.00070.0001−0.0106***0.0357R2(NORM)0.04130.03170.15910.26100.45510.45370.45640.45240.69450.67180.64700.6650R2(STDEV)0.41930.41990.45000.44580.13070.11600.16230.11220.30530.30460.37690.3214R2(Total)0.43880.43380.53380.58720.51770.50830.53630.50500.75850.74030.74970.7413Obs.12812812812892929292128128128128Notes:Thistablereportstheregressionresultsestimatedusingthestructuralequationmodeling(SEM)technique.LOCAL,JOINT,andFOREIGNrefertothelocal,jointventure,andforeigncasinosinMacao,respectively.ThesampleperiodisfromMach2010toJune2015.NORMisthepercentageofoutstandingsharesheldbythenorm-constrainedinstitutionalinvestors.SMOKEisassignedavalueequaltozeroforthelackofsmokingbanfromMarch2010toDecember2011,oneforthepartialbanfromJanuary2012toDecember2012,twoforthestricterbanfromJanuary2013toDecember2014,andthreeforthecompletebanfromJanuary2015toJune2015.RESPreferstotherateofresponsiblegamblingawarenessofMacaoresidents.VISAisadummyvariableequaltozerofortheloosevisapolicyfromJanuary2010toJune2014andequaltoonefortherestrictivevisapolicyfromJuly2014toJune2015.ANTIisthenumberofcorruptofficialsdismissedpermonthinmainlandChinascaledby100.TURNOVERistheratioofdailytradingvolumetosharesoutstandingeachmonth.AGEreferstothenumberofyearsafirmhasbeenlisted.STDEVisameasureoftotalrisk,computedasthestandarddeviationofdailycasinostockreturnsduringthecorrespondingmonth.***,**,and*indicatestatisticalsignificanceatthe1%,5%,and10%levels,respectively.X.M. Fu, et al. Journal of Corporate Finance 64 (2020) 10165717
Table5Responsibleinvestinginthegamingindustry(NABR:LOCAL/JOINT/FOREIGN).(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)LOCALJOINTFOREIGNPanelA:NARB(Dep.Var.)ANTI0.1211**0.00270.0160(1.99)(0.13)(0.32)VISA0.0679−0.00600.0114(1.54)(−0.53)(0.38)SMOKE0.0308*−0.0233*−0.0339(1.71)(−1.73)(−1.07)RESP0.13130.17810.2123(0.92)(0.98)(0.45)TURNOVER0.15610.13720.19150.14300.1240***0.1271***0.1141***0.1278***−0.1666−0.1644−0.1757−0.1645(1.36)(1.20)(1.57)(1.20)(4.61)(4.76)(4.28)(4.84)(−1.19)(−1.19)(−1.28)(−1.20)AGE−0.0029−0.0025−0.0032−0.00260.0215***0.0237***0.0368***0.00920.00900.00940.0325−0.0056(−1.34)(−1.18)(−1.44)(−1.16)(3.96)(5.48)(4.08)(0.69)(1.02)(1.27)(1.56)(−0.15)Constant0.2139***0.2243***0.1924***0.1599*−0.0182−0.0233*−0.0246**−0.09370.1713***0.1701***0.1149**0.1148(5.27)(5.62)(4.11)(1.74)(−1.28)(−1.81)(−2.24)(−1.23)(4.24)(4.68)(2.09)(1.02)PanelB:STDEV(Dep.Var.)NABR−0.0048−0.0049−0.0040−0.0047−0.0109−0.0094−0.0219−0.01060.00600.00610.00330.0058(−1.28)(−1.32)(−1.10)(−1.31)(−0.42)(−0.36)(−0.85)(−0.41)(0.87)(0.87)(0.51)(0.84)ANTI−0.00280.00730.0006(−1.07)(1.46)(0.15)VISA−0.00220.0019−0.0000(−1.17)(0.66)(−0.00)SMOKE−0.0020***−0.0085**−0.0105***(−2.75)(−2.53)(−4.50)RESP−0.0148**0.00440.0345(−2.56)(0.10)(0.93)TURNOVER0.0449***0.0451***0.0406***0.0426***0.0158**0.0169**0.0153**0.0178**0.0643***0.0647***0.0585***0.0634***(9.23)(9.38)(8.07)(8.78)(2.14)(2.26)(2.13)(2.40)(5.86)(5.97)(5.81)(5.89)AGE−0.0002***−0.0002***−0.0002*−0.0002**−0.0025*−0.00140.0048**−0.0012−0.0021***−0.0021***0.0046***−0.0048(−2.60)(−2.66)(−1.92)(−2.14)(−1.74)(−1.15)(1.97)(−0.36)(−3.09)(−3.54)(2.99)(−1.61)Constant0.0171***0.0170***0.0193***0.0252***0.0278***0.0256***0.0223***0.02250.0218***0.0215***0.0070*0.0137(9.12)(9.15)(9.51)(6.68)(7.79)(7.79)(8.04)(1.16)(6.45)(6.97)(1.71)(1.55)Indirecteffect−0.0006−0.0003−0.0001−0.0006−0.00000.00010.0005−0.00190.00010.0001−0.00010.0012Totaleffect−0.0034−0.0025−0.0022***−0.0155***0.00730.0019−0.0080**0.00250.00070.0001−0.0106***0.0357R2(NABR)0.04010.02860.03260.01710.40790.40970.42650.41400.03430.03470.04210.0351R2(STDEV)0.42630.42720.45340.44930.12790.11170.16560.10760.26960.26950.36930.2744R2(Total)0.44810.44240.47010.45750.48250.47440.52040.47590.29450.29460.39560.2996Obs.12812812812892929292128128128128Notes:Thistablereportstheregressionresultsestimatedusingthestructuralequationmodeling(SEM)technique.LOCAL,JOINT,andFOREIGNrefertothelocal,jointventure,andforeigncasinosinMacao,respectively.ThesampleperiodisfromMach2010toJune2015.NARBisthepercentageofoutstandingsharesheldbythenaturalarbitrageurs.SMOKEisassignedavalueequaltozeroforthelackofsmokingbanfromMarch2010toDecember2011,oneforthepartialbanfromJanuary2012toDecember2012,twoforthestricterbanfromJanuary2013toDecember2014,andthreeforthecompletebanfromJanuary2015toJune2015.RESPreferstotherateofresponsiblegamblingawarenessofMacaoresidents.VISAisadummyvariableequaltozerofortheloosevisapolicyfromJanuary2010toJune2014andequaltoonefortherestrictivevisapolicyfromJuly2014toJune2015.ANTIisthenumberofcorruptofficialsdismissedpermonthinmainlandChinascaledby100.TURNOVERistheratioofdailytradingvolumetosharesoutstandingeachmonth.AGEreferstothenumberofyearsafirmhasbeenlisted.STDEVisameasureoftotalrisk,computedasthestandarddeviationofdailycasinostockreturnsduringthecorrespondingmonth.***,**,and*indicatestatisticalsignificanceatthe1%,5%,and10%levels,respectively.X.M. Fu, et al. Journal of Corporate Finance 64 (2020) 10165718
Table6Responsibleinvestinginthegamingindustry(IO/NORM/NARB&idiosyncraticrisk).(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)IONORMNARBPanelA:IO/NORM/NARB(Dep.Var.)ANTI0.2618***0.2170***0.0448*(4.74)(3.98)(1.65)VISA0.1435***0.1172***0.0263(3.59)(2.98)(1.35)SMOKE0.1621***0.1549***0.0072(10.60)(10.29)(0.86)RESP1.3271***1.3137***0.0134(10.80)(10.98)(0.20)TURNOVER0.6780***0.6397***1.0143***0.9268***0.4486***0.4164***0.7811***0.7092***0.2293***0.2234***0.2332***0.2176***(5.38)(5.03)(8.54)(8.01)(3.61)(3.33)(6.68)(6.30)(3.71)(3.62)(3.58)(3.41)AGE−0.0024−0.0015−0.0072***−0.0063***−0.0047*−0.0040−0.0096***−0.0089***0.0023*0.0025*0.0024*0.0026**(−0.90)(−0.58)(−3.02)(−2.65)(−1.82)(−1.54)(−4.08)(−3.88)(1.82)(1.93)(1.82)(2.04)Constant0.3732***0.3975***0.1776***−0.3811***0.2722***0.2927***0.0785**−0.4831***0.1010***0.1048***0.0991***0.1020**(12.70)(13.86)(5.25)(−4.85)(9.39)(10.38)(2.36)(−6.31)(7.00)(7.54)(5.34)(2.35)PanelB:SD(Dep.Var.)IO/NORM/NARB−0.0059***−0.0057***−0.0049***−0.0058***−0.0061***−0.0059***−0.0051***−0.0060***−0.0002−0.00010.0001−0.0003(−5.45)(−5.32)(−4.08)(−4.73)(−5.49)(−5.39)(−4.17)(−4.79)(−0.08)(−0.05)(0.03)(−0.12)ANTI0.00060.0003−0.0010(0.49)(0.28)(−0.84)VISA−0.0003−0.0005−0.0012(−0.42)(−0.59)(−1.39)SMOKE−0.0006−0.0006−0.0014***(−1.44)(−1.48)(−3.89)RESP−0.00020.0000−0.0078***(−0.05)(0.02)(−2.71)TURNOVER0.0261***0.0256***0.0238***0.0257***0.0248***0.0244***0.0228***0.0246***0.0221***0.0220***0.0188***0.0205***(9.78)(9.71)(8.06)(8.98)(9.50)(9.44)(8.00)(8.88)(8.12)(8.15)(6.71)(7.41)AGE−0.0002***−0.0002***−0.0002***−0.0002***−0.0002***−0.0002***−0.0002***−0.0002***−0.0002***−0.0002***−0.0002***−0.0002***(−4.33)(−4.20)(−3.64)(−4.13)(−4.59)(−4.48)(−3.85)(−4.41)(−3.88)(−3.86)(−2.95)(−3.36)Constant0.0214***0.0215***0.0219***0.0215***0.0208***0.0209***0.0215***0.0208***0.0192***0.0192***0.0211***0.0237***(29.57)(29.94)(27.62)(11.63)(31.12)(31.79)(27.87)(11.02)(28.83)(29.75)(25.86)(12.76)Indirecteffect−0.0016***−0.0008***−0.0008***−0.0077***−0.0013***−0.0007***−0.0008***−0.0079***0.00000.00000.00000.0000Totaleffect−0.0010−0.0012−0.0014***−0.0078***−0.0010−0.0012−0.0014***−0.0078***−0.0010−0.0012−0.0014***−0.0078***R2(IO/NORM/NARB)0.13180.10870.30140.30770.06820.05000.25290.27650.09550.09320.09040.0885R2(SD)0.23790.23780.24190.23740.23880.23940.24330.23860.17280.17580.20560.1884R2(Total)0.32370.30550.45860.46030.26400.25010.41340.42830.24810.24880.27380.2565Obs.348348348348348348348348348348348348Notes:Thistablereportstheregressionresultsestimatedusingthestructuralequationmodeling(SEM)techniqueandtheidiosyncraticvolatilityasfirmriskmeasure.ThesamplecoversallcasinocompaniesinMacaofromMach2010toJune2015.SDisameasureofidiosyncraticrisk,computedasthestandarddeviationoftheresidualsfromaregressionofindividualdailyreturnagainstmarketreturn.IOisthepercentageofoutstandingsharesheldbyinstitutions.NORMisthepercentageofoutstandingsharesheldbythenorm-constrainedinstitutionalinvestors.NARBisthepercentageofoutstandingsharesheldbythenaturalarbitrageurs.SMOKEisassignedavalueequaltozeroforthelackofsmokingbanfromMarch2010toDecember2011,oneforthepartialbanfromJanuary2012toDecember2012,twoforthestricterbanfromJanuary2013toDecember2014,andthreeforthecompletebanfromJanuary2015toJune2015.RESPreferstotherateofresponsiblegamblingawarenessofMacaoresidents.VISAisadummyvariableequaltozerofortheloosevisapolicyfromJanuary2010toJune2014andequaltoonefortherestrictivevisapolicyfromJuly2014toJune2015.ANTIisthenumberofcorruptofficialsdismissedpermonthinmainlandChinascaledby100.TURNOVERistheratioofdailytradingvolumetosharesoutstandingeachmonth.AGEreferstothenumberofyearsafirmhasbeenlisted.***,**,and*indicatestatisticalsignificanceatthe1%,5%,and10%levels,respectively.X.M. Fu, et al. Journal of Corporate Finance 64 (2020) 10165719
analyses regarding the specific drivers of RI echo the findings of Mercer and LGT Capital Partners (2015), suggesting that includingESG considerations into investment decisions can enhance a portfolio's defense against risks arising from environmental and socialtrends, changes in policy and regulation, and governance failures. It can also place institutional investors in a better position to takeadvantage of opportunities arising from a shift towards more sustainable economic growth.In addition, the results show that the institutional investors under investigation are not a homogenous group. The norm-con-strained institutions are the prominent responsible investors in this special sector whereas the natural arbitrageurs do no demonstrateany significantly positive responses to the ESG-improving policies. Their difference in terms of characteristics, investment strategies,and techniques probably make the norm-constrained institutional investors better able to pursue the best-expected risk-adjustedreturn through RI. Furthermore, different responses to the ESG policies among the institutional investors in local, joint venture, andforeign casinos not only provide evidence for the profound role of the norm-constrained institutions in pursuing RI but also echo theargument of existing studies indicating that analyst coverage has great influence on the decision-making of institutional investors andhence RI performance worldwide. Finally, individual investors are found to favor the launches of smoking bans and responsiblegambling schemes. Overall, the findings are robust across various estimation techniques, model specifications and alternativemeasures of firm risk.Although this study is a specific experiment focusing on RI in the gaming industry, it provides a good vehicle to shed light onseveral broader and important implications. First, as highlighted in the UNPRI (2018), institutional investors set the direction ofmarkets by determining the goals for the investment of most of the world's wealth. Therefore, it is crucial to develop an appropriateframework to guide their investment process. The modern RI advocated by the UNPRI offers a dynamic framework for institutionalinvestors to conduct a positive, proactive and comprehensive review of their investment portfolios while considering both financialand social impacts. Under this framework, RI can be pursued even in the previously abandoned “sin” sectors. Therefore, with an aimto achieve inclusive growth, policymakers should be more active in implementing various ESG policies and taking effective measuresto encourage institutional investors adopting the modern RI framework in their investment processes.Second, the significant mediating effect observed in this study suggests that institutional ownership is an important component ofa broader toolkit designed to encourage firms to be more ESG responsible, regardless of the nature of the industry. The finding alsoshows how financial value and ESG benefits can become more closely interrelated from the perspective of institutional investors.Therefore, as argued in Hawley and Lukomnik (2019), instead of focusing on the traditional definition of investing such as securityselection and portfolio construction, institutional investors take actions, either individually or coordinating with others, to engage inmarket-wide ESG issues. Such actions have the potential to transform financial markets by producing a “better beta” by mitigatingsystematic risk and increasing opportunity across the entire market (p. 2). Consequently, sustainable growth becomes a possiblemission.Furthermore, given that analyst reports are an important input into investors' investment decisions and hence global RI, it is alsonecessary to make the consideration of ESG an integral component of investment culture worldwide. An ideal solution would be tomake ESG a compulsory component of analyst reports so that not only institutional investors but also individual investors couldbecome more aware of this critical issue. In addition, although the norm-constrained institutions are found to be the prominentresponsible investors in this study, this does exclude the possibility of equipping the natural arbitrageurs with ESG considerations thatmay suit their investment arena. As emphasized in the UNPRI (2017), some RI practices could be easily adopted by the naturalarbitrageurs. Such RI practices include incorporating ESG data into the investment process and stock valuation, and doing so wouldnot sacrifice their investment returns. Finally, to enhance overall risk management performance and to achieve sustainable growth,firm managers should consider voluntarily imposing ESG-related regulations on themselves in advance such as being proactive toincorporate CSR factors into management and operation systems. This is particularly true for the “sin” companies due to theirpotential negative impacts on society.This paper has some limitations. First, we do not employ detailed firm-level data for institutional investors, which prevents usfrom further exploring the reasons for the heterogeneity in RI performance by examining the characteristics of different groups ofinvestors. Second, the number of observations is small, particularly for joint ventures. Hence, we must be cautious in interpreting thenonsignificant results for joint ventures. Third, the decline in volatility might be due to other factors related to the regulationsthemselves. For example, there might have been a great deal of uncertainty regarding the regulatory environment that was resolvedonce the actual ESG regulations were imposed. Alternatively, the ESG regulations might have forced the casinos to operate on a lowerend of the risk-return tradeoff. In the current setup, it is difficult to completely isolate the effects of the ESG initiatives from those ofother factors. Finally, endogeneity is potentially an issue common to corporate governance studies. Although we have tried our bestto tackle this challenge, it is still insufficiently addressed, especially since each ESG related initiative was implemented at differenttimes.Sources: Bloomberg; HKSE (2012 & 2015).X.M. Fu, et al. Journal of Corporate Finance 64 (2020) 10165720
Table7Responsibleinvestinginthegamingindustry(LOCAL/JOINT/FOREIGN&idiosyncraticrisk).(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)LOCALJOINTFOREIGNPanelA:IO(Dep.Var.)ANTI0.2485***−0.0872−0.5789***(4.55)(−0.65)(−6.40)VISA0.1385***−0.0448−0.2898***(3.42)(−0.60)(−5.12)SMOKE0.1224***0.04730.2086***(9.01)(0.52)(3.28)RESP1.0714***0.57604.7053***(10.98)(0.48)(5.26)TURNOVER0.08060.04170.3012***0.2293***1.4419***1.4361***1.4397***1.4280***−0.3323−0.4919*−0.5629**−0.8427***(0.78)(0.39)(3.27)(2.82)(8.08)(8.11)(8.02)(8.11)(−1.32)(−1.89)(−2.05)(−3.26)AGE−0.0057***−0.0051***−0.0087***−0.0084***0.04630.0393−0.0032−0.01480.2744***0.2420***0.0647−0.1749**(−2.99)(−2.58)(−5.19)(−5.58)(1.29)(1.37)(−0.05)(−0.16)(17.23)(17.37)(1.55)(−2.45)Constant0.6088***0.6303***0.4803***0.02980.06590.07810.1169−0.1336−0.3872***−0.2698***0.2041*−1.1654***(16.75)(17.16)(13.63)(0.47)(0.70)(0.91)(1.58)(−0.26)(−5.30)(−3.92)(1.85)(−5.49)PanelB:SD(Dep.Var.)IO−0.0082**−0.0076**−0.0052−0.0054−0.0036−0.0037−0.0034−0.0037−0.0092***−0.0093***−0.0052**−0.0107***(−2.56)(−2.47)(−1.38)(−1.31)(−1.20)(−1.26)(−1.15)(−1.24)(−3.41)(−3.63)(−2.28)(−4.25)ANTI0.00030.0012−0.0030(0.16)(0.32)(−0.95)VISA−0.0006−0.0012−0.0023(−0.39)(−0.56)(−1.31)SMOKE−0.0009−0.0042*−0.0072***(−1.19)(−1.65)(−4.18)RESP−0.00570.00620.0743***(−0.90)(0.18)(2.64)TURNOVER0.0273***0.0270***0.0250***0.0260***0.0160**0.0171***0.0142**0.0166**0.0380***0.0376***0.0349***0.0325***(7.33)(7.32)(6.14)(6.67)(2.41)(2.58)(2.15)(2.52)(4.92)(4.92)(4.83)(4.24)AGE−0.0002***−0.0002***−0.0002**−0.0002**−0.00030.00030.0026−0.00050.00090.00090.0043***−0.0050**(−3.08)(−3.00)(−2.21)(−2.34)(−0.32)(0.34)(1.53)(−0.20)(1.08)(1.27)(3.94)(−2.41)Constant0.0219***0.0217***0.0213***0.0235***0.0211***0.0198***0.0196***0.01790.0176***0.0177***0.0093***0.0021(9.36)(9.32)(9.06)(8.01)(7.80)(8.08)(9.29)(1.24)(7.19)(8.41)(3.21)(0.31)Indirecteffect−0.0020**−0.0011**−0.0006−0.00580.00030.0002−0.0002−0.00210.0053***0.0027***−0.0011*−0.0504***Totaleffect−0.0017−0.0016−0.0015***−0.0115**0.0016−0.0010−0.0044*0.00410.00230.0003−0.0083***0.0240R2(IO)0.16890.11550.40930.50310.42080.42040.41980.41960.76260.73990.71090.7423R2(SD)0.32920.32980.33640.33330.07470.07680.10020.07400.29140.29580.37210.3234R2(Total)0.42040.38390.59250.65560.46240.46320.47630.46080.80570.78850.79040.7986Obs.12812812812892929292128128128128Notes:Thistablereportstheregressionresultsestimatedusingthestructuralequationmodeling(SEM)techniqueandtheidiosyncraticvolatilityasfirmriskmeasure.LOCAL,JOINT,andFOREIGNrefertothelocal,jointventure,andforeigncasinosinMacao,respectively.ThesampleperiodisfromMach2010toJune2015.SDisameasureofidiosyncraticrisk,computedasthestandarddeviationoftheresidualsfromaregressionofindividualdailyreturnagainstmarketreturn.IOisthepercentageofoutstandingsharesheldbyinstitutions.SMOKEisassignedavalueequaltozeroforthelackofsmokingbanfromMarch2010toDecember2011,oneforthepartialbanfromJanuary2012toDecember2012,twoforthestricterbanfromJanuary2013toDecember2014,andthreeforthecompletebanfromJanuary2015toJune2015.RESPreferstotherateofresponsiblegamblingawarenessofMacaoresidents.VISAisadummyvariableequaltozerofortheloosevisapolicyfromJanuary2010toJune2014andequaltoonefortherestrictivevisapolicyfromJuly2014toJune2015.ANTIisthenumberofcorruptofficialsdismissedpermonthinmainlandChinascaledby100.TURNOVERistheratioofdailytradingvolumetosharesoutstandingeachmonth.AGEreferstothenumberofyearsafirmhasbeenlisted.***,**,and*indicatestatisticalsignificanceatthe1%,5%,and10%levels,respectively.X.M. Fu, et al. Journal of Corporate Finance 64 (2020) 10165721
Table8Responsibleinvestinginthegamingindustry(laggedIO/NORM/NARB&bootstrapping).(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)IONORMNARBPanelA:Lag.IO/NORM/NARB(Dep.Var.)Lag.ANTI0.2653***0.2195***0.0459(4.82)(3.89)(1.63)Lag.VISA0.1436***0.1168***0.0267(3.71)(2.86)(1.32)Lag.SMOKE0.1662***0.1592***0.0070(11.87)(10.32)(0.81)Lag.RESP1.3580***1.3483***0.0096(12.16)(11.02)(0.14)Lag.TURNOVER0.6639***0.6255***1.0068***0.9164***0.4371***0.4048***0.7766***0.7018***0.2267***0.2207***0.2302***0.2145***(3.99)(3.76)(5.47)(5.18)(3.50)(3.22)(6.62)(6.23)(3.63)(3.55)(3.50)(3.33)Lag.AGE−0.0021−0.0013−0.0071***−0.0061***−0.0044*−0.0037−0.0094***−0.0087***0.0023*0.0024*0.0024*0.0026**(−0.90)(−0.54)(−2.95)(−2.69)(−1.71)(−1.43)(−3.97)(−3.76)(1.77)(1.88)(1.77)(1.99)Constant0.3743***0.3988***0.1750***−0.3963***0.2725***0.2931***0.0748**−0.5012***0.1018***0.1057***0.1001***0.1049**(10.55)(12.06)(4.41)(−5.32)(9.33)(10.32)(2.23)(−6.44)(6.98)(7.52)(5.32)(2.36)PanelB:STDEV(Dep.Var.)Lag.IO/NORM/NARB−0.0066***−0.0069***−0.0038**−0.0051***−0.0062***−0.0064***−0.0032*−0.0043**−0.0025−0.0028−0.0024−0.0030(−4.25)(−4.47)(−2.15)(−2.83)(−3.86)(−4.05)(−1.82)(−2.40)(−0.78)(−0.86)(−0.75)(−0.94)Lag.ANTI−0.0018−0.0022−0.0034**(−1.18)(−1.27)(−2.00)Lag.VISA−0.0006−0.0009−0.0016(−0.77)(−0.73)(−1.27)Lag.SMOKE−0.0022***−0.0023***−0.0028***(−2.90)(−3.97)(−5.50)Lag.RESP−0.0106**−0.0116**−0.0174***(−2.07)(−2.43)(−4.22)Lag.TURNOVER0.0328***0.0333***0.0262***0.0298***0.0311***0.0316***0.0248***0.0282***0.0289***0.0296***0.0229***0.0258***(4.01)(4.11)(2.92)(3.38)(8.27)(8.45)(6.14)(7.09)(7.53)(7.72)(5.88)(6.69)Lag.AGE−0.0002**−0.0002**−0.0002−0.0002*−0.0002***−0.0003***−0.0002**−0.0002**−0.0002***−0.0002***−0.0001−0.0002**(−1.99)(−2.07)(−1.32)(−1.66)(−3.14)(−3.29)(−1.97)(−2.57)(−2.66)(−2.82)(−1.53)(−2.01)Constant0.0237***0.0235***0.0254***0.0290***0.0229***0.0227***0.0249***0.0289***0.0214***0.0211***0.0249***0.0314***(20.46)(20.97)(16.54)(8.55)(23.65)(23.79)(22.73)(10.47)(22.76)(22.96)(21.91)(11.87)Indirecteffect−0.0018***−0.0010***−0.0006**−0.0069***−0.0014***−0.0007**−0.0005*−0.0059**−0.0001−0.0001−0.0000−0.0000Totaleffect−0.0035**−0.0016*−0.0028***−0.0174***−0.0035**−0.0016−0.0028***−0.0174***−0.0035**−0.0016−0.0028***−0.0174***R2(IO/NORM/NARB)0.12940.10580.30400.31050.06630.04780.25640.28060.09260.09020.08730.0856R2(STDEV)0.20700.20520.23570.21610.20050.19800.23210.21040.16710.16140.22600.1992R2(Total)0.30040.27980.46090.45220.23880.22120.41770.42070.24320.23590.29260.2667Obs.342342342342342342342342342342342342Notes:Thistablereportstheregressionresultsestimatedusingthestructuralequationmodeling(SEM)techniquewithbootstrappingandthelaggedvaluesofregressors.ThesamplecoversallcasinocompaniesinMacaofromMach2010toJune2015.STDEVisameasureoftotalrisk,computedasthestandarddeviationofdailycasinostockreturnsduringthecorrespondingmonth.IOisthepercentageofoutstandingsharesheldbyinstitutions.NORMisthepercentageofoutstandingsharesheldbythenorm-constrainedinstitutionalinvestors.NARBisthepercentageofoutstandingsharesheldbythenaturalarbitrageurs.SMOKEisassignedavalueequaltozeroforthelackofsmokingbanfromMarch2010toDecember2011,oneforthepartialbanfromJanuary2012toDecember2012,twoforthestricterbanfromJanuary2013toDecember2014,andthreeforthecompletebanfromJanuary2015toJune2015.RESPreferstotherateofresponsiblegamblingawarenessofMacaoresidents.VISAisadummyvariableequaltozerofortheloosevisapolicyfromJanuary2010toJune2014andequaltoonefortherestrictivevisapolicyfromJuly2014toJune2015.ANTIisthenumberofcorruptofficialsdismissedpermonthinmainlandChinascaledby100.TURNOVERistheratioofdailytradingvolumetosharesoutstandingeachmonth.AGEreferstothenumberofyearsafirmhasbeenlisted.***,**,and*indicatestatisticalsignificanceatthe1%,5%,and10%levels,respectively.X.M. Fu, et al. Journal of Corporate Finance 64 (2020) 10165722
Table9Responsibleinvestinginthegamingindustry(laggedIO:LOCAL/JOINT/FOREIGN&bootstrapping).(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)LOCALJOINTFOREIGNPanelA:Lag.IO(Dep.Var.)Lag.ANTI0.2541***−0.0835−0.5652***(5.42)(−0.80)(−6.53)Lag.VISA0.1400***−0.0427−0.2800***(6.46)(−0.71)(−6.21)Lag.SMOKE0.1260***0.04650.2152***(7.45)(0.59)(3.96)Lag.RESP1.0993***0.58944.7176***(8.49)(0.55)(5.51)Lag.TURNOVER0.08230.04240.3090***0.2340***1.4277**1.4219**1.4266**1.4155**−0.3470−0.5050**−0.5708***−0.8540***(0.78)(0.41)(2.84)(2.60)(2.38)(2.38)(2.39)(2.36)(−1.53)(−2.24)(−2.60)(−4.08)Lag.AGE−0.0057***−0.0050**−0.0087***−0.0084***0.04580.0389−0.0020−0.01500.2747***0.2428***0.0653**−0.1714**(−2.60)(−2.19)(−4.34)(−5.05)(1.40)(1.42)(−0.04)(−0.18)(17.97)(19.54)(2.25)(−2.39)Constant0.6073***0.6292***0.4757***0.01420.06850.08040.1167−0.1395−0.3865***−0.2707***0.1991***−1.1814***(19.49)(21.43)(11.78)(0.16)(0.71)(0.89)(1.41)(−0.32)(−5.43)(−4.33)(2.99)(−5.99)PanelB:STDEV(Dep.Var.)Lag.IO−0.0057−0.00620.00220.0034−0.0020−0.0021−0.0019−0.0023−0.0144***−0.0126***−0.0080***−0.0161***(−1.22)(−1.40)(0.36)(0.55)(−0.29)(−0.30)(−0.27)(−0.32)(−3.36)(−3.38)(−3.18)(−4.16)Lag.ANTI−0.00220.0068−0.0060(−0.83)(1.39)(−1.34)Lag.VISA−0.00120.0033−0.0012(−0.84)(1.44)(−0.52)Lag.SMOKE−0.0029**−0.0072*−0.0099***(−2.23)(−1.81)(−3.88)Lag.RESP−0.0231**−0.01080.1080***(−2.46)(−0.25)(3.48)Lag.TURNOVER0.0372***0.0375***0.0307**0.0330***0.01640.01700.01480.01850.0223*0.02070.01760.0137(3.48)(3.55)(2.42)(2.84)(0.66)(0.69)(0.60)(0.71)(1.72)(1.61)(1.52)(1.16)Lag.AGE−0.0002*−0.0002*−0.0001−0.0001−0.0027−0.00210.0034−0.00040.00190.00090.0061***−0.0071***(−1.74)(−1.85)(−0.54)(−0.66)(−1.53)(−1.42)(1.62)(−0.13)(1.56)(1.01)(3.86)(−3.42)Constant0.0209***0.0210***0.0195***0.0280***0.0282***0.0271***0.0235***0.02960.0232***0.0256***0.0127***0.0013(5.41)(5.48)(5.30)(5.66)(6.23)(6.66)(9.23)(1.55)(7.31)(9.79)(3.18)(0.17)Indirecteffect−0.0015−0.00090.00030.00370.00020.0001−0.0001−0.00140.0081***0.0035***−0.0017**−0.0759***Totaleffect−0.0037−0.0021−0.0026***−0.0194***0.00700.0034−0.0073**−0.01220.00210.0024−0.0117***0.0321R2(Lag.IO)0.16580.11130.41250.50760.41870.41830.41790.41780.76280.74030.71740.7480R2(STDEV)0.30850.30760.34470.33940.12100.11700.14630.10410.18970.18070.26280.2192R2(Total)0.41300.37380.60830.66900.48230.47960.49660.47150.77420.75000.75530.7689Obs.12612612612690909090126126126126Notes:Thistablereportstheregressionresultsestimatedusingthestructuralequationmodeling(SEM)techniquewithbootstrappingandthelaggedvaluesofregressors.LOCAL,JOINT,andFOREIGNrefertothelocal,jointventure,andforeigncasinosinMacao,respectively.ThesampleperiodisfromMach2010toJune2015.STDEVisameasureoftotalrisk,computedasthestandarddeviationofdailycasinostockreturnsduringthecorrespondingmonth.IOisthepercentageofoutstandingsharesheldbyinstitutions.SMOKEisassignedavalueequaltozeroforthelackofsmokingbanfromMarch2010toDecember2011,oneforthepartialbanfromJanuary2012toDecember2012,twoforthestricterbanfromJanuary2013toDecember2014,andthreeforthecompletebanfromJanuary2015toJune2015.RESPreferstotherateofresponsiblegamblingawarenessofMacaoresidents.VISAisadummyvariableequaltozerofortheloosevisapolicyfromJanuary2010toJune2014andequaltoonefortherestrictivevisapolicyfromJuly2014toJune2015.ANTIisthenumberofcorruptofficialsdismissedpermonthinmainlandChinascaledby100.TURNOVERistheratioofdailytradingvolumetosharesoutstandingeachmonth.AGEreferstothenumberofyearsafirmhasbeenlisted.***,**,and*indicatestatisticalsignificanceatthe1%,5%,and10%levels,respectively.X.M. Fu, et al. Journal of Corporate Finance 64 (2020) 10165723
AppendixA.CorrelationmatrixSTDEVSDIONARBNORMANTISMOKEVISARESPTURNOVERAGESTDEV1.0000SD0.9131***1.0000IO−0.1127**−0.1482***1.0000NARB0.02250.07180.3303***1.0000NORM−0.1292**−0.1914***0.8785***−0.1609***1.0000ANTI−0.1484***−0.0979*0.2049***0.07920.1741***1.0000SMOKE−0.3749***−0.3124***0.3653***−0.00520.3846***0.6951***1.0000VISA−0.1003*−0.06820.1515***0.06590.1250**0.8251***0.5846***1.0000RESP−0.2895***−0.2359***0.3958***−0.02490.4265***0.7691***0.9284***0.6408***1.0000TURNOVER0.4586***0.3721***0.2920***0.3092***0.1488***−0.0556−0.2209***−0.0159−0.1646***1.0000AGE0.05450.01580.1326**0.2252***0.02460.1171**0.1081**0.1009*0.1095**0.5647***1.0000Notes:STDEVisameasureoftotalrisk,computedasthestandarddeviationofdailycasinostockreturnsduringthecorrespondingmonth.SDisameasureofidiosyncraticrisk,computedasthestandarddeviationoftheresidualsfromaregressionofindividualdailyreturnagainstmarketreturn.IOisthepercentageofoutstandingsharesheldbyinstitutions.NORMisthepercentageofoutstandingsharesheldbythenorm-constrainedinstitutionalinvestors.NARBisthepercentageofoutstandingsharesheldbythenaturalarbitrageurs.SMOKEisassignedavalueequaltozeroforthelackofsmokingbanfromMarch2010toDecember2011,oneforthepartialbanfromJanuary2012toDecember2012,twoforthestricterbanfromJanuary2013toDecember2014,andthreeforthecompletebanfromJanuary2015toJune2015.RESPreferstotherateofresponsiblegamblingawarenessofMacaoresidents.VISAisadummyvariableequaltozerofortheloosevisapolicyfromJanuary2010toJune2014andequaltoonefortherestrictivevisapolicyfromJuly2014toJune2015.ANTIisthenumberofcorruptofficialsdismissedpermonthinmainlandChinascaledby100.TURNOVERistheratioofdailytradingvolumetosharesoutstandingeachmonth.AGEreferstothenumberofyearsafirmhasbeenlisted.***,**,and*indicatestatisticalsignificanceatthe1%,5%,and10%levels,respectively.X.M. Fu, et al. Journal of Corporate Finance 64 (2020) 10165724
Appendix B. Cost of equity capitalTo quantify the real effects of the increasing institutional ownership in response to the implementation of ESG-improving policies,we begin with the classical capital asset pricing model (CAPM) using the Fama and MacBeth (1973) procedure as follows:= + × +R R Ri f i m i (A1)= ×Cov R RSDSD( , )i i mim (A2)where.Ri: return of stock i.Rm: market return based on the Heng Seng index.Rf: risk free rate of return.βi: beta of stock i.Cov(Ri,Rm): covariance between return of stock i and market return.SDi: standard deviation of return of stock i.SDm: standard deviation of market return.εi: residual of stock i.Based on Eqs. (A1) and (A2), we can derive the following equation:= + × × +R RCov R RSDR SD( , )i fi mmm i i(A3)Eq. (A3) indicates that one unit change of SDi can lead to the change in Ri by × RCov R RSD m( , )i mm.As the implementation of ESG-improving policies can affect the portfolio firm's Ri through its effect on IO and then SD, thefollowing equation is applied to compute the real effect:= × ×real effect indirect effectCov R RSDR( , )i mmm(A4)where the indirect effect denotes the effect of an ESG policy on SDi through IOi.Eq. (A4) shows that one unit change in ESG can lead to the change in Ri (i.e., the cost of equity capital) by× ×indirect effect RCov R RSD m( , )i mm.Based on Eq. (A4), we calculate the changes in daily cost of equity capital in responding to the estimated changes in various ESGindicators. The results are provided in the following table.Daily cost of equity capital (%)ANTI VISA SMOKE RESPHK0027 −0.0023 −0.0013 −0.0011 −0.0107HK0880 −0.0020 −0.0011 −0.0009 −0.0092HK1128 −0.0019 −0.0011 −0.0009 −0.0091HK2282 −0.0021 −0.0012 −0.0010 −0.0096HK6883 −0.0013 −0.0008 −0.0006 −0.0062HK1928 −0.0021 −0.0012 −0.0010 −0.0100ReferencesAdamsson, H., Hoepner, A., 2015. The ‘Price of Sin’ Aversion: Ivory Tower Illusion or Real Investable Alpha? (Working paper).Bae, K.H., Chan, K., Ng, A., 2004. Investibility and return volatility. J. Financ. Econ. 71, 239–263.Barnato, K., 2015. How China's Anti-Corruption Drive is Hurting Growth. World Economy, CNBC, Friday, December 4. http://www.cnbc.com/2015/12/04/how-chinas-anti-corruption-drive-is-hurting-growth.html.Beyer, A., Cohen, D.A., Lys, T.Z., Walther, B.R., 2010. The financial reporting environment: review of the recent literature. J. Account. Econ. 50, 179–234.Bland, B., 2015. Macau casinos start winning after reversal in China visa policy. Financ. Times(July 2).Bolton, S., 2014. Why wall street analysts are cautious about Macau. Market Realist(Oct. 7). https://marketrealist.com/2014/10/why-wall-street-analysts-are-cautious-about-macau/.Bradsher, K., 2012. China’s anticorruption commission investigates senior officials. New York Times(December 5).Brennan, M., Hughes, P., 1991. Stock price and the supply of information. J. Financ. 46, 1665–1691.Brokenleg, I., Barber, T.K., Bennett, N.L., Boyce, S.P., Jernigan, V.B.B., 2014. Gambling with our health: Smoke-free policy would not reduce tribal casino patronage.Am. J. Prev. Med. 47 (3), 290–299.Brown, K.C., Brooke, B.A., 1993. Institutional demand and security price pressure: the case of corporate spinoffs. Financ. Anal. J. 49 (5), 53–62.Brown, R., Raeburn, J., 2001. Gambling, Harm and Health: Two Perspectives on Ways to Minimise Harm and Maximise Health with Regard to Gambling in NewZealand. The Problem Gambling Committee of New Zealand and the Gambling Studies Institute of New Zealand, Auckland, New Zealand.Cahan, S.F., Chen, C., Chen, L., 2017. Social norms and CSR performance. J. Bus. Ethics 145, 493–508.Capelle-Blancard, G., Monjon, S., 2012. Trends in the literature on socially responsible investment: looking for the keys under the lamppost. Bus. Ethics 27 (3),X.M. Fu, et al. Journal of Corporate Finance 64 (2020) 10165725
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