Institutional Ownership and Corporate Exposure to Equal Employment Opportunity Lawsuits

ABSTRACT Research Question/Issue This study investigates whether and how institutional ownership is associated with firms' exposure to equal employment opportunity (EEO) lawsuits under Title VII of the Civil Rights Act of 1964. These lawsuits capture an underexplored form of downside ESG risk arising from firms' treatment of employees, who constitute a key corporate stakeholder group. Research Findings/Insights Using a dataset of 22,501 EEO lawsuits filed in US federal courts from 2001 to 2020, this study finds that firms with higher institutional blockholdings experience significantly fewer EEO lawsuits. This relationship persists across active, passive, long‐term, and transient investors and remains robust to an instrumental variable analysis exploiting Russell 3000 Index inclusion, change analyses, industry adjustments, and numerous robustness tests. Post‐lawsuit responses reveal three mechanisms: The largest investors withdraw capital (exit); transient investors increase voting engagement (voice); and forced CEO turnover increases, particularly in high‐blockholding firms (discipline). Institutional investors' role is amplified in low‐skilled labor environments and complemented by independent board monitoring. Theoretical/Academic Implications This study documents the role of institutional investors in mitigating the risk of workplace discrimination litigation, advancing the literature on institutional monitoring, ESG, employee welfare, and corporate governance. EEO lawsuits provide an objective, non‐self‐reported measure of a specific downside ESG risk. This study further shows how heterogeneous investors deploy different mechanisms to improve EEO outcomes. Practitioner/Policy Implications Workplace discrimination poses a threat to employee well‐being and firm reputation. Uncovering institutional investors' role in safeguarding employees' civil right to EEO provides useful insights for policymakers, boards, and investors.