Geographic proximity of investors and firms' ESG performance: Evidence on local retail and institutional investors

Using EDGAR Log File data to measure active investor information acquisition and MSCI KLD ratings to assess ESG performance, we find that a higher proportion of local investors is positively associated with firms' future ESG performance. Separating local investors into retail and institutional subgroups, we find that both positively influence ESG outcomes and have economically comparable effects, suggesting that local retail investors play at least as important a role as local institutional investors. Three cross-sectional tests reveal that the influence of local retail investors strengthens as information asymmetry falls, managerial entrenchment declines, and the shareholder base widens, while the influence of local institutional investors generally moves in the opposite direction. Two identification strategies, including a headquarters-relocation instrumental variable and a geographic-segment subsample analysis, support causal interpretation. Additional tests show that local retail investors improve workforce diversity but are negatively associated with formal governance ratings, consistent with their reliance on informal local monitoring rather than formal shareholder engagement.