City Research Online

Conscious Capital

Homanen, M. (2019). Conscious Capital. (Unpublished Doctoral thesis, City, University of London)


My overarching research ambitions have been to understand the good and bad sides of finance and the market forces that enable or inhibit activities associated with them. While the three chapters in this thesis might seem different from one another, they reflect my continuous development and fundamentally showcase my overarching interests for the creation of a better welfare-optimal world. The best way to characterize this dissertation is to use the acronym commonly referred to in public discourse amongst academics and practitioners, namely, ESG. ESG stands for Environmental, Social and Governance factors that investors, businesses and households are using as a framework for understanding the challenges and opportunities that come with our continuously evolving capital market regime. Households begun using environmental factors to associate themselves with banks that are aligned with their societal preferences. Impact funds are incorporating social factors in their investment strategies to identify the most promising projects for the maximization of social returns. Asset managers are using governance factors to determine, which companies are operationally ready and adaptable to manage themselves towards a long-term sustainable future. Overall, Chapter 1. reflects the Environmental dimension, Chapter 2. reflects the Governance dimension and Chapter 3. reflects the Social dimension and together, they reflect my ESG aspirations.

Chapter 1. asks whether depositors react to non-financial information about their banks. By using branch level data for the United States, I show that banks, that financed the highly controversial Dakota Access Pipeline, experienced significant decreases in deposit growth, especially in branches located closest to the pipeline. These effects were greater for branches located in environmentally or socially conscious counties, and data suggests that savings banks were among the main beneficiaries of this depositor movement. Using a global hand-collected dataset on tax evasion, corruption, and environmental scandals related to banks, I show that negative deposit growth as a reaction to scandals is a widespread phenomenon. Overall, this is the first thorough documentation of the non-financial preferences of household financial investment decisions. The paper contributes to policy discussions surrounding investment externalities (e.g. environmental pollution), tax evasion and corruption. Lastly, it contributes to a broader theoretical discussion on the appropriate objectives of the firm. In other words, should firms maximize value or welfare? The results of this paper showcase that from here on out, banks must condition their corporate policies on the non-financial preferences of their creditors, i.e. the depositors.

Chapter 2. investigates whether there exist universally applicable corporate governance practices. In this paper, we construct various measures of firm- and country-level corporate governance, including a “global entrenchment index”. We then test their relation with firm value on a large sample of more than 20,000 firms across 47 countries. We find substantial heterogeneity in the relation between some governance practices—especially those related to corporate rules constraining insider entrenchment—and firm value across countries, which is contingent on firms’ ownership structure and institutional environments. In contrast, higher institutional ownership is unconditionally correlated with higher firm valuation. Our results cast doubt on the universality of rule-based corporate governance practices, and yield important policy recommendations for future discussions on corporate governance reforms.

Chapter 3. explores the empirical interaction between firm growth, financing constraints, and job creation. Using a novel small-business survey from Uganda, we find that the extent to which small businesses expand skilled employment as their sales and profits increase is significantly related to access to external funding, while the hiring of casual and family workers is not. This paper is an important contribution to policy discussions pertaining to youth and skilled unemployment in developing countries and, therefore, identifies a partial mechanism for addressing these policy relevant concerns.

Publication Type: Thesis (Doctoral)
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School
Bayes Business School > Finance
Doctoral Theses
Bayes Business School > Bayes Business School Doctoral Theses
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