Contracts with (Social) benefits: The implementation of impact investing

We draw on new data and theory to examine how private market contracts adapt to serve multiple goals, particularly the social-benefit goals that impact funds add to their financial goals. Counter to the intuition from multitasking models (Holmstrom and Milgrom, 1991), few impact funds tie compensati...

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Bibliographic Details
Published in:Journal of financial economics 2021-11, Vol.142 (2), p.697-718
Main Authors: Geczy, Christopher, Jeffers, Jessica S., Musto, David K., Tucker, Anne M.
Format: Article
Language:English
Subjects:
Compensation
Contracts
Financial incentives
Governance
Impact investing
Intuition
Investors
Mutual funds
Objectives
Private equity
Profitability
Socially responsible investing
Studies
Venture capital
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Summary:We draw on new data and theory to examine how private market contracts adapt to serve multiple goals, particularly the social-benefit goals that impact funds add to their financial goals. Counter to the intuition from multitasking models (Holmstrom and Milgrom, 1991), few impact funds tie compensation directly to impact, and most retain traditional financial incentives. However, funds contract directly on impact in other ways and adjust aspects of the contracts such as governance. In the cross-section of impact funds, those with higher profit goals contract more tightly around both goals.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2021.01.006