Monitoring or Selection? Institutional Ownership and Biodiversity Incidents

I examine the value consequences of biodiversity incidents and their association with institutional ownership. Markets react negatively, with average shareholder losses ranging from $76 million to $344 million per incident. Additional stock price declines around subsequent earnings announcements are consistent with market underreaction. Institutional ownership is negatively associated with incident occurrence. Using plausibly exogenous shocks to monitoring intensity, I distinguish monitoring from selection effects. Long-term and domestic institutions, especially insurance firms and public pension funds, reduce incidents through active monitoring, whereas short-term and foreign investors, particularly investment advisors, exhibit selection behavior. Evidence from shareholder proposals supports a governance-via-voice mechanism, with withdrawn biodiversity-related proposals associated with lower incident re-occurrence. Finally, incidents are positively associated with the cost of equity capital, suggesting that investors demand compensation for biodiversity risk exposure.