2. Motivation
• Chinese government took a series of actions to enhance CSR in
2009
o Enhance CSR regulations
Eg. Shanghai and Nanjing local governments launched CSR local standards;
Shandong and Wenzhou local governments built CSR evaluation systems
o Improve CSR disclosure regulations
Eg. Issued the “Guideline of Chinese CSR Report”
o Increase the CSR awareness in the society
Eg. Launched CSR Index
2
Corporate
scandals
Anxieties about the
safety and quality of
domestic product
Demand of domestic
product
Economic growth
Social stability
3. Research Question
Whether investors concern firms’ CSR performance
during their decision-making process?
After government policies launched, whether
investors are more sensitive to firms’ CSR information?
After government policies launched, whether the
financial performance of companies will affect the
relationship in Q2?
3
Q1
Q2
Q3
4. Background
• Chinese-specific political economy
o Most of the large companies are state-owned and led by government directly.
o The government has much more influence on business’ behaviors than other
stakeholders.
o The central government believes that economic development is essential to
rejuvenating the country and the key to solve all the problems in China.
o Enhances the CSR regulation keep the economic growth
• After a series of government policies launched in 2009
o The quantity and quality of CSR report increased in 2010 (CASSCSR, 2010)
The number of the published CSR reports increased 4.33 times in 2010 than 2008
o CSR information has become less asymmetry and more transparent after 2009
• SCVPS
o Social contribution per share is a unique ratio to measure CSR performance.
o Launched by Chinese government
4
5. Literature Review
• CSR performance is a significant determinant of long-term risk.
• Investors prefer the companies with better CSR performance in the Western
countries.
• Hypothesis 1: There is a positive relationship between the SCVPS growth
and stock price growth in Chinese stock market.
Low level CSR performance
Possible increased government
regulation
Low management skill
The variability of future cash flow
a symbol
CSR
investment
Corporate financial performance
Comparative advantage
Company image, reputation, and
symbolic value
A low risk of of government
punishment
5
6. Literature Review
• Chinese government took a series of actions to enhance CSR in 2009.
• Under Chinese-specific political economy, investors pay more attention to
the attitude and actions of the government when make decisions.
• Hypothesis 2: After a series of government actions, the investors are
more sensitive to the change of SCVPS.
Governmen
t regulations
and
promotions
in 2009
Set social
expectations for
responsible corporate
behaviors.
The quantity and
quality of CSR report
increased in 2010.
CSR information
has become less
asymmetry and
more transparent
after 2009.
Investors
are more
sensitive to
CSR
information
.
6
7. Literature Review
• For loss-making companies (negative annual profit):
o Difficult to take responsibilities to economy, shareholders and creditors
o High risk
o CSR practices are regarded as acceptance and further development when
companies can survive.
o investors may concern more about the survival problem than CSR performance.
• For companies with excellent financial performance (positive annual profit
and positive annual profit growth rate):
o Investors usually have limited ability to absorb, process, and interpret all of the
available information, so they are likely to simplify their evaluations by widely
understood, simple and intuitively appealing factors, which may influence short-
term outcomes.
o When the investors are facing the companies with better financial performance, it
is possible that they would be directly attracted by the favorable profit and profit
growth rate instead of CSR information which influences the long-term outcome.
7
8. Literature Review
• For the companies with relatively poor financial performance (positive
annual profit but negative annual profit growth rate):
o Financial performance are neither much attractive nor facing a loss.
o Investors pay more attention to the CSR performance.
o Compare with the companies with conspicuous financial performance, the
investors are more sensitive to the CSR information of the companies with
relatively poor financial performance in a more transparent market after the
government actions.
• Hypothesis 3: The investors have become more sensitive to the SCVPS
change of the companies with relatively poor financial performance after a
series of government actions in 2009.
Hence
8
9. Methodology
• Main Model:
• IR=β0+β1SCVPS+β2DY+β3DY*SCVPS+β4LR+β5SIZE+β6POSS+β7NOD+β8NOID+β9P
OSBD+β10DCL+β11RN+ε
IR= stock price at the end of year – stock price at the beginning of the year;
SCVPS= SCVPSt – SCVPSt-1;
DY= 0, from 2008 to 2009, without the effect of the government policies; DY=1, from
2010 to 2011, with the effect of the government policies;
LR= leverage ratio;
SIZE= ln(total asset);
POSS= percentage of shares held by the five largest shareholders;
NOD= number of directors serving on the boards;
NOID= number of independent directors on the boards;
POSBD= percentage of shares held by board directors;
DCL= 0 if the company only issued stock in A share; DCL=1 if the company also
issued stock in B share, H share or both;
RN= the annual return of A share market in SSE;
9
10. Methodology
• Scope:
o From 2008 to 2011
o Listed companies in the Shanghai Stock Exchange
o 3082 firm-year observations
• Tests of collinearity
o Correlation matrix and VIF test
o No serious collinearity problem
10
11. Findings and Discussion
Test 1 Test 2
Predictions
All
Profit > 0;
Profit growth rate < 0
Others
SCVPS + 0.620*** 0.297 1.078***
(4.63) (1.51) (5.73)
DY 3.299*** 3.769*** 2.713***
(17.77) (11.99) (11.90)
DY*SCVPS + 1.500*** 1.692*** 1.183***
(6.97) (5.03) (4.19)
LR 0.757* 1.733** 0.034
(1.73) (2.11) (0.07)
SIZE -0.721*** -0.801*** -0.604***
(-9.96) (-6.19) (-6.89)
POSS -0.000 -0.011 0.007
(-0.07) (-0.94) (0.93)
NOD 0.074 -0.020 0.189*
(0.94) (-0.16) (1.92)
NOID -0.050 0.281 -0.379
(-0.24) (0.84) (-1.42)
POSBD -1.466 -3.278 0.365
(-0.83) (-1.04) (0.15)
DCL 0.684** 1.189** 0.418
(2.21) (2.39) (1.04)
RN 9.937*** 10.526*** 9.329***
(68.36) (43.21) (52.13)
Interception 10.414*** 11.386*** 8.536***
(7.52) (4.74) (4.93)
N 3082 1254 1828
R square 0.625 0.621 0.632
F 465.201 184.743 283.487
P-value 0.000 0.000 0.000
• Test 1 for hypotheses 1 and 2
o The SCVPS coefficient is
significantly positive.
o The coefficient of the interaction
term (DY*SCVPS) is also
significantly positive. The
coefficient of the interaction term
is twice larger than the
coefficient of SCVPS.
• Test 2 for hypothesis 3
o Both of the coefficient of the
interaction term (DY*SCVPS)
are significantly positive. The
coefficient of the interaction term
of the companies with relatively
poor financial performance is
larger than that of other
companies.
11
12. Robust Tests 1 and 2
Robust 1 Robust 2
SCVPS 1.362*** 0.727***
(7.73) (4.82)
DY 2.986*** 3.640***
(16.23) (17.52)
DY* SCVPS 1.401*** 1.389***
(4.96) (5.91)
LR 0.497 0.687
(1.17) (1.32)
SIZE -0.614*** -0.757***
(-8.43) (-8.96)
POSS 0.001 -0.001
(0.22) (-0.16)
NOD 0.064 0.050
(0.82) (0.57)
NOID -0.078 0.028
(-0.37) (0.12)
POSBD -2.228 -2.433
(-1.12) (-1.25)
DCL 0.839*** 0.840**
(2.72) (2.40)
RN 9.164*** 10.333***
(63.74) (64.14)
Interception 8.650*** 11.014***
(6.11) (6.85)
N 2686 2642
R square 0.639 0.630
F 430.594 406.692
P-value 0.000 0.000
• Robust test 1 for hypotheses 1 and 2
o It is possible that investors do not prefer the companies
spend too much on CSR instead of development and
production.
o Drop the top 100 companies with highest SCVPS in
each year.
• Robust test 2 for hypotheses 1 and 2
o CSR practice is regarded as acceptance and further
development when companies can survive.
o Drop the samples with negative annual profit.
• Consistent with the results of the test1
12
13. Robust Test 3
Robust 3
(a) (b)
Profit > 0;
Profit growth rate<0
Others
SCVPS 1.430*** 1.324***
(4.68) (6.19)
DY 3.408*** 2.556***
(10.96) (11.23)
DY*SCVPS 2.354*** 1.086***
(4.36) (3.33)
LR 0.796 -0.024
(0.98) (-0.05)
SIZE -0.527*** -0.640***
(-4.11) (-7.09)
POSS -0.012 0.010
(-1.09) (1.27)
NOD -0.011 0.134
(-0.09) (1.36)
NOID 0.180 -0.298
(0.54) (-1.10)
POSBD -6.102* 0.058
(-1.79) (0.02)
DCL 1.336*** 0.461
(2.69) (1.16)
RN 9.473*** 8.829***
(39.24) (49.51)
Interception 6.581*** 9.640***
(2.74) (5.33)
N 1045 1641
R square 0.645 0.638
F 170.936 260.633
P-value 0.000 0.000
• Robust test 3 for hypothesis 3
o Drops the top 100 companies with
highest SCVPS in each year.
o Consistent with the results of the Test 2
13
14. Robust Test 4
Robust 4
(c) (d)
Profit > 0;
Profit growth rate<0
Others
SCVPS 0.757*** 1.078***
(3.38) (5.73)
DY 3.416*** 2.713***
(11.33) (11.90)
DY*SCVPS 2.596*** 1.183***
(5.40) (4.19)
LR 0.254 0.034
(0.32) (0.07)
SIZE -0.611*** -0.604***
(-4.83) (-6.89)
POSS -0.008 0.007
(-0.71) (0.93)
NOD -0.140 0.189*
(-1.12) (1.92)
NOID 0.551* -0.379
(1.68) (-1.42)
POSBD -4.054 0.365
(-1.47) (0.15)
DCL 1.259** 0.418
(2.57) (1.04)
RN 9.368*** 9.329***
(39.98) (52.13)
Interception 8.430*** 8.536***
(3.51) (4.93)
N 1027 1828
R square 0.647 0.632
F 168.795 283.487
P-value 0.000 0.000
• Robust test 4 for hypothesis 3
o Hypothesis 3 analyzes the difference
between the companies with less attractive
financial performance and other companies.
o Widen the difference between the two
groups.
o Consistent with the result of Test 2.
Companies with relatively
poor financial
performance
Top 100 companies
with the highest
annual profit in the
entire sample in each
year
Drop
14
15. Conclusion
• This study empirically analyzes the effect of government policies on
the relationship between corporate social responsibility (CSR) and
investors’ reactions in China.
o Start point: It proves that investors prefer the companies with better
CSR performance in China.
o Vertical (time) line: It compares the results before and after the
government policies launched in 2009 and concludes that the investors
are more sensitive to CSR information after the government actions.
o Horizontal line: It analyzes the effect of companies’ financial
performance and concludes that the investors are more sensitive to
CSR information of the companies with relatively poor financial
performance than other companies’ after the government actions.
15
16. Recommendation
• To enhance the companies’ CSR practices and keep the economic growth,
the central government should take over the supervisory authority from the
local government.
• Strengthen the independence of the regulatory agency
• Aim to pursue overall interests of the country rather than the provincial
interest
o Eg. Establish a centrally-administrated independent regulatory agency and
implement the third party regulating mechanism
Downstream
provinces
Local companies
(Upstream)
Local tax revenue Local supervision
department
Harmful
Benefit Rely on
Supervise?
16
17. Contribution and Limitation
• Contributions
o Evaluate the effect of the government policy.
o Evaluate the effect of firms’ financial performance.
• Limitations
o Limited sample size
o Dummy year roughly evaluates the effect of the
government actions.
17
