Does voluntary corporate social performance attract institutional investment? Evidence from China

• Author: Yugang Chen,Mingzhu Wang
• DOI: http://doi.org/10.1111/corg.12205
• Published date: 01 September 2017
• Date: 01 September 2017

ORIGINAL ARTICLE

Does voluntary corporate social performance attract

institutional investment? Evidence from China

Mingzhu Wang |Yugang Chen

King's Business School, King's College London,

UK

Correspondence

Mingzhu Wang, King's Business School, King's

College London, UK

Email: mingzhu.wang@kcl.ac.uk

Funding Information

National Natural Science Foundation of China,

Grant/Award Number: 71372147

Abstract

Manuscript Type: Empirical

Research Question/Issue: This study analyses whether institutional investment in China is

affected by the voluntary corporate social performance (CSP) of firms, after controlling for own-

ership structure, corporate governance, compensation, and other firm characteristics.

Research Findings/Insights: Firms with superior voluntary CSP attract more institutional

investment, which remains robust after controlling for the reverse causality problem. Mutual

funds are the main driver of the institutional investment pattern in China and they invest more

in firms that achieve better voluntary CSP with respect to employment equality and customer

care. Insurance companies and social security funds invest more in firms that take care of their

customers. Qualified foreign institutional investors (QFIIs) are the only type of institutional inves-

tors tilting their investment in favor of firms doing well at saving energy.

Theoretical/Academic Implications: Our empirical evidence suggests that different types

of institutional investors show preferences toward different aspects of investee firms’voluntary

CSP. We innovatively separate firms’voluntary CSP into expected components that can be

explained by firm characteristics and unexpected components (surprises) that cannot be

explained by firm characteristics. Although institutional investors, in general, and mutual funds

and QFIIs, in particular, own more shares in firms with more voluntary CSP surprises, only mutual

funds trade on them in the subsequent year.

Practitioner/Policy Implications: Foreign institutional investors invest more in firms with

better voluntary CSP, especially with respect to energy‐saving and environmental issues, but they

do not show a significant preference toward firms with better corporate governance in China.

Our paper offers implications for policy makers in transitory and emerging economies with regard

to encouraging foreign institutional investors’equity investment.

KEYWORDS

Corporate Governance, China, CorporateSocial Performance, Institutional Investment

1|INTRODUCTION

Transitory and emerging economics (TEEs) have experienced a surge of

awareness for, and attention paid to, corporate social responsibility

(CSR) issues in the past decade. For example, China supplied more del-

egates than any other country to the 2007 International Leaders’

Summit of the UN Global Compact (Waddock, 2008). As of 2009,

Chinese firms were issuing over 15% of the world's CSR reports, but

there is significant variation across Chinese firms in the amount of

information disclosed on specific CSR activities (Ministry of Commerce

of the People's Republic of China, 2009, China WTO Tribute). Simulta-

neously, institutional investment, especially from foreign investors, has

increased in TEEs. Prior studies (Coffey & Fryxell, 1991; Cox, Brammer,

& Millington, 2004; Graves & Waddock, 1994) report the influence of

voluntary corporate social performance (CSP) on institutional invest-

ment in developed economies. Despite the increasing importance

and awareness of CSR in TEEs, the extant literature offers limited

evidence from TEEs on the association between firms’CSP and institu-

tional investors. Li and Lu (2016) empirically examine whether Chinese

firms’environmental capital expenditure, an important dimension of

Received: 20 March 2015 Revised: 23 February 2017 Accepted: 24 February 2017

DOI: 10.1111/corg.12205

338 © 2017 John Wiley & Sons Ltd Corp Govern Int Rev. 2017;25:338–357.wileyonlinelibrary.com/journal/corg

CSR, affects the investment decisions of institutional investors, by

classifying them into long‐term and short‐term investors. Differently

from Li and Lu (2016), we consider firms’overall voluntary CSP and

its multiple dimensions. In addition to the different methodologies

adopted, we categorize institutional investors by their business nature

into mutual funds, insurance companies, social security funds, and

qualified foreign institutional investors (QFIIs).

We aim to answer the following questions, yet to be clarified in

the literature. Do firms with superior voluntary CSP attract more

investment from institutional investors in TEEs? Do foreign institu-

tional investors, mostly from developed countries, demonstrate a

preference for firms’voluntary CSP and corporate governance inTEEs,

similarly to their investment pattern in developed economies? We

address these questions by analyzing the link between the voluntary

CSP of 1461 Chinese listed firms and the shareholdings of different

types of institutional investors, collectively and separately.

China provides a unique context for investigating the aforemen-

tioned research questions because endogeneity is of less concern, a

unique rating for firms’voluntary CSP is available, and institutional

investment has experienced explosive development. First, endogeneity

is of relatively lower concern in our study. Institutional investors in

China, as minority shareholders, are passive investors (Yuan, Xiao,

Milonas, & Zou, 2009) and provide little monitoring of company man-

agement (Chen, Firth, Gao, & Rui, 2006). As such, China provides a bet-

ter research context for analyzing whether firms’voluntary CSP affects

institutional investment than developed economies where institutional

investors are more active in monitoring their investee firms. Second,

firms’CSR activities had been voluntary in China until December 31,

2008. A firm's voluntary CSP may be more informative than mandatory

CSP in explaining institutional investors’decision making. The Society

of the National Accounting Institute (SNAI) provides a unique CSR

rating based solely on the voluntary CSR activities of all Chinese listed

firms in 2007.

1

Its full coverage makes analyses of a large sample

possible, and in turn provides more conclusive empirical evidence.

Third, institutional investment has more than quintupled, from 5.73%

in 2003 to 37.17% in 2010 (Xi, 2006), fuelled by equity investments

from domestic institutional investors and QFIIs.

2

Despite the dramatic

increase in institutional investment, its landscape in the Chinese stock

market remains ambiguous in the literature. Our study hence meets

the timely call for studies of institutional investment in China and

offers insights that could help foreign institutional investors with their

investment decisions in TEEs like China.

We find that Chinese firms with superior voluntary CSP attract

more institutional investment. This positive association remains robust

after controlling for the reverse causality problem, ownership struc-

ture, corporate governance, compensation and other firm characteris-

tics. Mutual funds are the main driver of this investment pattern of

institutional investors in China. Different types of institutional inves-

tors show preferences toward different dimensions of voluntary CSP.

Our study offers three contributions to the literature. The first

contribution is to provide robust empirical evidence that a firm's volun-

tary CSP does attract more institutional investment in a TEE. Apart

from choosing the Chinese research context, we adopt the lead–lag

model to further alleviate the endogeneity problem and find that insti-

tutional investments in current and subsequent years are positively

associated with firms’voluntary CSP.Such positive associations remain

robust after controlling for the reverse causality problem using the

two‐stage least squares (2SLS) method.

Furthermore, we identify the types of institutional investors in

China attracted by the voluntary CSP of Chinese listed firms. Both

mutual funds and QFIIs invest more in firms with better voluntary

CSP. We do not observe such an investment preference amongst

long‐term institutional investors such as insurance companies and

social security funds, which is different from the UK evidence reported

in Cox et al. (2004). However, mutual funds, QFIIs and long‐term

institutional investors are all likely to increase their shareholdings in

firms with superior voluntary CSP in the subsequent year. Our further

tests suggest that mutual funds invest more in firms achieving better

voluntary CSP with respect to equality and customers, but less in those

doing well at saving energy. QFIIs are the only type of institutional

investors investing more in firms achieving better CSP in terms of

saving energy. Insurance companies and social security funds prefer

firms that look after their customers.

Last but not least, we provide empirical evidence on the impact of

“surprises”in firms’voluntary CSP, on institutional investment, by

innovatively splitting a firm's voluntary CSP into two components—

expected and unexpected. The unexpected voluntary CSP contains

information surprises to institutional investors, whereas expected

CSP can be explained by other firm characteristics. Institutional

investors in general, and mutual funds and QFIIs in particular, hold a

high percentage of shareholdings in firms with surprisingly superior

voluntary CSP that cannot be explained by corporate governance,

ownership structure, and other firm characteristics. However, only

mutual funds are likely to increase their investment in firms with

voluntary CSP surprises.

The rest of the paper proceeds as follows: Section 2 introduces

the institutional background on CSR reporting and institutional invest-

ment in China; Section 3 reviews relevant literature and develops

hypotheses; Section 4 illustrates the research design; Section 5

explains the sample selection and data collection; Sections 6 and 7

report the main empirical analyses and further tests, respectively; and

Section 8 discusses our findings and concludes the paper.

2|INSTITUTIONAL BACKGROUND

The CSR concept was introduced to the Chinese equity market in

2006. The China Business Council for Sustainable Development issued

the China CSR Recommended Standard and Best Practice (the Standard,

hereafter) in September 2006. The Standard offers normative sugges-

tions and references for Chinese listed firms to follow and use to build

up their capability at taking social responsibility. In September 2006,

the Shenzhen Stock Exchange (SZSE) issued the CSR Guide (the Guide,

hereafter) to encourage firms listed on the SZSE to issue CSR reports

along with their annual reports. The Guide particularly encouraged

CSR reporting from firms in specific industries, such as the biotech

industry, high‐polluting industries, mining, construction, etc. The Guide

recommended that the CSR reports of listed companies included at

least four dimensions: employee protection, environmental pollution,

product quality, and community. The CSR reports were also supposed

WANG AND CHEN 339