Institutional cross‐ownership and firm social performance

• Published date: 01 November 2022
• Author: Yishu Fu,Chunbo Liu,Zhenjiang Qin,Dongwei Zhao
• Date: 01 November 2022
• DOI: http://doi.org/10.1111/corg.12447

SPECIAL ISSUE ARTICLE

Institutional cross-ownership and firm social performance

Yishu Fu

1

| Chunbo Liu

2

| Zhenjiang Qin

3

| Dongwei Zhao

1

1

Institute of Chinese Financial Studies,

Southwestern University of Finance and

Economics, Chengdu, China

2

Institute of Financial Studies, Southwestern

University of Finance and Economics,

Chengdu, China

3

Faculty of Business and Administration,

University of Macau, Macau, China

Correspondence

Zhenjiang Qin, Faculty of Business and

Administration, University of Macau, Macau,

China.

Email: zhenjiangqin@um.edu.mo

Funding information

Research Committee of University of Macau,

Grant/Award Numbers:

MYRG2018-00210-FBA,

SRG2018-00113-FBA

Abstract

Research Question/Issue: This paper examines the relation between institutional

cross-ownership from the same industry (hereafter, INSTCO) and corporate social

responsibility (hereafter, CSR) for Chinese publicly traded firms. We also investigate

whether the relation between INSTCO and CSR depends on the strength of the

internal and external corporate governance.

Research Findings/Insights: Based on a sample of Chinese listed firms from 2009

to 2017, we find that INSTCO is significantly positively associated with firm CSR

performance. We interpret our results under the signaling theory of strategic CSR

spending, according to which CSR spending is a valuable signal that distinguishes

firms from peers, particularly in an environment with severe information asymme-

try. The effective monitoring of INSTCO drives managers to engage in the CSR

signaling more actively. Furthermore, this positive association between INSTCO

and CSR signaling is only found among firms with strong internal and/or external

corporate governance.

Theoretical/Academic Implications: The findings in this paper indicate that the well-

documented monitoring role of INSTCO also has important implications on firms'

social performance. Moreover, our findings contribute to the literature on strategic

CSR spending by highlighting the role of CSR spending as a signaling device in China

as the largest emerging market. Lastly, both internal and external corporate gover-

nance significantly moderate the impact of INSTCO on firms' social performance.

Practitioner/Policy Implications: CSR initiatives are valuable signals. Policy makers

should be aware that common ownership may enhance stakeholders' welfare due to

INSTCO's monitoring effect, since this study documents a significantly positive effect

of INSTCO on corporate social performance. Investors in the Chinese market should

also be aware of the nontrivial signaling function of CSR activities, especially in a

strong internal governance and/or an investor-friendly external governance

environment.

KEYWORDS

corporate governance, China, corporate social responsibility, institutional cross-ownership,

signaling theory

Received: 28 November 2020 Revised: 16 February 2022 Accepted: 31 March 2022

DOI: 10.1111/corg.12447

738 © 2022 John Wiley & Sons Ltd. Corp Govern Int Rev. 2022;30:738–764.wileyonlinelibrary.com/journal/corg

1|INTRODUCTION

The last few decades feature a substantial increase in the presence of

cross-owners, with more and more firms being cross-held in both

developed and emerging markets. Existing literature has highlighted

the role of institutional cross-owners in enhancing corporate gover-

nance (He et al., 2019; Kang et al., 2018), fostering collaboration

among companies (He & Huang, 2017; Li et al., 2021), changing the

industry-wide competitive landscape (Azar et al., 2018,2019), and

facilitating outside financing (Chen et al., 2021). However, little is

known regarding how increased cross-ownership impacts corporate

social performance (CSP). Given the ever-increasing interest from

both the public and academia in stakeholder governance, how institu-

tional cross-ownership affects firms' engagement in social responsibil-

ities is worth exploring. In this paper, we investigate how institutional

cross-ownership from the same industry (hereafter, INSTCO) impacts

CSP for Chinese listed firms during the sample period of 2009 to

2017.

As the largest emerging economy in the world, the Chinese

market features severe information asymmetry between firms and

stakeholders (Liu et al., 2021; Morck et al., 2000). The opaque infor-

mation environment, combined with weak investor protection, makes

it imperative for firms to use costly signals to reveal their quality to a

diverse group of stakeholders, such as employees, consumers, inves-

tors, and regulators (Spence, 1976). Corporate CSR activities that tar-

get various audiences can be particularly valuable as a signal that can

help differentiate firms from their peers in such an environment (Su

et al., 2016; Zerbini, 2017).

1

First, CSR activities could generate posi-

tive feedback from stakeholders. For instance, employee training, as

an important type of CSR activities, serves as a signal to employees

that attracts and retains talents. CSR spending can also send a positive

signal to consumers to attract and keep consumers who value social

responsibilities. Such positive feedback is especially prominent in

China as its society and business practices are profoundly influenced

by the Confucian culture that values altruism and social responsibili-

ties (Du et al., 2014; Low & Ang, 2013). Second, firms could utilize

CSR spending as a signal to investors to lower cost of capital (El-Ghoul

et al., 2011). CSR signaling to investors is particularly salient as stock

prices generally do not accurately reflect fundamental value of firms

in China (Morck et al., 2000), due to the relatively inefficient domestic

capital market.

2

Lastly, CSR spending can be employed as a signal to

regulators and the public to induce favorable policy and social impact,

including but not limited to more subsidies (Chen et al., 2008;

Lin et al., 2015), more government procurement contracts

(Flammer, 2018), and more positive public image (Hung et al., 2013).

CSR activities are very costly, and CSR performance is hard to

manipulate or “fake,”and this is an important condition under which

CSR spending qualifies as a costly signal that generates a separating

equilibrium. Specifically, CSR signal is costly and difficult to mimic for

the following two reasons. First, CSR involves a significant amount of

corporate resources and managerial effort to execute relevant activi-

ties, and it requires persistent investments (Krüger, 2015; Russo &

Perrini, 2010). Low-quality firms will not find it profitable to conduct

CSR activities. Second, the CSR performance of Chinese firms is usu-

ally evaluated by incentive-aligned rating agencies that collect infor-

mation from publicly disclosed sources, including the mandatory CSR

disclosure by firms.

3

Due to the existence of multiple rating agencies

and the subscriber-paid business model, rating agencies have the

incentives to provide unbiased CSR scores. Therefore, it is hard for

firms to “fake”their CSR performance.

Despite the importance of using CSR spending to signal firm qual-

ity in environments with weak institutions and opacity, firm managers

might lack the incentives to exert effort to conduct such signaling

absent effective monitoring. It is because engaging in CSR activities

would imply a decline in the discretionary power of managers, as

CSR spending typically involves investments of corporate resources

that lead to a substantial decline in free cash flows (Krüger, 2015;

Russo & Perrini, 2010). Besides, CSR spending requires persistent

investment of managerial effort. Myopic or effort-averse managers

might prefer to enjoy “quiet life”and lack the incentive to exert effort

to send CSR signals (Bertrand & Mullainathan, 2003; Edmans, 2009;

Stein, 1988).

Notably, the effective monitoring from INSTCO tends to

strengthen the incentives of managers to work hard and send CSR sig-

nals. Prior studies find that institutional cross-owners, by leveraging

the use of “voice”and “exit”governance mechanisms, could improve

governance and enhance monitoring effectiveness. The exit channel

works as follows. As the selling by cross-owners generates signifi-

cantly negative price impact, managers tend to work hard to avoid

such informative selling (Edmans et al., 2019). Institutional cross-

owners also leverage their information advantage and governance

experience/capacity when monitoring firm management, hence con-

stituting the “voice”mechanism. Notice that the governance impact

of INSTCO is particularly strong and has been highlighted in recent

literature. For example, INSTCO is found to perform effective

monitoring of CEOs (Kang et al., 2018), reduce inefficiency caused by

corporate governance externalities (He et al., 2019), and increase

innovation output (Gao et al., 2019). Due to the importance of CSR

signaling function in the Chinese market, we hypothesize that

INSTCO, as a type of effective monitors, is positively associated with

CSR signaling.

4

Based on a sample of Chinese publicly traded firms between

2009 and 2017, we test the relationship between INSTCO and firms'

CSR signaling. We measure the degree of CSR signaling using CSR

scores provided by the Rankins CSR Ratings (RKS). Following He and

Huang (2017) and He et al. (2019) and motivated by recent research

that shows that within-industry cross-owners are particularly effective

monitors (Kang et al., 2018), we focus on within-industry cross-own-

ership. Specifically, we define the institutions that have no less than

3% ownership in one firm while simultaneously having no less than

3% ownership in other firms in the same industry as INSTCO. We pro-

pose four proxies to capture the presence of INSTCO. Using pooled

OLS regressions, we find strong and robust evidence that INSTCO is

positively associated with CSR ratings, consistent with the monitoring

view on institutional cross-owners. For example, compared with oth-

erwise similar firms without cross-ownership, cross-held firms have

FU ET AL.739