Market Reaction to Corporate Social Responsibility Announcements: Evidence from China

• Author: Liang Zhang,Hung‐Gay Fung,Tie‐nan Wang
• Published date: 01 March 2014
• Date: 01 March 2014
• DOI: http://doi.org/10.1111/j.1749-124X.2014.12063.x

81

China & World Economy / 81–101, Vol. 22, No. 2, 2014

©2014 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Market Reaction to Corporate Social Responsibility

Announcements: Evidence from China

Liang Zhang, Tie-nan Wang, Hung-Gay Fung*

Abstract

This study uses an event study methodology to examine how the Chinese market reacts to

announcements of involvement in corporate social responsibility (CSR) by Southern Weekend

(a Chinese newspaper) for Chinese firms from 2008 to 2012. Our results show significant

and positive market reactions, supporting the instrumental stakeholder theory. We attribute

the positive market response to social capital development and real growth options related

to the CSR involvement by the Chinese firms.

Key words: Chinese stock market, corporate social responsibility, cumulative abnormal

returns

JEL codes: C51, G14, G15

I. Introduction

Research on corporate social responsibility (CSR) has become increasingly important in

the past decade. Two conflicting perspectives explain why managers undertake CSR

activities and how CSR involvement affects corporate financial performance. The agency–

cost perspective argues that managers have a motivation to allocate resources into CSR

activities for their own benefit as firm owners have difficulty monitoring their own behavior

*Liang Zhang, PhD candidate, School of Management, Harbin Institute of Technology, Heilongjiang,

China and Lecturer, School of Applied Mathematics, Guangdong University of Technology, Guangdong,

China. Email: zhanglianghl@163.com; Tie-nan Wang, Professor, School of Management, Harbin Institute

of Technology, Heilongjiang, China. Email: wtn@hit.edu.cn; Hung-Gay Fung, Dr Y. S. Tsiang Chaired

Professor of Chinese Studies and Curators’ Professor of Finance, College of Business Administration,

University of Missouri-St. Louis, St. Louis, USA. Email: fungh@msx.umsl.edu. Wang acknowledges the

National Natural Science Foundation of China (Approval No. 71031003) for financial support for this

study.

82 Liang Zhang et al. / 81–101, Vol. 22, No. 2, 2014

©2014 Institute of World Economics and Politics, Chinese Academy of Social Sciences

(Preston and O’Bannon, 1997; Barnea and Rubin, 2010).1 Thus, CSR involvement will harm

corporate financial performance because of managers’ self-interest for personal gains.

Jones (1995) proposes an alternative theory, the instrumental stakeholder theory, which

argues that CSR involvement is instrumental to establishing cooperative relationships and

trust between a firm and its stakeholders. That is, it is helpful in minimizing the costs of

managing complex relationships with stakeholders (Swanson, 1995; Sen, 1997). Thus,

according to the instrumental stakeholder theory, CSR involvement should be expected to

benefit corporate financial performance (Sen and Bhattacharya, 2001; Luo and Bhattacharya,

2006, 2009). Our study uses Chinese firms to shed light on the conflicting theories related

to CSR activities.

China is the largest energy consumer in the world and a global manufacturing hub. Its

environmental problems are becoming worse over time. China must curb its greenhouse

gas emissions to align with global standards (Zhuang, 2008). Thus, the government expects

Chinese firms to take their role in corporate social responsibility seriously to protect the

environment. Another emerging serious problem in China is food safety, which has been a

source of great concern to the Chinese people (Liu et al., 2013). These pressing social

problems highlight the need for Chinese firms to pay serious attention to the economy and

the welfare of the Chinese people.

The concept of CSR was introduced to China by developed-world multinational

corporations that began to explore the Chinese market after China’s economic reforms in

late 1978. Shell, the world’s largest petroleum company, entered the Chinese market soon

after the economic reforms were initiated. In 1999, Shell released the first CSR report in

China and contributed to spreading the concept of CSR (Wang et al., 2011). In 2005, the

18th meeting of the Standing Committee of the 10th National People’s Congress enacted

the new Company Law, which included some discussion on CSR.2 A year later, the first

CSR report was issued by a Chinese firm, the State Grid Corporation. Since then, the

number of CSR reports has grown rapidly. More than 700 Chinese CSR reports were issued

in 2009, with the number increasing to 1006 in 2012, demonstrating the importance of CSR

research (Zhong et al., 2012). China has a distinctive economic and regulatory system (Ip,

2008), which makes CSR research in China an important complement to CSR research in

developed countries.

Wang et al. (2011) show that Chinese institutional investors’ behavior is significantly

influenced by firms’ CSR activities and indicates that some Chinese investors do, indeed,

1The agency theory was originally proposed by Jensen and Meckling (1976).

2The English text of the law is available from: http://www.china.org.cn/china/LegislationsForm2001-

2010/2011-02/11/content_21898292.htm.