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Review of Managerial Science

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12-05-2020 | Original Paper

The effect of institutional investors’ distraction on firms’ corporate social responsibility engagement: evidence from China

Authors: Cheng Xiang, Fengwen Chen, Paul Jones, Senmao Xia

Published in: Review of Managerial Science | Issue 6/2021

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Abstract

To investigate the impact of institutional investors on firms’ corporate social responsibility (CSR) engagement while controlling for possible endogeneity concerns, we study how Chinese listed firms adjust their CSR decisions when their institutional investors are distracted by exogenous attention-grabbing events and thus are inattentive. With a sample of Chinese listed firms from 2009 to 2017, we find a significant and robust negative relationship between institutional investor inattention and firms’ CSR engagement. This negative relationship is more pronounced for firms with more principal–agent problems and/or weaker corporate governances and is more attributable to the inattention of institutional investors with more monitoring incentives. These findings suggest that managers are less motivated to engage in CSR when they are less monitored by institutional investors, indicating that CSR is beneficial to shareholders of Chinese listed firms. Our findings also indicate that the positive impact of institutional investors on CSR may be constrained by their limited attention.

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Additionally, see Faller and Knyphausen-Aufsess (2018) for a literature review regarding the impact of institutional ownership on CSR.

According to Kempf et al. (2017), the Investor Responsibility Research Center Institute (IRRC 2011) in America conducted a large-scale survey in 2011 and stated that “three-fourths of institutions report that time is the most common impediment to engagement [with corporations], while staffing considerations rank second.”

http://www.rksratings.cn/.

There is a rich literature documenting that agent problems are rampant in China (Allen et al. 2005; Jiang et al. 2010; He and Luo 2018).

As discussed later, the expense ratio, which is the operating expenses scaled by annual sales, is widely used to measure firms’ agency costs caused by principal–agent problems (Ang et al. 2000; Fauver and Fuerst 2006; Jiang et al. 2015).

According to a survey reported in the China Sustainable Investment Review 2019, 89% of the respondents said that they are not familiar with environmental, social and governance (ESG) investment, and 44% of them have never heard about “green investment”, “social responsibility investment” or “ESG”. See http://f.sinaimg.cn/client/ebe07d0f/20191205/ChinaSIF2019.pdf.

For instance, approximately 43% of Chinese listed firms do not even disclose CSR reports in our sample period.

Namely, these types are insurance companies, public mutual funds, the national social security fund, exchange-traded funds, overseas institutional investors, corporate annuity plans, banks, trust companies, brokerage firms, and private investment funds.

As discussed later in Sect. 4.4.1, insurance companies, mutual funds, and the national security fund are the three largest institutional investors in the Chinese A-share market. The institutional ownership of other institutional investors is relatively minor.

We follow the industry classifications issued by the China Securities Regulatory Commission (CSRC) in 2012 and classify stocks into 19 industries.

See Sect. 2.2 in Kempf et al. (2017) for a detailed discussion on this.

There are two stock exchanges in China, that is, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange. Firms listed on SSE are not required to disclose site visit events. Please see Cheng et al. (2016b, 2019), and Han et al. (2018) for details regarding the institution background of site visits in the Chinese A-share market.

http://www.ic-erm.com/pro2.html.

Overseas institutional investors in the Chinese A-share market include Qualified Foreign Institutional Investors (QFII), RMB Qualified Foreign Institutional Investors (RQFII) and other overseas institutional investors that are able to trade stocks of Chinese A-share listed firms with the Shanghai-Hong Kong Stock Connect program or the Shenzhen-Hong Kong Stock Connect program.

The national security fund is actually the largest single institutional investor in China. By the end of 2017, the market value of A-share stocks held by the national security fund was over 240 billion yuan (or 35 billion dollars).

Please see Bushee (1998) for detailed descriptions of the nine variables.

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Title: The effect of institutional investors’ distraction on firms’ corporate social responsibility engagement: evidence from China
Authors: Cheng Xiang
Fengwen Chen
Paul Jones
Senmao Xia
Publication date: 12-05-2020
Publisher: Springer Berlin Heidelberg
Published in: Review of Managerial Science / Issue 6/2021
Print ISSN: 1863-6683
Electronic ISSN: 1863-6691
DOI: https://doi.org/10.1007/s11846-020-00387-z

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