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Shifting Stakeholders Logics: Foreign Institutional Ownership and Corporate Social Responsibility

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Abstract

This study examines the role of foreign institutional ownership in corporate social responsibility (CSR). Using the Shanghai-Hong Kong Stock Connect as a quasi-natural experiment, our difference-in-differences estimation shows that foreign institutional ownership drives firms’ CSR corporate social responsibility. Further, the positive effect of foreign institutional ownership on CSR is motivated by foreign institutional investors shifting the stakeholders’ logics about social responsibility, not by profit maximization. We also provide evidence that this effect of foreign institutional ownership on CSR is more pronounced among firms with fewer political connections and with non-overconfident CEOs. Overall, our results indicate that foreign institutional investors transmit social norms and shift stakeholders’ logics regarding social responsibility and, in turn, propel firms to improve CSR to satisfy their stakeholders’ expectations.

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Notes

  1. The Coordinated Portfolio Investment Survey (CPIS) is led by the IMF and provides detailed data on the holdings of portfolio investment securities for different economies. See details at https://data.imf.org/

  2. For instance, Hong and Kacperczyk (2009) find that norm-constrained institutions are less likely to hold stocks of companies involved in producing alcohol and tobacco or in gaming. Nofsinger et al. (2019) show that institutional investor portfolios tend to avoid stocks with CSR concerns. Starks et al. (2017) find that firms with better environmental, social, and governance (ESG) profiles tend to attract investors with longer investment horizons.

  3. When using the RKS scores, we exclude the governance dimension because governance itself helps to protect shareholders’ value, which is different from the environmental and social dimensions.

  4. In untabulated tests, we conduct the PSM-DID regressions as in Table 8 with the CSR index (N_CSR) as the dependent variable. The results are consistent.

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Acknowlegdements

We thank Assaad El Akremi (the editor), four referees, seminar participants at Central South University, Huazhong University of Science and Technology for helpful suggestions.

Funding

We also gratefully acknowledge the financial support from the National Natural Science Foundation of China (grant no. 72302234, 72104204; 71991473), the Major Project of National Social Science Foundation of China (grant no. 21ZDA010; 22VRC145), the PRC Ministry of Education Youth Project for Humanities and Social Science Research (grant no. 20YJC790051), and the Guanghua Talent Project of Southwestern University of Finance and Economics. All authors contribute equally to this paper. All errors are our own.

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Authors and Affiliations

  1. Business School, Central South University, Changsha, China

    Xu Cheng

  2. School of Public Finance and Taxation, Southwestern University of Finance and Economics, Chengdu, China

    Xiandeng Jiang

  3. School of Economics, Huazhong University of Science and Technology, Wuhan, China

    Dongmin Kong

  4. LUISS Business School, Viale Romania 32, 162, Rome, Italy

    Samuel Vigne

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  1. Xu Cheng
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Correspondence to Dongmin Kong.

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Appendix A

Appendix A

Variable

Definition

Corporate social responsibility

CSR_rate

The rating score for corporate social responsibility reported by RKS Global. The maximum score is 100 points

N_CSR

The sum of 12 categories of CSR engagement reported by the CSMAR database. The 12 categories cover the evaluation of the firm-level quality of annual social responsibility reports, environmental reports, sustainability reports, and corporate citizenship reports. The highest value is 12, and the lowest value is 1

Control Variables

Size

The natural logarithm of the book value of total assets

Leverage

Total debt divided by total assets

Tobin’s Q

Total assets plus the market value of equity minus book value of equity divided by total assets

ROA

Return on asset

Cash

Cash and short-term investments divided by total assets

BM

The market value of equity divided by the book value of equity

Board

Number of directors on the board

InD

Number of independent directors

CEO_duality

The dummy variable equals one if the CEO is also the chairman and zero otherwise

Political dependence

SO_share

The ratio of state shareholdings to total shares outstanding

CEO_CPCC

The dummy variable equals one when the CEO was a member of the NPC or CPPCC and zero otherwise

CEO_GO

The dummy variable equals one when the CEO is or has been an officer of the central or regional governments and zero otherwise

CEO characteristics

Overconfidence

The dummy variable equals one if the firm has at least one instance in the sample period where the actual level of profitability is lower than the predicted level of profitability and zero otherwise

Existing foreign institutional ownership

AH_dual

The dummy variable equals one when the firm is cross-listed in both A- and H-share markets and zero otherwise

EFD

Capital expenditure divided by net fixed assets

Future performance

ROE

Return on equity

Profit_op

The ratio of operating profit to total assets

Net_profit

The ratio of net profit to total assets

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Cheng, X., Jiang, X., Kong, D. et al. Shifting Stakeholders Logics: Foreign Institutional Ownership and Corporate Social Responsibility. J Bus Ethics (2024). https://doi.org/10.1007/s10551-023-05587-7

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