Skip to main content

Advertisement

SpringerLink
Log in

Punishment by Securities Regulators, Corporate Social Responsibility and the Cost of Debt

  • Original Paper
  • Published:
Journal of Business Ethics Aims and scope Submit manuscript

Abstract

This study examines whether penalties issued to Chinese listed companies by securities regulators for violations of corporate law affect the cost of debt, and the moderating role of corporate social responsibility (CSR) fulfillment on this relationship. Our sample consists of firms listed on Shanghai and Shenzhen stock exchanges from 2011 to 2017 and the data are collected from the announcements of China Securities Regulatory Commission. The findings are as follows: (1) punishment announcements by regulatory authorities increase the cost of debt; and (2) the effect of punishment announcements on the cost of debt is partially offset by prior CSR performance. These findings are shown to be robust. The reputation insurance effect of CSR is more pronounced in state-owned enterprises and in an institutional environment with low marketization, a weak legal environment, and low information transparency. The findings support the reputation insurance hypothesis of CSR and employ the cost of debt as a governance mechanism.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. The CSRC is a public institution directly under the State Council at the ministerial level. In accordance with laws, regulations, and the authorization of the State Council, it uniformly supervises and administers the national securities and futures market, maintains order in the market, and ensures the lawful operation of the market.

  2. Violations include not disclosing non-conforming sample tests, information on complete production suspension, product recalls, and relevant information about the ingredients of biological products.

  3. Data source: Wind Database.

  4. In 2010, Chinese environmental authorities confirmed that Zijin Mining Group Ltd. leaked mining acids that damaged the Tingjiang River in Fujian province. However, Zijin Mining failed to disclose this event in order to avoid the negative impact on its stock price.

  5. Listed companies must disclose information on major events that may have a significant impact on their trading prices. Before investors obtain this information, the listed company must immediately submit a provisional report on the event to the securities regulators and the stock exchange, as well as make a public announcement. The report should describe the cause of the incident, its current state, and possible legal consequences.

  6. *ST Kunji (600806.SH) was penalized by securities regulators for violations. The 23 personnel responsible, including senior executives and members of the board of directors and supervisory board, were penalized RMB 2.5 million, in total. The former chairman of the board, Wang Xing, was banned from the securities market for life.

  7. Social contribution value per year is calculated as follows: (Net profit + income tax expense + business tax and surcharge + cash paid to and for employees + employee compensation payable in the current period − employee compensation payable in the previous period + financial expense + donation − sewage charge and cleaning fee) ÷ average of total assets at the beginning and end of the period.

  8. We sincerely thank the referee for their suggestion on measuring the corporate social responsibility by adopting the total assets as the deflator for the CSR variable in this section.

  9. We sincerely thank the referee for their suggestion on adding the competitive hypothesis in this section.

  10. We thank the referee for suggesting the use of different measurements to examine reputation insurance in this section.

  11. Hexun is a professional assessment organization for the social responsibility system of listed companies in China. The Hexun social responsibility score is evaluated from five aspects: shareholder responsibility, employee responsibility, supply chain responsibility, environmental responsibility, and public welfare responsibility. The total CSR score is a weighted total of the five indicators, with a highest possible score of 100. The five indicators include 13 secondary indicators and 37 tertiary indicators.

  12. Shareholders’ responsibilities include profitability, solvency, return ability, punishment times for responsible persons, and innovation ability.

  13. Employee’s responsibilities include enterprise performance, employee care, and employee safety awareness training.

  14. Supplier and customer responsibilities include product quality, after-sales maintenance, and fair competition.

  15. Environment responsibilities include environmental awareness, environmental management system certification, environmental protection investment amount, types of sewage discharge, and types of energy saving.

  16. Social contribution responsibilities include the proportion of income tax in total profits, and corporate philanthropy.

  17. We thank the referee for the suggestion of choosing a lag period to examine the reputation insurance effect of CSR.

  18. Note that “humane” in the original text is the spelling of “human” in modern-day English. This statement refers to the fact that because nobody is perfect, we all occasionally make mistakes. Such mistakes are worthy of forgiveness.

  19. If a person has faults, and corrects, them, then he or she will no longer have any faults. However, if the faults are not corrected, they become permanent, and will never be corrected.

References

  • Baskentli, S., Sen, S., Du, S., & Bhattacharya, C. B. (2019). Consumer reactions to corporate social responsibility: the role of CSR domains. Journal of Business Research, 95, 502–513.

    Google Scholar 

  • Bebchuk, L. A., Fried, J. M., & Walker, D. I. (2002). Managerial power and rent extraction in the design of executive compensation. University of Chicago Law Review, 69(3), 751–846.

    Google Scholar 

  • Benoit, W. L. (1995). Accounts, excuses, and apologies: A theory of image restoration strategies. Albany: State University of New York Press.

    Google Scholar 

  • Benson, K. L., & Humphrey, J. E. (2008). Socially responsible investment funds: Investor reaction to current and past returns. Journal of Banking and Finance, 32(9), 1850–1859.

    Google Scholar 

  • Bertrand, M., Bombardini, M., Fisman, R. J., et al. (2018). Tax-exempt lobbying: Corporate philanthropy as a tool for political influence. Working Paper. https://doi.org/10.2139/ssrn.3095686.

    Article  Google Scholar 

  • Bharath, S., Sunder, J., & Sunder, S. (2008). Accounting quality and debt contracting. The Accounting Review, 83(1), 1–28.

    Google Scholar 

  • Bhattacharya, C. B., & Sen, S. (2004). Doing better at doing good: When, why, and how consumers respond to corporate social initiatives. California Management Review, 47(1), 9–24.

    Google Scholar 

  • Booth, J. R., & Booth, L. C. (2006). Loan collateral decisions and corporate borrowing costs. Journal of Money, Credit and Banking, 38(1), 67–90.

    Google Scholar 

  • Brammer, S., Millington, A., & Pavelin, S. (2006). Is philanthropy strategic an analysis of the management of charitable giving in large UK companies. Business Ethics A European Review, 15(3), 234–245.

    Google Scholar 

  • Brown, W. O., Helland, E., & Smith, J. K. (2006). Corporate philanthropic practices. Journal of Corporate Finance, 12(5), 855–877.

    Google Scholar 

  • Burt, R. S. (1983). Corporate profits and cooptation: Networks of market constraints and directorate ties in the American economy. New York: Academic Press.

    Google Scholar 

  • Cai, Z. Y., & Wu, S. N. (2007). An empirical study on the influence of board characteristics on the irregularities of listed firms. Nankai Business Review, 10(6), 62–68. (In Chinese).

    Google Scholar 

  • Campbell, J. L. (2007). Why would corporations behave in socially responsible ways? An institutional theory of corporate social responsibility. Academy of Management Review, 32(3), 946–967.

    Google Scholar 

  • Chen, C., & Zhu, S. (2013). Financial reporting quality, debt maturity, and the cost of debt: Evidence from China. Emerging Markets Finance and Trade, 49(4), 236–253.

    Google Scholar 

  • Chen, D. H., et al. (2011). Selective enforcement of regulation. China Journal of Accounting Research, 4(1–2), 9–27.

    Google Scholar 

  • Chen, G., Firth, M., Gao, D. N., & Rui, O. M. (2006). Ownership structure, corporate governance, and fraud: Evidence from China. Journal of Corporate Finance, 12(3), 424–448.

    Google Scholar 

  • Chen, J. C., Patten, D. M., & Roberts, R. W. (2008). Corporate charitable contributions: A corporate social performance or legitimacy strategy? Journal of Business Ethics, 82(1), 131–144.

    Google Scholar 

  • Chen, W. R. (2008). Determinants of firms' backward and forward: Looking R & D search behavior. Organization Science, 19(4), 609–622.

    Google Scholar 

  • Cyert, R. M., & March, J. G. (1963). A behaviorial theory of the firm. New York: Prentice-Hall Press.

    Google Scholar 

  • Dai, Y. Y., Yu, W., Ning, B., et al. (2017). The party member status of chairman of private enterprise and financial violations. Accounting Research, 6, 75–81. (In Chinese).

    Google Scholar 

  • De Roeck, K., & Delobbe, N. (2012). Do environmental CSR initiatives serve organizations’ legitimacy in the oil industry? Exploring employees’ reactions through organizational identification theory. Journal of Business Ethics, 110(4), 397–412.

    Google Scholar 

  • Deng, X. H., & Gao, L. (2018). The monitoring of short selling: Evidence from China. Research in International Business and Finance, 43, 68–78.

    Google Scholar 

  • Du, X. Q. (2015). Is corporate philanthropy used as environmental misconduct dressing? Evidence from Chinese family-owned firms. Journal of Business Ethics, 129(2), 341–361.

    Google Scholar 

  • Du, S., Bhattacharya, C. B., & Sen, S. (2010). Maximizing business returns to corporate social responsibility (CSR): The role of CSR communication. International Journal of Management Reviews, 12(1), 8–19.

    Google Scholar 

  • Du, S., Swaen, V., Lindgreen, A., & Sen, S. (2013). The roles of leadership styles in corporate social responsibility. Journal of Business Ethics, 114(1), 155–169.

    Google Scholar 

  • Fan, J. P. H., Wei, K. C. J., & Xu, X. (2011). Corporate finance and governance in emerging markets: A selective review and an agenda for future research. Journal of Corporate Finance, 17(2), 207–214.

    Google Scholar 

  • Fich, E., & Shivdasani, M. A. (2007). Financial fraud, director reputation, and shareholder wealth. Journal of Financial Economics, 86(2), 306–336.

    Google Scholar 

  • Gao, Y. (2009). Corporate social performance in China: Evidence from large companies. Journal of Business Ethics, 89(1), 23–35.

    Google Scholar 

  • Gao, Y. Q., Chen, Y. J., & Zhang, Y. J. (2012). "Red scarf" or "green scarf”: A study on charitable donation motivation of private enterprises. Management World, 8, 106–114. (In Chinese).

    Google Scholar 

  • Gao, F., Faff, R., & Navissi, F. (2012). Corporate philanthropy: Insights from the 2008 Wenchuan earthquake in China. Pacific-Basin Finance Journal, 20(3), 363–377.

    Google Scholar 

  • Godfrey, P. C. (2005). The relationship between corporate philanthropy and shareholder wealth: A risk management perspective. Academy of Management Review, 30(4), 777–798.

    Google Scholar 

  • Godfrey, P. C., Merrill, C. B., & Hansen, J. M. (2009). The relationship between corporate social responsibility and shareholder value: An empirical test of the risk management hypothesis. Strategic Management Journal, 30(4), 425–445.

    Google Scholar 

  • Gong, G. M., Xu, S., & Gong, X. (2018). On the value of corporate social responsibility disclosure: An empirical investigation of corporate bond issues in China. Journal of Bisiness Ethics, 150(1), 227–258.

    Google Scholar 

  • Goss, A., & Roberts, G. S. (2011). The impact of corporate social responsibility on the cost of bank loans. Journal of Banking and Finance, 35(7), 1794–1810.

    Google Scholar 

  • Gottesman, A. A., & Roberts, G. S. (2004). Maturity and corporate loan pricing. Financial Review, 39(1), 55–77.

    Google Scholar 

  • Guidry, R. P., & Patten, D. M. (2010). Newsweek’s measure of corporate environmental reputation and the “financial halo effect”. Social and Environmental Accountability Journal, 30(1), 4–12.

    Google Scholar 

  • Haslem, B., Hutton, I., & Smith, A. H. (2017). How much do corporate defendants really lose? A new verdict on the reputation loss induced by corporate litigation. Financial Management, 46(2), 323–358.

    Google Scholar 

  • Johnson, W. C., Xie, W., & Yi, S. (2014). Corporate fraud and the value of reputations in the product market. Journal of Corporate Finance, 25(2), 16–39.

    Google Scholar 

  • Juric, D., O’Connell, B., Rankin, M., & Birt, J. (2015). Determinants of the severity of legal and employment consequences for CPAs named in SEC accounting and auditing enforcement releases. Journal of Business Ethics, 147(3), 545–563.

    Google Scholar 

  • Karpoff, J., Lee, D. S., & Martin, G. S. (2008). The consequences to managers for cooking the books. Journal of Finance Economics, 88(2), 193–215.

    Google Scholar 

  • Karpoff, J., & Lott, J. R. (1993). The reputational penalty firms bear from committing criminal fraud. Journal of Law and Economics, 36(2), 757–802.

    Google Scholar 

  • Karpoff, J. M., Scott, L. D., & Martin, G. S. (2008). The consequences to managers for financial misrepresentation. Journal of Financial Economics, 88(2), 193–215.

    Google Scholar 

  • Kim, Y., Li, H., & Li, S. (2014). Corporate social responsibility and stock price crash risk. Journal of Banking and Finance, 43(1), 1–13.

    Google Scholar 

  • Kimber, D., & Lipton, P. (2005). Corporate governance and business ethics in the Asia-Pacific region. Business and Society, 44(2), 178–210.

    Google Scholar 

  • Koehn, D., & Ueng, J. (2010). Is philanthropy being used by corporate wrongdoers to buy good will? Journal of Management and Governace, 14(1), 1–16.

    Google Scholar 

  • Kreps, D., & Wilson, R. (1999). Reputation and imperfect information. Levines Archive, 27(2), 253–279.

    Google Scholar 

  • Laura, M. E., Lars, L. G., Sabrina, S., & Jan, W. (2019). Frontline employees as corporate social responsibility (CSR) ambassadors: A quasi-field experiment. Journal of Business Ethics, 157(2), 359–373.

    Google Scholar 

  • Li, X. L., Hou, X. T., & Ge, C. F. (2017). Whether charitable giving is bona fide or hypocritical: From the perspective of corporate infractions. Journal of Shanghai University of Finance and Economics, 19(4), 66–78. (In Chinese).

    Google Scholar 

  • Liebman, B., & Milhaupt, C. (2008). Reputational sanctions in China’s securities market. Columbia Law Review, 108, 929–983.

    Google Scholar 

  • Lin, Z. G., & Ding, M. H. (2017). Internal control defects and their repair on corporate debt financing costs—An empirical study based on the perspective of internal control regulatory system changes. Accounting Research, 4, 73–80. (In Chinese).

    Google Scholar 

  • Liu, X., & Chen, X. C. (2018). CSRC penalties, analyst tracking and corporate bank debt financing—Empirical evidence from information disclosure violations. Accounting Research, 1, 60–67. (In Chinese).

    Google Scholar 

  • Lu, Y., Zhu, Y. J., & Hu, X. Y. (2012). Empirical study on institutional investors' shareholding and listed firms' violations. Nankai Business review, 15(1), 13–23. (In Chinese).

    Google Scholar 

  • Peloza, J. (2006). Using corporate social responsibility as insurance for financial performance. California Management Review, 48(2), 52–72.

    Google Scholar 

  • Pittman, J. A., & Fortin, S. (2004). Auditor choice and the cost of debt capital for newly public firms. Journal of Accounting and Economics, 37(1), 113–136.

    Google Scholar 

  • Sánchez, C. M. (2000). Motives for corporate philanthropy in El salvador: Altruism and political legitimacy. Journal of Business Ethics, 27(4), 363–375.

    Google Scholar 

  • Sharfman, M., & Fernando, C. S. (2008). Environmental risk management and the cost of capital. Social Science Electronic Publishing, 29(6), 569–592.

    Google Scholar 

  • Shen, H. T. (2007). Corporate characteristics and corporate social responsibility information disclosure—Empirical evidence from China's listed companies. Accounting Research, 3, 9–16. (In Chinese).

    Google Scholar 

  • Tian, L., & Estrin, S. (2010). Debt financing, soft budget constraints, and government ownership evidence from China. Economics of Transition, 15(3), 461–481.

    Google Scholar 

  • Vanhamme, J., & Grobben, B. (2009). “Too good to be true!”, the effectiveness of CSR history in countering negative publicity. Journal of Business Ethics, 85(2), 273–283.

    Google Scholar 

  • Williamson, O. E. (1985). The economic institution of capitalism. New York: The Free Press.

    Google Scholar 

  • Xia, X., Teng, F., & Gu, X. L. (2019). Reputation repair and corporate donations: An investigation of responses to regulatory penalties. China Journal of Accounting Research, 12(3), 293–313.

    Google Scholar 

  • Ye, K. T., & Zhang, R. (2011). Do lenders value corporate social responsibility? Evidence from China. Journal of Business Ethics, 104(2), 197–206.

    Google Scholar 

  • Ye, K. T., Zhang, R., & Xu, H. P. (2010). Reputation, institutional environment and debt financing, based on the evidence of private listed firms in China. Journal of Financial Research, 8, 171–183. (In Chinese).

    Google Scholar 

  • Zhang, W. Y., & Ke, R. W. (2002). Trust and its explanation: The investigation and analysis across the province from China. Economic Research Journal, 10, 59–70. (In Chinese).

    Google Scholar 

  • Zhang, D. L., & Li, S. H. (2012). Social trust, political relations and bank loans of private enterprises. Accounting Research, 8, 17–24. (In Chinese).

    Google Scholar 

  • Zhang, C., Lou, Z. K., & Zhan, D. (2014). Political management, financial performance and corporate social responsibility—Evidence from listed firms in China’s chemical industry. Management Review, 26(1), 130–139. (In Chinese).

    Google Scholar 

  • Zhou, X., & Reesor, R. M. (2015). Misrepresentation and capital structure: Quantifying the impact on corporate debt value. Journal of Corporate Finance, 34(1), 293–310.

    Google Scholar 

Download references

Acknowledgement

We appreciate comments and suggestions from participants of the China Journal of Accounting Studies Seminar 2019; the 2019 Global and China Accounting and Finance Conference (GCAFC); the 2019 Accounting Cooperative Forum of Xi’an Jiaotong University.

Author information

Authors and Affiliations

  1. Business School of Hunan University, Changsha, 410079, China

    Guangming Gong, Xin Huang, Sirui Wu & Wanjin Li

  2. School of Management, Xi’an Jiaotong University, Xi’an, 710049, Shaanxi, China

    Haowen Tian

  3. Department of Accountancy, City University of HongKong, Kowloon, Hong Kong

    Haowen Tian

Authors
  1. Guangming Gong
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Xin Huang
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Sirui Wu
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Haowen Tian
    View author publications

    You can also search for this author in PubMed Google Scholar

  5. Wanjin Li
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Sirui Wu.

Ethics declarations

Conflict of interest

All authors declare that we have no conflicts of interest to this work.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Gong, G., Huang, X., Wu, S. et al. Punishment by Securities Regulators, Corporate Social Responsibility and the Cost of Debt. J Bus Ethics 171, 337–356 (2021). https://doi.org/10.1007/s10551-020-04438-z

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10551-020-04438-z

Keywords

Search

Navigation