Corporate Social Responsibility, Internal Controls, and Stock Price Crash Risk: The Chinese Stock Market

Dong Hao,Jing Wang,Guo Qi

doi:10.3390/su10051675

Abstract

As the core of sustainable development strategy, corporate social responsibility (CSR) is a concept that influences business missions, management, operations, finance, and marketing. Studies of the economic consequences of CSR have focused on the theoretical and practical arenas. However, few studies have examined the impact of CSR on the market price fluctuations of company shares. The purpose of this study was to investigate the effect of CSR on stock price crash risk and its relationship with the role of internal controls in China. After empirical analysis, we found a significantly negative association between CSR and stock price crash risk. Furthermore, we determined that internal controls play a significant and partially mediating role between CSR and stock price crash risk. Internal controls have become an important system for Chinese companies to improve their social responsibility and reduce their operating risk, especially the risk of a stock price crash. We also found that internal controls had a significant and partial moderating effect on the relationship between CSR and stock price crash risk. In certain environments with higher levels of internal controls, CSR prominently reduced the risk of stock price crash. In theory, our study adds to the growing literature about CSR, expands the scope of CSR research, elaborates upon relevant CSR economic consequences, and complements the literature about the determinants of stock price crash risk. In practice, our conclusions provide a reference for Chinese managers, investors, and the related government departments to evaluate the effects of CSR and internal controls, and provides regulators with a method to help control abnormal fluctuations in the stock market. More importantly, the results of this study have reference value for scholars and practitioners in developing countries like China.

Highlights

Corporate social responsibility (CSR) is the responsibility of enterprises toward consumers, communities, and the environment while creating profit and maintaining legal responsibility to shareholders and employees
The results suggest that the negative relation between corporate social responsibility (CSR) and future crash risk holds after controlling for endogeneity based on the dynamic generalized moment estimate method (GMM) estimator
We found that CSR was more significantly and negatively associated with crash risk when firms had a higher-quality internal control system

Summary

Introduction

Corporate social responsibility (CSR) is the responsibility of enterprises toward consumers, communities, and the environment while creating profit and maintaining legal responsibility to shareholders and employees. A need for further research still exists about the environments in which CSR exerts either a positive value effect or a negative value effect This is especially true for China, which is a country where CSR introduction has lagged and whose society is in a transition phase. Chinese companies have made great progress in undertaking and fulfilling CSR in just a few years, they are still far from Western developed countries (for example, the MSCI ESG Stats, previously known as KLD, began to evaluate U.S firms’ CSR activities as early as 1990). With the understanding that the Chinese government guides enterprises to rationally use social resources and achieve scientific development through institutional innovation, thereby improving the quality of the national economy, the economic consequences of the establishment of the CSR system (as an important micro-institutional design) have become the focus of attention for all sectors of society

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