Do foreign institutional investors drive corporate social responsibility? Evidence from listed firms in China

Ping Wang,Tianlong Wu,Zhe Li

doi:10.1111/jbfa.12481

Abstract

AbstractThis paper investigates the effect of qualified foreign institutional investors (QFIIs) on corporate social responsibility (CSR) within the context of listed firms in China. We find that QFIIs offer an incisive channel for improving socially responsible practices. In addition, we find that firms with QFIIs are more likely to comply with the Global Reporting Initiative (GRI) guidelines, and that their sustainability reports tend to be longer. We also find that this positive effect is more pronounced in firms with low initial CSR scores than those with high CSR scores at the time when QFIIs enter the sample. Our empirical evidence further confirms that this positive impact is driven by QFIIs from countries with high social awareness, or QFIIs from geographically distant countries, consistent with their motives, and is linked to the ownership of QFIIs, especially when the QFII is among the top ten of the largest shareholders. Finally, our extended analysis reveals that the increase in CSR performance associated with the presence of QFIIs results in greater firm performance and easier access to finance.

Highlights

Opening domestic capital markets to foreign investors is generally considered as one of the most critical business strategies, especially for emerging economies, in propelling integration of global capital markets, and it has attracted greater attention from academics and policymakers in recent years
This paper investigates the effect of qualified foreign institutional investors (QFIIs) on corporate social responsibility (CSR) within the context of listed firms in China
Using percentage of ownership by QFIIs to capture the degree of influence, and whether a QFII is among the top ten shareholders as a measure for the strength of influence, we provide evidence suggesting that CSR performance is positively linked to the ownership of QFIIs, and this positive link is more salient if the QFII is among the top ten shareholders, suggesting that the mechanism through which QFIIs influence CSR is from the voting power, especially by appointing a director on the management team

Summary

Introduction

Opening domestic capital markets to foreign investors is generally considered as one of the most critical business strategies, especially for emerging economies, in propelling integration of global capital markets, and it has attracted greater attention from academics and policymakers in recent years. The literature on the influence of foreign investors largely finds that these offshore owners play an important role in shaping business strategies by bringing in better corporate governance, advanced managerial skills, and enhanced monitoring mechanisms (Huang & Zhu, 2015). Recent years have seen the capital market benefits that firms derive from the presence of foreign institutional investors (Douma et al, 2006; Schuppli & Bohl, 2010)

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