Institutional cross‐ownership and firm social performance

Abstract

AbstractResearch Question/IssueThis paper examines the relation between institutional cross‐ownership from the same industry (hereafter, INSTCO) and corporate social responsibility (hereafter, CSR) for Chinese publicly traded firms. We also investigate whether the relation between INSTCO and CSR depends on the strength of the internal and external corporate governance.Research Findings/InsightsBased on a sample of Chinese listed firms from 2009 to 2017, we find that INSTCO is significantly positively associated with firm CSR performance. We interpret our results under the signaling theory of strategic CSR spending, according to which CSR spending is a valuable signal that distinguishes firms from peers, particularly in an environment with severe information asymmetry. The effective monitoring of INSTCO drives managers to engage in the CSR signaling more actively. Furthermore, this positive association between INSTCO and CSR signaling is only found among firms with strong internal and/or external corporate governance.Theoretical/Academic ImplicationsThe findings in this paper indicate that the well‐documented monitoring role of INSTCO also has important implications on firms' social performance. Moreover, our findings contribute to the literature on strategic CSR spending by highlighting the role of CSR spending as a signaling device in China as the largest emerging market. Lastly, both internal and external corporate governance significantly moderate the impact of INSTCO on firms' social performance.Practitioner/Policy ImplicationsCSR initiatives are valuable signals. Policy makers should be aware that common ownership may enhance stakeholders' welfare due to INSTCO's monitoring effect, since this study documents a significantly positive effect of INSTCO on corporate social performance. Investors in the Chinese market should also be aware of the nontrivial signaling function of CSR activities, especially in a strong internal governance and/or an investor‐friendly external governance environment.