Restricted shares and CSR: Evidence from foreign strategic investors in China

Abstract

Using hand-collected ownership data from a large sample of Chinese listed firms, we examine the link between foreign strategic ownership and firms' corporate social responsibility (CSR). We find that foreign strategic ownership is significantly associated with greater CSR performance. The restrictions of shares are the main motivation behind foreign strategic investors (FSIs) increasing firms' CSR engagement. The influence of foreign ownership on CSR is driven by strategic investors with non-tradable shares, but not by Qualified Foreign Institutional Investors (QFIIs) with tradable shares. FSIs with longer restriction horizons and in firms with stronger political connections are found to have more pronounced effects on CSR. We also find FSIs' home country characteristics, including the legal system, cultural background, geographic distance, trade relationship, and economic policy uncertainty, are significant factors in explaining their incentives to increase firm CSR in China. From the perspective of corporate governance, we find that the impacts of FSIs on firms' CSR performance is more pronounced when shareholder power is stronger and executive power is weaker in the firm. Difference-in-differences tests and tests based on instrumental variables provide confirming evidence. Overall, our findings suggest that restricted ownership, political connections, and foreign investors' home country characteristics provide incentives for FSIs to pay more attention to firms' long-term reputation and thus enhance CSR engagement.