To Achieve the Same Goal in Different Ways: How Institutional Ownership Affects Firms’ CSR Activities in China 

By | September 21, 2022

Research from industrialized economies reveals that institutional ownership can boost the corporate social responsibility participation of companies (Chen et al., 2019). These studies argue that stating their opinions, or the mere prospect of voting, can improve institutional investors’ influence over firms’ CSR policy. But does this story apply in emerging economies? The answer is YES. We found that institutional shareholders do significantly enhance firms’ engagement in CSR via improving firms’ information transparency in emerging nations.  

Institutional Ownership and Firms’ Engagement in China 

In our recent paper, we found that institutional investors had a considerable impact on corporate social responsibility (CSR) in Chinese listed companies between 2010 and 2018. But the process through which institutional investors impact the CSR participation of companies differs from industrialized economies. 

Notably, institutional investors do not hold sway in China. For example, from 2004 to 2014, the average share of institutional ownership was 22.54% in China. Individual investors make up the majority of market participants in China’s A-share market. According to the Shanghai Stock Exchange, only 12% of Shanghai Stock Exchange transactions were made by institutional investors (In China, an institutional investor is a legal entity that invests in securities with its own funds or with funds raised from the general public), while 86% were made by natural persons. A-shares held by mutual funds totaled 5,721.501 billion yuan at the end of the third quarter of 2021, and the percentage of the entire market value of A-shares held by these funds was only 7%. Therefore, are institutional investors important enough to able to communicate their concerns about corporate social responsibility (CSR) to companies?  

Institutional Stakeholders, Information Disclosure, and Firms’ CSR engagement We suggest that institutional investors impact CSR involvement by increasing the transparency of companies’ CSR information to stakeholders, including analysts, the public, and governments. 

Our research on corporate social responsibility (CSR) has shown that institutional investors can help companies improve information disclosure. This line of investigation reveals that institutional investors exert pressure on companies through collective action when they make disclosures. For the Chinese market, where the information environment is generally opaque, the cost of getting CSR information for the public is considerable. Institutional investors typically have in-house teams of experts that can undertake in-depth CSR research. Companies usually will not turn down the visits of institutional investors. As a result, institutional investors in China are more of an essential source of information than in more developed markets.  

Furthermore, we argue that institutional investors can improve CSR participation by increasing CSR information visibility to the public and governments. If companies’ CSR data is now more readily available to institutional investors, we believe it will also impact other stakeholders. In order to enhance public interest in the subject, financial analysts will begin to publish reports in reputable media outlets. Hence, analysts will pay more attention to a company if institutional investors make site visits to that company. Finally, governments will pay more attention to the issue related corporate social responsibility. Specifically, Chinese government issued severe sanctions to firms’ unethical behaviors once they inspect that. For example, in 2022, Zhengbang Technology, an A-share listed firm in China, was fined over RMB 1.42 million in 2022 for sewage spillage. 

The empirical findings in our paper support the theoretical hypotheses; we find a positive relationship between institutional ownership and institutional side visits, and between institutional ownership and analyst coverage. By these mechanisms, institutional investors increase firms’ CSR information exposure to the governments and thus motivate firms to engage more in CSR to cater to the governments’ will in promoting social welfare. This is in stark contrast with intuitional investors affecting firms’ CSR activities in developed nations, where institutional investors promote CSR activities by their voting right on the boards directly.  To sum, promoting firms’ CSR information visibility to governments is a distinctive mechanism whereby intuitional investors promote CSR engagement in China. 

For instance, Shanghai Science and Technology Fund has signed the UN Principles for Responsible Investment (PRI) as an institutional investor, and actively promoted the visibility of CSR information of invested companies such as Shanghai International Group, Shanghai Guosheng Group, Shanghai Port Group, Guotai Junan, Shanghai Trust, and Zhangjiang Hi-Tech by side visits and publish CSR reports on these firms’ CSR engagement. 

Institutional Ownership and CSR Engagement: Moderating Factors 

As part of our research, we examine the influence of several variables on the positive connection between institutional ownership and CSR involvement, such as political ties, ownership type (state-owned vs. non-state-owned), budgetary restrictions, and institutional investors’ investment horizons. 

Institutional investors have a significant impact on CSR participation by increasing the amount of information that corporations are exposed to, which places a greater ethical obligation on them. In order to keep their political ties, businesses that have political ties are more concerned with the views of the government. Thus, increased transparency brought about by institutional investors attracts the attention of companies with political links.  

The same reasoning applies to state-owned enterprises (SOEs). The SOEs are more concerned with the issues brought by, and attention from, governments than non-SOEs. As a result, SOEs will be more likely than non-SOEs to engage in CSR when the visibility of CSR information increases due to institutional investors. In fact, SOEs face severer pressure in engaging CSR in China from governments. For example, in 2022, the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council of the People’s Republic of China established a Social Responsibility Bureau. This bureau is responsible for researching and proposing policies to promote the fulfillment of social responsibility by state-owned enterprises, guiding the fulfillment of social responsibility by the enterprises under its supervision, and guiding the promotion of carbon compliance and carbon neutrality. 

Moreover, even though companies with increased CSR information visibility are trying to improve their CSR participation, they still face financial limits for activities such as employee well-being and charitable donations, which are expensive. Hence, the impacts of institutional investors are more pronounced for firms with lower financial constraints.  

Finally, the benefits of CSR participation are generally only obvious over the long term. For example, good CSR can increase a company’s profitability. In addition, firms can benefit from CSR by raising stock returns and decreasing the probability of a stock market crash. Therefore, multiple studies demonstrate that only institutional investors with a long-term perspective can encourage CSR participation (Kim et al., 2019; Petersen & Vredenburg, 2009; Ullah & Jamali, 2010). To assess the moderating effect of institutional investors’ investment horizons on the link between their holdings and CSR engagement, we measure investment horizons based on investor turnover rate. We find that the positive association between firms’ CSR engagement and institutional investors is stronger for investors with longer-term objectives. 

Implications of This Study 

We add to our knowledge of how institutional investors influence corporate social responsibility (CSR) endeavors. In other research, institutional investors’ voting power on company boards has been proven to increase enterprises’ CSR activity. 

Complimentarily, we present alternative insights into why institutional investors might boost firms’ CSR information openness via analyst coverage and their site visits; we show that the institutional investor is a substantially more important information source compared with well-developed markets.  

Regulatory authorities will benefit from our findings, which show that CSR participation may be boosted if the information is made more accessible to the public. Regulators should endeavor to improve capital market information openness and collaborate with various information platforms, such as institutional investment, public media, third-party organizations, and securities companies, in order to inspire enterprises to engage in CSR. For publicly traded companies, it is crucial to understand that institutional ownership will boost the transparency of their CSR information to the public and the government. As a result, companies anticipating the introduction of institutional investors should boost their CSR spending. 

Wanfang Xiong is a pos-doc researcher at the Department of Finance at the Chinese University of Hong Kong Shenzhen 

Mengming (Michael) Dong is an Assistant Professor of Finance at the College of Business at California State University Long Beach, and a Visiting Scholar at the Jones Graduate School of Business at Rice University 

Cheng (Elvis) Xu is a lecturer at International Business School Suzhou at Xi’an Jiaotong-Liverpool University.  

This post is adapted from their paper, “Institutional investors and Corporate Social Responsibility: Evidence from China”, forthcoming at Emerging Markets Finance and Trade, and SSRN.  

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