Effects of Public Firms’ Business Ties with the Government on Firm-Level CSR Exposure

By | February 7, 2023

With growing attention on corporate social responsibility (CSR) or the more recent expression of environmental, social, and governance (ESG), many countries and regions have imposed strict mandatory rules on CSR disclosures to better serve investors and other stakeholders. At the same time, government incentive programs such as the Paycheck Protection Program (PPP) were also effective at promoting CSR initiatives during the pandemic. These two methods can be viewed as effective tools for governments to promote CSR activities. Apart from them, based on the traditional four main pillars’ framework on government and firm relationship for CSR issues, governments partner with industry peers and endorse or incentivize specific firms through rewards. These two comparatively indirect methods can be categorized as soft law or soft regulation.   

In my recent working working paper, I examine how government soft regulation, or government business ties, affects firms’ CSR behaviors. Overall, my empirical results show a positive relationship between these ties and CSR activity disclosures, and this relationship is still valid when a sudden increase of contract renegotiation occurs led by the American Recovery and Reinvestment Act of 2009. In conclusion, my findings provide a new perspective on the function of government business ties as an indirect regulatory tool. 

To better understand the relationship between government and public firms, especially under soft regulation through business collaborations, I focus on firms with government business ties and their CSR disclosures. My findings suggest that when conducting business with the government, firms will spend more time discussing CSR issues during conference calls. To strengthen my baseline results, I use the sudden increase in contract supply brought about by the American Recovery and Reinvestment Act of 2009 and find that firms with government business ties disclose more climate related information during the renegotiation period, which certainly helps to explain the causality between government business ties and CSR disclosures. 

In my following tests, by considering two prevalent theories (political cost and stakeholder theories) in CSR literature, my results collectively confirm that firms with government businesses conditionally fulfill their CSR duties through more climate disclosures when they are under pressure from politicians and stakeholders. Further, to better understand corporate CSR behaviors, I examine what public companies with government business ties choose to disclose, whether they will disclose more social issues instead of only environmental topics, and whether they pursue real CSR activities, such as the reduction of toxic releases. For my collective results, first, for the heterogeneity among all three climate change dimensions including climate change opportunities, climate change regulations, and physical threats, I find that firms with government business are more willing to discuss the opportunity side of climate change. Surprisingly, firms do not disclose significantly more regulatory matters, which can certainly be considered a direct response to government business partners. On top of that, they also discuss more climate change risks in their conference call transcripts, showing their preference on disclosure of “risk” or “uncertainty” along with climate change information. Second, for heterogeneity between “environmental” (climate change) and “social” (human capital) dimensions, different from climate change information that significantly increases during the government contract renegotiation period, I do not find any significant results on any type of human capital management disclosures. These results of climate change and human capital disclosures suggest government officials apply the most “pressure” on environmental components compared to social components and it is consistent with one recent argument that the heart of ESG is climate change and emission issues. As for CSR’s real effects on firms’ operations and emissions, my findings show that public firms with government business ties do not significantly reduce all types of toxic emission intensity. Finally, in my CSR disclosure consequence test, I find that firms with government business ties can lower their probability of being penalized from the EPA in the following year if they disclose more CSR information such as climate change. The transparency of firms’ CSR information helps government understand firms’ CSR duty better. As a result, government may offer them real benefits to support their operating business.  

In other words, my findings show that firms are most willing to disclose new opportunities stemming from climate change and would comply with government CSR demand by taking potential costs into consideration. Firms are also concerned with operation-oriented human capital topics, but these topics are less important than climate change topics which government officials pay more attention to and have legislated on recently. More importantly, by disclosing more climate change information, firms with government business ties are less likely to be punished by the EPA which, in turns, provides more incentives for firms to increase exposure on these topics.  

My paper contributes to the academic literature in three ways. First, my results show that firms with government business ties have strong incentives to fulfill government CSR goals. In particular, the paper provides new evidence for the theory that government expectations about CSR help promote a better CSR information environment through firms’ voluntary disclosures. My results partially infer that government officials care more about climate issues than social and human capital issues. This is also consistent with the argument that ESG could boil down to emission, which is significantly relevant to global climate change. Moreover, my cross-sectional results support two existing theories—the political cost and stakeholder theories—by showing that relationship between firms with government businesses and climate change disclosure is more pronounced when firms face higher political costs such as lobbying fees and more stakeholder attention. Furthermore, my last hypothesis test shows that CSR is not a panacea because both firms and politicians can have other priority financial goals to achieve. For instance, firms need to solve their financial constraint problems to survive first and then make sustainable impact for society.  

Second, different from the traditional direction of political connection studies, in which firms always receive benefits from US government connections, my paper shows that government business is a means by which the government can influence corporate CSR decisions. Specifically, it expands the government contract and customer literature because government business can be seen as a new means of monitoring firms’ fulfillment of nonmonetary goals. This argument also indicates government business can be expensive because of the potential cost of CSR. Additionally, the Renegotiation Act suggests that even if public firms already have government contracts, they will devote to CSR for government goals to pursue more government support through climate change disclosures. This further helps to confirm the importance of government reliance from a new angle.  

Finally, different from prior studies on government mandatory CSR disclosure policies and emerging government incentive programs, my results imply that when firms face soft laws, they still choose to comply with such CSR demands. This outcome might appear natural for developing countries with centralized political systems, but democratic countries like the United States which are systematically decentralized also displayed such phenomena. For example, in general, the bargaining power of firms is much weaker in China compared to the United States. Moreover, my paper infers that government officials are also the audience in firms’ conference calls. Firms provide CSR information to satisfy politicians and those regulators make decisions based on firms’ voluntarily disclosed information. Although politicians and CEOs can communicate privately, by disclosing information through public channels, such as conference calls, a firm’s climate change information is seen as more credible, and senior management face less concern about regulations, like Regulation Fair Disclosure (Reg FD), that apply to private communications. On top of that, my paper indicates that public voluntary disclosure of climate change information can have an indirect positive effect on government business scrutiny. Finally, my consequence test shows that for firms with government ties, disclosing climate change information brings real benefits of lowered likelihood of penalty by the EPA.  

 

Zhige Harry Yu is a Ph.D. candidate of Accounting at the HKU business school.  

 

This post is adapted from his paper, “Effects of public firms’ business ties with the government on firm-level CSR exposure,” available on SSRN. 

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