The effect of institutional investors’ distraction on firms’ corporate social responsibility engagement: evidence from China

Abstract

To investigate the impact of institutional investors on firms’ corporate social responsibility (CSR) engagement while controlling for possible endogeneity concerns, we study how Chinese listed firms adjust their CSR decisions when their institutional investors are distracted by exogenous attention-grabbing events and thus are inattentive. With a sample of Chinese listed firms from 2009 to 2017, we find a significant and robust negative relationship between institutional investor inattention and firms’ CSR engagement. This negative relationship is more pronounced for firms with more principal–agent problems and/or weaker corporate governances and is more attributable to the inattention of institutional investors with more monitoring incentives. These findings suggest that managers are less motivated to engage in CSR when they are less monitored by institutional investors, indicating that CSR is beneficial to shareholders of Chinese listed firms. Our findings also indicate that the positive impact of institutional investors on CSR may be constrained by their limited attention.

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Notes

  1. 1.

    Additionally, see Faller and Knyphausen-Aufsess (2018) for a literature review regarding the impact of institutional ownership on CSR.

  2. 2.

    According to Kempf et al. (2017), the Investor Responsibility Research Center Institute (IRRC 2011) in America conducted a large-scale survey in 2011 and stated that “three-fourths of institutions report that time is the most common impediment to engagement [with corporations], while staffing considerations rank second.”

  3. 3.

    http://www.rksratings.cn/.

  4. 4.

    There is a rich literature documenting that agent problems are rampant in China (Allen et al. 2005; Jiang et al. 2010; He and Luo 2018).

  5. 5.

    As discussed later, the expense ratio, which is the operating expenses scaled by annual sales, is widely used to measure firms’ agency costs caused by principal–agent problems (Ang et al. 2000; Fauver and Fuerst 2006; Jiang et al. 2015).

  6. 6.

    According to a survey reported in the China Sustainable Investment Review 2019, 89% of the respondents said that they are not familiar with environmental, social and governance (ESG) investment, and 44% of them have never heard about “green investment”, “social responsibility investment” or “ESG”. See http://f.sinaimg.cn/client/ebe07d0f/20191205/ChinaSIF2019.pdf.

  7. 7.

    For instance, approximately 43% of Chinese listed firms do not even disclose CSR reports in our sample period.

  8. 8.

    Namely, these types are insurance companies, public mutual funds, the national social security fund, exchange-traded funds, overseas institutional investors, corporate annuity plans, banks, trust companies, brokerage firms, and private investment funds.

  9. 9.

    As discussed later in Sect. 4.4.1, insurance companies, mutual funds, and the national security fund are the three largest institutional investors in the Chinese A-share market. The institutional ownership of other institutional investors is relatively minor.

  10. 10.

    We follow the industry classifications issued by the China Securities Regulatory Commission (CSRC) in 2012 and classify stocks into 19 industries.

  11. 11.

    See Sect. 2.2 in Kempf et al. (2017) for a detailed discussion on this.

  12. 12.

    There are two stock exchanges in China, that is, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange. Firms listed on SSE are not required to disclose site visit events. Please see Cheng et al. (2016b, 2019), and Han et al. (2018) for details regarding the institution background of site visits in the Chinese A-share market.

  13. 13.

    http://www.ic-erm.com/pro2.html.

  14. 14.

    Overseas institutional investors in the Chinese A-share market include Qualified Foreign Institutional Investors (QFII), RMB Qualified Foreign Institutional Investors (RQFII) and other overseas institutional investors that are able to trade stocks of Chinese A-share listed firms with the Shanghai-Hong Kong Stock Connect program or the Shenzhen-Hong Kong Stock Connect program.

  15. 15.

    The national security fund is actually the largest single institutional investor in China. By the end of 2017, the market value of A-share stocks held by the national security fund was over 240 billion yuan (or 35 billion dollars).

  16. 16.

    Please see Bushee (1998) for detailed descriptions of the nine variables.

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Acknowledgements

This study was supported by the China Postdoctoral Science Foundation (Grant No. 2018M643401), the Natural Science Foundation of Chongqing, China (cstc2019jcyj-bshX0087), the National Natural Science Foundation of China (Grant NoS. 71772019, 71973018) and the Fundamental Research Funds for the Central Universities (Grant No. 2019CDSKXYJG0037).

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Appendix: Variable definitions

Appendix: Variable definitions

Variables Definitions Data sources
Score i,t The total RKS CSR score of firm i in year t RKS
M i,t The RKS macrocosm score of firm i in year t RKS
C i,t The RKS content score of firm i in year t RKS
T i,t The RKS technique score of firm i in year t RKS
I i,t The RKS industry score of firm i in year t RKS
DDis i,t Dummy that equals 1 if firm i volunteers to disclose its CSR report in year t RKS
HXScore i,t The total CSR score of firm i in year t assigned by hexun.com hexun.com
SHolder i,t The shareholder responsibility score of firm i in year t assigned by hexun.com hexun.com
Employee i,t The employee responsibility score of firm i in year t assigned by hexun.com hexun.com
Customer i,t The customer responsibility score of firm i in year t assigned by hexun.com hexun.com
Envir i,t The environmental responsibility score of firm i in year t assigned by hexun.com hexun.com
Social i,t The social responsibility score of firm i in year t assigned by hexun.com hexun.com
DVisit i,t Dummy that equals 1 if firm i is visited by institutional investors at least once in year t and 0 otherwise Firm annual reports
NVisit i,t The log of 1 plus the number of times firm i is visited by institutional investors in year t Firm annual reports
DManu i,t Dummy that equals 1 if firm i is in the manufacturing industry and 0 otherwise CSMAR
DRate i,t Dummy that equals 1 if the information disclosure quality of firm i is relatively poor and hence is rated as C or D by the Shenzhen Stock Exchange (SZSE) and 0 otherwise CSMAR
Ret i,t The market-adjusted stock return of firm i in year t CSMAR
Age i,t The log of years for which firm i has been listing in SZSE CSMAR
MShare i,t The market share of firm i in year t CSMAR
NFirms i,t The log of the total number of listed firms in the city where firm i is headquartered CSMAR
GDPGrowth i,t The GDP growth of the city where firm i is headquartered CSMAR
   CSMAR
InAtt i,t The firm-level measure of institutional investor inattention following (Kempf et al. 2017) Wind
\( InAttI_{i,t}^{n} \) The firm-level inattention of the nth institution type of institutional investors, n = 1, 2, …, 10. Types 1 to 10 refers to insurance companies, public mutual funds, the national social security fund, exchange-traded funds, overseas institutional investors, corporate annuity plans, banks, trust companies, brokerage firms, and private investment funds, respectively Wind
InAttD i,t The firm-level inattention of dedicated institutional investors Wind
InAttT i,t The firm-level inattention of transient institutional investors Wind
InAttQ i,t The firm-level inattention of quasi-indexers Wind
BM i,t Book value of assets over the market value of assets CSMAR
Size i,t The log of total year-end assets (in billion yuan) CSMAR
ROA i,t The return on assets in the year of t CSMAR
Lev i,t Total debt divided by total assets CSMAR
SOE i,t Dummy that equals 1 for state-owned enterprises and equals 0 otherwise CSMAR
Capex i,t Capital expenditure scaled by total assets CSMAR
AC i,t The log of the number of analysts following in year t CSMAR
IO i,t The total share percentage of institutional investors by the end of year t CSMAR
BInep i,t The percentage of independent board directors CSMAR
BSize i,t The log of the number of board directors CSMAR
Duality i,t Dummy that equals 1 if the CEO also chairs the board CSMAR
MO i,t The share percentage of the top management team by the end of year t CSMAR
TOP1 i,t The share percentage of the largest shareholder by the end of year t CSMAR
HHI5 i,t The Herfindahl–Hirschman Index of share percentage of the top 5 shareholders CSMAR

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Xiang, C., Chen, F., Jones, P. et al. The effect of institutional investors’ distraction on firms’ corporate social responsibility engagement: evidence from China. Rev Manag Sci (2020). https://doi.org/10.1007/s11846-020-00387-z

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Keywords

  • Corporate social responsibility
  • Institutional investors
  • Limited attention
  • Principal–agent problem
  • China

Mathematics Subject Classification

  • 62-07