Corporate Social Responsibility, Corporate Performance, and Pay-Performance Sensitivity—Evidence from Shanghai Stock Exchange Social Responsibility Index

ABSTRACT

Based on annual data of listed companies on Shanghai Stock Exchange (SSE) through 2009–2013, this article examines three hypotheses: first, whether a firm’s taking corporate social responsibility (CSR) affects corporate performance; second, whether corporate governance and a firm’s age positively moderate the relationship between CSR and performance; and third, whether CSR positively moderates the magnitude/direction of linkage between a firm’s performance and top management/director compensation (pay-performance sensitivity, PPS). Three proxies for CSR engagement are constructed by a firm’s inclusion in the SSE Social Responsibility Index. Empirical evidence generally shows that firms engaging in CSR tend to obtain superior performance in terms of higher profitability. However, firm’s age and sound corporate governance have little additional benefit on the effect of a firm engaging in CSR on performance. Finally, greater CSR engagement is associated with larger PPS. Principal outcome does not shift under two-stage estimation and propensity score matching (PSM) to correct for sample self-selection of CSR engagement.

KEY WORDS:

• corporate performance
• CSR
• pay-performance sensitivity

JEL CLASSIFICATION:

• G32
• G34

Notes

1. WBCSD Stakeholder Dialogue on CSR, The Netherlands, September 6–8, 1998. Another definition about CSR is, for example, by Frooman (1997), who defined CSR as “an action by a firm, which the firm chooses to take, that substantially affects an identifiable social stakeholders’ welfare”. McWilliams and Siegel (2001) described CSR as “actions that appear to further some social good, beyond the interest of the firm and that which is required by law”.

2. Recent empirical studies covering a wider range of CSR influence, such as cost of equity (Sharfman and Fernando 2008; EI Ghoul et al. 2011; Dhaliwal et al. 2011; 2014), cost of bank loan (Goss and Roberts 2011), risk premium (Menz 2010), access to finance (Cheng, Ioannou, and Serafeim 2014), earnings quality (Choi, Lee, and Park 2013; Kim, Park, and Wier, 2014), stock price crash risk (Kim, Li, and Li 2014), pay-performance sensitivity (Ferrell, Liang, and Renneboog 2015), investment recommendation and analyst forecast (Dhaliwal et al. 2012; Ioannou and Serafeim 2015), performance insurance (Minor and Morgan 2010; Peloza 2006), and earnings management (Chih, Shen, and Kang 2008; Hong and Andersen 2011; Grougiou et al. 2014). Based on banking firms, Wu and Shen (2013) examined the relationship between CSR and performance.

3. In 2013, the vice chairman of the China Securities Regulatory Commission, Liu Xinhua, appealed that listed companies should disclose the annual social responsibility report to accept investor’s and the public supervision. The vice president of China Association of Listed Companies, Shiao-Shue Lee, also pointed out that a listed company must have social responsibility and its corporate culture and behavior should pour into the concept of corporate governance to promote enterprise in a changing environment. Conclusively, a company should enhance social trust, deepen customer loyalty, and enhance its continued competitiveness.

4. A-share means that shares in mainland China-based companies that trade on Chinese stock exchanges such as the SSE and the Shenzhen Stock Exchange. A-shares are generally only available for purchase by mainland citizens; foreign investment is only allowed through a tightly regulated structure, known as the Qualified Foreign Institutional Investor (QFII) system.

5. The purpose of constructing the social responsibility index is to promote the listed company to actively fulfill its social responsibility as well as provide investors with underlying asset for social responsibility investment (SRI).

6. Refer to the announcement by SSE in 2008, “A Notice for the Strengthening of Corporate Social Responsibility on Listed company”.

7. Annual adjustment list (trading code on SSE) for SSE Corporate Governance Index, SSE 180 Corporate Governance Index, and SSE Social Responsibility Index through is referred to: http://biz.sse.com.cn/sseportal/webapp/datapresent/SSEQueryStockInfoInitAct?reportName=BizCompStockInfoRpt&PRODUCTID=&PRODUCTJP=&PRODUCTNAME=&keyword=&CURSOR=1&tab_flg=1.

8. For example, In 2002, the US Congress passed the Sarbanes-Oxley Act (SOX), and one important component of the SOX Act is to require independence of the board’s auditing committee. Meanwhile, the New York Stock Exchange and Nasdaq also improved the listing rule to increase the required percentage of independent directors on the corporate board and the board’s committees (e.g. auditing, nominating, and compensation committee). The Taiwan Stock Exchange (TWSE) amended “Guidelines for the Review and Listing Rules of Securities on TWSE” in February 2002. The new listing rule requires that newly listed companies must employ at least two independent directors and one independent supervisor to contribute their independent and professional function. Firms with larger equity must also delegate an independent director.

9. To estimate regression equation (1), eight specifications are prevailed. In Model (1), CSR proxy, four financial characteristic variables (LNASSET, DEBTRATIO, SALESGR, and AGE), and six corporate governance variables (BOARD, MANAHOLD, DIRHOLD, BLOCK, IDRATIO, and FORIDNUM) are presented in equation. In Model (2), 17 industry dummies and four year dummies are added. In Models (3) and (4), the interaction term of CSR proxy and firm age (CSR*AGE) is added on models (1) and (2). In Models (5) and (6), the interaction term of CSR proxy and the number of independent director (CSR*IDNUM) is added on models (1) and (2). In Models (7) and (8), CSR*AGE and CSR*IDNUM are added on models (1) and (2). The regression equation is estimated by ordinary least square.

10. To estimate equation (2), two specifications are employed. In Model (1), proxy for a firm’s performance, the interaction term of CSR, and performance proxy, three financial characteristic variables (LNASSET, DEBTARION, and SALESGR) and four corporate governance variables (BOARD, BLOCK, IDRATIO, and FORIDNUM) are included. In Model (2), 17 industry and four year dummies are added.

11. We thank the anonymous referees for their revision suggestions.

12. The estimation results are not displayed in the current version of this article entirety due to space constraints but still available upon request (email address: [email protected]).

13. The estimation results are available upon request (email address: [email protected]).