Stock Market Liberalization and Corporate Social Responsibility: Evidence From a Quasi-Natural Experiment in China

Abstract

Exploiting a quasi-natural experiment in China in which some firms become investible to the global market across different periods (i.e., pilot firms), we evaluate the role that stock market liberalization plays in shaping local firms’ incentives to invest in corporate social responsibility (CSR) activities. In a staggered difference-in-differences research design, we find that pilot firms significantly reduce their CSR investments from the pre-liberalization period to the post-liberalization period, relative to non-pilot firms that remain under strict capital controls during the same timeframe. This result is concentrated among firms that suffer worse agency problems. Additional empirical analyses suggest that pilot firms enjoy higher labor productivity and better stock performance after reducing their CSR activities in the post-liberalization period; however, a major negative externality is that they emit more pollution afterward. Collectively, our results suggest that market liberalization induces local firms to curtail their CSR activities, benefiting shareholders at the expense of the environment. Our findings provide new insights into the importance of stock market liberalization for firms’ CSR activities, market values, labor productivities, and environmental effects.

Keywords: stock market liberalization; corporate social responsibility (CSR); firm value; labor productivity; environmental effects

JEL Classification: F65, G32, M14, O44