The Role of Foreign Institutional Investors in Corporate Social Responsibility: Evidence from Chinese Listed Firms
46 Pages Posted: 10 Jan 2022 Last revised: 6 Jul 2022
Date Written: June 20, 2022
This study examines the interplay between two major global trends – the growing role of foreign institutional investors (FII) due to global financial liberalization and the embracement of corporate social responsibility (CSR) as an investment ethos – in the world’s second largest economy. Using a sample of 17,894 firm-year observations representing 3,518 Chinese listed firms, we find that CSR performance influences the portfolio allocation decisions of certain types of institutional investors – those from Scandinavian countries. Importantly, we document that while CSR is, on average, positively related to firm value this relation is significantly stronger in firms with a higher level of ownership by FIIs. This finding is robust to a battery of endogeneity checks including a quasi-natural experiment and is largely attributed to the monitoring and advising roles of FIIs. Finally, we document that FIIs enhance the firm’s ability to harness the power of CSR as a driver of innovation.
Keywords: Foreign Institutional Investors; Corporate Social Responsibility (CSR); Environmental, Social, and Governance (ESG); Firm Performance; Innovation; China
JEL Classification: F21; F39; G11; G15; G23; G32; G34; M14; O16; O31
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