Corporate Governance and Firm Value: The Impact of Chinese Companies’ Corporate Social Responsibility

We investigate whether the corporate social responsibility (CSR) of Chinese companies has a certain impact on firm value, and further, depending on the level of corporate governance, how the impact of CSR on firm value changes. First, CSR activities generate a positive effect on firm value suggesting that companies may have an incentive to be willing and to continue to perform their CSR activities. Second, if the ratio of the largest shareholder’s stake is low (high) or the gap between the largest and the second-largest shareholder’s stakes is small (large), CSR activities lead to a significant positive (negative) impact on firm value. Third, we find a positive impact for firms with high management or auditor ownership and for firms whose CEO and chairman of the board are not the same person. Interestingly, due to the fact that significant numbers of outside directors of Chinese companies are appointed by the largest shareholders in China, CSR activity may be used to better align the company with the private interests of the largest shareholders than with the interests of other shareholders, thus lowering firm value. Lastly, if the company’s largest shareholder is the country government, CSR has a positive impact on firm value. In this case, the largest shareholder—the country government—carries out CSR activities for social benefit because such a benefit is naturally aligned with the country’s interests in the company. This paper also sheds light on Chinese companies’ corporate governance structure that enhances socially responsible activities and firm value. Our results suggest that good governance provides incentives to voluntarily and continuously perform socially responsible activities.