2 - Dong Soon Kim

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

Dong Soon Kim,* Eunjung Yeo** and Ying-Ai Zhang***
Abstract: 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 inter-
ests in the company. This paper also sheds light on Chinese companies’ corpo-
rate governance structure that enhances socially responsible activities and firm
value. Our results suggest that good governance provides incentives to volun-
tarily and continuously perform socially responsible activities.
Keywords: Corporate social responsibility, corporate governance, firm value,

Chinese companies JEL Classifications: G32, G34, G38
*** Professor, CAU Business School, Chung-Ang University, Seoul, Korea.

*** Corresponding Author: Associate professor, CAU Business School, Chung-Ang University,
Seoul, Korea.
*** Assistant Manager, Global Solution Team, Heungkuk Asset Management, Seoul, Korea.
Manuscript received June 13, 2016; out for review June 23, 2017; review completed August 7, 2017;
accepted August 8, 2017.
The Korean Journal of Policy Studies, Vol. 32, No. 2 (2017), pp. 23-61.
© 2017 by the GSPA, Seoul National University

24 Dong Soon Kim, Eunjung Yeo & Ying-Ai Zhang
INTRODUCTION
During the past decades, corporate social responsibility (hereinafter referred to as

CSR) activities have emerged as an integral part of businesses, investors, govern-
ments, and other areas of society. Companies become major players in an economy,
but also cause many business-related and social problems. Moreover, given the global-
ization of the world economy, CSR activities in foreign countries have become
important.1 In fact, many companies dedicate a section of their annual reports and cor-
porate websites to CSR activities, emphasizing the importance they attach to such
activities. Chinese companies are no exception.2
However, in China, different from other developed or developing countries, the
pace of the development of laws, regulations, and institutional systems has failed to
keep up with the speed of economic growth. The credibility and image of the corpo-
rate sector have declined sharply because of the illegal and unfair practices of some
companies. Recently, situations such as food made from waste materials, the illegal
disposal of toxic substances, a harsh labor environment, and a heavy burden on
employees have created a social sentiment that requires Chinese companies to dedi-
cate more resources to CSR activities.
Since first introduced in the 1930s, CSR has been a main research topic in busi-
ness practice and corporate governance. Friedman (1970) defines CSR as managing a
company to enable it to create as much wealth as possible while obeying laws and
ethical practices, which is a very narrow definition of CSR. In response, McWilliams
and Siegel (2000) propose a more comprehensive definition of CSR activities as the
act of creating a social good that goes beyond corporate interests and the requirements
of the law. According to CSR theory, companies not only pay for benefits to share-
holders but also must bear a certain amount of social responsibility by considering the
interests of other stakeholders in society.
Despite significant research on CSR, previous studies provide mixed results on the
effect of such activities on firm value (see Griffin and Mahon (1997), Orlitzky (2001),
Orlitzky et al. (2003), Margolis and Walsh (2003), and Margolis et al. (2007) for
reviews of the literature). Although there appears to be more support for the view that
1. For example, in 2012, Foxconn—known for assembling most of Apple’s products—was

linked to multiple employee suicides and poor working conditions, which in turn damaged
Apple’s company image.
2. For example, an article in World Economic Forum(2015) notes the importance of CSR for
Chinese companies through change in strategic thinking by mentioning “…Today, leading
Chinese companies seek to become some of the world’s most reputable and pre-eminent
brands and view CSR as a critical part of their transformation….”
The Korean Journal of Policy Studies

Corporate Governance and Firm Value 25
CSR activities are positively related to profitability and firm value, a large number of
studies find the opposite relation. As a result, the normative implications of the
research on CSR remain uncertain.
In this paper, we propose an indirect relation between CSR and firm value by con-
sidering the corporate governance structure. Similar to Servaes and Tamayo (2014),
we also emphasize the channels through which CSR affects firm value. However,
unlike them, we use the insight that the impact of CSR on firm value depends on the
ability of CSR to influence shareholders and not stakeholders of the firm. We first
focus on the effect of CSR activities on firm values using an empirical analysis of Chi-
nese listed companies. We then determine whether these activities additionally incur
costs to companies or are a good business practice that enhances firm value.
Although most previous studies focus only on the relation between CSR activities
and firm value, we further analyze whether this relationship depends on the corporate
governance structure, which is a key contribution of the paper. Corporate governance
is a mechanism for protecting external investors, improving the value of the company,
and maximizing shareholder value (Beltratti 2005). The consensus is that corporate
governance is positively related to firm value (Lemmon and Lins 2003; Allen et al.
2005). If CSR activities increase a company’s value, companies with good corporate
governance are more likely to be more actively engaged in CSR activities.3 Kook and
Kang (2011) analyze the relationship between corporate governance and CSR using
Korean company data and show that companies with better corporate governance
more actively engage in CSR activities.
In our analysis, we employ data on Chinese publicly listed companies from 2008–
2010, which cover the CSR activities of a large subset of Chinese companies, and
combine them with their financial statement data. Our main performance metric is
Tobin’s Q, which is the market value of the firm divided by the replacement value of
its assets. We start by assessing whether firms with high corporate governance mea-
sures can enhance firm value by increasing CSR activities, and find this to be the case
in models that employ firm fixed effects. CSR activities have a negligible or negative
impact on firm value for firms with low corporate governance measures, suggesting
that the costs of CSR activities may outweigh the benefits for these firms. However,
3. Due to the weak corporate governance structure, if managers can enjoy private benefits,
they can pursue CSR activities for the purpose of promoting their own private benefits in
contrast to corporate value. At this time, those CSR activities carried out to pursue the
private interests of managers can be profitable for managers only. For shareholders, it will
be the cost of the amount spent for CSR activities, so firm value will be undermined by it.
The better the corporate governance structure, the more likely the CSR activities are to be
effectively controlled.

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. Moreover,
because significant numbers of outside directors of Chinese companies are appointed
by the largest shareholders in China, CSR activities 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 share-
holder is the country, CSR has a positive impact on firm value. In this case, the largest
shareholder—the country—carries out CSR activities for social benefit because such a
benefit is naturally aligned with the country’s interests in the company.
This article contributes to the debate on the role of CSR in corporate strategy. This
research is important because it presents the first empirical evidence from an examina-
tion of whether corporate governance measures are associated with improved financial
value through CSR activities for Chinese companies. This study can potentially alert
policymakers in developing countries to the increasing overlap between corporate
governance and CSR agendas, the need to reform the regulatory and judicial systems
from the context of corporate governance structure, and to increase institutional pres-
sure to enhance CSR adoption.
The remainder of this paper is organized as follows. Section 2 presents the back-
ground, related studies, and research hypotheses. Section 3 describes the sample selec-
tion, the variables, and the regression model. Section 4 presents the empirical results.
Finally, Section 5 concludes the paper and provides implications.
LITERATURE REVIEW AND HYPOTHESES
CSR and Firm Value
Previous empirical research on the relationship between CSR and corporate value
shows mixed results. Many empirical studies find that companies’ CSR activities have
positive effects on their financial performance. Prior studies such as Bowman and
Haire (1975), Heinze (1976), and Sturdivant and Ginter (1977) present the results of
increased financial performance from a company’s CSR activities. Cochran and Wood
(1984) investigate the financial performance of 36 companies from 1979 to 1975 and
of 39 companies from 1970 to 1974. They find a positive correlation between CSR
activities and financial performance, proxied by financial variables such as return on
assets (ROA), return on sales, and market valuations. Preston and O’Bannon (1997)
analyze data on 67 large companies in the United States from 1982 to 1992 and find a
strong positive relation between CSR activities and financial performance, including

ROA and return on equity (ROE). In the 1990s, Waddock and Graves (1997) investi-
gate data on S&P 500 companies and find that both a company’s prior and future
financial performance, as indicated by debt-to-equity ratio, ROA, and equity returns,
are positively associated with corporate social performance activities as measured
using the KLD index. Using Korean company data, Kim (2009) demonstrates that the
value of companies performing CSR activities is higher. He argues that, although CSR
activities generate costs in the short term, they enhance the reputation of the company,
increase sales, and lower costs in the long term.
In contrast, claims have been made that CSR activities negatively influence a com-
pany’s financial performance. Bragdon and Marlin (1972) argue that companies’ CSR
activities have an adverse impact on competition because of the increase in compa-
nies’ costs compared with that of competitors. Vance (1975) measures the financial
performance of a company using the percentage change in its stock price and mea-
sures CSR using Milton Moskowitz’s social responsibility rating. He finds that the
stock prices of corporates with a higher CSR grade are actually lower. The additional
costs incurred to fulfill social responsibilities lowers companies’ profits.
Some studies take a neutral stance. Unlike the aforementioned studies, Ullmann
(1985) argues that finding reasons regarding the relationship a company’s social
responsibility and financial performance is difficult. Zheng Li (2006) studies the rela-
tionship between CSR and corporate value by analyzing 521 Chinese companies listed
on the Shanghai Stock Exchange in 2003. Using stakeholder theory and social capital
theory, he concludes that, although the value of firms engaging in more social respon-
sibility activities are lower in the short run, CSR activities do not reduce firm value in
the long run.
In all, claims of a negative relationship between CSR and corporate value empha-
size the additional costs incurred to perform CSR activities, which can be a competi-
tive disadvantage. In contrast, claims of a positive relationship argue that the costs of
CSR activities are relatively small compared with their benefits. More CSR activities
enhance a company’s image and improve relationships between employees and other
stakeholders—ultimately resulting in higher firm value.
We expect that investments in CSR activities in areas such as labor relations, envi-
ronmental issues, and community development will assist in improving the corporate
image, maintaining a smooth relationship between the community and employees, and
attracting better workers in the long run. In contrast, if a company avoids engaging in
CSR activities to reduce its short-term costs, it may fail to meet stakeholder expecta-
tions. Such a company may face more problems and lawsuits in the long run.
For example, the fine for excessive pollution or the cost to recall products with
defects can be larger without CSR activities. The damage to a company’s image and

reputation is also more significant (Tsoutsoura 2004). Most of all, companies volun-
tarily continue to perform CSR activities only if they have a positive impact on long-
term firm values (Guk and Gang 2011). In this paper, we develop the following
hypothesis regarding the impact of a company’s social responsibility activities on firm
value.
H1: Corporate social responsibility activities increase the value of the firm.
Effects of corporate governance on the impact of CSR activities on firm values
If a company’s CSR activities can increase its firm value, CSR activities can be
regarded as a business strategy and managers may select the level and extent of these
activities. In this case, agency costs associated with CSR activities may occur. Execu-
tives may abuse their rights by selecting a CSR policy that does not correspond to
shareholder interests but, instead, enhances private interests. In other words, if manag-
ers can enjoy private benefits, such as enhancing their own reputations by performing
CSR activities, they have an incentive to engage in such activities regardless of the
effect on firm value (Jensen and Meckling 1976). Therefore, we expect that the impact
of corporate CSR activities varies depending on corporate governance, including own-
ership and board structures.
H2: The effects of corporate social responsibility activities on firm values differ
depending on the degree of corporate governance.
Studies on the ownership structure of Chinese companies focus on the concentra-

tion of corporate ownership, the characteristics of the ownership, and insider share-
holdings. Two arguments are related to concentration of ownership. One argument
states that companies with more concentrated ownership are better at executive moni-
toring through the majority shareholder. In contrast, the other argument states that
majority shareholders may expropriate the interests of the minor shareholders for their
own interests.
Monitoring theory argues that majority shareholders who expect high returns have
a strong incentive to monitor managers and prevent behavior that may harm share-
holder interests. The empirical result of Morck et al. (1988) shows that, as the largest
shareholder holdings ratio increases, agency costs are likely to decrease because the
majority shareholder reduces the conflicts of interest between managers and share-
holders by overseeing managers’ opportunistic behavior.
In contrast, other empirical research provides different results and finds negative

effects of ownership concentration on firm value. Leech and Leahy (1991) obtain the
result that ownership concentration has a significant negative effect on firm value.
Shleifer and Vishny (1986) argue that, in some countries, the agency problem occurs
more in the conflict between the majority shareholder and minority shareholders than
between managers and shareholders. In this circumstance, the interests of the majority
shareholders and minority shareholders are not aligned. In this case, major sharehold-
ers can abuse their rights and ineffectively allocate company resources, and the cost of
owning shares can be very large to minority shareholders. Therefore, if the ratio of the
largest shareholder’s holdings is high, or if the difference between the ratio of the larg-
est shareholder’s holdings and that of the second largest shareholder’s holdings is suf-
ficiently large, the largest shareholder may be able to proceed with CSR activities for
private benefit, which may have a negative effect on firm value.
H2-1: A lower ratio of the largest shareholder’s holdings results in a higher firm
value.
H2-2: Corporate social responsibility activities lead to higher firm values if the dif-
ference in the holdings ratio between the largest and the second largest share-
holders is small, and leads to lower firm values if this difference is large.
Shareholdings by management can provide an incentive for executives to maxi-

mize the value of the shares and increase corporate control by shareholders by aligning
executives’ and shareholders’ interests. Many previous studies claim a positive rela-
tionship between management ownership and corporate value, and describe this rela-
tionship as a mechanism to align the interests of executives and shareholders (Demsetz
1983; Hill and Snell 1989; Morck et al. 1988; Cho 1998).
Shares owned by executives can cause managers’ and shareholders’ interests to
converge. Berle and Gardiner (1932) state that a potential conflict of interest arises
from the separation of ownership and corporate control. Later, Jensen and Meckling
(1976) propose the incentive alignment hypothesis: as managers’ shares increase, the
interests of managers and shareholders converge and, therefore, agency costs decrease.
Sometimes, managers allocate company resources for their private interest, which cre-
ates conflicts with external shareholders. However, the manager-owner of a company
has incentives to fulfill these shareholders’ needs because both parties’ incentives are
more aligned. A recent empirical study of U.K. companies by Florackis (2008) con-
cludes that a high management shareholding ratio reduces agency costs.
However, the management entrenchment hypothesis (Stulz, 1990) states that, as
managers’ shares increase, outside threats from the market decrease and the utility

from seeking private benefit exceeds the utility from an increase in firm value. These
effects lead to managerial entrenchment.
In this study, we choose the incentive alignment hypothesis and expect that a high-
er ratio of executive management shareholdings indicates better alignment of their
interests with that of external stakeholders, thus mitigating the conflict of interest
issue. That is, a higher ratio of management shareholdings indicates that CSR activi-
ties are geared more toward the interests of shareholders than the private interests of
executives.
H2-3: CSR activities have a positive effect on firm value if the ratio of managers’
shares is high, but a negative effect if the ratio is low.
Another way to reduce agency costs is to increase directors’ or the audit commit-
tee’s shareholdings, which is the same concept as executives’ shareholdings, by align-
ing their interests with those of shareholders (Jensen 1993). If executives receive just a
fixed salary, they may act to enhance their personal short-term interests rather than
those of shareholders. In contrast, if directors or audit committee members own shares
of the company, they will more actively monitor managers’ behavior and propose
management strategies that benefit both shareholders and themselves. According to
claims by Mace (1986), monitoring efficiency can increase when directors or audit
committee members possess adequate shares of stock. Kren and Kerr (1997) demon-
strate that the ratio of director shareholdings has a positive effect on firm value.
We expect that directors’ or audit committee members’ shareholdings result in
stronger incentives and motivation to oversee CEO behavior. Thus, CSR strategy is
carried out to increase firm value. We also expect that this notion is valid for shares
held by audit committee members.
H2-4: If the ratio of directors’ shares is high (low), CSR has a positive (negative)
effect on firm value.
H2-5: If the ratio of the audit committee’s share is high (low), CSR has a positive
(negative) effect on firm value.
The claims as to whether the CEO and chairman of the board of directors should be
different people are conflicting—often referred to as the CEO-duality problem. Agency
theory predicts that when corporate ownership and management rights are separated,
agency problems occur because of (i) conflicts of interest between managers, including
the CEO, and shareholders and (ii) incomplete information (or information asymme-

try). Agency theory assumes that agents are selfish and monitoring is necessary to pre-
vent executives from making self-serving decisions. The board of directors needs to
play this supervisory role. However, if the CEO and the chairman of the board are the
same person, agency theory predicts that executive directors are highly likely to pur-
sue private benefits rather than maximize shareholders’ interests.
In contrast, stewardship theory (Donaldson and Davis 1991) assumes that individu-
als are organization oriented and pro-organizational and argues that executives rather
choose to serve the interests of the organization and maximize shareholder value than
pursue their private interests. Similarly, Boyd (1995) claims that executives are likely
to seek self-satisfaction and fulfillment more than private benefits. In all, if steward-
ship theory is true, it predicts that CEO-duality provides more freedom to executives
and leads to rapid decision making, which leads to higher firm value.
We choose the more conventional view—agency theory—that indicates that indi-
viduals are self-centered. We assume that it is possible that CEO-directors perform
CSR activities for private benefit.
H2-6: If the CEO and chairman of the board are not the same person, CSR has a
positive effect on firm value.
Fama and Jensen (1983) emphasize the importance of the board’s role of supervi-
sion and control over management. To reduce management’s pursuit of private bene-
fits, setting up an institution such as the board of directors and the audit committee is
necessary to monitor executives’ behavior. The main role of the board of directors and
the audit committee is to mitigate conflicts of interest between shareholders and man-
agement, minimize agency costs, and protect the interests of shareholders. Beasley et
al. (2000) demonstrate that financial statement fraud is less prevalent among firms
with a strong audit committee.
Further, according to resource dependence theory (Pfeffer amd Salancik 2003),
organizations such as the board of directors or the audit committee can assist in
accessing the company’s information and providing important feedback for setting the
company’s direction. Zahra and Pearce (1989) also claim that directors or an audit
committee can provide connections to competitors and other stakeholders and help a
company acquire important information, skills, reputation, and other resources.
Thus, if the board of directors or audit committee is large, its supervisory role will
be enhanced and CSR will be carried out to improve firm value rather than to benefit
the company’s major shareholders or CEO. The opinions and views of the directors or
audit committee members are also expected to help the effective CSR activities.

H2-7: If the board of directors is large (small), CSR activities have positive (nega-
tive) effects on firm value.
H2-8: If the audit committee is large (small), CSR activities have positive (nega-
tive) effects on firm value.
Independence of outside directors is indispensable for effective governance and

discipline. We can easily find evidence to support the following relationship: a higher
proportion of outside directors at a firm results in discipline being exerted more effec-
tively over management and, thereby, in better firm performance. A review article by
Hermalin and Weisbach (2003) also supports the causality previously mentioned.
Their main conclusions are that a higher proportion of outside directors leads to a
higher probability that the CEO will be replaced when corporate performance declines
and lower CEO compensation, which are consistent with the hypotheses considered in
this paper.4 However, for Chinese companies, the largest shareholders or chief execu-
tive officers often appoint directors of other large companies as outside directors of
their own companies. Such an appointment process might be one reason for the dam-
age to the independency of outside directors in China. Because major shareholders or
managers can nominate outside directors, their relationship is not for supervision and
monitoring but for cooperation and accordance (Ma Qingyun, 2013).
Westphal (1998) also show that executives use their power to influence the process
of selecting directors and their decision making. They are involved in appointing
directors who primarily support their managerial decisions.
We expect that the largest shareholder and the executives are more willing to per-
form CSR activities for their own benefit. In this case, a company with a higher pro-
portion of outside directors who primarily support the executives (the so-called gray
directors) is expected to have a lower firm value from CSR activities.
H2-9: CSR has a positive (negative) effect on firm value if the proportion of out-
side directors at a firm is low (high).
A significant number of Chinese companies are state owned. There are conflicting
claims about the effects on firm value when the largest shareholder is the government
in China. Tian (2005) demonstrates that the financial performance of state-owned
4. For details, refer to their paper. However, note that no significant relationship exists
between the proportion of outside directors and the corporate performance measured using
accounting income or stock returns.

companies is generally lower than that of private companies. The explanation is that,
although governments provide a variety of preferential treatment for state-owned com-
panies, they also take significant profits from these companies. Chen Xinyuan and
Huang Jun (2007) argue that the government puts more emphasis on the realization of
political objectives and social functions than on the company’s interests and, thus,
greater interference is observed in the management of state-owned companies. Xu
Xiaodong and Chen Xiaoyue (2003) claim that private companies have higher firm
values because they receive more external oversight and make more aggressive deci-
sions than state-owned companies to survive market competition.
In contrast, some scholars argue that state ownership can increase firm value. Liu
Yuanyuan et al. (2011) demonstrate that the ratio of a company’s state ownership
shows a significantly positive correlation with financial performance. Liao Guan Min
and Chen Yan (2007) argue that when state-owned companies face financial distress,
the government reduces the capital costs of these companies through support from the
government’s budget, which positively affects the company’s financial performance.
Sun et al. (2002) use Chinese company data from 1994 to 1997 and find that the ratio
of state-owned shareholdings has a positive effect on firm value.
Because the ultimate purpose of the government is to maximize social welfare rath-
er than company profits, CSR activities may be regarded as the realization of a national
policy if the company’s controlling shareholder is the government. We expect that if
the company’s largest shareholder is the government, CSR activities positively affect
firm value because agency costs are not incurred as a result of their implementation.
H2-10: CSR activities show positive (negative) effects on firm values if the largest
shareholder is (not) the government.
Relationship between corporate governance and CSR activities
Corporate governance is a mechanism for protecting external investors, improving

the value of a company, and maximizing shareholder value (Beltratti, 2005). If CSR
activities increase a company’s value, companies with good corporate governance are
more likely to be more engaged in CSR activities. Guk and Gang (2011) analyze the
relationship between corporate governance and CSR with Korean company data and
show that companies with better corporate governance are more active with CSR
activities. Choi (2013) studies the correlation between corporate governance variables
and capital costs and concludes that a higher ratio of the largest shareholdings results
in lower CSR activities.
Wang and Bu (2012) study Chinese food manufacturers and find that the ratio of

the largest shareholder of a company has a negative impact on CSR activities. They
also found that the size of the board is positively correlated with CSR activities. Xie
(2011) also finds a strong relationship between corporate governance structure and
CSR activities, indicating that the ratio of the largest shareholder’s holdings has a neg-
ative effect on CSR activities and state ownership has a positive effect.
Therefore, companies with better corporate governance, that is, companies with
lower agency costs, are expected to engage in more CSR activities.
H3: Good governance structure and practices are positively associated with CSR
activities.
DATA AND EMPIRICAL ANALYSIS
Data
This study uses data from 2008–2010. Data were collected on 277 Chinese compa-
nies listed on the Shanghai Stock Exchange and Shenzhen Stock Exchange (Shanghai
Stock Exchange 90, Shenzhen Stock Exchange 63), and that met the following condi-
tions:
(1) does not belong to the financial sector;

(2) has a fiscal year end of December 31; and,
(3) has CSR score data for three consecutive years, from 2008 to 2010.
The financial sector is excluded because it is regarded as highly regulated, indicat-

ing that heterogeneity exists when comparing its financial characteristics with those of
the nonfinancial sector. The industry classification for the sample companies is repre-
sented in <Table 1>.
Table 1. Industry Classification of the Sample Companie
Exchange
Industry classification Shanghai Shenzhen Total
Manufacturing 90 63 153
Transportation 21 2 23
Electricity, gas, utilities 16 4 20

Telecommunication 14 6 20
Mining 9 3 12
Construction 6 2 8
Wholesale, retail 6 3 9
Real estate, rent 4 9 13
Service 4 2 6
General 4 5 9
Agriculture, Forest, Fishery 1 1 2
Entertainment, Culture 1 1 2
Total 176 101 277
Empirical Analysis
Variables
The definition of the key variables for the empirical analysis and their measure-
ment method are summarized in <Table 2>.
Table 2. Definition of the Key Variables
Variables Definition Measurement

Dependent variable
Value Firm value Tobin’s Q
Explanatory variables
CSR A firm’s CSR activities RLCCW’s CSR activity score
The largest The largest shareholder’s holdings/total
CR1 shareholder’s holding outstanding shares
ratio
The largest shareholder’s holdings/second
Z Z index
largest shareholder’s holding
Mangers’ shareholdings/total outstanding
manageshr Managers’ share ratio
shares
Directors’ shareholdings/total outstanding
directshr Directors’ share ratio
shares

Auditors’ shareholdings/total outstanding

supervisorshr Auditors’ share ratio
shares
CEO and chairperson If CEO and chairperson are the same, then 1;
P are or are not the same otherwise 0
individual
dsize Size of board Number of directors on the board
Size of supervisory Number of auditors
ssize
committee
Ratio of independent Independent directors/total directors
Indep_ratio
directors
stateowner State-owned If state-owned then 1; otherwise 0
Control variables
SIZE Size of a firm Natural logarithm of total assets
EPS Earnings per share Net income/total shares outstanding
LEV Debt to equity Debt/total equity
GRW Growth rate of assets Growth rate of assets
Corporate governance structure and financial statement data for the sample were
collected through the CSMAR database and from CCER data. Data related to CSR
activities were used, and the CSR scores were published by the Rankins CSR Ratings
(RKS) 2008–2010. Founded in 2007, RKS is known as a prestigious rating agency
that assesses the social responsibility of enterprises in China and provides objective
and scientific assessments of CSR information.
The RKS rating system used in this study is as follows. A score is composed of
four columns, including Macrocosm (full configuration), Content (information), Tech-
nique (technology), and Industry (industry). Under the four columns are 15 sub-items.
The company’s experts evaluate the social responsibility report submitted by the com-
panies on a scale of 100 points. The ratios of the four columns—Macrocosm, Content,
Technique, and Industry—are 30%, 45%, 15%, and 10%, respectively. The evaluation
system is shown in detail in <Table 3>. Industry trends of CSR scores and yearly CSR
scores in the sample are summarized in <Table 4>.
Tobin’s Q ratio is used as a proxy variable of firm value and is obtained by divid-
ing the sum of the market capitalization and the book value of total debt by the book
value of total assets. Other variables that affect firm value are presented, as well as the
corporate governance variables already included in the study. As control variables in
this study, the natural logarithm of market capitalization as a proxy for firm size, earn-
ings per share, debt to equity ratios, and growth in total assets are adopted.

Table 3. Rankins CSR Rating System
Macrocosm
Item NO Sub-item
M1 Strategic CSR goals
Sustainable development: the effects of climate change,
M2 social problems, and the macro environment on the
sustainable development of companies
Socially responsible strategies and corporations: the effects
Strategy
M3 of a company’s provision of products and services on
society and the environment
Announcement of sustainable development by the
M4
management of companies
M5 Planning corporate social responsibility goal
M6 Basic company information
M7 A company’s social responsibility values
Existence of professional labor to monitor and supervise
M8
CSR activities
Methods and processes to manage environmental,
M9
Management societal, and economic businesses
M10 Disclosure system for company information
M11 CSR-related risk assessment and management
M12 Institutional norms for compliance of commercial morality
Joint participation in CSR activities by related sub-divisions
M13
and their subsidiaries
M14 Awareness about stakeholders and their importance
Long-term communication with stakeholders and
Stakeholders M15
improvement after receiving feedback
M16 Evaluation of information by stakeholders
Content
Item NO Sub-item
Financial information, such as annual sales, profits, and
C1
dividends
Economic
Performance C2 Growth rates of sales, profits, and dividends
C3 Sales of products and services, market share, innovativeness

C4 Employees’ composition: gender, age, total number

Employees’ education: total hours of education, number of
C5
employees participating in education, number of lectures
Safety production: healthcare program for employees, safe
C6
working environment
Human rights: same occupation–same pay, prohibition of
Employee rights/ C7
child labor, treatment for employee reporting
Human rights
Working environment: employee vacation, welfare and other
C8
benefits, caring for employees
Union-related information, employee leisure activities, caring
C9 for family members of employees, employee satisfaction
surveys
C10 Company training and promotion of CSR knowledge
Annual test results and certification of environmental
C11 management systems, environmental protection investments
by year
Awareness and prevention measures against environmental
C12
pollution
Environment
Identification of sources of energy and water, measurement
C13 and recording of energy consumption, energy-saving
measures, and use of renewable energy
Measurement and recording of carbon dioxide emissions,
C14
preventive measures (for example, boiled drinking water)
C15 Preventive measures related to embezzlement
Fair operation Active promotion of CSR-related information to society as a

C16 whole, overseeing the social responsibility of other social
groups
Quality assurance system for products and services of the
C17
business, technical innovations
Consumer (customer) relationship management system,
C18
customer satisfaction surveys
C19 Protection for the safety and health of the consumer
Consumers
Customer service convenience, customer reporting rates,
C20
dispute settlement-related information
C21 Protection of consumer privacy information
Consumer education: the practice of educating consumers
C22
about the dangers of the product

C23 Amount of social donations

C24 Employee volunteer activities
Participation in the establishment of the regional policy and
C25
industry standards
C26 Job creation: annual employee recruitment
Contribution to Participation in science and technology projects in the region

social community C27 and the country, contribution to the development of science
development and technology
Use of natural resources after receiving permission from the
C28
local community, gathering opinions of local communities
Promotion of health knowledge and improvement in disease
C29
prevention awareness in the local community
Consideration of the impact on the environment and local
C30
communities when investment decisions are made
Technique
T1 Degree stated on all stakeholders related to CSR
Equity of contents
T2 Disclosure of the extent of negative information about CSR
T3 Consistency: consistency with previous reports
Consistency of
information Degree of the description related to the achievement of CSR
T4
activities using data or ratio information
Creativity of T5 Creativity of the structure and format for reporting

reporting T6 Impact of creativity on business efficiency
T7 Degree of disclosure of stakeholders’ opinions
Reliability/ T8 Third party inspection

transparency T9 Authority of third party inspection agency
T10 Efficiency in resolution of readers’ opinion of the report
T11 Policy norms of the report
Norms T12 Degree that the report criteria are met
T13 Typographical errors made during preparation of the report
T14 Satisfaction of language version of the report
T15 Accessible path of the report
Effectiveness of
information Improvement in disclosure effects given the design and
T16
editing of the report
T17 Table of related information, illustrated figures in the report

Table 4. CSR Score Trends of the Sample Companies
Industry Annual CSR score

Exchange CSR Average
classification 2008 2009 2010
mean 25.00 25.26 30.07 26.77
Shanghai max 30.80 34.74 38.60 38.60
min 19.93 17.92 17.23 17.23
Construction
mean 22.79 28.99 29.53 27.10
Shenzhen max 23.35 29.35 32.41 32.41
min 22.22 28.62 26.65 22.22
mean 45.30 52.46 57.08 51.61
Shanghai max 68.76 78.49 80.29 80.29
min 24.66 28.64 28.05 24.66
Mining
mean 29.17 27.46 30.26 28.96
Shenzhen max 34.12 31.64 35.43 35.43
min 24.23 24.29 26.16 24.23
mean 20.85 23.71 20.06 21.54
Shanghai max 20.85 23.71 20.06 23.71
Agriculture, min 20.85 23.71 20.06 20.06
Forest,
Fishery mean 25.87 21.40 18.07 21.78
Shenzhen max 25.87 21.40 18.07 25.87
min 25.87 21.40 18.07 18.07
mean 25.65 30.75 31.87 29.42
Shanghai max 35.86 45.77 43.97 45.77
min 19.13 21.58 21.08 19.13
Wholesale, Retail
mean 27.13 29.13 33.09 29.78
Shenzhen max 28.72 31.20 43.18 43.18
min 26.12 26.48 25.14 25.14
mean 24.10 27.94 28.20 26.74
Shanghai max 31.23 31.24 34.58 34.58
min 15.56 21.77 23.49 15.56
Real estate, lease
mean 28.37 35.56 38.07 34.00
Shenzhen max 36.30 71.06 71.87 71.87
min 17.60 22.66 23.09 17.60

mean 28.38 30.62 31.06 30.02

Shanghai max 34.58 31.92 40.41 40.41
min 17.29 28.29 22.33 17.29
Service
mean 29.19 29.38 38.01 32.19
Shenzhen max 36.79 40.42 52.36 52.36
min 21.58 18.34 23.65 18.34
mean 22.57 19.76 24.92 22.42
Shanghai max 22.57 19.76 24.92 24.92
Entertainment, min 22.57 19.76 24.92 19.76
culture mean 25.97 22.43 21.93 23.44
Shenzhen max 25.97 22.43 21.93 25.97
min 25.97 22.43 21.93 21.93
mean 33.30 36.69 40.47 36.82
Shanghai max 61.73 66.91 77.59 77.59
min 15.82 21.20 21.97 15.82
Transportation
mean 28.86 37.22 38.52 34.86
Shenzhen max 34.54 38.05 39.51 39.51
min 23.17 36.39 37.52 23.17
mean 29.48 32.59 33.06 31.71
Shanghai max 39.64 44.84 46.66 46.66
Electricity, gas, min 22.94 25.21 23.23 22.94
utilities mean 36.73 35.99 39.24 37.32
Shenzhen max 52.89 55.69 62.51 62.51
min 28.70 23.68 20.96 20.96
mean 27.88 30.19 31.56 29.88
Shanghai max 65.12 76.14 78.44 78.44
min 15.20 15.32 17.21 15.20
Manufacturing
mean 28.76 32.16 34.33 31.75
Shenzhen max 60.69 64.15 71.50 71.50
min 20.42 21.75 18.77 18.77
mean 22.92 22.53 23.00 22.82
Shanghai max 29.03 26.98 28.00 29.03
min 18.61 17.22 16.12 16.12
General
mean 23.87 23.32 24.79 24.00
Shenzhen max 27.97 31.21 32.33 32.33
min 18.20 16.62 20.18 16.62

mean 26.05 30.09 32.47 29.54

Shanghai max 40.85 44.33 56.15 56.15
min 17.33 18.45 18.52 17.33
Telecommunication
mean 26.36 31.67 39.73 32.59
Shenzhen max 34.26 46.58 70.46 70.46
min 18.86 23.00 28.23 18.86
Total average score 28.79 31.80 33.93 31.51
Total max score 68.76 78.49 80.29 80.29
Total min score 15.20 15.32 16.12 15.20
Regression analyses
Waddock and Graves (1997) argue that a two-way analysis between two variables
is essential to understand the relevance of CSR and financial performance. Before ver-
ifying the impact of CSR activities on firm value, a causality test between CSR and
firm value is conducted to determine whether CSR activities increase firm value (<Eq.
1>) or whether initially high-value firms actively perform CSR activities (<Eq. 2>).
Based on the panel data analysis, we first use <Eq. 1>, <Eq. 2> to perform the cau-
sality validation
<Eq. 1>
<Eq. 2>
We also use panel analysis with <Eq. 3> to analyze the effects of CSR on corporate
value.
<Eq. 3>

Next, we set <Eq. 4> by adding 10 corporate governance variables in turn to evaluate
their interaction effects with CSR.
<Eq. 4>

Using <Eq. 4>, we carry out panel analysis using 10 corporate governance vari-
ables, respectively. First, those governance variables are divided into two groups
accordingly based on the level of the corporate governance variables (see <Table 10>).
Second, regression analysis is performed for each group to determine the impact of
CSR activities on firm value, which might appear differently depending on the value
of the governance variables.
<Eq. 5>
Finally, after analyzing the impact of CSR on firm value in accordance with the
corporate governance variables, we perform a panel analysis using <Eq. 6> to test
whether a company more actively engages in CSR activities under certain levels of
corporate governance.
<Eq. 6>
RESULTS
Descriptive statistics
Table 5. Descriptive Statistics
Variables N mean max min median std. dev.
Value 831 1.8035769 15.1134 0.652 1.4785 1.1295604
CSR 831 31.507485 80.29 15.2 28.54 11.2364462
CR1 831 0.3922908 0.8641884 0.0369 0.4007 0.1626508
z 831 17.96826 274.76 1 8.0912162 26.4910084
manageshr 831 0.0254095 0.735 0 0.00003478 0.0985377
directshr 831 0.0231819 0.654 0 6.56E–06 0.0921568
supervisorshr 831 0.0014037 0.1425 0 0 0.0101306

P 831 0.2599278 1 0 0 0.4388589
dsize 831 6.1528279 13 1 6 1.5874473
ssize 831 4.2069795 11 2 3 1.483402
Indep_ratio 831 0.3648037 0.6 0 0.3333333 0.0592038
stateowner 831 0.7256318 1 0 1 0.4464641
SIZE 831 22.670242 28.1356484 19.662737 22.5194142 1.415356
EPS 831 0.4791692 5.8932 –2.22 0.3597 0.5606302
LEV 831 1.3818031 10.8824438 –2.1862569 1.0644229 1.1045665
GRW 831 0.2410588 10.5916814 –0.722847 0.1523273 0.5755948
The basic statistics of the key variables are as follows: the average largest share-
holder stake is 39.2%, its maximum value is 86.4%, and a multiple of the Z index—
defined as the largest shareholder stake divided by the second largest shareholder
stake—is more than a maximum of 200 times and on average 18 times, which indi-
cates a significant ownership concentration in the Chinese company companies.
Before the regression analysis, the existence of a multicollinearity problem between
variables should be checked to ensure that the results of the panel analysis are valid.
The multicollinearity test result is shown in <Table 6>,5 which indicates that no strong
correlation was found when the controlled variables were excluded. This result implies
that this empirical study is immune to the multicollinearity problem.
Impact of corporate social responsibility activities on firm value
Before investigating the impact of CSR activities on firm value, we conduct a cau-
sality test between CSR activities and firm value. Conversely, we investigate whether
the previous year’s CSR causes (or precedes) this year’s firm value, or vice versa. As
shown in <Table 7>, a causal relationship may exist between CSR and corporate val-
ues; in particular, CSR precedes firm value. However, because firm value may precede
CSR with simultaneous weak significance, a robustness check using an instrumental
variable should be further conducted.
5. Based on the value of variable inflation factors (VIFs), the directors’ ownership variable is
dropped because of its high correlation with management ownership. All other variables
have VIFs less than 2. Therefore, Hypothesis 2-4 is automatically dropped.

Table 6. Pearson Correlation Coefficients
Outside_
CSR CR1 z manageshr supervisorshr P dsize ssize stateowner SIZE EPS LEV
ratioio
0.2291***
CR1
<.0001***
0.0152*** 0.4484***
z
0.6620*** <.0001***
–0.0827*** –0.1396*** –0.1369***

manageshr
0.0171*** <.0001*** <.0001***
–0.0525*** –0.0782*** –0.0727*** 0.5594***

supervisorshr
0.1302*** 0.0241*** 0.0362*** <.0001***
–0.0115*** 0.1274*** 0.1248*** –0.1213*** –0.0285***

P
0.7410*** 0.0002*** 0.0003*** 0.0005*** 0.4126***
0.1868*** 0.0713*** –0.0164*** –0.1350*** –0.1041*** 0.0087***

dsize
<.0001*** 0.0399*** 0.6365*** <.0001*** 0.0027*** 0.8030***
0.1403*** 0.2395*** 0.1257*** –0.1732*** –0.0915*** 0.0883*** 0.3416***

ssize
<.0001*** <.0001*** 0.0003*** <.0001*** 0.0083*** 0.0109**** <.0001***
–0.0055 *** 0.0290*** –0.0045*** 0.0106*** 0.0025*** –0.0498*** –0.4549*** –0.1187***

Outside_ratio
0.8743*** 0.4034*** 0.8974*** 0.7605*** 0.9434*** 0.1512*** <.0001*** 0.0006***
0.1425*** 0.3345*** 0.1927*** –0.3946*** –0.2029*** 0.2198*** 0.1833*** 0.2732*** –0.0226***

stateowner
<.0001*** <.0001*** <.0001*** <.0001*** <.0001*** <.0001*** <.0001*** <.0001*** 0.5148***
0.4977*** 0.3580*** 0.0954*** –0.2332*** –0.0912*** –0.0153*** 0.2532*** 0.2665*** 0.0245*** 0.3113***
SIZE
<.0001*** <.0001*** 0.0059*** <.0001*** 0.0086*** 0.6600*** <.0001*** <.0001*** 0.4809*** <.0001***
0.1838*** 0.0464*** –0.0997*** 0.0409*** 0.0334*** –0.0932*** 0.1162*** 0.0587*** –0.0536*** –0.0853*** 0.1997***
EPS
<.0001*** 0.1816*** 0.0040*** 0.2391*** 0.3361*** 0.0072*** 0.0008*** 0.0907*** 0.1225*** 0.0139*** <.0001***
0.0207*** 0.0548*** 0.0835*** –0.0994*** –0.0546*** 0.0419*** 0.0498*** 0.0744*** –0.0063*** 0.1689*** 0.3164*** –0.0396***
LEV
0.5513 *** 0.1143 *** 0.0161** 0.0041*** 0.1158*** 0.2279*** 0.1518*** 0.0321*** 0.8553*** <.0001*** <.0001*** 0.2539***
–0.0244*** 0.1051*** –0.0130 *** 0.0591*** 0.0540*** –0.0044*** –0.0287*** –0.0255*** –0.0049*** –0.0441*** 0.1075*** 0.1152*** 0.1183***
GRW
0.4819*** 0.0024*** 0.7085*** 0.0888*** 0.1196*** 0.8986*** 0.4081*** 0.4623*** 0.8874*** 0.2038*** 0.0019*** 0.0009*** 0.0006***

Note: *, **, and *** represent 10%, 5%, and 1% significance levels, respectively.
Table 7. Causality Test
Causality Wald Test

Causality direction Chi-square Pr > Chi-sq Hypothesis
CSR → Value 20.12 <.0001*** H0: CSR does not cause value
Value → CSR 3.34 0.0675*** H0: Value does not cause CSR
<Table 8> indicates the fixed effect controlled results from an investigation into
how CSR affects firm value. Initially, both the fixed effect and the random effect mod-
els are considered. The fixed effect model is selected with statistically significant
parameters using the Hausman specification. Panel analysis of the entire sample
shows that a relationship exists between CSR activities of the previous year and this
year’s firm value at a 1% significance level, after controlling for various variables. In
addition, as a control variable, larger firm size and earnings per share indicate higher
firm values. A higher debt ratio indicates a larger firm value, and a lower growth rate
of total assets leads to a larger firm value. The result of an analysis that separates com-
panies listed on the Shanghai Stock Exchange and on the Shenzhen Stock Exchange is
consistent with the results for the entire sample.
Table 8. CSR and Firm Value
Dept. variable: Tobin’s Q, Indep. Variable: CSR.
All sample Shanghai Exchange Shenzhen Exchange
Variables Coeff. Std. dev. t-value p-value Coeff. Std. dev. t-value p-value Coeff. Std. dev. t-value p-value
Const. –20.38 4.02 –5.07 <.0001*** –19.37 5.39 –3.6 0.0004 –14.61 4.86 –3.01 0.003
CSR –0.02 0.01 –2.68 0.0076*** –0.02 0.01 –1.96 0.051* –0.02 0.01 –1.86 0.0637*
SIZE –0.81 0.16 –5.03 <.0001*** –0.77 0.22 –3.56 0.0004*** –0.81 0.24 –3.33 0.001****
EPS –0.02 0.10 –0.22 0.8296*** –0.01 0.13 –0.11 0.9135 –0.06 0.16 –0.37 0.7098
LEV –0.15 0.08 –1.95 0.0515*** –0.15 0.10 –1.44 0.1508 * –0.10 0.16 –0.63 0.5318
GRW –0.11 0.07 –1.71 0.0887*** –0.09 0.13 –0.7 0.4844 –0.12 0.07 –1.68 0.0948*
F-value 2.56 2.28 3.05
R2 0.6397 0.6878 0.6878
N 277 176 101

Time
3 3 3
series
Model fixed effect fixed effect fixed effect
Notes: *, **, and *** represent 10%, 5%, and 1% significance levels, respectively.

Effects of corporate social responsibility on firm value depending on

corporate governance structure
In the previous analysis, we verify that a corporation can increase its corporate
value through CSR activities. Furthermore, for different corporate governance/owner-
ship structures, to verify how the effects of these variables differ, panel analysis using
such governance variables as interaction terms is performed.
<Table 9> indicates the regression results using nine corporate governance vari-
ables, each performed by adopting fixed effects panel analysis using the Tobin’s Q
dependent variable.
The interaction terms between the corporate governance variables and CSR (CG ×
CSR) show significant negative coefficients in Eq. (1) and Eq. (8). Conversely, CSR
has a weaker impact on corporate value because the largest shareholder stake appears
at a higher governance level and for a higher proportion of outside directors. Namely,
the effect of CSR on firm value weakens as the levels of the two corporate governance
variables increase. The interaction terms of the other equations are not statistically sig-
nificant. Accordingly, inferring that a firm’s largest shareholder uses CSR more to
obtain private benefits than for the interest of shareholders is possible. Outside direc-
tors, who may not be independent given the nature of Chinese companies, are inter-
preted as not properly checking CSR activities, thus leading to weaker effects on firm
value.
Depending on the level of corporate governance, similar panel analysis using the
separation of two groups should be performed. <Table 10> presents criteria for the
corporate governance variables divided into two groups. Group A has an above aver-
age governance structure and Group B has a below average governance structure.
<Table 11> shows the results of the group panel analysis. For group A, CSRs in
regressions (3), (4), (5), (7), (8), and (10) have positive effects on firm value at the 5%
significance level. However, the results were not statistically significant in regressions
(1), (2), (6), and (9). For Group B, CSRs have positive effects on firm values at a 5%
significance level in regressions (1), (2), (6), and (9). In regressions (3), (4), (5), (7),
(8), and (10), the results were not statistically significant. According to regression (1),
CSR activities have positive effects on firm values in group B, which has a relatively
lower largest shareholder stake. However, CSR does not have a significant effect in
group A, which has a relatively higher largest shareholder stake. In regression (2),
CSRs have positive effects on firm values in group B, which has a lower largest share-
holder stake relative to the second largest shareholder stake. However, CSRs do not
have significant effects on firm value in group A, which has a higher largest share-
holder stake relative to the second largest shareholder stake. In regressions (3), (4),

and (5), CSR has a significant effect on firm value when executive ownership is high,
director ownership is high, and audit committee ownership is high. In contrast, CSR
does not have a significant effect on firm value when executive ownership is low,
director ownership is low, and audit committee ownership is low. In regression (6),
CSR increases firm value when the chairman of the board and the CEO are not the
same person. When the chairman of the board and the CEO are the same person, CSR
does not have significant effects. In regressions (7) and (8), CSR increases firm value
when the board of directors and the audit committee are relatively large. However,
CSR does not have significant effects when the board and the audit committee are rel-
atively small. In regression (10), CSR increases corporate value when the percentage
of outside directors is relatively low. However, CSR does not have significant effects
on firm value when the percentage of outside directors is relatively high. Finally, in
regression (10), CSR increases firm value when the largest shareholder is the country
government. When the largest shareholder is not the country, CSR does not signifi-
cantly influence firm value. These results are in accordance with the argument pro-
posed initially that the effects of CSR activities on firm value are different depending
on the level of corporate governance, thus supporting Hypothesis 2. Conversely, CSR
activities have a positive effect on firm value for a relatively low level of the largest
shareholder ownership and a relatively high level of audit committee ownership. Fur-
thermore, similar to most companies in the United States, CSR activities positively
affect firm value through a supervising role that is faithfully performed if the CEO and
chairman of the board are different individuals and if the board of directors and the
audit committee are large. In contrast, the role of independent directors in China
appears to be dysfunctional. If the country is the company’s largest shareholder, it pur-
sues CSR activities from the perspective of its economic and social policy dimension.
As a result, CSR has a positive effect on firm value. These results suggest that agency
costs are present during the process of implementing CSR activities.

Table 9. Impact of CSR on Firm Value in Accordance with Corporate Governance Variables (interaction term panel analysis)
Dept. variable: Tobin’s Q, Indep. Variable: CSR, interaction term of (CG variable × CSR).
CG variable
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Selected CG variable CR1 z manageshr supervisorshr P dsize ssize outside_ratio stateowner
–21.8425 –20.4335 –20.014 –19.9688 –20.3942 –19.59 –20.0591 –22.5506 –20.8913
Intercept
(–5.52)*** (–5.06)*** (–4.99)*** (–4.96)*** (–5.06)*** (–4.74)*** (–4.88)*** (–5.43)*** (–5.13)***
0.03838 0.017169 0.01441 0.015689 0.016389 0.004933 0.026185 0.068085 0.032231
CSR
(–2.47)** (2.33)** (2.21)** (2.46)** (2.29)** (0.24) (1.6) (2.43)** (2.44)**
–2.82937 –0.00082 –4.93885 –44.4651 –0.21148 –0.08531 0.008457 5.724885 0.874974
CG variable
(–2.07)** (–0.11) (–2.21)** (–1.63) (–0.55) (–0.8) (0.07) (2.07)** (1.27)
–0.06076 –0.00000965 0.071787 1.188797 0.001902 0.00181 –0.00207 –0.14003 –0.01874
CG variable × CSR (–1.29)
(–1.67)* (–0.04) (1.21) (1.36) (0.17) (0.61) (–0.6) (–1.88)*
0.94263 0.811607 0.799871 0.795699 0.811288 0.80162 0.801123 0.815386 0.802028
SIZE
(5.84)*** (5.03)*** (4.98)*** (4.94)*** (5.04)*** (4.96)*** (4.96)*** (5.07) (4.97)***
–0.00358 0.017503 0.033125 0.031511 0.025019 0.016449 0.024962 –0.00191 0.033332
EPS
(–0.04) (0.17) (0.32) (0.31) (0.24) (0.16) (0.24) (–0.02) (0.32)
–0.12299 –0.15122 –0.14864 –0.14758 –0.15057 –0.1474 –0.15213 –0.1483 –0.15579
LEV
(–1.6) (–1.94)* (–1.92)** (–1.9)* (–1.93)* (–1.89)* (–1.95)* (–1.91)* (–2)*
–0.01817 –0.11231 –0.10647 –0.10363 –0.11445 –0.11028 –0.11108 –0.10461 –0.10866
GRW
(–0.26) (–1.7)* (–1.62) (–1.57) (–1.74)* (–1.67)* (–1.69)* (–1.58) (–1.65)*
F-value 2.74*** 2.55*** 2.57*** 2.55*** 2.56*** 2.52*** 2.56*** 2.52*** 2.56***
R2 0.6537 0.6398 0.6427 0.6416 0.6402 0.6401 0.6403 0.6425 0.6409
N 276 276 276 276 276 276 276 276 276
Time series length 3 3 3 3 3 3 3 3 3
Model fix effect fix effect fix effect fix effect fix effect fix effect fix effect fix effect fix effect

Notes: Numbers in parenthesis represent t-values and *, **, and *** represent 10%, 5%, and 1% significance levels, respectively.
Table 10. Criteria for Group Division
Group A Group B
Variables Criteria Description N Criteria Description N
Largest Largest
Above Below
CR1 shareholder’s 417 shareholder’s 414
median median
holding ≥4 0% holding < 40%
Above Below
z ≥ 8.09 416 < 8.22 415
median median
Above Below
manageshr ≥ 0.0034% 418 < 0.0034% 413
median median
supervisorshr >0 324 =0 507
CEO and CEO and

P =1 chairperson are the 216 =0 chairperson are 615
same not the same
Above Below
dsize ≥7 254 ≤6 577
median median
Above Below
ssize ≥4 403 ≤3 428
median median
Above Below
outside_ratio ≥ 35% 402 < 35% 429
median median
Privately-
stateowner =1 State-owned 603 =0 228
owned

Table 11. Influences of CSR on Firm Value with Different Corporate Governance Variables (Group Division)
Dept. variable: Tobin’s Q, Indep. Variable: CSR.
Group A
CG variables
(1) (2) (3) (4) (5) (6) (7) (8) (9)
CR1 z manageshr supervisorshr P dsize ssize outside_ratio stateowner
8.77768 9.87719 7.92486 8.13532 7.8087 7.05471 8.79079 10.30836 7.98349

Intercept
(9.79)*** (9.16)*** (7.59)*** (7.46)*** (7.17)*** (7.8)*** (9.69)*** (10.38)*** (11.26)***
0.00646 0.00731 0.01147 0.01144 0.00734 0.01055 0.01122 0.00873 0.00818
CSR
(1.27) (1.22) (2.18)** (2.04)** (1.03) (2.28)** (2.28)** (1.53) (2.02)**
0.30126 0.27647 0.18633 0.21687 0.23753 0.22854 0.30525 0.32131 0.23644
EPS
(2.96)*** (2.49)** (2.29)** (2.67)*** (2.22)** (2.88)*** (3.34)*** (2.95)*** (2.95)***
–0.31504 –0.36175 –0.27998 –0.29445 –0.271 –0.25191 –0.32221 –0.37882 –0.28476
SIZE
(–7.22)*** (–6.91)*** (–5.51)*** (–5.45)*** (–5.07)*** (–5.84)*** (–7.35)*** (–7.85)*** (–8.29)***
–0.09695 –0.12658 –0.19142 –0.13178 –0.14242 –0.08193 –0.11294 –0.14479 –0.09385
LEV
(–2.15)** (–2.46)** (–3.53)*** (–2.21)** (–2.15)*** (–1.78)* (–2.61)*** (–2.68)*** (–2.62)***
–0.05545 –0.04129 0.01568 0.02748 0.0263 0.19085 –0.01075 –0.04957 –0.03459
GRW
(–0.81) (–0.42) (0.2) (0.18) (0.24) (1.04) (–0.07) (–0.53) (–0.33)
F-value 19.15*** 17.71*** 17.24*** 13.77*** 9.72*** 10.97*** 19.43*** 21.77*** 21.61***
Adj R2 0.1791 0.1679 0.163 0.1651 0.1686 0.1646 0.1865 0.2057 0.1462
N 417 416 418 324 216 254 403 402 603

Group B
CG variables
(1) (2) (3) (4) (5) (6) (7) (8) (9)
8.53458 7.85384 8.96567 8.9298 9.04332 9.23772 8.61068 7.18482 9.08488

Intercept
(8.33)*** (10.07)*** (10.22)*** (10.95)*** (11.36)*** (10.47) (9.02)*** (8.86)*** (5.01)***
0.01413 0.01196 0.00686 0.00859 0.01065 0.00671 0.00773 0.01158 0.01308

CSR

(2.48)** (2.55)** (1.25) (1.68)* (2.41)** (1.24) (1.34) (2.47)** (1.47)
0.15254 0.20769 0.31736 0.26871 0.22607 0.23208 0.16273 0.13059 0.17203

EPS
(1.72)* (2.6)*** (2.79)*** (2.47)** (2.69)*** (2.38) (1.68)* (1.71)* (1.36)
–0.31105 –0.28153 –0.32333 –0.32191 –0.33118 –0.33114 –0.30547 –0.25511 –0.32214

SIZE
(–6.27)*** (–7.31)*** (–7.51)*** (–8.09)*** (–8.49)*** (–7.62) (–6.48)*** (–6.39)*** (–3.64)***
–0.20131 –0.14247 –0.09991 –0.13728 –0.12872 –0.16586 –0.16613 –0.10273 –0.32525

LEV
(–3.6)*** (–3.02)*** (–2.12)** (–3.12)*** (–3.12)*** (–3.49) (–2.87)*** (–2.37)** (–3.2)**
0.29124 0.02863 –0.03872 –0.01679 –0.01954 –0.02521 –0.00261 0.0438 0.03103

GRW
(1.46) (0.35) (–0.38) (–0.23) (–0.25) (–0.36) (–0.04) (0.53) (0.35)
F-value 16.25*** 18.52*** 18.4*** 21.33*** 25.33*** 23.68*** 15.69*** 14.38*** 8.63***
Adj R2 0.1558 0.1746 0.1743 0.1673 0.1654 0.1645 0.1467 0.1352 0.1439
N 414 415 413 507 615 577 428 429 228
<Table 12> presents the results of the effect of the corporate governance variables
on CSR activities and indicates a negative significant coefficient on the CR1 variable.
This result implies that the higher largest shareholder stake suggests that those compa-
nies perform CSR activities less actively in the interest of shareholders. This result
also indicates that, if the largest shareholder of the company is the country, then the
company is actively reluctant to perform CSR activities.
Table 12. Panel Analysis of CSR and Corporate Governance Structure
Dep. variable: CSR, Indep. Variable: CG variables
Variables Coeff. Std. dev. t-value p-value

Intercept –157.903 27.0236 –5.84 <.0001***
CR1 –13.7306 6.8173 –2.01 0.0445***
z 0.010351 0.0141 0.74 0.4621***
manageshr –47.4146 27.0332 –1.75 0.081***
supervisorshr 26.17099 149.11 0.18 0.861***
P 0.273508 1.1411 0.24 0.8107***
dsize 0.323896 0.3629 0.89 0.3725***
ssize –0.03742 0.4759 –0.08 0.9374***
Indep_ratio 5.068235 6.9765 0.73 0.4679***
stateowner –9.66032 2.8029 –3.45 0.0006***
SIZE 8.541777 1.0337 8.26 <.0001***
EPS 0.417667 0.6894 0.61 0.5449***
LEV –0.55919 0.5205 –1.07 0.2831***
GRW –0.98395 0.4653 –2.11 0.0349***
F-value 4.32
2
R 0.158
N 554
Time series length 3
Model Fixed effect
Notes: Numbers in parenthesis represent t-values and *, **, and *** represent 10%, 5%, and 1%
significance levels, respectively.

Corporate governance is a mechanism that enhances the value of the business and
maximizes shareholder value. If CSR positively affects the growth in enterprise value,
good corporate governance indicates that those companies should perform more CSR
activities that have lower agency costs. Therefore, a lower ownership stake of the larg-
est shareholder and of management positively affects CSR activities, which is consis-
tent with prior results.
Robustness test
We now consider the endogeneity problem of the CSR variable. Conversely, CSR
activities may have positive effects on firm value; however, initially high-value busi-
nesses or large enterprises can also engage in more CSR activities. In this case, the
CSR variable becomes the endogenous variable, meaning that the conventional ordi-
nary least squares method can no longer provide an unbiased consistent estimator.
Two-stage least squares (2SLS) with instrumental variables were used for the aver-
age of the annual CSR score for that industry. Industry characteristics can be associat-
ed with firms’ CSR activities but are not expected to directly affect the value of the
company (Surroca et al. 2010). Therefore, the industry average annual CSR score may
be regarded as appropriate as an instrumental variable used to estimate the CSR vari-
able in the 2SLS analysis.
Among the previously analyzed results, only the significant results are the target of
the 2SLS analysis using a group division regression. <Table 13> provides the results
of the 2SLS analysis using the annual industry average CSR score as an instrumental
variable. Panel A indicates the results of the first stage regression and Panel B indi-
cates the results of the second-stage regression.
The first stage regression analysis is used to estimate the CSR industry average
score (CSR_indumean). This regression shows statistically significant positive (+)
coefficients on all variables. In the second stage regression analysis, the CSR estimate
in the first stage (predicted CSR value) is used as an explanatory variable. The regres-
sion also presents statistically significant coefficients on variables such as CR1 and
Stateowner. Overall, the impact of CSR on firm value is still valid after controlling for
the endogeneity problems of the CSR variable that may arise.

Table 13. 2SLS Analysis (IV: industry mean of CSR score)
Panel A: First-Stage Regression (Dep. var: CSR)
CG variables
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Group B Group B Group A Group A Group B Group A Group A Group B Group A
–39.24686*** –57.20115 –60.08069 –90.19553 –72.78615 –77.12165 –74.65346 –56.19372 –70.70603
Intercept
(–4.59)*** (–7.9)*** (–6.4)*** (–9.65)*** (–11.15)*** (–7.39)*** (–9.26)*** (–7.51)*** (–11.04)***
Industry mean 0.57661 0.80186 0.56172 0.69948 0.59316 0.89218 0.68457 0.74171 0.59991
of CSR (5.17)*** (7.12)*** (4.69)*** (5.54)*** (6.63)*** (6.37)*** (6.47)*** (7.33)*** (7.13)***
2.29252 2.80996 3.3978 4.60832 3.81866 3.51669 3.72801 2.8751 3.68872
EPS
(5.63)*** (7.36)*** (7.79)*** (10.24)*** (12.14)*** (6.77)*** (9.48)*** (7.67)*** (12.19)***
1.44387 1.5877 –0.06371 –0.04186 1.11062 1.12426 0.94533 1.73124 2.05846
SIZE
(1.95)** (2)** (–0.09) (–0.05) (1.49) (1.11) (1.07) (2.33)** (2.65)***
–0.34169 –0.35491 –1.95404 –2.53805 –0.90187 0.46364 –0.47646 –1.22595 –0.76074
LEV
(–0.72) (–0.74) (–4)*** (–4.59)*** (–2.45)** (0.77) (–1.09) (–2.88)*** (–2.15)**
–0.02244 –1.31191 –0.83847 –1.23364 –1.5569 –0.04787 –1.17034 –1.03144 –1.97703
GRW
(–0.01) (–1.64) (–1.15) (–0.83) (–2.29)** (–0.02) (–0.81) (–1.28) (–1.93)*
F-value 19.8*** 47.56*** 21.66*** 40.38*** 60.98*** 36.28*** 45.64*** 42.02 68.17
2
Adj. R 0.1854 0.3599 0.1985 0.3787 0.3281 0.4108 0.357 0.324 0.3581
N 414 415 418 324 615 254 403 429 603

Panel B: Second-Stage Regression (Dept. var: Tobin’s Q)
CG variables
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Group B Group B Group A Group A Group B Group A Group A Group B Group A
10.97126 10.47869 13.79402 13.88901 13.73421 9.9041 13.13844 9.36537 12.07301

Intercept
(8.81)*** (9.36)*** (9.03)*** (7.46)*** (10.02)*** (7.68)*** (9.24)*** (8.6)*** (10.53)***
0.08858 0.05461 0.12466 0.07817 0.07854 0.04492 0.06947 0.05042 0.06939

Estimate of CSR
(3.89)*** (3.91)*** (5.51)*** (4.22)*** (4.67)*** (3.69)*** (4.45)*** (3.63)*** (4.89)***
–0.52047 –0.45956 –0.712 –0.65634 –0.63773 –0.42518 –0.59787 –0.40883 –0.55318

EPS
(–6.57)*** (–6.87)*** (–7.3)*** (–5.99)*** (–7.7)*** (–5.99)*** (–7.25)*** (–6.28)*** (–8.06)***
0.04929 0.15214 0.2018 0.20099 0.13471 0.16741 0.22448 0.07536 0.06945

SIZE
(0.53)* (1.88)* (2.55)** (2.53)** (1.57) (2.08)** (2.44)** (0.97) (0.8)
–0.15423 –0.09559 0.06007 0.07861 –0.03494 –0.06762 –0.03689 –0.02575 –0.01167

LEV
(–2.7)*** (–1.95)* (0.83) (0.97) (–0.75) (–1.48) (–0.79) (–0.51) (–0.29)
0.28764 0.09775 0.12577 0.10605 0.10415 0.19878 0.06054 0.08553 0.1059

GRW
–1.46 (1.18) (1.56) (0.69) (1.28) (1.1) (0.41) (1.03) (0.98)
F-value 18.37*** 20.64*** 23.36*** 17.05*** 29.15*** 12.99 23.01 16.02 26.27
Durbin-Watson D 1.486 1.5 1.678 1.597 1.561 1.474 1.515 1.675 1.669
Adj R 2 0.1737 0.1917 0.2114 0.199 0.1865 0.1916 0.2149 0.1493 0.1735
N 414 415 418 324 615 254 403 429 603
Notes: Number in parenthesis represents t-values and *, **, and *** represent 10%, 5%, and 1% significance levels, respectively.
CONCLUSIONS
Corporate social responsibility has emerged as an important issue with the global-
ization of the world economy. In particular, the importance of CSR activities is more
pronounced for Chinese companies, which have enjoyed high economic growth, and
this growth has caused significant negative side effects on society at the same time. If
CSR has an impact on increases in firm value, companies with better corporate gover-
nance or lower monitoring costs should be more actively involved in CSR activities.
In this paper, we provide an empirical analysis of the impacts of CSR activities of
Chinese companies on firm value and—depending on the different level of the corpo-
rate governance measures—analyze the effects of CSR activities on firm value.
Depending on the level of corporate governance measures, the effects of CSR activi-
ties on firm value are expected to be different.
The main results are as follows. First, CSR activities generate a positive effect on
firm value. This result suggests 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 (or
negative) impact on firm value. Third, if executives’ shareholding ratio or the audit
committee’s ownership is high or if the CEO and the chair are different individuals,
then CSR activities are carried out to benefit the company and enhance firm value.
Fourth, a positive effect of CSR activities on firm value is observed for companies
with large boards of directors and audit committees. This effect occurs because larger
boards and audit committees imply better corporate monitoring, thus reducing agency
costs. In contrast, if the ratio of outside directors is relatively low, the influence of
CSR activities on firm value is positive. Because outside directors in many Chinese
companies are typically appointed by major shareholders, it is no surprise that these
outside directors may choose CSR activities that serve these shareholders’ private
interests rather than the interests of all shareholders. Finally, if the state is the largest
shareholder of a company, CSR activities positively impact firm value because they
are performed for social benefit instead of for private interests. Overall, CSR activities
have a positive impact on firm value for companies with good corporate governance
but not for companies with poor corporate governance.
This study is important because it presents the first empirical evidence that exam-
ines whether CSR activities are associated with improved financial value depending
on the different corporate governance measures for Chinese companies. This article
contributes to the debate on the role of CSR in corporate strategy. It also sheds light on
the corporate governance structure that can enhance the performance of CSR activities

and, eventually, firm value. This study can alert policymakers in developing countries
such as China to the increasing overlap between corporate governance and CSR agen-
das, the need to reform the regulatory and judicial systems from the context of corpo-
rate governance structure, and the need to increase institutional pressures to enhance
CSR adoption.
However, this study has some caveats. For example, a panel data approach using a
sample period of three years with a one-year lag may not be appropriate given the
shorter period. The sample consists of only companies with available CSR scores for
the entire sample period, thus generating a sample selection bias issue. Future research
needs to address these problems by expanding the sample period for the panel data
and adjusting the sample selection bias using appropriate econometric methods.
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Corporate Governance and Firm Value:

The Impact of Chinese Companies’ Corporate Social Responsibility

Abstract: We investigate whether the corporate social responsibility (CSR) of

Keywords: Corporate social responsibility, corporate governance, firm value,

*** Professor, CAU Business School, Chung-Ang University, Seoul, Korea.

© 2017 by the GSPA, Seoul National University

During the past decades, corporate social responsibility (hereinafter referred to as

1. For example, in 2012, Foxconn—known for assembling most of Apple’s products—was

The Korean Journal of Policy Studies

The Korean Journal of Policy Studies

LITERATURE REVIEW AND HYPOTHESES

CSR and Firm Value

The Korean Journal of Policy Studies

The Korean Journal of Policy Studies

Effects of corporate governance on the impact of CSR activities on firm values

Studies on the ownership structure of Chinese companies focus on the concentra-

The Korean Journal of Policy Studies

Shareholdings by management can provide an incentive for executives to maxi-

The Korean Journal of Policy Studies

The Korean Journal of Policy Studies

The Korean Journal of Policy Studies

Independence of outside directors is indispensable for effective governance and

The Korean Journal of Policy Studies

Relationship between corporate governance and CSR activities

Corporate governance is a mechanism for protecting external investors, improving

The Korean Journal of Policy Studies

DATA AND EMPIRICAL ANALYSIS

(1) does not belong to the financial sector;

The financial sector is excluded because it is regarded as highly regulated, indicat-

Table 1. Industry Classification of the Sample Companie

The Korean Journal of Policy Studies

Table 2. Definition of the Key Variables

Variables Definition Measurement

The Korean Journal of Policy Studies

Auditors’ shareholdings/total outstanding

The Korean Journal of Policy Studies

Table 3. Rankins CSR Rating System

The Korean Journal of Policy Studies

C4 Employees’ composition: gender, age, total number

Fair operation Active promotion of CSR-related information to society as a

The Korean Journal of Policy Studies

C23 Amount of social donations

Contribution to Participation in science and technology projects in the region

Creativity of T5 Creativity of the structure and format for reporting

Reliability/ T8 Third party inspection

The Korean Journal of Policy Studies

Table 4. CSR Score Trends of the Sample Companies

Industry Annual CSR score

The Korean Journal of Policy Studies

mean 28.38 30.62 31.06 30.02

The Korean Journal of Policy Studies

mean 26.05 30.09 32.47 29.54

Table 5. Descriptive Statistics

Variables N mean max min median std. dev.

Value 831 1.8035769 15.1134 0.652 1.4785 1.1295604

CSR 831 31.507485 80.29 15.2 28.54 11.2364462

CR1 831 0.3922908 0.8641884 0.0369 0.4007 0.1626508

z 831 17.96826 274.76 1 8.0912162 26.4910084

Effects of corporate governance on the impact of CSR activities on firm values

–0.0827* –0.1396* –0.1369***

–0.0525* –0.0782* –0.0727* 0.5594*

–0.0115* 0.1274* 0.1248* –0.1213* –0.0285***

0.1868* 0.0713* –0.0164* –0.1350* –0.1041* 0.0087*

0.1403* 0.2395* 0.1257* –0.1732* –0.0915* 0.0883* 0.3416***

–0.0055 * 0.0290* –0.0045* 0.0106* 0.0025* –0.0498* –0.4549* –0.1187*

0.1425* 0.3345* 0.1927* –0.3946* –0.2029* 0.2198* 0.1833* 0.2732* –0.0226***