Indifferent to CSR performance? Market liberalization brings about changes.

Area of Science:

• Economics
• Finance
• Business Ethics

Background:

• Investor acceptance of corporate social responsibility (CSR) is crucial for market valuation.
• Market liberalization can influence how investors perceive and value CSR activities.
• China's Stock Connect programs represent a significant form of capital market liberalization.

Purpose of the Study:

• To investigate the impact of the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect on investor acceptance of CSR.
• To analyze how market liberalization affects the relationship between CSR performance and stock market outcomes.
• To identify firm characteristics that moderate the effect of Stock Connect on CSR valuation.

Main Methods:

• Utilizing a quasi-natural experiment design.
• Employing a difference-in-differences approach to assess the impact of the Stock Connect programs.
• Analyzing a sample of Chinese-listed companies.

Main Results:

• Stock Connect strengthens the positive correlation between CSR performance and market response to CSR reports.
• Stock Connect enhances the association between CSR performance and Tobin's Q, indicating improved firm valuation.
• The positive impact of Stock Connect on CSR valuation is more significant for non-state-owned enterprises, firms with lower agency costs, and those less likely to engage in impression management.

Conclusions:

• Market liberalization via Stock Connect improves both short- and long-term stock market performance for companies with strong CSR records.
• The benefits of Stock Connect are more pronounced for firms without prior Qualified Foreign Institutional Investor (QFII) shareholdings.
• The findings advocate for continued liberalization of China's capital market to foster CSR engagement and firm value.