Finance Faculty Publications and Presentations

Document Type

Article

Publication Date

11-2023

Abstract

This study examines the interplay between two major global trends – the growing role of foreign institutional investors (FIIs) due to financial liberalization and the rise of corporate social responsibility (CSR) as an investment ethos. We choose the setting of China, the world’s second-largest economy that has recently experienced substantial growth in foreign portfolio investment and increased its commitment to CSR. We document that CSR performance significantly influences the portfolio allocation decisions of certain types of FIIs. Crucially, our analysis reveals that firms with a higher level of ownership by FIIs are associated with a more positive relation between CSR performance and firm value. This finding is robust to endogeneity examinations, including quasi-natural experiments and instrumental variable estimations. The finding is stronger for non-state-owned enterprises, firms with higher customer awareness, firms with more foreign directors, and firms with more frequent corporate site visits from FIIs. Monitoring and advising are two likely channels through which FIIs enhance the CSR-value relation. Finally, we demonstrate that FIIs enhance firms’ ability to harness the power of CSR as a driver of innovation.

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