Driving Value Through Corporate Social Responsibility : The Role of Foreign Institutional Investors

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. Most 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