Corporate Social Responsibility And The Cost Of Capital:Theory And Empirical Analysis On Chinese Resource-based Companies

Abstract:Accompanying with the advent of globalization and liberalization, the entry of multi-national corporations into Asian markets, increasing consumer expectations towards business, and the emergence of pressure groups, the case for CSR has become stronger in Asian countries including China. The narrow and exclusive focus on short-term monetary results of China has led to counter-productive and negative consequences for business and society, including environmental pollution, resource consumption, business ethics, etc, which seriously hampered the sustainable development of China’s economy and its firms, especially for the resources-based companies.Resources-based enterprises are very special. Their producing mode is based on the exploitation and primary processing of natural resources, and the competitive edge of them comes from their monopolization of resources. Obviously, the social responsibility of this kind of companies has some special characteristic different from other kinds of companies. Due to the features of the resources-based companies, the absence of social responsibility of this kind companies are more serious. In the past few years, CSR has become one of the dominant themes in business, especially for the resources-based companies. Although firms should make serious efforts to integrate CSR into various aspects of their businesses to contribute to sustainable development, the issue of whether socially responsible investment (SRI) is value-increasing, decreasing, or neutral remains an open question. An increasing number of studies attempt to answer this question by concentrating on the ties between CSR and financial performance. However, most of these studies focus on accounting-based or market-based measures of financial performance, whereas few studies examine capital market participants’perceptions of CSR. Therefore, it is necessary to understand the CSR-financial performance relationship by examining whether CSR performance affects the costs of capital of resources-based companies.We examine the effect of CSR towards primary stakeholders on the cost of capital, including the cost of capital and the cost of debt, for a sample of Chinese A-share listed resources-based companies from2009to2012, dividing the sample into SOEs and NSOEs for comparison. To estimate CSR, we build an index system of CSR with respect to six stakeholder groups-investors, employees, customers, community, government, suppliers, and environment on the basic of the characteristics of resources-based companies, various global standards, local standards and previous studies, since there is no authoritative database on CSR available in China. Then determine the weight of each evaluation index by the entropy method and use the method based on firm disclosure to specify our proxy for CSR. The results are shown as following:(1)The resources-based companies have some special characteristic and importance different from other kinds of companies, which results in the difference of CSR index and the weight of each evaluation index.Resources-based companies is a special category among all kinds of companies, which shown as follows. First, as the most important strategic companies of our country, the possession and monopolization of the natural resources are the competing priority of them. Second, the employees of resources-based companies are working in a highly dangerous working environment and the damage to the environment is more serious than other companies. Third, as the important energy companies of our country, the products of them are the important industrial raw materials and they are very closely related to the stability of politics and economy.Due to the features of the resources-based companies, the absence of social responsibility of this kind companies are more serious. First, this kind of companies shoulder the important responsibility of protecting national energy security; Second, the standard of the responsibility of protecting and preserving the natural environment are more strict for the more heavy damage to natural resources. Third, they should shoulder important responsibility of ensuring the safe and health of the employees. Additionally, for the limit of the resources, the resources-based companies should shoulder the social responsibilities considering the priority of different responsibilities to different stakeholders on the basics of the importance of them.(2)Firms with higher CSR scores exhibit lower cost of equity capital as well as lower the cost of debt, however, there are some difference in the degree of the impact for the different cost of capital as well as the social responsibilities to different stakeholders.With the respect to the cost of equity capital, resources-based firms with higher CSR scores have significantly lower cost of equity capital. In particular, we find that investments in improving CSR towards investors and environment make the greatest contribution to reducing firms’equity financing costs, and the cost of capital effects of CSR is more significant in recessions than in economic booms. In addition, SOEs have better CSR and lower cost of equity capital than NSOEs, but the effect of CSR in reducing the cost of equity capital is greater for NSOEs than for SOEs.With the respect to the cost of debt, there has a negative relationship between CSR and the cost of debt, however, the significance level is low for the whole sample. Particularly, the coefficients on CSR towards investors and environment are statistically significant, while the coefficients on CSR towards other stakeholders are not statistically significant. Additionally, the cost of debt is lower for SOEs than for NSOEs, however, the relationship between the cost of debt and CSR is statistically significant for NSOEs, but not for SOEs. At last, the cost of debt effects of CSR is more significant during recession than during an economic boom, too.(3)The government has the motivation of scrambling for the financial resources and intervening the allocation of the credit funds.The special government governance mode results in the double position of supervisor and participator of the economic activity. To reform the tax and fiscal system, the local governments begin to vie for financial resources to meet the needs of the funds for local economic growth, and the intervention of government plays a very important role on the quality of local institution environment and efficiency of loan allocation. The results show that government intervention plays a negative role in the cost of capital effects of CSR. In other words, the bank will not care the level of CSR for the resources-based companies in the city where the government intervention is serious for the political purpose.