Creating value through corporate social responsibility: The role of foreign institutional investors in Chinese listed firms

Yunhe Li, Yu Liu, Mihail Miletkov and Tina Yang

Journal of Empirical Finance, 2025, vol. 82, issue C

Abstract: This study examines the interplay between two major global trends—the growing role of foreign institutional ownership (FIO) 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 FIO. Crucially, our analysis reveals that firms with a higher level of ownership by foreign institutional investors 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 FIO. Monitoring and advising are two likely channels through which FIO enhance the CSR-value relation. Finally, we demonstrate that FIO enhance firms’ ability to harness the power of CSR as a driver of innovation.

Keywords: Foreign institutional investors; Corporate social responsibility (CSR); Environmental, Social, and Governance (ESG); Firm performance; Innovation; China (search for similar items in EconPapers)
JEL-codes: F21 F39 G11 G15 G23 G32 G34 M14 O16 O31 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:82:y:2025:i:c:s092753982500043x

DOI: 10.1016/j.jempfin.2025.101621

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