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Smith, Adhikari & Tondkar, 2005) due to the differences in institutional structure, such as national economy and legal and regulatory structure. Whether the relationship between CSR disclosure and ownership documented in the previous studies in the developed countries still apply in the emerging market setting, for example, China, is questionable.

Secondly, the quantity of CSR disclosure has dramatically increased since 2008 due to several initiatives launched to promote social responsibilities. For example, the 2006 Chinese Company Law first gave explicit recognition to CSR and required firms to undertake social responsibility in the course of business (Ip, 2008; Lin, 2010). In 2008, State-owned Assets Supervision and Administration Commission issued the Corporate Social Responsibilities Guideline for State-owned enterprises (SOEs) to encourage them to consider CSR in their reform process (Hu & Yusuf, 2015). As for listed companies, the China Securities Regulatory Commission (CSRC) issued the National Code of Conduct which required firms to act socially responsible (Kimber & Lipton, 2005). The two stock exchanges, the Shenzhen and Shanghai Stock Exchanges released a further guide on listed companies’ social responsibility in 2006 and 2007 respectively ( In 2006 the Shenzhen Stock Exchange released a Guide on Listed Companies’ Social Responsibility, but has yet to issue mandatory requirements around Environmental, Social and Corporate Governance Disclosure. In 2008, the Shanghai Stock Exchange issued a Guide on Environmental Information Disclosure for Companies Listed on the Shanghai Stock Exchange). and encouraged listed companies to include CSR information in their annual reports in 2008 (Li et al., 2013; Hu & Yusuf, 2015). Despite these efforts to institutionalise CSR in the Chinese legal system and capital market, the level of CSR disclosure varies and this difference may be reflected in the different types of ownership.

Thirdly, China’s secondary privatization (the split-share structure reform) in 2005 was initiated to remove the dual share structure by converting non-tradable shares into tradable shares (Liao, Liu & Wang, 2014) (Before the split-share structure reform, shares of Chinese listed companies were divided into non tradable shares and tradable shares. The no-tradable shares, were mainly held by state (central or local governments), or legal person shareholders (i.e. affiliated to state-owned firms, manager, etc.). After almost a decade the beginning of the implementation of this reform, it is relevant to investigate how particular types of owners could have a specific impact on the firm’s CSR disclosure. Prior CSR studies on ownership in China rely on the official classification scheme which ignores the nature of shareholders as well as obscure the controlling shareholder of a firm (Chen, Firth & Xu, 2009; Kang & Kim, 2012), leading to inconsistent empirical results (e.g. Li & Zhang, 2010; Li et al., 2013). This study uses an alternative classification scheme for the ownership of SOEs that focuses on the ultimate owner of the firm instead of the owner disclosed by the firm to examine the link with CSR disclosure.

The study contributes to the literature in six ways. Firstly, most of the previous studies examined the relationship between CSR and the domestic institutional investors. The current study includes several nonGCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 184 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 financial domestic investors, for example, state, corporation and foreign investors, which add richness of the literature of CSR and corporate governance. To the best of our knowledge, this study constitutes the first effort to include the foreign investors-CSR relationship. Secondly, prior research on CSR mainly focuses on Western Europe, and the U.S. This study aims to understand how the different types of shares motivate firms towards the CSR engagement in China. Our study reveals that the ownership-CSR relationship has a distinct implication in the context of China as compared to Western contexts. Firms controlled by the government are better at CSR disclosure and produce better CSR reports than firms controlled by private individuals or non-government related entities.

Thirdly, our study extends the understanding of the association between CSR and organizational factors, such as firm size, profitability, leverage etc. These findings confirm those of prior research conducted in the developed countries, suggesting CSR activities are largely driven by strategic motivations. Fourthly, our findings on the relationship between CSR and ownership type have implications in other countries where state ownership is prevalent, such as Singapore, Austria, and Finland (Faccio and Lang, 2002; Li & Zhang, 2010). Fifthly, various theoretical frameworks have been applied around CSR and corporate governance (Walls, Berrone & Phan, 2012) but this study, from a ‘facts’ perspective, contributes to the progress of building a dominant paradigm to inform the research in corporate governance and CSR. Finally, our study supplements the literature on transition economies by providing empirical evidence that state ownership motivates firms to undertake and influence the quality of CSR. The rest of the paper is organised as follows. The next section highlights the use of stakeholder theory as a basis for our study and formulates the study’s hypotheses, followed by the research method. The empirical evidence is then presented. The last section offers conclusions and possible policy recommendations.

Stakeholder theory and Hypotheses

Ownership is often separated from control in large public companies because different stakeholders have different demands on firms causing conflicts of interest among stakeholder groups. This creates a big challenge for managers to control the diverse interests of multiple stakeholders. Management therefore prioritize their stakholders according to their attributes of power, legitimacy and urgency (Agle, Mitchell, & Somenfiled, 1999). By disclosing CSR information, a firm addresses the information needs of stakeholders and CSR disclosure can be seen as a strategic tool to shape stakeholder perceptions of firms and justify the firms’ acceptance and approval of their operations from stakeholders (Deegan & Rankin, 1996). If the owner is predominantly motivated by financial performance, we assume that agency problems will be relatively high. In this case, CSR disclosure may be employed as a means of conflict resolution and is viewed as a means to neutralize agency problems from the perspective of stakeholder theory (Dam & Scholtens, 2012). Botosan (1997) find CSR disclosure leads to a reduction in information asymmetry between managers and investors, thus helps increase share liquidity, builds up a positive image, improves firms’ access to global capital markets, attracts investors more easily and improves operating performance (Hooghiemstra, 2000; Spence, 2007). Although the empirical evidence on the effect of CSR on financial performance is inconsistent, the majority of studies show a positive relation between CSR ratings and financial performance (Barnea & Rubin, 2010: 72).

However, when non-financial motives are included in the decision to disclose CSR information, transaction and agency costs are reduced and may become less important (Dam & Scholtens, 2012), CSR reporting may be used to seek preferred status and associated resources and meet particular expectations from the key stakeholders. If this argument holds, CSR disclosure can be used to secure the legitimacy from certain stakeholders thus enjoying positional advantage. It can be argued that different types of owners have divergent preference regarding various corporate decisions and investments (Oh & Change, 2011). Whether to disclose CSR information is decided by the corporate management under pressure from stakeholders.

The main issue is how the decision to undertake CSR disclosure and the quality of such disclosure is affected by the holdings of a particular owner. We investigate four types of owner: the state, institutional GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 185 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 investors including, mutual funds, banks, insurance companies, security companies, finance companies, pension funds, and investment trusts, corporate investors and foreign investors. Regarding CSR disclosure, we look at two decisions made by the management, (i) whether to issue a CSR report and, (ii) how much information should be disclosed.

State Ownership

State ownership refers to investments by government and government-related institutions. China has unique cultural and institutional features with nearly 60% of listed companies being SOEs (Li et al., 2013).

Although the split-share structure reform programme converts non-tradable state owned shares into tradable shares, the government still maintains considerable ownership and control of SOEs (Marquis & Qian, 2014) through different types of controlling shareholders, ranging from solely state-owned agencies, for example, the state asset management bureaus, to the firms affiliated to the government. As a result, this study classifies Chinese firms into SOEs according to the ultimate owner of the firm instead of the legal classification of shares as done in previous studies.

The political connections with the government in SOEs have a critical effect on their operations (Hillman, Zardkoohi & Bierman, 1999). The objectives of SOEs include not only profit, but also social aims, for example, greater employment (Li et al., 2013: 163), which helps to improve CSR. The inherent political interference enables SOEs to receive political and financial support from the government easily (Li et al., 2013; Marquis & Qian, 2014), if they act in the government’s communicated interests. For example, SOEs are provided with listing privileges based on political rather than economic objectives (Aharony, Lee & Wong, 2000) and government is more likely to bail out large SOEs when they are in financial distress (Wang, Wong & Xia, 2008; Li et al., 2013). In exchange for governmental support, SOEs are subject to monitoring by the state to a greater extent than private controlled listed firms. The political legitimacy of SOEs lies in the eyes of the government. Their performance is more likely to be reviewed by government agencies (Li et al., 2013). For example, in 2007 China’s Ministry of Environmental Protection promulgated further Measures on Open Environmental Information (for Trial Implementation) to regulate the disclosure of environmental information by government environmental agencies and by firms. In early 2008, the Stateowned Assets Supervision and Administration Commission issued the Corporate Social Responsibilities Guideline for SOEs. Therefore, we assume that SOEs are the firms most likely to issue CSR reports as a

result of coercive pressure from their government owners. We then hypothesize:

Hypothesis 1a: SOEs are more likely to issue CSR reports than non SOEs.

Hypothesis 1b: If SOEs do issue CSR reports then they are of higher quality than the CSR reports issued by than non SOEs.

Institutional Ownership Institutional ownership refers to the stock market investments of institutional investors, such as, pension funds, insurance companies, mutual funds etc. Many studies have reported that institutional owners have significant influence on organizational decisions by exercising substantial voting rights (Neubaum & Zahra, 2006; Shleifer & Vishny, 1997), thus large holdings by institutional owners are likely to gain the attention of management informed by the stakeholder theory. In most cases, institutional investors invest a considerable part of their funds in stocks. Graves and Waddock (1994) suggest that institutional holders are likely to support CSR related actions. One of the reasons is institutional investors use CSR to show their potential clients reliability and responsibility, thereby differentiating their services (Siegel & Vitaliano, 2007). The other reason is institutional investors see the long-term benefits of a firm’s participation in and spending in CSR (Turban & Greening, 1997). This argument has been documented in previous studies (Cox, Brammer & Millington, 2004; Sethi, 2005; Oh & Chang, 2011; Neubaum & Zahra, 2006). Thus, it appears for this type of shareholder disclosing CSR information reduces conflicts and may even mitigate GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 186 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 firm specific risk (Harjoto & Jo, 2011; Margolis et al., 2007). We therefore posit there is a positive association between CSR and institutional ownership.

Hypothesis 2a: Institutional ownership is positively associated with the probability of disclosing CSR information.

Hypothesis 2b: Institutional ownership is positively associated with the quality of CSR report.

Foreign Ownership It can be argued that firms can be influenced by foreign practices if the volume of foreign investors rises.

Oh and Chang (2011) notes that current trends of CSR practice in Asia have been largely affected by Western-style management practices and globalization. In the context of China, a substantial proportion of foreign investment is received from North America and Europe where CSR disclosure is a must or desirable.

According to KPMG (2005), CSR disclosure in China will be boosted as a result of external pressures, such as the expansion of foreign trade, local firms seeking overseas listings, and the supply chain requirements on local manufactures. Thus, foreign investors are assumed to have a positive impact on the promotion of CSR engagement. Further, investment in a foreign country is uncertain due to increased information asymmetries (Gehrig, 1993). Investing in socially responsible companies is a way to reduce risk for the foreign investors, particularly institutional investors, and it also shows their clients that they themselves are highly reputable (Siegel & Vitaliano, 2007). Gelb & Strawser (2001) consider a great amount of CSR disclosure itself is a form of socially responsible behavior. Given this reasoning, it is rational for foreign investors, especially institutional investors, to invest in socially responsible companies. We therefore


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