Restart economy in a resilient way: The value of corporate social responsibility to firms in COVID-19

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Highlights

  • This paper investigates the importance of corporate social responsibility to stock returns in COVID-19.

  • The mechanism analysis show that corporate social responsibility can bring social trust capital to enterprises.

  • Corporate social responsibility can improve the corporate performance during the epidemic.

  • The impacts of employee protection and environmental protection responsibilities on stock returns are even more significant.

Abstract

This paper investigates the importance of corporate social responsibility (CSR) to firms in COVID-19. Using data from listed companies in China, we find that a high-level of CSR is conducive to improving stock returns. Importantly, the mechanism analysis shows that corporate social responsibility can bring social trust capital to enterprises, and it can improve the corporate performance during the epidemic. Additional tests show that the impacts of employee protection and environmental protection responsibilities on stock returns are even more significant. Our findings reveal the importance of the socially responsible investing and have important policy implications.

Introduction

The stock market is an indispensable part of the capital market. It has been playing a crucial role in optimizing resource allocation, broadening financing channels, and diversifying market risks. The spread of the COVID-19 pandemic has caused a significant impact on the financial markets in a short time (Wang et al., 2020), resulting in severe fluctuations in the stock market. Excessive volatility is not conducive to the stock market's functioning and harms investors, listed companies, and the national interest. However, we observed that the stock prices of some companies, such as China State Construction Engineering Corporation, Ping An Insurance (Group) Company of China, Ltd and China Vanke Co., Ltd., dropped by −3.78%, −3.02%, and −5.29%, respectively within a week after the outbreak. These were far less than the declines of −6.55%, −4.86%, and −7.46% in the industry. There is an obvious similarity among these companies that each of them has a high level of corporate social responsibility (CSR). Is it just a coincidence, or is there a logical necessity? This phenomenon aroused our curiosity. To be concrete, whether the more a company undertakes CSR, the more stable its stock price will be in the face of significant public emergencies, and the more it will be able to withstand external shocks?

It is meaningful to explore this question. With the impact of the epidemic on social and economic development, large-scale economic stimulus plans have been implemented worldwide, and a large amount of funding has been injected into firms to help them fight against the COVID-19. According to statistics from the International Monetary Organization in January 2021, the global financial support has reached nearly $14 trillion to help businesses and families cope with the COVID-19. In this event, the problem worth considering for the time being is to explore a better mode of development for firms, support firms in improving their business strategies, and maintain the stability of the financial market (Brammer et al., 2020). The research on CSR and stock market stability in this paper could be helpful to shed light on firm's recovery path after the epidemic. And also, this may help increase the resilience of financial markets to deal with similar major emergencies in the future.

Besides that, the research of this paper also has specific academic significance. At present, the existing relevant studies are mainly aimed at enterprises in specific industries, and there are relatively few discussions on their mechanisms and different types of social responsibility (Qiu et al., 2021; Zhai et al., 2021). Based on the summary of relevant research, as an indirect profit-making behavior, corporate social responsibility can produce two opposite effects on the level of stock returns during the COVID-19. One argument is that according to the stakeholder theory, the development of an enterprise cannot be separated from the participation of all stakeholders, and the enterprise pursues the interests of stakeholders rather than just those of shareholders (Dyck et al., 2019; Bardos et al., 2020; Broadstock et al., 2021; Gloßner, 2019; Qiu et al., 2021; Gregory et al., 2014; Jahmane and Gaies, 2020; Servaes and Tamayo, 2013; Ding et al., 2021). Thus, a high level of social responsibility is conducive to improving stock returns, and both shareholders and society should pay attention to social responsibility in the recovery process. Another argument is that corporate social responsibility is only a manifestation of the principal-agent conflict arising between shareholders and managers. The fulfillment of social responsibility by managers will be beneficial to themselves but detrimental to shareholders’ interests (Carroll, 1979; Masulis and Reza, 2015; Jensen, 2001). In this case, undertaking corporate social responsibility is ineffective in enhancing corporate performance in the financial market. Given this, can corporate social responsibility support firms in maintaining their stability in the financial market? Can we take advantage of the COVID-19 pandemic to carry out social responsibility transformation, and “responsibility recovery” for a more sustainable economy? The search for the solution to these issues is crucial to the sustainable development of the economy.

Actually, it is believed that the COVID-19 pandemic presents an opportunity to validate the value of corporate social responsibility in an unusual way. First, the COVID-19 pandemic is an exogenous shock stemming from public health concerns rather than from economic conditions such as the financial crisis. Second, the unexpected impact demonstrates that firms’ ability to make a prompt response to the COVID-19 pandemic is limited, the stock market's reaction is premised mainly on the pre-existing level of corporate social responsibility, which can reduce the endogenous problems to some degree. Herein, the social responsibility of firms and the stock returns generated amid the COVID-19 pandemic were explored, based on which the mechanism behind it was analyzed. It is found that corporate social responsibility undertakings are significantly positively correlated with the raw returns and abnormal returns, and this positive correlation is mainly driven by the responsibility for employee protection and environmental protection. The responsibility for public relations has not a significant impact on the stock returns during the epidemic. Mechanism analysis shows that corporate social responsibility can increase social trust capital, and it reveals corporate performance, thus it has a positive impact on the stock returns.

Our study offers several contributions to the literature. First, this paper provides empirical evidence for the value of corporate social responsibility, and indicates the direction of corporate “restructuring” in the wake of the pandemic. Second, this study determines how different types of corporate social responsibility could impact the performance of firms in the financial market, thus enriching the research in the relevant fields (Lins et al., 2017; Ferrell et al., 2016). Lastly, our paper explores the mechanism behind the impact of corporate social responsibility on stock returns, and provides evidence for the economic consequences of corporate social responsibility. Our research can shed light on the follow-up research.

Section snippets

Methodology

In this paper, the fifth week of 2020 is treated as the event week since the city leader of Wuhan announced the lockdown measures on January 23, 2020, the day before the Spring Festival, which sent shocks to the financial market. The market model method is applied to measure the abnormal return:Ri,t=α0+α1RM,t+ε

Where Ri,t indicates the stock return of company i in t trading week, and RM,t denotes the market return at time t. The level of market return is estimated by the window period [- 100, -

Preliminary regression results

Table 3 reports the regression results of corporate social responsibility on the raw return and abnormal return. In columns (1) and (2), we run the cross-sectional regressions, and the coefficients on CSR_treatment are significant and positive, which confirm that companies with high levels of social responsibility have higher stock returns. Based on the effects, we further use the DID model to test our hypothesis more precisely. In columns (3) and (4), we run the DID regressions for our main

Conclusions

Using data from listed companies in China, we show that corporate social responsibility is conducive to improving stock returns during the COVID-19 pandemic. The impact of employee protection and environmental protection responsibilities on stock returns are significant, while the responsibility of public relations such as charitable donation makes no significant impact on stock returns. It means that environmental protection responsibility and employee protection responsibility are approved by

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