Pakistan Journal of Commerce and Social Sciences
2021, Vol. 15 (1), 31-57
Pak J Commer Soc Sci
Corporate Social Responsibility and Institutional
Investors: Evidence from Emerging Markets
Muhammad Arslan (Corresponding author)
Bang College of Business, KIMEP University, Kazakhstan
Email: [email protected]ep.kz
Dana Abeuova
Bang College of Business, KIMEP University, Kazakhstan
Email: d.abeu[email protected]
Ahmad Alqatan
Arab Open University, Kuwait
Email: aalqatan@aou.edu.kw
Article History
Received: 23 Dec 2020
Revised: 09 Mar 2021
Accepted: 19 Mar 2021
Published: 31 Mar 2021
Abstract
This study investigates whether foreign institutional investors consider corporate social
responsibility (CSR) while making investment decisions. Drawing on a sample from 21
countries, the study took 8756 firm-year observations from 650 non-financial firms over
the 2002-2018 period. The study used generalized least square (GLS) regression along with
other statistical techniques to analyse the data. The findings show a negative association of
poor environmental and social performance with foreign institutional ownership (FIO).
The findings also reveal that foreign institutional investors invest even less in poor CSR
performing firms when these firms are located in countries with low disclosure
requirements. The findings reveal that FIO has positive association with market turnover,
economic development, free float, and firm size while negative association with financial
leverage. The findings of the study have important implications for investors, regulators,
and corporate managers in emerging and developing economies (EMDEs). The research is
limited on CSR and institutional investors in emerging and developing economies.
Therefore, this study contributes to existing CSR literature, aiming its importance for both
foreign institutional investors and emerging and developing economies.
Keywords: CSR, institutional; investors, ownership, environmental and social, foreign
institutional ownership, financial leverage.
1. Introduction
In recent years, corporate social responsibility (CSR) has gained significant consideration
from practitioners and academician around the globe. Firms have allocated a substantial
portion of their annual reports to disclose their CSR activities and addressed several CSR
Corporate Social Responsibility and Institutional Investors
32
issues that can be beneficial for employees and society as whole. Many universities have
incorporated CSR into their curricula for its evolving demand and attention. Existing
literature has mainly focused in exploring the effects of CSR on the corporate outcomes
(Deng et al., 2013; El Ghoul et al., 2011; Jiraporn et al., 2014; Oikonomou et al., 2012),
corporate bonds (Stellner et al., 2015), and firm risk (Albuquerque et al., 2019; Jo & Na,
2012). However, firm’s motivations are still unknown regarding CSR practices. Therefore,
question arises why firms engage themselves in CSR activities? Drawing on stakeholder
theory, the firms engage its stakeholders in decision making process. Literature provides
the evidence that institutional investors, such as banks and pension funds, are the biggest
stakeholders of the firms that not only provides capital but also enhances the firm’s
technological innovation (Luong et al., 2017), financial performance (Correa-Garcia et al.,
2020; Douma et al., 2006), and earning quality and transparency (Beuselinck et al., 2017;
Kim et al., 2020). Therefore, institutional investors have become progressively imperative
for firms both in developed and developing countries. Scholars argued that firms can get
capital market benefits in the presence of foreign investors (Lu & Abeysekera, 2021),
however these foreign investors can also influence corporate decisions (Jeon et al., 2011).
Existing literature has two empirical research streams, mainly focusing on accounting
standards and information disclosure. Aggarwal et al. (2005) found that US funds invest
more in emerging countries with robust accounting standards and regulatory compliance.
Those firms also attract more institutional investments that issue American Depository
Receipt (ADRs) (Aggarwal et al., 2005). Similarly, DeFond et al. (2011) contended that
US fund managers increased their investments in EU firms after mandatory adoption of
IFRS. This indicates that investors’ protection and high accounting standards are pivotal to
attract foreign institutional investments. Scholars argued that CSR initiatives help in
building the positive impression over stakeholders (Dhaliwal et al., 2011) and
consequently, reduce the firms cost of capital and increase the firm value (Margolis &
Walsh, 2003).
Literature provides the evidence that foreign investors give more weightage to strong CSR
activities, compared to domestic investors who are only motivated by financial returns (Li
et al., 2021). Scholars contended that CSR practices are already well adopted in developed
economies, therefore foreign investors have more awareness as compared to domestic
investors. Additionally, these foreign investors can demonstrate their CSR awareness while
investing in weakly governed emerging economies and may exert more pressure on
management teams to incorporate CSR activities. In similar vein, Barmeyer and Mayrhofer
(2008) argued that foreign investors may have less information as compared to domestic
investors due to geographical and cultural differences. Therefore, CSR engagement can
help in reducing this information asymmetry through signalling mechanisms (Oh et al.,
2011). Jamali et al. (2008) contended that firms need to focus not only economic sphere,
but they also need to focus on environmental and social issues. Consequently, investors are
focusing on financial performance as well as environment and social (E & S) performance
that are two key elements of CSR. Harjoto et al. (2017) found that investors prefer to invest
in firms with CSR activities to fulfil their social and economic objectives. In contrast,
scholars contented that more E & S investments could lead to agency problems in the firm.
Arslan et al.
33
However, external stakeholders exert more pressure on E & S improvements (Liang &
Renneboog, 2017; Masulis & Reza, 2015). Some scholars contended that E & S
investments can provide insurance against event risk (Albuquerque et al., 2017; Lins et al.,
2017) and product market differentiation (Servaes & Tamayo, 2013).
Most of the existing literature has focused on foreign institutions' behaviour and investors'
attitude towards CSR in the U.S. market (Aggarwal et al., 2003; Leuz et al., 2009) while
little is known about investors’ behaviour in the emerging economies. CSR reporting and
transparency are pivotal in understanding the environmental and social performance and
provides benefits to distinctive stakeholders, such as government, regulators, employees,
customers, and society in general (Dubbink et al., 2008). Solomon and Solomon (2006)
debated that enhanced management of CSR problems results in better financial
performance and ethical and socially responsible investment. Amran et al. (2014) also
reported that an effective sustainability disclosure process is influenced by the manager’s
engagement with CSR issues. Existing literature reveals that institutional ownership has a
great effect on research and development spending (Baysinger et al., 1991; Khan et al.,
2020; O'Barr et al., 1992), insider trading (Chung et al., 2018), dividend policies (Grinstein
& Michaely, 2005), capital structure (Chaganti & Damanpour, 1991; Chung et al., 2018),
executive compensation (Janakiraman et al., 2010), organisational commitment (Roudaki
& Arslan, 2017), and mergers and acquisition (Ferreira et al., 2010). Agency theory
suggests that institutional investors can monitor the managers and avoid the agency
conflicts (Eisenhardt, 1989; Jensen & Meckling, 1979). Consequently, a high institutional
ownership may motivate firms to actively engage in CSR activities (Rustam et al., 2019).
Good management theory also proposes that institutional investors should have a positive
effect on firm CSR practices (Van Beurden & Gössling, 2008; Waddock & Graves, 1997)
through different voicing mechanisms (Brickley et al., 1988). Scholars contended that
socio-economic environment is unique in emerging economies due to their distinct
ownership structure (Arslan & Abidin, 2019; Peters et al., 2011) and absence of norms.
However, most of existing CSR work has done among developed countries and there is
need to conduct similar studies in the emerging economies. Additionally, family businesses
are dominant among emerging countries and offers a different scenario from that of
developed countries. Therefore, this provides us opportunity to explore the determinants
of CSR activities in emerging economies that are characterised by weak institutional
environment.
It is evident that existing literature provides mixed findings about the behaviour of
institutional investors towards firm's CSR practices and need arises to examine the
behaviour of foreign institutional investors towards the firm's CSR activities. In particular,
this study investigates whether foreign institutional investors invest less in firms with poor
CSR performance or not. We focused on emerging markets and developing economies
(EMDEs) because foreign capital remains the largest and most constant source of outside
financing for these economies. Therefore, many countries have made major policy shifts
to attract international investors. Additionally, it is also pivotal for policymakers to identify
what determines foreign capital allocation and how CSR activities may influence
Corporate Social Responsibility and Institutional Investors
34
investment decisions. We exploit the significant variation in firm-level CSR performance
in EMDEs that potentially affects foreign capital allocation. It is very risky for foreigners
who are doing businesses in EMDEs (particularly in regions with conflict risk), however
high firm-level social performance could offset the home country’s institutional
deficiencies.
This study has drawn its sample from 21 emerging and developing countries over the 2002-
2018 period and finds the negative association of poor environmental and social
performance with foreign institutional ownership. In addition, foreign institutional
investors even invest less in poor CSR performing firms when these firms operate in
countries with low disclosure requirements and weak investors’ protection. Our findings
imply that CSR initiatives can helps firms, in emerging countries, to attract more foreign
institutional investments. Robustness test also revealed similar findings.
This study adds value to the existing CSR literature particularly related to emerging and
developing economies and offers distinct understanding and behaviour of institutional
investors. This study helps in determining the role of disclosure requirements and investors
protection in getting access to reduce cost of capital and attract more institutional
investments. The findings can provide guidelines to managers and policy makers to
develop CSR policies to attract institutional investments. This study also highlights the
importance of institutional, agency and stakeholder theories in promoting the CSR
practices among firms.
This paper proceeds as follows. Section 2 expounds the literature review while
methodology is presented in Section 3. Results and discussion are presented in Section 4.
At the end, Section 5 concludes the findings of the paper and provides recommendations,
limitations and future research directions.
2. Literature Review
In existing literature, CSR is delineated as abating the harmful effect of firm’s operations
while amplifying the long-term benefits to society and stakeholders (Liang & Renneboog,
2017). CSR has gained much attention among different stakeholders in recent years.
Therefore, firms are trying to boost their CSR activities to become more socially
responsible firms and attract more investment. This is aligned with perspectives of
stakeholder theory. Similarly, Ferrell et al. (2016) argued that firms rely on numerous
stakeholders like customers, employees, owners and policy makers to get reputation and
recognition. The CSR activities provide firms an opportunity to give ethical signal in
capital markets and differentiate themselves from their counterparts (Siegel & Vitaliano,
2007) to gain benefits. Scholars also found that socially responsible firms reduce the
information asymmetry, provide more transparency, and make more responsible decisions
(Kim et al., 2012). In addition, CSR activities help in building the loyalty and commitment
of numerous stakeholders to the firms, hence adds long term value to the firms (Maqbool
& Zamir, 2019). Literature also indicates that institutional investors, as key stakeholder,
has remarkable effect on decision making of the firms (Maqbool et al., 2020). In similar
vein, scholars contended that institutional investors can play an important role in boosting
CSR activities because they make large segment of capital markets and big firms are
Arslan et al.
35
dominated by institutional ownerships (Rhou & Singal, 2020; Sundarasen et al., 2016).
CSR activities can reduce stock volatilities and can attract more institutional investors
because institutional investors are risk averse (Petersen & Vredenburg, 2009). It implies
the need to allocate more resources to boost CSR activities for the firms. However, firms’
investment decision can vary in emerging economies that have unique institutional
arrangements. Scholars contended that allocation of resources mainly depend on ownership
structure and identity which can significantly influence the strategic decisions of the firms
(Gómez-Mejía et al., 2007; Khanna & Palepu, 2000; Wąsowska, 2013). Scholars
acknowledged a positive association between CSP and institutional investors (mutual
funds, pension funds, and investment banks) (Johnson & Greening, 1999). Similarly, Teoh
and Shiu (1990) contended that institutional investors prefer firms which are actively
engaged in CSR activities while making investment decisions. Correspondingly, Cox et al.
(2004) also found the positive relationship between institutional investors (pension funds,
charitable fund, and life assurance funds) and CSP. Scholars also found a substantial
increase in institutional investments both in developed and developing countries (Blume &
Keim, 2012; Gompers et al., 2003). Prior studies advocate that institutional investors have
a great influence on firm's policies and corporate decisions (Bena et al., 2017; Chen et al.,
2020; Dam & Scholtens, 2012; Dyck et al., 2019; Grinstein & Michaely, 2005). Sethi
(2005) contended that public funds use tax money from general to make investments,
therefore they consider firm’s overall environmental policies while making investment
decisions. GarcíaSánchez et al. (2020) argued that foreign institutional investors such as
pension fund enhance the disclosure of information while government does not have any
effect on information disclosure. On the other hand, Dalton et al. (2003) contended that
high institutional ownership may create conflicts due to divergence in institutions’ interests
that will shrink the effectiveness of monitoring. In a similar vein, Hoskisson et al. (2002)
argued that different institutional owners might have their own interests that can create the
conflicts among them and ultimately distract them to encourage firms to engage in CSR
activities. Scholars contended that insider block holders are less motivated to invest in CSR
activities while FIO can enhance CSR activities through monitoring mechanisms (Shu &
Chiang, 2020). Harjoto et al. (2017) found that institutional ownership varies with CSR
activities and CSR practices decrease the stock return volatility. Yu and Zheng (2020)
contended that qualified foreign institutional investors prefer to invest more in firms with
strong CSR reporting. Therefore, our first hypothesis is as follows:
H
1
: Foreign institutional investors avoid investing in poor CSR-performing EMDEs
firms.
Several studies have been conducted to investigate the relationship between CSR and
institutional investor, however these studies focused either on developed countries or have
smaller time period. Scholars found that firms can attract more institutional investment by
focusing on CSR initiatives and such initiatives also influence the behaviour of the
institutional investors (Mahoney & Roberts, 2007). This signalling effect can offer more
insights to institutional investors about firm’s policies and preferences. Therefore,
institutional investors consider both financial and nonfinancial information while making
Corporate Social Responsibility and Institutional Investors
36
investment decisions. Scholars contended that CSR initiatives reduce the unsystematic risk
and reduces the stock volatilities which also helps in attracting more institutional
investments (Maqbool & Zamir, 2019). This indicates the positive association of CSR and
institutional investments (DiMaggio & Powell, 1983b).
Institutional theory highlights the importance of macro-level factors on CSR initiatives.
Scholars contended that institutional pressures enhance the CSR activities among firms
(Carbone & Moatti, 2011; Hoejmose et al., 2014). DiMaggio and Powell (1983a) argued
that three mechanisms lead to isomorphism (i.e., coercive, mimetic, and normative).
Coercive isomorphism is social process to institutionalise CSR due to political pressures
and legitimacy issues. It implies that firms have to respond to these pressures and take CSR
initiatives. In mimetic isomorphism, firm tries to imitate other firms to enjoy similar
benefits. Firms adopt mimetic isomorphism because of uncertainty. The normative
isomorphism is the pressure from professionals in their network. It indicates that firms
focus more on CSR initiatives if it is required by the legal system of the country. It also
reveals that institutional environment play a critical role in boosting the CSR activities in
firms, consequently it can attract more institutional investment and vice versa. Drawing on
institutional theory, this study implies that nonfinancial information disclosure plays an
important role in a country with weak institutional environment. Therefore, our second
hypothesis is as follows:
H
2
: Foreigner institutional investors will be more reluctant to invest in poor CSR-
performing EMDEs firms, especially when these firms operate in countries with weak
investor protection and low disclosure requirements.
3. Methodology
This section presents the research methodology of the study. The first section discusses
data sources of CSR and institutional ownership. The second section presents the
dependent variable (i.e., institutional ownership) while the third section presents the
independent variable (i.e., CSR). At the end, the control variables (i.e., firm level and
country level) are presented.
3.1 Data Sources
This section expounds the data and sample of this study. This study used institutional
ownership and firm level CSR performance data from 21 emerging economies for the
period of 2002-2018. We used probability sampling and collected the available data from
the databases. After collecting the institutional ownership and CSR performance data, we
combined it with country and firm level control variables. The firm level characteristics
were collected from World Scope while country level variables data were collected from
DataStream and World Bank. We also excluded all financial firms. Thus, our final sample
consists of 650 non-financial firms and 8756 firm-year observations.
3.2 Dependent Variables
This study examines the impact of CSR on foreign institutional ownership. We gathered
the holdings data from Fact Set ownership database. This dataset covers the equity holdings
by funds collected from different sources such as funds report, regulatory authorities, and
Arslan et al.
37
fund associations. This database covers the institutions with sophisticated investors such
as pension funds, mutual funds, and insurance companies as explained by (Ferreira &
Matos, 2008). Similarly, this database has been used by several existing studies on
institutional ownership (Aggarwal et al., 2011; Bena et al., 2017; Ferreira & Matos, 2008;
Kim et al., 2019). We used total institutional ownership ratio in percentage of market
capitalization at the end of each calendar year (IO_Total), the domestic institutional
ownership ratio in % of market capitalization (IO_Dom) and the FIO ratio in percentage of
market capitalization (IO_For).
Table 1: Institutional Ownership by Country
Country
IO_Total (mean)
IO_Dom (mean)
Poland
30.90%
20.56%
Hungary
29.00%
0.65%
Israel
24.65%
1.34%
Brazil
21.01%
2.99%
Mexico
16.36%
2.01%
South Africa
14.94%
5.05%
Thailand
14.04%
0.95%
South Korea
13.94%
0.52%
China
13.75%
1.30%
Turkey
13.41%
0.25%
India
13.01%
4.99%
Taiwan
12.54%
0.98%
Russia
12.51%
0.09%
Greece
12.17%
0.85%
Philippines
11.52%
0.23%
Indonesia
10.72%
0.46%
Czech Republic
10.69%
0.61%
Malaysia
9.82%
0.72%
Chile
8.22%
1.19%
Egypt
7.17%
0.08%
Morocco
1.34%
0.02%
Total
14.37%
2.18%
IO_Total represents the total institutional ownership ratio (in percentage of market
capitalization). IO_For represent foreign while IO_Dom represent the domestic
institutional ownership ration (in percentage of market capitalization)
Table 1 reveals the institutional ownership by countries. It can be seen that institutions hold
on average 14.37% of EMDEs firms' market capitalization which is lower than most of
developed countries (Aggarwal et al., 2011). Table 1 reveals that Poland has the highest
Corporate Social Responsibility and Institutional Investors
38
institutional ownership (30.90%) while Morocco has the lowest institutional ownership
(1.34%). On the other side, Hungary has the highest foreign ownership (28.35%) while
Poland has the highest domestic institutional ownership (20.56%). Malaysia, Chile, Egypt,
and Morocco have less than 10% of FIO. The higher amount of FIO among these EMDEs
countries reflects the government's efforts to attract more international investment by
providing a favourable business environment. China launched the Qualified Foreign
Institutional Investor Program in 2002 and increased the quota in 2012 from US$30 billion
to US$80 billion. Through this program, foreign investor need to get approval to buy “A
shares” (Zhao & Liu, 2019).
3.3 Independent Variables
This study examines the role of institutional investors in corporate social responsibility
(CSR); hence the key explanatory variable is corporate social responsibility. The study
specifically examines the firms' CSR activities that give benefit to the stakeholders and
behaviour of institutional investors towards such firms. Environmental (Env) and social
(Soc) dimensions are two main pillars of CSR and we have used these dimensions to
examine the impact of corporate externalities on stakeholders (Chen et al., 2020; Dyck et
al., 2019; Hartzmark & Sussman, 2019; Liang & Renneboog, 2017).
Environmental, social, and governance (ESG) investment approaches have evolved
considerably since their inception in the 1990s (Townsend, 2017). Many ESG indices were
introduced but mostly focused on the firm-level CSR performance of the U.S. and other
major developed markets. However, this coverage has expanded steadily over time due to
the evolving prominence of CSR information for the financial community. This also
attained evolving attention from researchers, academia, and policy makers around the
globe. Early CSR studies focused on U.S. firms and relied on the data developed by Kinder,
Lydenberg, Domini & Co., Inc. (KLD) (Graves & Waddock, 1994; Waddock & Graves,
1997; Wood & Jones, 1995). However, several international studies have been conducted
since the expansion of data coverage over time (Arslan, 2020; Dyck et al., 2019; Liang &
Renneboog, 2017; Roudaki & Arslan, 2017; Wang, Dou, & Jia, 2016). We collect CSR
data by using ASSET4 database from Thomson Reuters which has global coverage.
ASSET4 collects data from their original publicly available sources (i.e., CSR reports,
annual reports, news, stock exchanges, and companies’ websites) and reflects more than
750 individual points. This individual raw data is induced in eighteen categories, then
grouped into four pillars of CSR (i.e., Economic, environment, social, and governance) and
accumulate to single overall CSR score. These ratings are available from the year 2002,
covering more than 5000 large public firms. Among other major equity indices worldwide,
this coverage includes firms from MSCI Emerging Markets, DJSTOXX, MSCI Europe,
and MSCI World. These CSR ratings are objective since these rating agencies are not
financially dependent on rated firms. In addition, Thomson Reuters does not apply a tick
box approach to rate firms and firms are not assessed according to their compliance with
local regulation and international guidelines. However, CSR ratings reflect the firm’s
voluntary engagement in CSR strategies to manage opportunities and risks that firms assess
in contrast to their counterparts both nationally and internationally. Consequently, these
ratings are not dependent on the country specific context (Ferreira & Matos, 2008). CSR
Arslan et al.
39
ratings range from 0 to 100% and a relative measure which is equally weighted and
normalized and a high score indicates the high performance. CSR_Total represents the
overall CSR performance of the firms in all four areas (i.e., economic, environmental,
social, and governance). The score ranges from zero (0) to hundred (100) and higher score
represents higher CSR performance. CSR_Env represents the environment performance
and having a score of 0 to 100. The higher score reflects higher environmental performance.
It measures the firms' effect on non-living and living natural systems including water, land,
and air. It also reveals how a company generates long term shareholder value by employing
the best management practices. CSR_Soc represents social performance and having a score
of 0 to 100. The higher score is associated with higher social performance. It is a measure
of firm’s ability to develop loyalty with its customers and trust within the society, and
workforce by following best management practices.
The poor CSR performing firms are the main part of our analysis and therefore, based on
studies of La Porta, Lopez-de-Silanes, and Shleifer (2006) and Leuz et al. (2009), we
classified the countries according to a level of disclosure requirements ranging from 0 to
1. The countries that score below the median of 0.75 are classified as "low disclosure
requirements" while countries that score above the median of 0.75 are classified as "high
disclosure requirements". Poor_Total is a dummy variable of overall CSR score (beyond
median = 1, otherwise = zero). Poor_Env is a dummy variable of environmental score
(beyond median = 1, otherwise = zero). Poor_Soc is a dummy variable of social score
(beyond median = 1, otherwise = zero). We also used robustness tests by taking the ESG
scores from the new Thomson Reuters ESG score which is a substitution and enhancement
of ASSET4 ratings. Thomson Reuters ESG Controversy Score (ESGC) provides a
comprehensive and rounded evaluation of a firm’s ESG performance based on the reported
information in the ESG pillars with an ESG controversies overlay captured from global
media. ESGC_high is a dummy variable for controversies score ((beyond median = 1,
otherwise = zero). These new controversies scores provide an alternative CSR performance
proxy and help in detecting irresponsible firms. The explanatory variables data were
collected from Thomson Reuters ASSET4 and Thomson Reuters ESG scores CSR_total,
CSR_Env, CSR_Soc, Poor_Total, Poor_Env, and Poor_Soc variables data were collected
from Thomson Reuters ASSET4 while ESGC data was collected from Thomson Reuters
ESG scores.
Table 2 reveals the mean CSR performance by country. It reveals that overall CSR score
of firms operating in EMDEs firms is 46.37%. The study finds that Hungary has the highest
CSR performance score (70.56%) while Egypt has the lowest CSR performance (16.01%).
South Africa has the second highest CSR performance score (70.08%) while India has the
third highest CSR performance score (62.46%). This may be due to the fact that CSR
reporting is mandatory in South Africa and India (Eccles, 2015; Pandey & Pattnaik, 2017).
Chile (34.04%), Taiwan (33.29%), Poland (33.02%), China (22.07%), and Egypt (16.01%)
have the lowest overall CSR performance score.
Corporate Social Responsibility and Institutional Investors
40
The mean value of CSR environmental performance score is 50.58%. This score is slightly
lower than the study of Dyck et al. (2019). Liang and Renneboog (2017) argued that
Scandinavian firms are good performers of CSR performance and such firms are missing
in this study. Hungary has the highest CSR environment performance score (76.02%)
South Africa has the second highest score of CSR environmental performance (66.32%)
while India has the third highest score (65.67%). The mean of CSR social performance is
57.01%. Morocco has the highest CSR social performance score with 79.05% while China
has the lowest score (26.53%).
Table 2: CSR (Country Level)
CSR_Total (mean)
CSR_Env (mean)
CSR_Soc (mean)
Hungary
70.56%
76.02%
78.04%
South Africa
70.08%
66.32%
78.02%
India
62.46%
65.67%
72.09%
Thailand
60.24%
54.50%
63.03%
Brazil
56.20%
57.02%
69.01%
Czech Republic
54.50%
51.04%
71.23%
Turkey
53.78%
60.03%
57.40%
Malaysia
52.23%
43.54%
58.01%
Indonesia
50.35%
49.42%
65.09%
South Korea
49.32%
65.29%
59.06%
Russia
47.01%
50.03%
53.00%
Philippines
46.34%
40.02%
48.34%
Greece
43.01%
53.43%
58.91%
Mexico
42.09%
52.45%
56.03%
Israel
41.23%
42.56%
44.03%
Morocco
36.02%
43.49%
79.05%
Chile
34.04%
45.03%
47.58%
Taiwan
33.29%
51.25%
42.52%
Poland
33.02%
41.03%
42.10%
China
22.07%
28.45%
26.53%
Egypt
16.01%
25.61%
28.21%
Total
46.37%
50.58%
57.01%
CSR_Total represents the equal-weighted and normalized score of the firm's
performances in all of the four CSR pillars (i.e., economic, environmental, social,
and governance). CSR_Env represents the firms' environmental performance by
country. CSR_Soc represents the firms' social performance by country.
We also employed the t-test (parametric stats) to compare FIO across different CSR
performance levels because IO_For variable is normally distributed. Table 3 reveals the
Arslan et al.
41
difference in FIO is highly statistically significant across different levels of CSR
performance (both overall and by component). Table 3 reveals that foreign institutional
holdings are consistently lower in poor CSR-performing firms (weak) than in high CSR-
performing firms. Foreign ownership is even lower in worst CSR-performing firms
compared to those that have the highest CSR performance (best).
Table 3: Foreign Institutional Ownership by CSR Performance Level
CSR_Total
CSR_Env
CSR_Soc
Weak (below median)
13.04%
12.35%
12.23%
Strong (beyond median)
14.97%
15.01%
15.05%
Worst (bottom quartile)
12.02%
13.12%
12.01%
Best (top quartile)
17.08%
14.89%
17.04%
Strong versus Weak (p-value t-test)
0.0000
0.0000
0.0000
Best versus Worst (p-value t-test)
0.0000
0.0001
0.0000
CSR_Total is the overall CSR performance score; CSR_Env is the environmental
performance score; and CSR_Soc is the social performance score
3.4 Control Variables
3.4.1 Firm Level Characteristics
Existing literature has highlighted the importance of using firm-level characteristics in
expounding the behaviour of foreign institutional investors (Ferreira & Matos, 2008;
McCahery et al., 2016). This study used several firm level characteristics as control
variables such as leverage (debt divvied by assets), firm size (net sales in U.S. dollars), and
free float (the percentage of total shares in the issue accessible to ordinary shareholders
who hold less than 5% of shares). These variables are used by several previous studies
(Dam & Scholtens, 2012; Dyck et al., 2019). Researchers argued that control variables
such as firm size (Siz_Sal) (Gompers et al., 2003; Pfeifer & Sullivan, 2008), leverage (lev)
(Saleh et al., 2010) and free float (float) (Cox et al., 2004; Dam & Scholtens, 2012) may
affect FIO. Firm-level controls were obtained from World Scope for this study.
3.4.2 Country Level Characteristics
Existing studies documented the importance of institutional macro context for foreign
investors (Dyck et al., 2019; Hail & Leuz, 2006; Leuz et al., 2009). Therefore, we employed
country level control variables such as economic development (measure as the natural
logarithm of gross domestic product divided by population) (lnGDPperCap) and market
turnover (value of all year-end traded shares at the stock market in thousands of U.S.
dollars) (Mkt_Turn) to proxy for liquidity to examine their effect on FIO. The institutional
control variables were obtained from World Bank and DataStream.
Corporate Social Responsibility and Institutional Investors
42
4. Findings and Discussion
This section presents the findings and discussion of this study. The first section provides
the results of descriptive statistics and correlation analysis while the second section
presents the findings of poor CSR and FIO of sample firms. At the end, this section
provides results of CSR and FIO with respect to low and high disclosure requirements.
4.1 Descriptive Statistics
Table 4 presents the results of descriptive statistics of all the variables of the study. It can
be seen that FIO has a mean value of 14.37%, standard deviation of 0.121 with a minimum
of zero while a maximum of 98.20%. Similarly, total CSR score has mean value of 46.37%
with standard deviation of 0.314. It also has 2.30% minimum value while 96.20%
maximum value. Environmental CSR has mean value of 50.58% and standard deviation of
0.342. It has minimum value of 8.3% while maximum value of 97.50%. Social component
of CSR has mean value of 57.01% and standard deviation of 0.316. It has minimum value
of 3.9% and maximum value of 98.20%.
Table 4: Descriptive Statistics
Variable
N
Mean
Std. Dev.
Min
Max
IO_For
8756
14.37%
0.121
0%
98.20%
CSR_Total
4672
46.37%
0.314
2.30%
96.20%
CSR_Env
4672
50.58%
0.342
8.3%
97.50%
CSR_Soc
4672
57.01%
0.316
3.9%
98.20%
Siz_Sal
8734
15.02
1.413
4.6%
19.40%
Lev
8690
23.53
0.189
0%
735.21%
Float
8470
65.34
0.253
0%
100%
lnGDPperCap
6536
9.3
0.78
6.70%
11.30%
lnMkt_Turn
5345
19.78
1.23
13.90%
21.40%
IO_FOR represents the holdings (end-of-year) by institutions located in a
different country from where the stock is listed. CSR_Total is an equal-weighted
and normalized score that reflects a company’s performance in all of the four
CSR components (i.e., economic, environmental, social, and governance).
CSR_Env) and CSR_Soc are environmental and social performance scores,
respectively. Siz_Sal is the natural logarithm of net sales. Lev is debt-to-assets
ratio. Float is the percentage of shares that are not held by large block holders
(shareholders that hold more than 5% of the outstanding shares). lnGDPperCap
is the natural logarithm of gross domestic product (GDP) divvied by total
population. lnMkt_Turn is the natural logarithm of total value of all traded shares
(end-of-year) on a stock market.
4.2 Correlation Analysis
The results of correlation analysis are presented in Table 5. It reveals that foreign
institutional ownership (IO_For) has positive relationship with total score of CSR
(CSR_Total). It also has positive relationship with Environmental score (CSR_Env) and
Arslan et al.
43
Social CSR (CSR_Soc). These findings are well supported from the studies of Dyck et al.
(2019) and Maqbool et al. (2020). Total CSR also has positive relationship with social and
environmental CSR. Table 5 reveals that institutional ownership has positive relationship
with firm size, floating share (float), GDP, and value of all traded share (lnMkt_Turn) while
negative relationship with leverage (Lev).
IO_For CSR_Total CSR_Env CSR_Soc Siz_Sal Lev Float
lnGDPperCa
p
lnMkt_Tur
n
IO_For 1
CSR_Total 0.002317 1
CSR_Env 0.015890 0.007466 1
CSR_Soc 0.003496 0.013948 0.033657 1
Siz_Sal 0.003002 0.018059 0.022166 0.004545 1
Lev -0.014443 -0.020689 -0.011166 0.002548 0.002947 1
Float 0.000254 0.005796 0.004181 -0.013283 -0.008654 -0.006583 1
lnGDPperCap 0.006797 0.001946 -0.001241 0.011474 -0.008898 -0.013543 -0.015231 1
lnMkt_Turn 0.018981 0.000625 0.005311 0.014883 0.003145 0.005886 0.003458 0.026283 1
Table 5 Pearson Correlation Analysis
Corporate Social Responsibility and Institutional Investors
44
4.3 Results of Poor Corporate Social Responsibility and Foreign Institutional Ownership
In order to assess whether foreign institutional investors avoid poor CSR firms, we
estimated a generalized least squares (GLS) regression using our firm-year panel. GLS is
employed to avoid heteroskedasticity issues and serial correlation issue (Gujarati et al.,
2012). It may also improve the efficacy of statistical estimate (Hoq et al., 2010). The FIO
was taken as a dependent variable. Our key explanatory variables were dummy variables
that equal to one if the firm has a below-median CSR performance (overall then by
component). We employed a firm level and country level control variables. We also took
industry, year and country fixed effects.
Table 6 reveals the results of the panel regression of corporate social responsibility on FIO
by employing Generalized Least Squares (GLS) for non-financial firms from 21 EMDEs
over the 2002-2018 period. IO_For was taken as a dependent variable which is the % of
FIO as a fraction of market capitalization. The main independent variables were:
(Poor_Total) which is dummy variable of overall CSR score (beyond median = 1,
otherwise = zero), (Poor_Env) which is dummy variable that equals one if the firm has an
environmental score below the median and zero otherwise, and (Poor_Soc) which is
dummy variable that equals one if the firm has below the median social score and zero
otherwise. Siz_Sal, Lev, and Float represented the firm level while lnGPDperCap and
lnMkt_turn represented country level control variables. Indicator variables for the country,
year, and industry groups were included but not reported.
Table 6 reports the results of GLS regressions of foreign institutional ownership with
explanatory variables. A total of three model were executed. Consistent with our
hypothesis, it can be seen that poor performing firms' dummies (Poor_Total, Poor_Env,
and Poor_Soc) have a negative relationship with FIO. These results provide support to the
studies of Dyck et al. (2019) and Xiang et al. (2020).
Arslan et al.
45
Table 6: Foreign Institutional Ownership and Corporate Social Responsibility
(Model 1)
(Model 2)
(Model 3)
Poor_Total
-0.0121***
(0.00175)
Poor_Env
-0.000134
(0.00182)
Poor_Soc
-0.0109***
(0.00179)
Siz_Sal
0.00793***
0.00992***
0.00834***
(0.000798)
(0.000877)
(0.000855)
Lev
-0.0536***
-0.0556***
-0.0586***
(0.00508)
(0.00512)
(0.00503)
Float
0.152***
0.149***
0.178***
(0.00523)
(0.00510)
(0.00487)
lnGPDperCap
0.0499***
0.0495***
0.0471***
(0.0129)
(0.0118)
(0.0123)
lnMkt_Turn
0.0132***
0.0141***
0.0128***
(0.00349)
(0.00356)
(0.00339)
Constant
-0.762***
-0.751***
-0.728***
(0.103)
(0.108)
(0.113)
Observations
2850
2850
2850
Number of firms
534
534
534
Country FE
Yes
Yes
Yes
Year FE
Yes
Yes
Yes
Industry FE
Yes
Yes
Yes
Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
Poor_Total represents the overall CSR score dummy; Poor_Env
represents environmental performance score dummy; Poor_Soc
represents the social performance score dummy; Siz_Sal represents the
firm size; Lev represents the leverage; Float represents the free float;
GPDperCap represents the economic development; Mkt_Turn represents
the market turnover
Model 1 reveals that FIO has a significant negative relationship with poor total CSR
performance. Model 2 reveals that FIO has a negative association with poor environmental
Corporate Social Responsibility and Institutional Investors
46
performance, but this relationship is not significant. Model 3 reveals that FIO has s
significant negative association with poor social performance. These findings support our
first hypothesis that foreign institutional investors avoid investments in firms with poor
CSR performance and this is a cut-off criterion for foreign capital allocation. Li et al.
(2021) also found that qualified institutional investors can drive CSR activities and
sustainability report of those firms tend to be longer as compared to their counterparts. We
also performed regressions using CSR scores rather than dummies and found positive
relationship between CSR and foreign institutional ownership, but those findings are not
reported here. Several other studies also support our findings. Scholars contended that
foreigner institutional investors invest more in those firms which have higher sales, more
investible shares (Leuz et al., 2009), and low leverage (Graves & Waddock, 1994). At the
end, Table 6 reveal that FIO has a positive association with economic development and
stock market liquidity.
4.4 Results of CSR, Institutional Ownership and Disclosure Requirements
To test our second hypothesis, we re-estimated our results by dividing the sample according
to country level transparency and disclosure requirements. Leuz et al. (2009) argued that
investors are more sensitive to governance issues rather CSR issue while making
international investment decisions. Following the contention of Leuz et al. (2009), we
classified the countries according to level of disclosure requirements, developed by La
Porta et al. (2006). In this study, the disclosure requirements were ranged from 0 to 1. The
sample countries were divided into low disclosure requirement and high disclosure
requirement. Countries that have score below the median of 0.75 were classified as low
disclosure requirements while above the median of 0.75 were classified as high disclosure
requirements.
Table 7 reveals the results of GLS regressions of CSR on FIO, using disclosure
requirements. Model 1, 2, and 3 have revealed the results of firms in countries with low
disclosure requirements while Model 4, 5 and 6 have revealed the results of firms in
countries with high disclosure requirements. Model 1 reveals that poor CSR performance
dummy has a significant negative association with FIOs. Interestingly, Model 4 also
reveals similar findings however, it shows insignificant negative relationship between CSR
and foreign institutional ownership. This indicates that institutional investors are not solely
motivated by disclosure requirements. These findings support the argument of Mahoney
and Roberts (2007) who contended that institutional investors consider both financial and
nonfinancial information while making investment decisions. It indicates the CSR
practices can reduce the stock volatilities that can increase the financial performance and
may help in attracting the foreign institutional investors. The findings of Model 2 and 5
provided the evidence that environmental performance does not shape the behaviour of
foreign institutional investors. These findings contradict the argument of Yu and Zheng
(2020) who contended that qualified foreign institutional investors prefer to invest more in
firms with strong CSR reporting. Similar to findings of Table 6, Model 3 and 6 have
revealed that poor social performance has a significant negative association with FIO in
both low and high disclosure requirements countries. However, the level of significance is
lower in high disclosure requirements compared to low disclosure requirements. It implies
Arslan et al.
47
that institutional factors play pivotal role in boosting the CSR initiatives and may help in
attracting institutional investors. This also implies that institutional investors might have
their own interests and supports the findings of Hoskisson et al. (2002).
Table 7: Foreign Institutional Ownership, CSR, and Disclosure Requirements
Low Disclosure Requirements
High Disclosure Requirements
(Model 1)
(Model 2)
(Model 3)
(Model 4)
(Model 5)
(Model 6)
Poor_Total
-0.0167***
-0.00341
(0.00456)
(0.00239)
Poor_Env
-0.00324
-0.00218
(0.00451)
(0.00269)
Poor_Soc
-0.0115**
-0.00863***
(0.00463)
(0.00345)
Siz_Sal
0.0132***
0.0142***
0.0154***
0.0142***
0.0143***
0.0234***
(0.00231)
(0.00246)
(0.00224)
(0.00171)
(0.00156)
(0.00178)
Lev
-0.0694***
-0.0702***
-0.0704***
-0.125***
-0.128***
-0.146***
(0.0124)
(0.0135)
(0.0129)
(0.00987)
(0.00966)
(0.00976)
Float
0.170***
0.171***
0.184***
0.246***
0.234***
0.245***
(0.00945)
(0.00908)
(0.00976)
(0.00902)
(0.00901)
(0.00911)
lnGPDperCap
0.0304
0.0298
0.0221
0.0401
0.0302
0.0324
(0.0265)
(0.0253)
(0.0345)
(0.0411)
(0.0424)
(0.0445)
lnMkt_Turn
0.00678
0.00732
0.00687
0.0162***
0.0168***
0.0197***
(0.00846)
(0.00798)
(0.00783)
(0.00587)
(0.00603)
(0.00603)
Constant
-0.523**
-0.512**
-0.532**
-0.621*
-0.606
-0.601
(0.217)
(0.230)
(0.213)
(0.353)
(0.398)
(0.398)
Observations
973
973
973
876
876
876
Number of
firms
213
213
213
256
256
256
Country FE
Yes
Yes
Yes
Yes
Yes
Yes
Year FE
Yes
Yes
Yes
Yes
Yes
Yes
Industry FE
Yes
Yes
Yes
Yes
Yes
Yes
Standard errors in parentheses*** p<0.01, ** p<0.05, * p<0.1
Poor_Total represents the overall CSR score dummy; Poor_Env represents environmental performance score
dummy; Poor_Soc represents the social performance score dummy; Siz_Sal represents the firm size; Lev
represents the leverage; Float represents the free float; GPDperCap represents the economic development;
Mkt_Turn represents the market turnover
Corporate Social Responsibility and Institutional Investors
48
4.5 Robustness and Additional Tests
We also performed robustness tests to check the validity of our main findings. We analyzed
the alternative classifications of foreign institutional investors. We drew our sample of poor
CSR performing firms (Firms that have below median CSR performance are considered as
Poor CSR performing firms) from ASSET4 database and therefore, our results could be
driven by the rating methodology. To avoid this, we took an alternative CSR sample to
detect "bad performers". Recently, Thomson Reuters has added new ESG Controversies
Scores (ESGC). Controversies variable (ESGC) reflects a firm's exposure to the
environment, social, and governance controversies and negative events reflected in the
global media. Similar to our main findings, we assumed ESGC to be negatively associated
to FIO. Table 8 reports these results.
Table 8: Foreign Institutional Ownership and CSR Controversies
ESGC
-0.0534***
(0.00541)
Siz_Sal
0.00801***
(0.000903)
Lev
-0.0584***
(0.00521)
Float
0.181***
(0.00501)
lnGPDperCap
0.0559***
(0.0182)
lnMkt_Turn
0.0125***
(0.00339)
Constant
-0.692***
(0.109)
Observations
2848
Number of firms
534
Country FE
Yes
Year FE
Yes
Industry FE
Yes
Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
ESGC represents the controversies; Siz_Sal represents the firm
size; Lev represents the leverage; Float represents the free float;
GPDperCap represents the economic development; Mkt_Turn
represents the market turnover
Results confirmed our assumption, and we found a significant negative association
between CSR controversies and FIO. These results support our hypothesis that foreign
institutional owners avoid investing in CSR controversies. We also run the same regression
and use a controversial score dummy (that equals one if a firm has an above-median
Arslan et al.
49
CONTROV_score) and found similar results. However, we did not report those results
here. The investments in "sin" stocks could lead to reputational concerns because many
large institutional investors need to report their holding (e.g., 13F filings). In many cases,
the large money managers ditched their stock holdings in sin stocks due to the pressure
from environmental activists (Hong & Kacperczyk, 2009; Sandberg, 2008) and other
ethical issues (Hong & Kacperczyk, 2009; Hudson, 2005). We also found similar results
for our control variables. These findings also support the argument of institutional theory
that institutional pressures are important in shaping the behaviours of the firms.
5. Conclusion, Recommendations and Implications of the Study
This study investigated the relationship between CSR and foreign institutional ownership.
This study used 8756 firm year observations from 21 EMDEs and found a significant
negative association between CSR and foreign institutional ownership. The results indicate
that foreign institutional investors are motivated by CSR activities and intend to invest
more in firms with strong CSR reporting. This study also found that foreign institutional
investors are motivated by financial and nonfinancial information. And institutional
investors invest even less when firms are located in countries with low disclosure
requirements. However, this relationship is insignificant. As evident from existing
literature, the principal-principal problem exists in emerging countries. The institutional
investors may help in reducing such problem and can monitor the role of owners and
management. Overall, the study supports the arguments of stakeholder theory and
integrates the roles of stakeholders in firm’s decision-making process.
The findings of firm level control variables reveal that foreign institutional investors invest
in a large firm with freer float shares. In contrast, foreign institutional investors avoid
investing in firms with high leverage. The findings of county level control variables reveal
that foreign institutional investors invest in firms that operate in countries with high
economic development and market turnover. The study also supports the argument of
institutional theory that institutional pressures play a pivotal role in shaping the behaviour
of the firms. Coercive, mimetic and normative pressures are important to attract more
institutional investments. Our findings are robust to alternative CSR measure and foreign
institutional investors’ classification.
The study contributes to existing literation particularly in EMEDs where little is known.
The study extends and complements the literature and highlights the importance of agency,
stakeholder and institutional theories in emerging economies and developing economies.
It provides theoretical support by confirming the importance of institutional pressures and
supports the argument of DiMaggio and Powell (1983b) who contended the isomorphism
as mechanisms to institutionalize CSR. The study also highlights the role of stakeholders
in decision making process of firms and supports the stakeholder theory.
The study also has some managerial implications and offers a precise understanding to the
managers about behaviour of institutional investors and role of institutional environment
in getting access to capital market and reduce cost of capital. Thus, the study helps in
analysing the importance of financial and nonfinancial information for foreign institutional
Corporate Social Responsibility and Institutional Investors
50
investors while making investment decisions. It is recommended that managers need to
disclose more information and involve stakeholders in decision making process. Managers
also need to respond to institutional pressures and raise their engagement in CSR issues
especially when these firms are located in weak institutional environment.
It is also noticed that firm’s engagement in CSR initiatives can gain stakeholders support
even it is not mandated by security regulators. Therefore, it motivates the management,
policy makers, and investors to develop and promote CSR practices.
5.1 Limitations and Future Research Directions
The study also presents some limitations and offers directions for future research. The
study only considered social and environmental components of CSR. Future studies may
consider all four components of CSR. The study only considered quantitative dimensions
of CSR and employed quantitative method to analyse the data. Future studies may consider
both quantitative and qualitative dimensions and use mixed method approach to analyse it.
Qualitative dimensions may help in highlighting the CSR awareness among stakeholders
in emerging countries and potential barriers in true implementation of CSR policies.
Grant Support Details / Funding
This research was supported and funded by the research sector, Arab Open University,
Kuwait.
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