Political legitimacy and CSR reporting: Evidence from non-SOEs in China

Abstract

This study explores the corporate social responsibility (CSR) reporting initiatives of Chinese non-state-owned enterprises (non-SOEs) after losing their political connections due to exposure of corruption scandals. Using difference-in-differences estimation, we show that firms are more likely to issue CSR reports voluntarily after losing their political connections. This phenomenon is more prevalent for firms facing severe financial constraints, those located in provinces with low marketisation, and those in industries with high competition. Our mediation analysis suggests that a reduction in profitability serves as a channel through which the loss of political connections influences firms' decision to disclose CSR. Furthermore, we find that the loss of political connections reduces economic benefits for corruption-related firms. These results imply that non-SOEs voluntarily disclose their CSR reports to build political legitimacy, which is valuable capital for firms to maintain their competitiveness in the market. Our results are robust to alternative measurements of the key variables and rule out several alternative explanations.