Firm Responses to Nonprescriptive Pollution Regulation: Evidence from China’s Corporate Social Responsibility Reporting Mandate

Abstract

We employ China’s mandatory corporate social responsibility (CSR) reporting requirement as a natural experiment to evaluate firm-level responses to a Chinese rule that required public firms to issue CSR reports beginning in 2009. Our difference-in-differences analyses of firm-level data indicate that firms required to issue CSR reports decreased overall pollution levels after the mandate. Conventional wisdom (the “Traditional View”) argues that pollution reductions cannot be achieved without profit sacrifice. Conversely, under the Porter Hypothesis, non-prescriptive regulations can stimulate innovations that improve process efficiency and lead to both pollution reductions and improved long-term shareholder returns. Our results reveal evidence of reduced asset returns among firms required to issue CSR reports after 2008, consistent with both hypotheses. However, consistent with the Porter Hypothesis and not the Traditional View, positive three-day stock returns surrounding the release of CSR report information suggest that shareholders favorably view the overall long-term effects of required CSR reports.