Stakeholder Pressures and Corporate Practice of Environmental Responsibility: Evidence of Corporate Environmental Reporting and Investment in China

Abstract

The mainstream research on institutional strategies related to corporate social responsibility focuses on the context of developed economies, whereas limited attention has been paid to the relevance of these strategies in developing countries (Marquis & Raynard, 2015). China is a fast-rising transitional and developing economy, where market mechanisms are incomplete and formal institutions (e.g., legal infrastructure) are underdeveloped. Therefore, western theories related to institutional strategies might not be applicable in China. As firms globalise, it is important to understand how firms strategically handle different types of stakeholder pressures using various relational strategies (one group of institutional strategies) to survive in an institutional context like China. This thesis examines corporate relational strategies associated with the practice of Corporate Environmental Responsibility (CER) in China, which has been continuously promoted by the Chinese government over the last 20 years. This thesis is comprised of three related studies examining CER practice in China. Article 1 reviews both English and Chinese literature on corporate social responsibility (CSR). Then it constructs a general framework for CER practice that can be adapted for different contexts and further develops an extended CER framework for the Chinese context. This article contributes to the CSR literature by, first, showing the organisational journey a firm can take towards environmental sustainability through proactive CER commitments to address legitimacy pressures from key stakeholders and, second, by demonstrating how to adapt a general CER framework to a different institutional context. Given that the Chinese government is the primary stakeholder that drives CER activities in China, Article 2 investigates when and why firms employ substantive or symbolic strategies under the pressure imposed by the government regarding substantive reporting. Drawing on the extended framework developed in Article 1, this article proposes a model to test hypotheses related to the impact of political connections and levels of political monitoring on firm environmental reporting. Using a sample of 306 Chinese listed companies during the period 2014 – 2015, this study finds that a firm’s political connections can buffer the firm from the need to pursue a substantive reporting strategy. Moreover, compared with state-owned enterprises (SOEs), private firms are more likely to employ substantive reporting strategies when they are subject to high levels of political monitoring. Article 2 adds a political perspective to the CSR literature by showing that a firm’s political ties and levels of political monitoring have different impacts on its preference for symbolic or substantive reporting strategies. Article 3 examines whether and how organisational visibility (company characteristic) and environmental reporting (CER- based relational strategy) influence shareholders’ valuation of corporate environmental investment. Using a sample of 367 firm-years listed on the Shanghai stock exchange during the period 2016-2019, higher levels of public attention (one dimension of organisational visibility) and monetary environmental reporting are found to be associated with lower short-term negative effects of environmental investment on firm value. Further analyses show that for firms making large environmental investments, both dimensions of visibility (i.e., public attention and analyst coverage) and substantive emissions reporting are related to a lower negative effect of environmental investment on firm value. In this regard, Article 3 enhances our understanding of the theoretical links between corporate environmental efforts and firm value creation as illustrated in the extended CER framework produced by Article 1. It adds to the literature by showing that substantive environmental reporting, or strategies that focus on improving organisational visibility, are useful relational strategies to handle stakeholder pressures by enhancing shareholder management, which in turn positively leverages shareholders’ evaluation of firm environmental investment. In summary, this thesis adds to the literature on corporate institutional strategies in China by demonstrating how the idiosyncrasies of the Chinese institutional context can be incorporated into a framework for studying Chinese CER-based institutional strategies. Moreover, the three articles jointly contribute to the understanding of CER practice in China by showing the effects of CER-based relational strategies that firms undertake to address legitimacy pressures from different stakeholders.