1. Introduction
In the last three decades, CSR reporting has received considerable attention. CSR reporting decreases the information gap between stakeholders and the firm, which leads to the minimization of the cost of capital [
1] and increase in firm value [
2,
3]. Additionally, it provides a mechanism through which a company can improve its reputation [
4].
We have investigated the effect of firm performance on corporate social responsibility (CSR) reporting through the lens of the stakeholder, slack resources, and legitimacy theories, expanding on prior literature [
5,
6,
7,
8,
9,
10]. The results of all these investigations are mixed. Economic benefits for shareholders has been a conventional consideration in economically developed and developing countries [
9,
11]. More research is called for in the context of economically developing countries, such as China [
5,
7,
8].
It is essential to grasp the factors that influence a company’s decision to report CSR information. Stakeholders and investors rely on this information to assess the CSR reporting of the firm. Previous studies have examined the numerous characteristics of corporate governance, such as leverage and size of the firm [
12,
13,
14] and their impact on CSR reporting. Financial performance remains a key variable which impacts CSR performance and reporting. The impact of this variable was tested in the context of voluntary CSR reporting by Chinese companies. Chinese companies have been selected as China is the largest exporter in the world and the country also has the largest share of CO
2 emissions in the world (Union of Concerned Scientists Cambridge, USA 2017). As a result, corporate social responsibility, which covers environmental impacts of business activities, needs to be a key consideration, requiring detailed analysis.
The main aim of reporting CSR related activities is to provide the necessary information that will affect the perception of society and stakeholders about the firm and its management [
15]. The challenge for the firm is not only reporting the CSR activities, but also managing the perception of the stakeholders about CSR reporting [
16]. In China, the government is the basic driver of corporate social responsibility, as most companies are state-owned [
17,
18]. The Chinese economy is described as a new and transitional economy with unique characteristics that are diverse from those of Anglo-Saxon countries. As a result, the factors which impact CSR in China are also different from influencing factors in other countries.
Regardless of where a company is based, traditionally, the motivation has been to maximize financial wealth [
19] while ignoring factors, such as environmental impacts. However, today business has multiple stakeholders who have social and environmental expectations about business performance. Stakeholder theory posits that firms need to address stakeholder expectations [
20]. Meeting stakeholder expectations requires financial resources. Slack resource theory highlights that firms with higher profitability undertake greater CSR action and reporting [
21,
22]. CSR reporting is a strategy for managing societal perceptions regarding social and environmental impacts [
12,
23]. Although the Chinese Central Government has been actively promoting the importance of CSR to enterprises and urging them to implement CSR practices [
24], CSR reporting is still in the initial stage for Chinese companies [
25]. As a result, various corporation-related factors have an impact on the amount of CSR reporting undertaken by Chinese companies. For example, Chinese firms focus on profitability when deciding to report CSR activities due to the lack of regulation and stakeholder influence [
9] to the same degree as that found, for example, in European countries.
In our study, the CSR reporting index is considering as the dependent variable, and our research is based on a sample of 4257 firm-year observations. The observation period covers the years from 2008 to 2015. We find that average firm performance positively correlated to CSR reporting and, furthermore, better-performing firms demonstrate extra anticipation of reporting CSR information than the worse-performing firms. Our results remain consistent after controlling for endogeneity issues.
This study contributes to the literature in two ways. First, most studies have focused on the CSR impact on firm performance FP [
5,
7,
8]. We investigate the effect of firm performance on CSR reporting [
9,
26,
27]. Second, most studies have considered economically-developed countries [
28,
29]. Other countries, with different organizational factors, such as culture and control (influence through ownership), may have different perspectives and expectations for CSR issues. Our focus is on China, which is the largest CO
2 emitter in the world [
30].
The rest of the study organized as follows:
Section 2 represents the literature review and research hypotheses;
Section 3 explains the methodology;
Section 4 represent the results and, finally,
Section 5 represents the conclusion.
2. Literature Review and Research Hypotheses
Traditionally, the essential motivation behind firms has been to minimize agency cost and maximize stockholder wealth by meeting profit maximization expectations of investors [
19]. However, today, firms work internationally, where they also likewise make contracts with moneylenders, clients, and suppliers with diverse social and environmental policies. Thus, companies must satisfy the social and environmental policies, as well as broader stakeholder expectations. Stakeholder theory posits that long-term survival of a firm depends on tending to the issues of stakeholders and, in this scenario, CSR is expanded to include business commitments to the public and stakeholders [
20]. According to slack resource theory, higher levels of a firm’s profitability foster the individual firms to report more CSR activities. Therefore, the firm’s original behavior towards CSR reporting depends on the availability of surplus economic resources. Better firm performance is, therefore, more likely to lead to surplus financial resources [
22], which can provide the firm with a chance to invest more in CSR-related activities, whereas a lower economic performance might lead to decreased CSR-associated activities [
21].
As per the legitimacy perspective, better-performing firms need to show their commitments to community and social interest and deliver comprehensive report more fully on CSR activities to avoid regulations [
31,
32]. It is due to the availability of financial resources that firms would undertake more CSR performance and CSR reporting. The proponents of legitimacy theory perceive CSR information as the strategy for managing the perceptions of society regarding the social and environmental impact of business operations [
23]. However, the current evidence is mixed. Roberts [
33], Haniffa and Cooke [
34], and Alnajjar [
35] confirm a positive, and Neu and Warsame [
36], establish a negative relationship, while Reverte [
14] and Cormier and Magnan [
13] have not obtained any noteworthy association between firm performance and CSR reporting. These different results are due to institutional and cultural differences between countries [
12]. Chinese firms primarily consider profitability when deciding to report CSR activities due to a lack of regulatory costs and influence from stakeholders [
9]. Therefore, when the company has good performance results, this motivates and encourages the implementation of CSR reporting.
According to Jamali [
11], in the developed market, creating the most significant benefit for shareholders is a top priority, measured through business performance. Zu and Song [
27], by using the survey method, showed that managers also looked at performance before considering the level of CSR disclosure. However, this will differ in the economy between developed and emerging markets [
9]. Therefore, more research is needed to confirm this relationship [
5,
7,
8].
Ghelli [
37] investigated the association between the disclosure of corporate social responsibility and firm performance. The sample included 322 Fortune 500 companies, and the author collected the firm performance information from the ORBIT database and information related to CSR was collected from the KLD database. The findings proved the positive and significant association of CSR with Tobin’s Q and ROA. Nevertheless, ROE was not found to be significantly associated with CSR reporting.
Haniffa and Cooke (2005) found that firms with good performance lead to more information relating to CSR to legitimize their existence. The positive association between firm performance and CSR reporting is due to management opportunities and suppleness to issue circulation of more CSR activities to stockholders. Gamerschlag and Möller [
38] found a positive association between firm performance and disclosures related to the environment. Tagesson and Blank [
39] found that if the firm has good financial performance, there is a positive association between CSR reporting and the firm’s financial performance, and firms can bear the cost of CSR reporting.
Li and Luo [
9] investigated the nexus between firm performance and CSR information of listed firms in China in the year 2008. The sample data was 1574 non-financial listed firms from the China Stock Market and Accounting Research (CSMAR) database. CSR information was collected from the Bluebook of CSR reporting in 2009. ROA was used as a proxy of firm performance. The results confirmed that firms with a better return on assets led to better quality CSR reporting. A positive FP and CSR relationship suggest that CSR commitment generates the condition of preparing reports which meet the needs of stakeholders even if there is no substantial improvement in CSR commitment and performance (reputational value and return clients). According to Jiraporn and Jumreornvong [
40] older companies with stable performance more aggressively participate in the CSR activities in which there is a focus on environmental performance. Our research builds on Li et al.’s work by considering a larger sample of Chinese companies and by covering a larger time frame from 2008 to 2015.
Based on the above discussion, we contend a positive association between firm performance and CSR reporting among Chinese firms.
Hypothesis (H1): Firm performance has a positive effect on CSR reporting.
Hypothesis (H2): High performing firms have a positive effect on CSR reporting than low performing firms.
5. Conclusions
We have explored the effect of firm performance on CSR reporting through the lens of the stakeholder, slack resources, and legitimacy theories. Evidence indicates that firm performance has a significant influence on CSR reporting and, specifically, firms with better performance report more on CSR activities than those with lower performance. Our findings remain the same after controlling for the problem of endogeneity. Our results have implications for the development of CSR reporting in developing countries, like China: that financially-solid performing companies undertake more CSR reporting. With increasing stakeholder pressure more companies are bound to undertake CSR activities and reporting.
Research tends to understand CSR reporting in a variety of settings. CSR reporting supports investors in obtaining non-financial information beyond the company’s financial statements. For regulators, the level of presentation and disclosure of CSR reporting serves as a “signal" to implement or change legislation which impacts CSR activities and reporting.
This study has highlighted the state of influence on CSR reporting of Chinese companies in the current context. Our results have confirmed that CSR reporting is a legitimacy tool for better financially-performing companies in China. This is in spite of the government pressure to undertake CSR activities and reporting. The main problem that Chinese companies face at present is confusion. As CSR activities and reporting are in infancy, Chinese companies are not very confident regarding CSR focus. From a legitimacy angle, we propose that Chinese companies should allow stakeholders (in addition to the government), such as employees, customers, media, and NGOs, to determine the key areas of concern and improvement for different Chinese companies to consider. Chinese companies should also use CSR reporting to determine key areas that require their attention. In other words, Chinese companies should use CSR reporting as an internal audit tool to determine their CSR agenda. Our paper has some limitations. First, we concentrated on the overall CSR index. A detailed analysis of various forms of CSR and their stakeholder impacts can be undertaken in the future. Future studies should apply the specific CSR disclosures, such as environment and sustainability disclosures; disclosures on the protection of employee and customer interests, disclosures on the protection of shareholder interests, and other CSR techniques, like content analysis, such as the number of words, sentences, paragraphs, or other methods. Secondly, this research is restricted to firm performance indicators, like Tobin’s Q, to measure firm financial performance. The future investigation could apply more firm performance indicators (both accounting-based and market-based performance, e.g., stock return, and price earnings ratio) to explore the correlation between firm performance and CSR reporting.