Does the Chinese Market Respond to Corporate Philanthropy?

In March, China Policy Institute published a study questioning the market reaction to Chinese corporate philanthropy. This topic is an important one as corporate social responsibility (CSR) gains ground in China and the market pays more attention to those companies exhibiting responsible and generous business practices. In the weeks and months following the Sichuan earthquake, the public showed considerable favoritism to companies that donated money and resources to the area. Conversely, many companies that failed to give to the standards of the public were lambasted and experienced a decline in their stock market.

The CPI report takes a look at this from the market perspective using the Sichuan earthquake as a case study. The report seeks to answer three question:

1. Do government-controlled companies have the same incentives to increase corporate value through philanthropic giving as private firms?
2. For government-controlled companies, is donation a genuine manifestation or an ingratiating attempt?
3. Can the market distinguish genuine intention from ingratiation for government-controlled companies?

Simply approaching the issue by evaluating companies’ corporate social responsibility (CSR) initiatives in broad terms is not adequate for several reasons. First, CSR practices in China are difficult to track and the concept itself is voluntary. Second, there is no uniform reporting style or standard method that companies use to announce their CSR practices. Third, CSR has many interchangeable components that may or may not include charitable giving, which further makes the evaluation of market reaction challenging.

Philanthropic giving during the Sichuan earthquake provided an opportunity to evaluate the effects of this aspect of CSR on the Chinese market because many companies chose to publically share their financial and in-kind donations following the disaster. The report analyzed 136 Chinese companies listed on www.cninfo.com.cn (Chinese only) and evaluated the cumulative abnormal return (CAR) and average abnormal return (AAR) of their stock over a brief period of time following the earthquake. Comparisons between these companies were made based on their size (small or large) and whether they were government-controlled or private.

The resulting analysis of the study showed these findings:

1. The earlier a company announced their donations publically combined with the amount of money donated showed a direct correlation with the market response in comparison to companies in the control group. This finding shows that the public was watching to see how companies would respond to the market and made their approval and disapproval felt in a significant way.
2. Surprisingly, the study showed that the market response to government-controlled and private companies was fairly indifferent despite the fact that private companies made their donations earlier and donated more on average than government-controlled companies. The report concludes, “donations made by government-controlled companies were more an ingratiating effort than a genuine manifestation.” These companies are more likely to have a monopoly on their services provided and less of a need to support their reputations through speedy philanthropic giving as do private companies. Regardless, it made little difference to the market.
3. The market also reacted indifferently to the amount of money given by large companies, whereas there was a dramatic difference in the market response to small companies with those that gave large donations receiving a much more positive jump in share price.
4. The study found that the market’s reaction to larger corporations was more positive than to smaller ones. The authors conjecture that this is either due to the fact that most large companies are government-run or that it is easier for them to gain “reputation capital” than private companies. Donations given to the government for relief efforts were a significant part of total money given for earthquake relief efforts.

As one expert argues (paraphrased by the report), “not all charitable giving can increase firm value and only such giving that is perceived to be a genuine manifestation of the underlying firm’s social responsiveness will generate strategic value.” We noticed this trend among the public’s reaction to the earthquake donations. Even so, the market did react positively to companies as a whole that gave charitable donations to the earthquake. The motives and benefits for large and small companies, private and government-owned are different and the market reactions to them are not uniform. Overall this study shows that companies need to carefully evaluate their philanthropic giving practices against market expectations.

—Georgia