Influence of distracted mutual fund investors on corporate ESG decoupling: evidence from China

Abstract

Purpose This study aims to explore whether investors’ inattention is associated with firms’ environmental, social and governance (ESG) decoupling, which is defined as the misalignment between the implementation and incorporation of ESG policies. Design/methodology/approach Focusing on a sample of the components of ESG ratings for China Securities Index (CSI) 300 companies between 2017 and 2019, the authors test the relationship between firms’ ESG decoupling level and mutual fund investors’ distraction by applying exogenous shocks to their portfolios. Findings The results show that firms with distracted mutual fund investors engage in more external than internal ESG actions, leading to a high ESG decoupling level. Mutual fund investors use “threat of exit” rather than “voice” as a governance mechanism to influence corporate ESG decoupling. While external ESG actions mitigate stock price crash risk, internal ESG actions increase firm value; firms with a high ESG decoupling level suffer lower valuations. Practical implications This study has implications for increasing the congruence between firms’ external and internal ESG actions, thereby improving firms’ ESG performance and long-term economic outcomes. Social implications This paper helps policy-makers and regulators to reassess how ESG policies can be implemented to be consistent with organizations’ core business activities. Originality/value Contributing to prior studies of greenwashing and corporate social responsibility decoupling, this paper extends decoupling literature by revisiting ESG impacts in an integrated framework and explores the antecedents of corporate ESG decoupling from the perspective of institutional investor monitoring.

Determinants and consequences of corporate social responsibility decoupling—Status quo and limitations of recent empirical quantitative research

“…Overall, researchers stressed that CSR decoupling leads to negative corporate financial consequences . This is in line with the business case argument, legitimacy theory and agency theory, assuming a decreased stakeholder trust and lack of firm reputation (Hawn & Ioannou, 2016; Liu et al, 2023). If CSR decoupling behavior is obvious, firms are confronted with increased stakeholder concerns, decreased firm reputation and impaired financial performance.…”

“…Zhao et al (2022) found a positive relationship between board network centrality and greenwashing in the pre‐adoption period of new environmental regulations. Liu et al (2023) documented that mutual fund investors' distraction increases CSR decoupling, more pronounced by negative shocks. Shareholder attendance mediates this relationship.…”

“…If CSR decoupling behavior is obvious, firms are confronted with increased stakeholder concerns, decreased firm reputation and impaired financial performance. Results were reported in international settings (Schons & Steinmeier, 2006), developed countries (e.g., Canada: Walker & Wan, 2012), and developing countries (Liu et al, 2023). In more detail, CSR decoupling is positively related to analyst forecast errors and cost of capital (Garcia‐Sanchez et al, 2021).…”

“…Regarding board composition , managerial entrenchment (Garcia‐Sanchez et al, 2020), sustainability board committees (Gull, Hussain, Khan, Khan, & Saeed, 2022), board gender diversity (Eliwa et al, 2023; Gull, Hussain, Khan, Nadeem, & Zalata, 2022), board independence and size (Yu et al, 2020), board network centrality (Zhao et al, 2022), CEO with positions as government officials (Marquis & Qian, 2014), CEO power (Gull et al, 2023; Shahab et al, 2022), CEO overconfidence (Sauerwald & Su, 2019), and CEO narcissism (Al‐Shammari et al, 2019) were included. Ownership structure was recognized as institutional ownership, (Yu et al, 2020), family ownership (Parra‐Dominguez et al, 2021), mutual fund investors' distraction (Liu et al, 2023) and institutional shareholder linkage to the central government and chair/CEO served as delegate to the two most important national political councils (Luo et al, 2017). Moreover, internal and external normative stakeholder pressure was included (Hyatt & Berente, 2017).…”

“…Agency problems and symbolic use of CSR issues may lead to impaired firm reputation. Regarding financial consequences, included studies recognized ROA as accounting‐based performance (Walker & Wan, 2012), interest rates and collateral loans (Cao et al, 2022), stock price crash risk (Liu et al, 2023), Tobin's Q (Chen & Dagestani, 2023;Hawn & Ioannou, 2016; Liu et al, 2023), cumulative abnormal returns (Du, 2015), economic performance score (Schons & Steinmeier, 2006), analyst forecast errors, cost of capital, and access to finance (Garcia‐Sanchez et al, 2021). Relying on CSR performance , CSR donations during the COVID‐19 crisis (Zhong et al, 2022), customer satisfaction (Ioannou et al, 2022), green trust (Chen & Chang, 2013) and firms' actual employee turnover and intentions (Robertson et al, 2023; Scheidler et al, 2019) were recognized.…”