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Abstract

This paper examines the dynamic impact of corporate social responsibility (CSR) on firms’ performance by estimating the yearly effect of disclosing CSR on the financial performances among 1667 firms in the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) from 2005 to 2019. The study exploits CSR as a quasi-natural experiment to test the hypothesis that firms’ mandatory disclosure of CSR activities undermines their financial performance in the short run but benefits their financial performance in the long run with the difference-in-difference method. The firm financial performance is measured by widely used metrics for evaluating profitability and returns: return on equity (ROE), Tobin’s Q, and annualized stock return. The difference-in-difference model controls for the year fixed effect and the industry fixed effect while considering influencing firm characteristics such as free-float market capitalization, total asset, leverage ratio, and ownership status as controls. The empirical results of the ROE, Tobin’s Q, and annualized stock return support the hypothesis that the mandatory disclosure of CSR report undermines firm financial performance in the short run but benefits the firm performance in the long run. The regression indicates that the mandatory CSR disclosure decreases Chinese firms’ stock return in the first 9 years but starts to enhance stock return after the 9th year after the mandate. Likewise, when Tobin’s Q is used to measure firm performance, the decreasing trend of the negative CSR coefficients (measuring Tobin’s Q changes) starts to increase after the 7th year after the mandate. Also, when ROE is used to measure firm performance, the increasing trend of the negative CSR coefficients (measuring ROE changes) starts to decrease after the 9th year after the mandate. Overall, the investigation provides useful guidance for firms’ stakeholders and regulators in understanding how such a non-financial factor influences a firm’s performance in the short versus the long run.

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