Abstract
Based on a sample of China’s Shanghai and Shenzhen A-share public firms during 2010-2016, we examine the role of a firm’s life cycle stage on the relationship between corporate social responsibility (CSR) and financial constraints. After classifying firms into the initial, growth, mature, and declining stages of the life cycle, we find that for firms in the growth, mature, and declining phases of the life cycle the CSR engagement is negatively correlated with financial constraints. However, the effect of CSR relieving financial constraints is not related to firms in the initial stage of the life cycle. The results suggest that firms are not homogeneously related to the impact of CSR on financial constraints. Hence, investors can identify the firm’s life cycle and take it into consideration when making decisions to minimize their investment risk. Our findings are robust using various CSR and financial constraint measurements. This study can also help regulators make more reasonable and reliable social responsibility disclosure policies appropriate for firms in different life cycle stages.
Conclusion
This paper examines the moderate role of a firm’s industrial life cycle on the impact of CSR engagement on financial constraints. While the literature suggests that a firm’s CSR engagement can relieve its financial constraints, it implicitly assumes that firms are homogeneous in the context of industrial life cycle. According to the life cycle theory, firms exhibit different investment, financing, and dividend payout preference in their growth trajectory. Firms also faced with different social responsibility goals at each distinct development stage, and they show various capabilities of fulfilling social responsibility. Thus, we hypothesized that the impacts of CSR on financial constraints are different across different life cycles. Specifically, we conjecture that for firms in the growth, mature, and declining stages, the higher their CSR scores, the lower the financial constraints they faced. In contrast, for firms in the initial stage, CSR engagement has no significant impact on financial constraints. Using a sample of Chinese A-share listed firms during the period of 2010 to 2016, our findings are consistent with our hypotheses. The findings remain intact after using a lagged effect model, an alternative sample of firms choosing to disclose their CSR report, and various financial constraints measurements.
