Pacific-Basin Finance Journal 51 (2018) 155–170

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Pacific-Basin Finance Journal

journal homepage: www.elsevier.com/locate/pacfin

The relationship between CSR and performance: Evidence in China

T
e,⁎ a,b c d
Erin H. Kao , Chih-Chuan Yeh , Li-Hsun Wang , Hung-Gay Fung
a
Department of Finance, Overseas Chinese University, No. 100, Chiao Kwang Road., Taichung 407, Taiwan, ROC
b
Department of International Business, National Taiwan University, Taipei, Taiwan, ROC
c
Department of International Business Administration, Wenzao Ursuline University of Languages, No. 900 Mintsu 1st Road, Kaohsiung 807, Taiwan,
ROC
d
College of Business Administration, University of Missouri St. Louis, One University Plaza, St. Louis, MO 63121–4499, USA
e
Tunghai University, Taichung, Taiwan, ROC

A R T IC LE I N F O ABS TRA CT

Keywords: This study uses a system of simultaneous equations to investigate various hypotheses on the
Corporate social responsibility relationship between corporate social responsibility (CSR) and firm performance for state-owned
Simultaneous equation modeling enterprises (SOEs) and non-SOEs in China. The results show variations in market response to CSR
Agency cost theory engagement by firm ownership type. That is, the market responds favorably to CSR by market-
Stakeholder theory
oriented non-SOEs but neutrally to CSR by SOEs with substantial agency costs. The Chinese firms
Window dressing
are able to link their CSR activities to firm performance over time, likely recognizing the long-
term benefits of CSR. Our study demonstrates the important role of ownership in the dynamic
CSR-performance relationship.

1. Introduction

Does the pursuit of corporate social responsibility (CSR) activities by firms hurt or enhance financial performance? The question
has important implications for financial managers in making CSR decisions. A review of the CSR literature suggests two main
viewpoints and findings while survey results indicate that stockholders and investors do not pay much attention to CSR (Starks,
2009). The classic argument by Friedman (1970), he sees CSR as an agency problem and suggests that CSR has a negative effect on
corporate financial performance because a firm's CSR entails costs. Brown et al. (2006), invoking the agency cost theory, indicate that
managers may benefit themselves using firm resources through corporate philanthropy while shareholders incur a loss by spending
on charity. Lee and Faff (2009) find that leading corporate sustainability firms underperforms the market portfolio and their lagging
counterparts, implying a negative effect of CSR on firm performance. Barnea and Rubin (2010) similarly highlight the agency cost
incurred when managers overinvest in CSR to build up their personal reputation. In contrast, Freeman (1994) suggests that from the
stakeholders' perspective CSR has a positive effect on corporate financial performance. Because firms have the relationships with
different stakeholders, including the government, competitors, consumers, and environmental advocates, an increase in social
spending can improve stakeholder relationships, which in turn reduce the firms' social cost and increase market opportunities,
leading to higher net financial performance. Statman and Glushkov (2009) find that firms with a high CSR rating generally provide
higher returns than those with low CSR ratings. Filbeck et al. (2009) find that investing in the best corporate citizens results in
superior market performance. Jo and Harjoto (2011, 2012) show that CSR engagement positively affects corporate financial per-
formance because CSR activities can resolve conflicts between managers and stakeholders.
Most empirical research on CSR has focused on developed economies (such as the United States and European countries) with

⁎
Corresponding author.
E-mail addresses: erinkao@thu.edu.tw (E.H. Kao), robert@ocu.edu.tw (C.-C. Yeh), 97027@mail.wzu.edu.tw (L.-H. Wang), fungh@msx.umsl.edu (H.-G. Fung).

https://doi.org/10.1016/j.pacfin.2018.04.006
Received 13 June 2016; Received in revised form 30 November 2017; Accepted 17 April 2018
Available online 23 April 2018
0927-538X/ © 2018 Published by Elsevier B.V.
E.H. Kao et al. Pacific-Basin Finance Journal 51 (2018) 155–170

less agency cost between managers and shareholders, and thus a positive effect of CSR on performance is generally reported.
Firms in emerging markets and developed markets have important organizational and behavioral differences from those in de-
veloped countries (Fan et al., 2011). Thus, this study uses results in China to investigate the relationship between firm perfor-
mance and CSR for two reasons. First, China, an important emerging market, has increasingly engaged in CSR in recent years.
Particularly, environmental pollution in China has become a great concern to society, as commonly reported by the media and
government agencies. Government encouragement and intervention at Chinese firms leads to greater CSR engagement. The
results of our study in China can provide some useful information for policymakers in promoting CSR activities and further be
extended to other emerging markets. Second, state-owned enterprises (SOEs) dominate the capital market in China despite the
fact that non-SOEs are growing in number. Chinese government is the largest shareholders at SOEs. Thus, SOEs with politically
connected executives tailor primarily to government priorities but do not necessarily maximize firm value (Chen et al., 2011). By
contrast, non-SOEs are likely to be market-oriented and try to maximize firm value. The distinctive features of SOEs and non-SOEs
in China allow a valuable experiment to be conducted on the extent to whether ownership type affects the relationship between
CSR and firm performance.
This study uses a unique data set, the CSR ranking system provided by the newspaper, Southern Weekend, to examine factors
affecting CSR engagement. Our study examined in China contributes to the literature on CSR in four ways. First, the issue of state
ownership is important in China because social or political agencies have exerted pressure on SOEs to pursue CSR (See, 2009). The
CEOs at SOEs are appointed by the Chinese government. Thus, they have strong incentives of overinvesting in CSR to serve state
interests or to avoid future CEOs turnover. That is, political interference by the Chinese government creates severe agency problems
in SOEs (Chen et al., 2011). On the other hand, non-SOEs, engaging in CSR activities, can achieve higher social and environmental
standards to enhance their reputation as good global citizenship (Barnea and Rubin, 2010; Zhang et al., 2015); signal product quality
in the competitive market (Siegel and Vitaliano, 2007); and reduce conflicts of interest between managers and stakeholders (Jo and
Harjoto, 2011), provided that CSR investment brings economic benefits. The market-oriented non-SOEs have a simpler goal of value
maximization to ensure long-run survival of the firms, which is more applicable to stakeholder theory and organization theory.
Because different ownership types have different motivations in CSR engagement, it is important to consider ownership type in
assessing CSR.
Second, most prior studies mainly examined the effect of CSR in one direction, but there should be a mutual and interactive
relationship between CSR and performance (Waddock and Graves, 1997). In this study, incorporating the effect of the ownership, we
shed light on the interactive relationship between CSR activities and firm performance, conditioning on the ownership type. Based on
agency theory, we propose two related hypotheses on the negative relation between CSR and firm performance. The first is the trade-
off hypothesis (Makni et al., 2009). The hypothesis reflects the costs of CSR that reduce profits. CSR has few readily measurable
economic benefits but does have numerous costs that lower shareholder wealth (Friedman, 1970). In the reverse direction, the second
is the managerial opportunism hypothesis (or window-dressing hypothesis), which suggests that firm performance has a negative effect on
CSR (Makni et al., 2009; Preston and O'Bannon, 1997; Tan and Peng, 2003; Barnea and Rubin, 2010). CSR can be a source of agency
problems because opportunistic managers use firm resources to engage in conspicuous CSR investments to avoid negative attention
and to disguise their disappointing underperformance (called window dressing). Many CSR investments at SOEs are not properly
aligned with shareholder interests because they try to meet government objectives to enhance a manager's private benefits. Given
that SOEs with government intervention have severe agency problem, the trade-off hypothesis and managerial opportunistic hypothesis
appear to be more applicable for SOEs.
Alternatively, two related hypotheses explain the positive relation between CSR and firm performance. First, the good management
hypothesis, based on stakeholder theory (Freeman, 1994), suggests that CSR engagement can improve relationships among various
stakeholder groups and thus will result in better firm performance (Waddock and Graves, 1997; Preston and O'Bannon, 1997).
Managers use CSR engagement to resolve conflicts among stakeholders and thereby maximize the shareholders' wealth, thus CSR to
have a positive effect on firm performance (Jo and Harjoto, 2011). In the reverse direction, the second is slack resource hypothesis that
explains the positive effect of firm performance on CSR (Tan and Peng, 2003; Waddock and Graves, 1997) because organizational
slack enables firms to survive over time as they invest in social goods, such as community relations, environmental and philanthropic
programs, resulting in more CSR. Organization theorists believe that survival is the ultimate goal of firms. Availability of slack
resources (i.e., previous profits) strongly influenced the level of CSR engagement. Consistent with the argument, Preston and
O'Bannon (1997) and Waddock and Graves (1997) find that financial performance has positive impact on social performance. Given
that non-SOEs' purpose is profit driven, based on stakeholder theory and organization theory, they have strong motivation to promote
corporate reputation and build closed relationship with their stakeholders through CSR for long run survival. Thus, we posit good
management hypothesis and slack resource hypothesis are more prone to be supported by non-SOEs.
Third, we use a simultaneous equation approach to capture the interactive relationship between CSR and firm performance (Jo
and Harjoto, 2011; Waddock and Graves, 1997). According to organization theory, good financial performance potentially results in
the availability of slack resources, which provide an opportunity for firms to invest more in CSR activities, establishing the causal link
of performance to CSR (Tan and Peng, 2003; Waddock and Graves, 1997). At the same time, higher CSR engagement, which can be
viewed as an intangible asset or social capital for the firms, may lead to better performance (Chiu and Sharfman, 2011; Surroca et al.,
2010). These arguments suggest a two-way relation between CSR and firm performance. However, most previous studies on CSR and
firm performance are often based on a unidirectional, single-equation ordinary least squares (OLS) regression, which is likely to be
biased because of the endogenous relationship. To minimize the endogeneity problem and provide consistent estimates of the
structural parameters, we apply a novel heteroskedasticity-based identification approach using the simultaneous-equation model
(SEM) proposed by Lewbel (2012) to examine the interactive nature of CSR and firm performance. This method has been widely used

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in the literature (Schlueter et al., 2015; Dungey et al., 2015; and Emran and Hou, 2013).1 The method is appealing because no
instrumental variables are needed in estimating the simultaneous equations and that the associated estimators usually take the
standard form of the generalized method of moments (GMM). Instrumental variables are subject to judgment errors as different
researchers may select different instrument variables.
Finally, it takes time for firms engaging in CSR to realize higher financial returns (Brammer and Millington, 2008), and CSR
should be regarded as a long-term investment that benefits from the interactions among stakeholders (Barnett and Salomon, 2012).
Thus, we expected that CSR initiatives will require significant initial investments while the benefits will be contingent on the sub-
sequent interactions of different stakeholder groups. The negative effect of CSR on firm performance may unintentionally capture the
initial cycle of CSR with its significant short-term cost while the positive effect of CSR on firm performance captures the longer-term
benefits. The net benefits of CSR on financial performance may be cyclical. Few existing studies explicitly examine how CSR and firm
performance are related over time. To fill the void, we examine the relationship between CSR and performance changes over time,
and shed light on the cyclical nature of CSR and changes in the dynamic behavior of CSR.
In sum, our analysis confirms that the presence of a bidirectional relationship between CSR and firm performance. After con-
trolling for endogeneity, we demonstrate that firm performance has a negative and significant effect on CSR for all firms. When we
separate out the ownership type factor, the results are very different. Firm performance's negative effect on CSR is found only in SOEs,
supporting the managerial opportunism hypothesis, while CSR's positive and significant effect on firm performance is found only in non-
SOEs, supporting the good management hypothesis. Interestingly, the relationship between CSR and firm performance appears to
change over time for both SOEs and non-SOEs. Firm performance's negative effect on CSR in both SOEs and non-SOEs is found in the
earlier period but becomes positive effect in the recent period, supporting the slack resource hypothesis. However, CSR has no effect on
performance at SOEs but a strong positive effect at non-SOEs. The positive interactive relationship between performance and CSR at
non-SOEs observed in the recent period suggests the presence of a “virtuous circle.” These results demonstrate the cyclical nature of
the performance-CSR relationship.
The rest of this paper is organized as follows. Section 2 reviews different hypotheses and the literature on relations between CSR
and firm performance. Section 3 discusses the data and methodology. Section 4 presents and discusses empirical results. The final
section is the conclusion.

2. Literature review and hypothesis development

2.1. CSR in China

China has experienced remarkable economic growth since the 1980s, but this growth comes with high social and environmental
costs. China is now confronting with severe environmental pollution.2 The anti-sweatshop and environmental movements have
caused multinational companies to adopt social and environmental standards in selecting their suppliers. Two factors have brought
CSR to China. Externally, the CSR concept was imported to China mainly through supply chains that involve Western consumer
markets. Chinese suppliers have to prove that they have met the social and environmental standards to do business with Western-
based multinational companies. Internally, the Chinese government and businesses also recognize the need and importance for
economic, social, and environmental changes in CSR in the country.
The Chinese government has played an important role in incorporating CSR into company laws to help it develop more quickly in
China. For example, the Chinese government has encouraged firms listed on the Shenzhen and Shanghai Stock Exchanges to engage
in CSR and uses financial channels to motivate firms to do so, including the “green loan policy”3 and “green securities.”4 More, in
September 2006, the Shenzhen Stock Exchange launched “Shenzhen Stock Exchange Social Responsibility Introductions to Listed Com-
panies” guidelines to encourage listed firms to produce CSR activities in their annual report, while Shanghai Stock Exchange provides
guidelines requesting the listed enterprises to disclose CSR issues, including: “Notice on Strengthening Listing Companies' As-
sumptions of Social Responsibility (Shanghai CSR Notice)” and “Guideline on Listed Companies' Environmental Information Dis-
closure (Shanghai Environmental Disclosure Guidelines)” issued in May 2008. Similarly, the State-Owned Assets Supervision and
Administration Commission of the State Council (SASAC) released the opinion on the social responsibility implementation for the
State-owned enterprises controlled by the central government in January 2008 (Li et al., 2013). In light of the CSR regulations or
guidelines, the number of CSR report disclosures or CSR activities has been growing dramatically since 2008 (Marquis and Qian,
2014). The effect of political interference in CSR in China is largely concentrated in SOEs. Li and Zhang (2010) shows that the role of
government intervention in China affects engagement in CSR, and controlling interests of the largest shareholder are positively

1
According to the google scholar, Lewbel (2012) has been cited more than 300 times by scholars, indicating the significant impact of the method on research.
2
Due to the severe level of socially irresponsible behavior by businesses in China, such as abysmal working conditions at Apple's main supplier, Foxconn, and the
Sanlu Dairy (the melamine contamination) incident, much criticism came from overseas. The Chinese government and businesses have looked to CSR to rebuild their
legitimacy with respect to social responsibility.
3
Environmental agencies built up an information database that contains standardized information related to corporate environmental violations, environmental
approval records, among other things, and provides the information to banks, which incorporate the information into credit assessments. For example, the Industrial
and Commercial Bank of China (ICBC), one of the five major banks in China, claimed that in 2007 it assessed environmental performance, and 78% of ICBC were
cleared for green loans of more than RMB 200 million, accounting for about 80% of its total loans.
4
The State Environmental Protection Administration (SEPA) coordinated with the China Securities and Regulatory Commission (CSRS) to initiate a series of
environmental measures called “green securities.” Under the green securities scheme, firms in high-pollution and high-energy consumption industries are subject to
environmental performance reviews when applying for an initial public offering (IPO) or refinancing.

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(negatively) related to the level of CSR for SOEs (non-SOEs) and in a single regression analysis. However, the literature with respect
to corporate performance and CSR is limited regarding comparison of SOEs and non-SOEs. This study explicitly examines the re-
lationship between CSR and firm performance to shed light on the role that ownership type plays on CSR and performance.

2.2. Link between CSR and performance

The empirical evidence in the literature on the relationship between CSR and a firm's performance is mixed. Most previous
research on this issue examined primarily the effect of CSR on performance in one direction. However, Waddock and Graves (1997)
and Preston and O'Bannon (1997) have found that there is a mutual and interactive positive relation between CSR and a firm's
performance. In addition, contrary the studies conducted in the West, SOEs have very high level in Chinese listed firms. As gov-
ernment is the largest shareholders at SOEs, the CSR investment can be driven by governmental pressures, which entail severely
agency problem between controlling and non-controlling shareholders (Li and Zhang, 2010). By contrast, firms with non-SOEs'
ownership are largely consistent with stakeholder theory. Given that the motivations at SOEs are expected to be different from those
at non-SOEs (Zhang et al., 2015), we analyze ownership type in assessing CSR. Based on stakeholder theory, agency theory and
organization theory, we link these relationships related to SOEs and non-SOEs and develop four possible causal and directional
hypotheses (Makni et al., 2009; Waddock and Graves, 1997; Preston and O'Bannon, 1997): a trade-off hypothesis, a managerial
opportunism hypothesis, a good management hypothesis, and a slack resource hypothesis.

2.2.1. Negative relation between CSR and performance

Two related hypotheses suggest the negative relation between CSR and firm performance. First, the trade-off hypothesis, which is
fundamental to the argument by Friedman (1970) and other neoclassical economists, suggests that CSR entails costs directly or
implicitly. Although CSR has few readily measureable economic benefits, the numerous costs, which outweigh the benefits, will
reduce profit and lower shareholder wealth (Waddock and Graves, 1997). In addition, based on agency theory (Jensen and Meckling,
1976), it can be argued that CSR engagement reflects an agency problem between managers and shareholders; the affiliated insiders
might have an interest in overinvesting in CSR to obtain private benefits by building their reputation as good citizens, possibly at a
cost to shareholders (Barnea and Rubin, 2010; Brown et al., 2006). CSR investments in SOEs may not properly align with shareholder
interests because they try to meet government objectives to enhance a manager's private benefits. In this view, CSR engagement
entails a net waste of valuable resources, thus corporate performance will be reduced accordingly. Thus, based on agency problem
more severely for SOEs, we propose the following:
Hypothesis 1. According to the trade-off hypothesis, we expect CSR to have a negative effect on firm performance. This is particularly
applicable to SOEs.
Second, the managerial opportunism hypothesis (or window-dressing hypothesis) is also derived from agency theory (Jensen and
Meckling, 1976), that managers are not always aligned with shareholders at large. Viewing firms as a nexus of contracts between
principals and agents, Tan and Peng (2003) suggest that mangers may use slack (such as for CSR engagement) to engage in excessive
diversification and empire-building. As a result, slack becomes a source of agency problems, which breed inefficiency, inhibit risk-
taking and hurt performance. Many SOEs from emerging economies has been blamed on their high level of slack that may lead to
inefficiency (Gao, 2009). Stan et al. (2013) also argue that the relationship between CSR and firm performance is negative because of
the potential inefficiencies caused by holding idle resources and self-serving managerial behaviors. The opportunistic managers
pursue their own private benefits to the detriment of both shareholders and stakeholders (Borghesi et al., 2014; Brown et al., 2006).
When a firm's performance is weak, managers may be likely to engage in more social programs (CSR) to window dress their dis-
appointing results (Preston and O'Bannon, 1997). Fan et al. (2007) show that the stock return performance of the firms with poli-
tically connected CEOs is not closely related to shareholders. As CSR investment at SOEs is likely to be inefficient and along with
previous discussions, we propose the following:
Hypothesis 2. According to the managerial opportunism hypothesis, the effect of firm performance on CSR engagement is negative.
This hypothesis is more applicable to SOEs than non-SOEs.

2.2.2. Positive relation between CSR and performance

Two alternative hypotheses can explain the positive relation between CSR and firm performance. First, the good management
hypothesis, based on stakeholder theory (Freeman, 1994), suggests that CSR engagement can improve relationships among various
stakeholder groups and thus will result in better firm performance (Waddock and Graves, 1997; Preston and O'Bannon, 1997).
Similarly, Jo and Harjoto (2011) argue that managers use CSR engagement to resolve conflicts among stakeholders and thereby
maximize the shareholders' wealth, thus CSR engagement will positively influence firm performance. According to this hypothesis,
serving the implicit claims of stakeholders will enhance a firm's reputation such that it has a positive effect on a firm's performance.
Conversely, less CSR will disappoint these different groups of stakeholders, leading to a negative effect on performance. Unlike SOEs,
non-SOE firms try to maximize firm value and are motivated to use CSR for effective corporate governance in resolving conflicts
between managers and non-investing stakeholders (e.g., employees and customers). Thus, we propose the following:
Hypothesis 3. According to the good management hypothesis, the effect of CSR engagement on firm performance is positive. This
hypothesis is more applicable to non-SOEs than SOEs.

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Second, the slack resource hypothesis is based on organization theory, in which organizational slack is a resource for conflict
resolution, and thus it is necessary to help a firm survive in the long run. In organization theory, slack has been suggested to be a
resource for conflict resolution (Tan and Peng, 2003), which can enhance firm performance. With sufficient organizational slack,
every problem (i.e., agency problem, ethical, and environment pollution problem) will have a solution. Although firms may wish to
engage in CSR to help firms develop new competencies and resources in areas such as better community relations, employee rela-
tions, or environmental policy, to lead to higher shareholder wealth in the long run, their actual CSR activities may depend on the
resources available. The availability of slack resources (i.e. previous profits) strongly influenced the level of CSR engagement. Preston
and O'Bannon (1997) find evidence that financial performance has positive impact on social performance, which can be explained by
slack resource hypothesis (or available funding). SOEs have severely agency problem, yet they have an advantage in obtaining access
to scarce resources, such as bank financing (Song et al., 2011). The high level of slack and soft budget constraint provided by
government often leads to their inefficiency. However, non-SOEs are profit driven and they have a strong motivation to promote
corporate reputation and build good relationship with stakeholders through CSR. Thus, based on the organization theory, we propose
the following:
Hypothesis 4. According to the slack resource hypothesis, the effect of performance on CSR engagement is positive for non-SOEs.
There is likely a debate concerning on the performance-CSR relation over time. CSRs often require significant initial investments.
Environment initiatives, waste reduction and process innovation, community and philanthropic programs involve significant upfront
costs. The benefits of having CSR are contingent upon awareness of interactions among stakeholder groups (Brammer and Millington,
2008). It takes time for being social responsive to translate into higher performance. That is, a firm has to be socially responsive
strategy consistently over time to receive CSR benefits. Barnett and Salomon (2012) view CSR as a long-term investment in creating
the capacity to influence stakeholders and argue that though it may not receive benefits now, but later once adequate capacity is
built. The net benefits of CSR on financial performance may be cyclical. Thus, we suggest the following:
Hypothesis 5. The negative relationship between CSR and performance is easily found in the short run while the relation between
CSR and performance will become positive over a longer time.

3. Methodology and data

3.1. Simultaneous equations model

To describe the interactive relationship between performance (Q) by firm i and its CSR (Π) as follows5:
Qit = α1 Πit + x it′ γ1 + ε1it (1)

Πit = α2 Qit + x it′ γ2 + ε2it (2)

It is well known that if both α1 and α2 are different from zero, Eqs. (1)–(2) cannot be consistently estimated using standard
econometric methodology without specifying further information or restrictions, or it would result in simultaneity bias problem. We
discuss more estimation bias of simultaneous regression in Appendix A.
To avoid possible simultaneity bias (with endogenous variables), the standard solution is to employ an instrument variable (IV)
approach. If an instrument is identified, the IV method can be used to address the endogeneity problem and provides consistent
estimates of the structural parameters. While the IV approach can solve the endogeneity problem, it has some drawbacks. First, the
availability of IVs by itself does not guarantee identification of average treatment effects. Second, different instruments may lead to
different parameters. For example, the two-stage least squares (2SLS) method requires at least as many instruments as the parameters
and is sensitive to the instrument variables chosen. An appropriate list of instrument variables would definitely improve the 2SLS
estimation results, which are obtained by using all the instruments simultaneously in the first-stage regression. The 2SLS estimators
provide typically larger standard errors than OLS, and the method may not be the best approach from the perspective of efficiency.
Thus, we further examine the interaction between CSR and performance using a novel heteroskedasticity-based identification
approach proposed by Lewbel (2012), who demonstrates that identification can be obtained by observing a vector of exogenous
variables that are uncorrelated with the covariance of heteroskedastic errors. The main advantages of this method are that (1) there is
no need for an instrumental variable for identifying the structural parameters, and (2) the associated estimator usually takes the
standard form of the generalized method of moments (GMM).
To examine the interactions between CSR and firm performance, we use two measures of CSR engagement. One measure is the
CSR dummy, which equals one if the firm has been identified by Southern Weekend and zero otherwise. The other measure is CSR
scores which is a weighted average score compiled by Southern Weekend. The firm performance measure is Tobin's Q (Qit), We
consider the following simultaneous equation model:
Qit = α1 Πit + x it′ γ1 + ε1it (3)

Πit = α2 Qit + x it′ γ2 + ε2it (4)

5
Without loss of generality, we omit constant terms for simplicity.

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Table 1
Southern Weekend CSR ranking system.
Source: China Corporate Social Responsibility (CSR) Research Center in Southern Weekend Journal.
Index Weight (%) Detailed items Weight (%)

Social responsibility 40% Product safety and services quality 10%

Environmental protection 10%
Labor relations 10%
Firm's community involvement 10%
Operating performance 30% Sales 10%
Net asset 10%
Net profit 10%
Social contribution 20% Tax paid 10%
Employee rights 5%
R&D and self-innovation 5%
Public image 10% Online public opinion poll 10%

The system of equations allows CSR (Πit) to affect firm performance (Qit), which, in turn, affects CSR. In addition, we allow firm
performance and CSR to depend on a vector of the government and other control variables xit. The parameters of particular interest
are the coefficients of the endogenous variables, i.e., α1 and α2, as they measure the causal effect of CSR on firm performance and the
causal effect of firm performance on CSR. Appendix B provides detailed explanations of the heteroskedasticity-based indentification
and estimation method proposed by Lewbel (2012) in our simultaneous equations model.

3.2. Data

We use both the scores and ranking of CSR created by the China CSR Research Center of the Southern Weekend (one of most
influential newspapers in China). Southern Weekend is the first institute in China to conduct research and assess the scale of CSR by
Chinese companies based on scientific and measurable third-party data. Southern weekend, an independent rating agency, invites a
group of experts and scholars from the government, industries, universities, and research institutes, including All-China Federation of
Trade Unions, All-China Federation of industry & Commerce, Peking University, Fudan University, and Nankai University, to rank
Chinese listed firms in terms of their social responsibility levels. The CSR ranking system is a simplified version of the widely
acknowledged CSR criteria developed by KLD Research & Analytics. Southern weekend includes indices of “operation”, “social con-
tribution”, “social responsibility” and “public image”. Nowadays, the CSR ranking system has been widely used in China and become
one of the most powerful CSR rating systems in China (Wang et al., 2011; Kao et al., 2014; Zhang et al., 2014). To measure CSR
ranking in China, Southern Weekend also takes economic responsibility, social responsibility and public support into consideration in
compiling its CSR rankings (Wang et al., 2011).
As shown in Table 1, the CSR ranking system has four sub-indices: social responsibility, operating performance, social con-
tribution, and public image. The evaluation system has 11 items. Every item in the index has a 10% weight, except employee rights
and R&D, which have a 5% weight. A weighted score of these indices is the total score for the CSR activities. In the CSR ranking
system by the Southern Weekend, the social responsibility index emphasizes on product safety and services quality for customers and
engagement in environmental protection to perform the social responsibility. Labor relations include buying social insurance for
employees, offering employees trading and opportunities and giving employees appropriate retirement benefits. Firm's community
involvement is measured by public welfare programs such as philanthropy and donations for society. Operating performance index
mainly measures economic responsibility, including firm's sale revenues, net asset value and net profit value in the last year. Social
contribution index measures the firm's contribution for the society, including the tax payment, employee rights, R&D and self-
innovation. Paying tax to the Chinese government can help government build constructions for the society. Employee rights are the
rights of workers related to joining a labor union, taking part in management decision-making and efforts to obtain professional
certification from a global organization.6 Investing R&Ds and self-innovation can improve product quality and improve product
design to comply with environmental needs. The safety and environment aspect of new design fits in well with CSR requirements,
which could contribute positive to society. Finally, the public image index is to capture the corporate brand recognition. The online
public opinion polls from the websites of Sothern Weekends, Sina, Hexun, Tianya online community, and Ifeng to measure the public
image for firms were collected.7
Based on the four indices, Southern Weekend calculated the weighted average CSR score for each firm using the weights. The firm
with the best performance received a score of 100, and the rest received scores based on their performance relative to that of the best-
performing firm. Southern Weekend announces the Top 100 firms each year based on their CSR scores.
The most recent CSR rules and regulations for listed firms were primarily introduced during 2006–2008. For example, the Shenzhen
Stock Exchange released a guide to listed companies' social responsibility in 2006, and the Shanghai Stock Exchange did the same in
2008 (Li et al., 2013) and Southern Weekend began to compile CSR rankings in 2008. Thus, our sample period covers 2008 to 2012,

6
The professional certification has been done using OHSAS 18001, which is an international standard for occupational health and safety management systems.
7
Data source of the public poll comes from http://finance.sina.com.cn/hy/20081218/13375654304.shtml (in Chinese).

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Table 2
Variable definitions and measures.
Variable Name Variable definitions

CSR (1, 0) [CSR_D] Dummy variable equals 1 if a firm is rated by Southern Weekend with a CSR score, and 0 otherwise.
CSR combined score [CSR_S] The weighted average of the combined scores on social responsibility, operating performance, social
contribution, and public image dimensions compiled by Southern Weekend.
Tobin's Q [Q] Tobin's Q = (market value of equity market value + liabilities book value) / total assets. (source:
CSMAR)
Independent director/supervisor director [INDS] INDS is calculated as the number of independent directors divided by supervisor directors.
Duality (1, 0) [DUALITY] Dummy variable equals 1 if a CEO is also chair of the board and 0 otherwise. (source: CSMAR)
Equity concentration indicator [TOP_10] Sum of shareholding percentage of top-ten negotiable shareholders. (source: CSMAR)
Percentage of direct controlling [CONTROL] Percentage of shares of listed companies held by direct controlling shareholder. (source: CSMAR)
shareholder (%)
Ln (subsidies) [FINSUB] Various subsidies received by a company such as subsidy for loss due to government policies, and
refund of value-added tax in logarithmic form (source: TEJ).
Log (total asset) [SIZE] Total asset in logarithmic form (source: CSMAR)
R&D expenditure intensity ratio [R&D] Research and development expenses divided by total sales (source: CSMAR)
Debt/total assets [DEBT] Long-term debt divided by total assets (source: CSMAR)
Assets turnover [TAT] Operating revenue / ending total assets (source: CSMAR)

Note: data sources are from China Stock Market & Accounting Research (CSMAR) and Taiwan Economic Journal (TEJ).

after the implementation of the CSR rules and regulations. The corporate governance, ownership, and financial variables are taken from
China Securities Market and Accounting Research (CSMAR) and Taiwan Economic Journal (TEJ) databases. We require the firms ranked in
Southern Weekend to have sufficient corporate governance and financial data available from CSMAR and TEJ for our tests.
In our analysis, we also use matching firms. We include the matching non-CSR firms corresponding to CSR firms with the same
industry and similar size which are not listed among the Top 100 firms by Southern Weekend and have no CSR activities and in-
formation listed on CSMAR. Size is measured as the book value of assets. In total, we identified 1250 observations, including CSR and
matching samples. All of them are listed on the Chinese stock market.

3.3. Measurements of variables

Table 2 provides a complete description and measurement of the variables used. In order to examine the relationships between the
CSR engagement and a firm's performance, we employ CSR_D, a (1, 0) dummy variable to measure the status of CSR engagement,
which equals 1 if a firm is rated and zero otherwise. We use CSR_S to measure the level of CSR activities. Market-based performance,
Tobin's Q, is used to measure a firm's performance.
We include some corporate governance variables as control variables because previous studies have found that the CSR choice is
associated with governance characteristics (Barnea and Rubin, 2010; Borghesi et al., 2014). INDS is the independent director ratio,
which is calculated as the number of independent directors of the board scaled by the number of board members. DUALITY is a (1, 0)
dummy variable to measure strong leadership. It equals 1 if the CEO is also the chairman of the board and zero otherwise. We use the
shareholding percentage of the top-ten shareholders (TOP_10) and the shareholding percentage held by the direct controlling
shareholders (CONTROL) to measure the extent of corporate ownership concentration.
In addition, Makni et al. (2009) suggest that CSR activity is costly and requires government subsidies to neutralize its adverse
effects. We include a government subsidy variable in our analysis. FINSUB is government subsidies, measured as various subsidies
received by a company, such as subsidies for loss due to government policies, and refunds of value-added taxes in logarithmic form.
CSR and firm characteristics are also used as control variables (Waddock and Graves, 1997). The firm's size (SIZE) is measured by a
log of total assets; the R&D expenditure intensity ratio is measured as R&D expenditures divided by total assets (R&D); the level of
leverage is measured as long-term debt divided by total assets (DEBT); and operating performance (TAT) is measured as asset
turnover rate (i.e., operating revenue divided by total assets).

4. Empirical results and analysis

4.1. Univariate tests and variable correlations

The following analysis provides descriptive statistics and correlations among variables. Table 3 presents the sample descriptive
statistics of variables for firm performance, two CSR measures, a corporate governance proxy, and other firm characteristics. The
mean and standard deviation of these variables are reported.
Table 4 reports the bivariate correlation matrix for Tobin's Q, CSR measures, governance variables, and firm characteristics. CSR
DUMMY and firm performance (Q) are negatively and significantly correlated (−0.1496). A similar correlation coefficient
(−0.1508) is found if CSR_S is used. The correlations of control variables (including FINSUB, SIZE, DEBT, and TAT) with CSR
variables are positive and significant. The correlations of control variables with firm performance are also significant. The correla-
tions between CSR and government variables (INDS, TOP_10 and CONTROL) are positive and significant. The correlations between
firm performance (Q) and government variables (INDS, UALITY, and CONTRO) are negative and significant.

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Table 3
Basic descriptive statistics for full sample.
Q CSR_D CSR_S FINSUB SIZE RD DEBT TAT INDS DUALITY TOP_10 CONTROL

Mean 1.3474 0.3272 11.3215 9.7386 22.1643 0.0067 0.5889 0.9996 0.9115 0.2666 0.3738 0.4472
Median 1.1091 0.0000 0.0000 10.1916 22.9200 0.0001 0.6094 0.7791 1.0000 0.0000 0.3493 0.4782
Maximum 8.2926 1.0000 79.5720 17.7445 28.2821 0.1567 2.0559 9.1000 3.3333 1.0000 0.9788 0.8642
Minimum 0.0000 0.0000 0.0000 0.0000 13.3851 0.0000 0.0058 0.0300 0.0000 0.0000 0.0000 0.0000
Std. Dev. 0.8445 0.4694 16.8128 2.8662 2.9133 0.0133 0.1822 0.9084 0.3516 0.4423 0.2469 0.1877
Skewness 3.0251 0.7366 1.0173 −1.6773 −1.0018 3.3089 −0.0613 4.0538 1.4269 1.0559 0.3316 −0.5135
Kurtosis 17.5337 1.5426 2.7019 6.9198 3.1209 21.5460 6.2947 28.4702 7.7480 2.1150 2.0099 2.9819
#Obs. 1250 1250 1250 1250 1239 1250 1250 1250 1239 1238 1250 1250

Note: Full sample period 2008–2012.

Table 4
Bivariate correlation matrix for full sample (2008–2012).
1 2 3 4 5 6 7 8 9 10 11 12

1. Q 1.0000
2. CSR_ D −0.1496 1.0000
(0.00)
3. CSR_S −0.1508 0.9658 1.0000
(0.00) (0.00)
4. FINSUB −0.1445 0.2124 0.2514 1.0000
(0.00) (0.00) (0.00)
5. SIZE 0.0846 0.2160 0.2296 0.0557 1.0000
(0.00) (0.00) (0.00) (0.05)
6. RD −0.0346 −0.0251 −0.0287 0.1382 −0.3013 1.0000
(0.22) (0.38) (0.31) (0.00) (0.00)
7. DEBT −0.2926 0.1399 0.1187 0.1410 0.0374 −0.0541 1.0000
(0.00) (0.00) (0.00) (0.00) (0.19) (0.05)
8. TAT 0.0850 0.1318 0.1210 −0.0356 −0.0564 −0.0727 0.0157 1.0000
(0.00) (0.00) (0.00) (0.21) (0.05) (0.00) (0.58)
9. INDS −0.0576 0.1194 0.1044 0.0175 0.0139 0.0277 0.0401 −0.0133 1.0000
(0.04) (0.00) (0.00) (0.54) (0.62) (0.33) (0.16) (0.64)
10. DUALITY −0.1306 0.0349 0.0335 0.1007 −0.7336 0.2285 −0.0006 −0.0142 0.0725 1.0000
(0.00) (0.22) (0.24) (0.00) (0.00) (0.00) (0.98) (0.67) (0.01)
11. TOP_10 0.0257 0.1359 0.1576 0.2319 −0.0801 0.0886 0.0465 −0.0308 −0.0381 0.1866 1.0000
(0.37) (0.00) (0.00) (0.00) (0.00) (0.00) 0.1022 0.2789 (0.18) (0.00)
12. CONTROL −0.0638 0.1160 0.1521 0.0440 0.1759 −0.0312 −0.0115 −0.0239 −0.0623 −0.0960 0.1538 1.0000
(0.02) (0.00) (0.00) (0.12) (0.00) (0.27) (0.68) (0.40) (0.02) (0.00) (0.00)

Notes: Pearson's correlation coefficients' p-value is reported in parentheses.

Table 5 provides a comparison of firm characteristics using the mean equality test for differences across SOEs and non-SOEs in full
sample and subsample periods. Panel A presents the results of the full sample. The mean of Tobin's Q for SOEs is 1.1745, and the
mean for non-SOEs is 1.4768. There is a significant difference between SOEs and non-SOEs. Non-SOEs perform better than SOEs. The

Table 5
Test of mean equality for SOEs and non-SOEs, considering the time horizon effect.
Full sample period over 2008–2012 1st subsample period over 2008–2010 2st subsample period over 2011–2012

SOEs Non-SOEs T-statistics SOEs Non-SOEs T-statistics SOEs Non-SOEs T-statistics

⁎⁎⁎ ⁎⁎⁎
Q 1.1745 1.4768 −6.3601 1.3194 1.6348 −4.9661 0.9571 1.2397 −4.2856⁎⁎⁎
CSR_D 0.6505 0.0853 26.2199⁎⁎⁎ 0.6355 0.0862 19.5724⁎⁎⁎ 0.6729 0.0839 17.4951⁎⁎⁎
CSR_S 22.1480 3.2205 23.7078⁎⁎⁎ 21.6916 3.1473 17.9421⁎⁎⁎ 22.8326 3.3304 15.4973⁎⁎⁎
FINSUB 10.5499 9.1316 8.9254⁎⁎⁎ 10.1701 8.6694 6.8211⁎⁎⁎ 11.1197 9.8247 6.2078⁎⁎⁎
SIZE 23.0377 21.5071 9.4762⁎⁎⁎ 24.2495 22.6888 19.4278⁎⁎⁎ 21.2369 19.7677 4.5627⁎⁎⁎
RD 0.0060 0.0072 −1.5622 0.0038 0.0039 −0.1923 0.0094 0.0122 −1.7861
DEBT 0.6298 0.5584 6.9886⁎⁎⁎ 0.6259 0.5468 6.2157⁎⁎⁎ 0.6356 0.5758 3.5357⁎⁎⁎
TAT 1.2780 0.7913 9.7165⁎⁎⁎ 1.2784 0.7962 7.5933⁎⁎⁎ 1.2773 0.7840 6.0588⁎⁎⁎
INDS 0.9454 0.8859 2.9542⁎⁎⁎ 0.9395 0.8685 2.9324⁎⁎⁎ 0.9540 0.9115 1.2244
DUALITY 0.2538 0.2762 −0.8837 0.0755 0.0950 −0.9344 0.5187 0.5439 −0.5568
TOP_10 0.4236 0.3366 6.2567⁎⁎⁎ 0.3391 0.2691 4.1220⁎⁎⁎ 0.5503 0.4378 5.7162⁎⁎⁎
CONTROL 0.4797 0.4229 5.3544⁎⁎⁎ 0.4816 0.4244 4.2319⁎⁎⁎ 0.4768 0.4205 3.2818⁎⁎⁎

⁎⁎⁎ ⁎⁎ ⁎
Notes: , , are statistically significant at the 1%, 5%, and 10% levels, respectively.

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mean of CSR scores is 22.1480 for SOEs and is 3.2205 for non-SOEs. The difference is statistically significant. SOEs appear to engage
in more CSR than the non-SOEs do. SOEs have greater subsidies, a larger size, more leverage, and higher asset turnover than non-
SOEs. We also find that the direct controlling rights and the top 10 shareholders are significantly higher for SOEs than non-SOEs. The
result is consistent with Li and Zhang (2010). Panels B and C present the results of the early periods during 2008–2010 and later
periods during 2011–2012. The firm characteristics across SOEs and non-SOEs are similar in different subsample periods.

4.2. Regression results

4.2.1. OLS and simultaneous equation models

The following analysis illustrates the difference in results when OLS and simultaneous regressions are used to estimate the
relationship between CSR and firm performance. Table 6 reports the results of OLS and the simultaneous regressions. The results of
the OLS specification are reported in columns 1–4. In column 1, the coefficient of CSR_D is −0.235, which is negative on firm
performance (Q) and significant at the 1% level. The result is consistent with Barnea and Rubin (2010) that CSR engagement is costly,
negatively affecting performance. Column 2 shows that the coefficient of firm performance (Q) is −0.068, implying a negative effect
on CSR_D. The result confirms the conjecture that a manager with poor performance has more incentive to engage in CSR to window
dress. The negative and significant interaction relations between CSR scores (CSR_S) and firm performance are also found in columns
3–4. Some studies have mentioned that CSR and firm performance should account for endogeneity problems (Jo and Harjoto, 2011;
Tan and Peng, 2003; Waddock and Graves, 1997). To examine explicitly the endogeneity issue, we use an endogeneity test in the OLS
estimation. That is, we use the Durbin-Wu-Hausman (DWH) test to verify the consistency of the OLS; the value of F-statistics in
columns 1–4 are significant at the 1% level, indicating that OLS estimates are not consistent. Thus, it is necessary to control for the
endogeneity problem and simultaneity bias when we examine the relation between CSR and firm performance.
The results of simultaneous models for CSR dummy (CSR_D) and performance are presented in columns 5–6. The result shows

Table 6
Main results under OLS and simultaneous regressions for all firms.
The table shows results of GMM estimation method described in Lewbel (2012) for simultaneous equations models. Standard errors are in
parentheses. The Durbin-Wu-Hausman (DWH) test for endogeneity indicates that the OLS estimates are not consistent. The endogeneity test was first
proposed by Durbin (1954) and separately by Hausman (1978) and Wu (1973). P-values are in square brackets. ⁎⁎⁎, ⁎⁎, ⁎ are statistically significant at
the 1%, 5%, and 10% levels, respectively.
OLS model Simultaneous model

Dependent variable Dependent variable

(1) (2) (3) (4) (5) (6) (7) (8)

Q CSR_D Q CSR_S Q CSR_D Q CSR_S

⁎⁎⁎
CSR_D −0.235 −0.183
(0.05) (0.17)
CSR_S −0.007⁎⁎⁎ −0.004
(0.00) (0.00)
Q −0.068⁎⁎⁎ −2.476⁎⁎⁎ −0.053⁎⁎⁎ −1.905⁎⁎⁎
(0.02) (0.54) (0.02) (0.76)
Intercept 1.697⁎⁎⁎ −2.012⁎⁎⁎ 1.652⁎⁎⁎ −75.06⁎⁎⁎ 1.870 ⁎⁎⁎ −2.027⁎⁎⁎ 1.957⁎⁎⁎ −76.07⁎⁎⁎
(0.31) (0.16) (0.31) (5.53) (0.43) (0.15) (0.39) (5.65)
FINSUB −0.029⁎⁎⁎ 0.017⁎⁎⁎ −0.027⁎⁎⁎ 0.842⁎⁎⁎ −0.032⁎⁎⁎ 0.019⁎⁎⁎ −0.032⁎⁎⁎ 0.861⁎⁎⁎
(0.01) (0.00) (0.01) (0.16) (0.01) (0.00) (0.01) (0.17)
SIZE 0.035⁎⁎⁎ 0.079⁎⁎⁎ 0.037⁎⁎⁎ 2.877⁎⁎⁎ 0.031⁎ 0.077⁎⁎⁎ 0.027 2.863⁎⁎⁎
(0.01) (0.01) (0.01) (0.23) (0.02) (0.01) (0.02) (0.25)
RD 0.387 1.179 0.320 30.623 −0.032 1.093 −0.139 25.877
(1.77) (0.95) (1.77) (33.61) (1.48) (0.83) (1.46) (29.16)
DEBT −1.254⁎⁎⁎ 0.166⁎⁎ −1.268⁎⁎⁎ 3.377 −1.307⁎⁎⁎ 0.187⁎⁎⁎ −1.258⁎⁎⁎ 4.294⁎
(0.12) (0.07) (0.12) (2.44) (0.20) (0.07) (0.19) (2.57)
TAT 0.102⁎⁎⁎ 0.095⁎⁎⁎ 0.102⁎⁎⁎ 3.264⁎⁎⁎ 0.098⁎⁎⁎ 0.094⁎⁎⁎ 0.081⁎⁎ 3.203⁎⁎⁎
(0.02) (0.01) (0.02) (0.47) (0.04) (0.02) (0.04) (0.51)
INDS −0.065 0.113⁎⁎⁎ −0.067 3.417⁎⁎⁎ −0.080 0.116⁎⁎⁎ −0.084 3.341⁎⁎⁎
(0.06) (0.03) (0.06) (1.21) (0.06) (0.04) (0.06) (1.24)
DUALITY −0.104 0.367⁎⁎⁎ −0.098 13.329⁎⁎⁎ −0.116 0.364⁎⁎⁎ −0.136 13.578⁎⁎⁎
(0.08) (0.04) (0.08) (1.46) (0.12) (0.04) (0.11) (1.57)
TOP_10 0.393⁎⁎⁎ 0.164⁎⁎⁎ 0.399⁎⁎⁎ 6.494⁎⁎⁎ 0.372⁎⁎⁎ 0.156⁎⁎⁎ 0.362⁎⁎⁎ 6.015⁎⁎⁎
(0.10) (0.05) (0.10) (1.82) (0.10) (0.05) (0.10) (1.96)
CONTROL −0.414⁎⁎⁎ 0.126⁎ −0.393⁎⁎⁎ 7.281⁎⁎⁎ −0.435⁎⁎⁎ 0.136⁎⁎ −0.443⁎⁎⁎ 7.468⁎⁎⁎
(0.12) (0.07) 0.13 (2.37) (0.12) (0.07) (0.12) (2.35)
Endogeneity test 19.86⁎⁎⁎ 19.86⁎⁎⁎ 21.24⁎⁎⁎ 21.24⁎⁎⁎
F-statistics [0.00] [0.00] [0.00] [0.00]
#Obs. 1238 1250

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that, after controlling for the simultaneity bias, firm performance has a negative effect on CSR, which is significant at the 1% level,
but CSR engagement does not appear to influence firm performance. Similarly, firm performance influences CSR only when we use
CSR scores as a proxy for CSR in columns 7–8. Comparing the results of OLS and the simultaneous model, we find different results in
Table 6, implying that we cannot ignore the endogeneity problem.
Many control variables are highly significant in explaining CSR engagement, as shown in Table 6. The result shows that firms with
a higher government financial subsidy (FINSUB) will engage in more CSR. Larger firms (SIZE) are more capable of engaging in CSR.
Recently, the Chinese government has begun to require banks to incorporate CSR engagement information in credit assessments. It
should be noted that highly leveraged firms (DEBT) engage in more CSR. A firm with better operating performance (TAT) is more
likely to engage in CSR.
For the ownership and governance variables, we find that the coefficients on INDS, DUALITY, TOP_10, and CONTROL are positive
and significant with CSR, implying that firms with boards that are more independent directors (INDS), higher board leadership
(DUALITY), a higher proportion of ownership concentration (TOP_10), and larger controlling rights (CONTROL) are more likely to
engage in CSR.

4.2.2. Results using the two-stage instrumental variable regression

To check the robustness of our results obtained from the simultaneous equation model, we conduct a two-stage instrumental
variable (IV) regression model to estimate our results in light of the endogeneity issue.8 That is, a two-stage-least-square (2SLS)
regression is used. When Tobin Q is the dependent variable in the first stage, we include lagged Tobin Q, firm's sales, and number of
firm's employees as instrumental variables. High sales and hiring more employees often have high performance, but they may not
necessarily lead to engage more in CSR. When CSR is used as the dependent variable in the first stage, our choice of an instrumental
variable is firm's age, which is highly correlated with CSR but is uncorrelated with Tobin Q. Because older firms can afford CSR
engagement, but that may not necessarily lead to higher firm performance (Jo and Harjoto, 2012).
To compare with our results of simultaneous equation model in Table 6 for the all firms, we reported the results of the second
stage regression in the Table 7. In the Table 7 for the full sample, the predicted value of Tobin Q (PQ) in columns (1)–(2) has a
negative and significant effect on CSR_D and CSR_S, but the predicted value of CSR_D (PCSR_D) and CSR_S (PCSR_S) does not affect
Tobin Q significantly in columns (3)–(4). The results are similar to our findings using the simultaneous regression reported earlier in
the Table 6, implying that (1) there is indeed an interaction between CSR and performance, and (2) our results with the simultaneous
equation are robust.

4.2.3. SOEs and non-SOEs

According to the above results, it is necessary to control for the endogeneity problem in estimating the CSR-performance re-
lationship. We present results of the simultaneous models with different ownership in Table 8. The results of SOE and non-SOEs
subsamples are shown in columns 1–4 and columns 5–8, respectively.
For SOEs, the result using the CSR dummy (CSR_D) is reported in columns 1–2. The coefficient of performance (Q) is −0.072 in
column 2, which is negative and significant at the 5% level. The result implies that firm performance affects CSR negatively.
However, the coefficient of CSR_D on performance is also negative but insignificant. Columns 3–4 present the result of CSR combined
scores (CSR_S). The coefficient of performance (Q) on CSR is −2.95, which is negative and significant at 1% level; the coefficient of
CSR_S on performance is also insignificant. In sum, regardless of the CSR measure proxy for the CSR dummy or CSR combined scores,
CSR has a significant effect on firm performance at SOEs, supporting the managerial opportunism hypothesis. The result echoes that of
Li and Zhang (2010), who suggest that CSR in China is largely concentrated at SOEs as firms respond to incentives or directives from
the government to initiate CSR activities. In general, SOEs have lackluster performance, likely attributed to the inefficiency re-
presented by slack (Chen et al., 2011). Because SOEs have severe agency–government problems, managers at firms with lackluster
performance have strong incentives for engaging in CSR to serve the state's interest or to ensure the firm's survival.
Regarding the coefficients of control variables for SOEs, except for DEBT and INDS, most of them are similar to those of the entire
samples presented in Table 6. In emerging economies, such as China, SOEs often face soft budget constraints (i.e., due to implicit
government guarantees). They have an advantage in obtaining access to scarce resources if they are involved in CSR activities. Thus,
we expect a significant and negative effect of DEBT on CSR. In addition, the Chinese government is the largest shareholder of SOEs.
Firms with higher board leadership (DUALITY), a higher proportion of ownership concentration (TOP_10), and larger controlling
rights (CONTROL) are more likely to engage in CSR.
For non-SOEs, the results are reported in the columns 5–8 of Table 8. Column 5 shows that the coefficient of CSR_D on perfor-
mance is 0.331, which is positive and significant at the 10% level, while the coefficient of Q on CSR is positive (0.02) but insignificant
in column 6. When we use the CSR score proxy, the coefficient of CSR_S on performance is 0.012, which is positive and significant at
the 5% level in column 7. Regardless of the CSR measure proxy for CSR, the results support the good management hypothesis. Non-SOEs
often have less government support and intervention. They tend to have fewer agency problems. To maximize shareholders' wealth,
non-SOEs' managers likely use CSR activities to resolve conflicts among stakeholders. Thus, we find that CSR has a positive impact on
firm performance. This result is consistent with most evidence in Western countries, showing that CSR has a positive effect on firm
performance in general (Filbeck et al., 2009; Statman and Glushkov, 2009).
The coefficient of DEBT on CSR_D (CSR_S) is 0.243 (10.955) for non-SOEs, which is positive and significant at the 1% level,

8
We appreciate an anonymous referee who suggests the two stage instrumental variable regression method to us to check robustness of our results.

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Table 7
Results of two-stage instrumental variable (IV) method for all firms.
The dependent variable in the second stage regression are CSR dummy (CSR_D), CSR score (CSR_S) and Tobin Q (Q) respectively. In the columns
(1) and (2), in the first-stage regression, the dependent variable is Tobin Q and we include lagged Tobin's Q, firm sales and number of employees as
instrumental variables. PQ is the predicted values of Tobin's Q from the first stage regression. In the column (3), the first-stage dependent variable is
CSR_D, which includes lagged CSR_D and firm's age as instrumental variables. PCSR_D is the predicted values of CSR_D from the first stage re-
gression. In the column (4), PCSR_S is the predicted values of CSR_S from the first stage regression. Standard errors are reported in parentheses. ⁎⁎⁎,
⁎⁎ ⁎
, are statistically significant at the 1%, 5% and 10% levels, respectively.
Variables Dependent variables

(1) (2) (3) (4)

CSR_D CSR_S Q Q

PCSR_D −0.174
(0.457)
PCSR_S −0.0769
(0.455)
PQ −0.542⁎⁎⁎ −14.71⁎⁎⁎
(0.188) (4.582)
Intercept −2.162⁎⁎⁎ −80.34⁎⁎⁎ 2.659⁎⁎⁎ 2.667⁎⁎⁎
(0.169) (5.876) (0.336) (0.336)
FINSUB 0.0232⁎⁎⁎ 1.119⁎⁎⁎ −0.0455⁎⁎⁎ −0.0455⁎⁎⁎
(0.00536) (0.186) (0.0105) (0.0105)
SIZE 0.0764⁎⁎⁎ 2.697⁎⁎⁎ 0.0151 0.0149
(0.00702) (0.244) (0.0139) (0.0139)
RD 0.984 36.14 −1.501 −1.503
(0.993) (34.50) (1.958) (1.958)
DEBT 0.237⁎⁎⁎ 7.667⁎⁎⁎ −1.516⁎⁎⁎ −1.519⁎⁎⁎
(0.0745) (2.579) (0.146) (0.146)
TAT 0.0794⁎⁎⁎ 2.662⁎⁎⁎ 0.103⁎⁎⁎ 0.102⁎⁎⁎
(0.0154) (0.534) (0.0303) (0.0303)
INDS 0.124⁎⁎⁎ 3.801⁎⁎⁎ −0.0945 −0.0952
(0.0377) (1.311) (0.0744) (0.0744)
DUALITY 0.391⁎⁎⁎ 14.15⁎⁎⁎ −0.271⁎⁎⁎ −0.272⁎⁎⁎
(0.0462) (1.607) (0.0914) (0.0915)
TOP10 0.154⁎⁎⁎ 6.727⁎⁎⁎ 0.145 0.145
(0.0578) (2.011) (0.114) (0.114)
CONTROL 0.133⁎ 7.044⁎⁎⁎ −0.446⁎⁎⁎ −0.446⁎⁎⁎
(0.0743) (2.589) (0.147) (0.147)
YEAR Controlled Controlled Controlled Controlled
IND Controlled Controlled Controlled Controlled
R-squared 0.213 0.240 0.171 0.171
F-value 26.73⁎⁎⁎ 31.19⁎⁎⁎ 20.38⁎⁎⁎ 20.36⁎⁎⁎
#Obs. 996 996 996 996

implying that non-SOEs do not have easy access to resources; they often have budget constraints. In order to borrow funds from banks
or launch an initial public offering, these firms need to follow the government's “green loan policy” and engage in CSR activities. That
might explain why DEBT has different effects on CSR in SOEs and non-SOEs. Also, unlike in SOEs, external governance (independent
boards, INDS) is a positive and significant for CSR, suggesting that having some external governance is important in determining CSR
engagement at non-SOEs. The result is in line with evidence in the West (Jo and Harjoto, 2011).
In sum, our study highlights an interesting finding that CSR and performance have a different relation at SOEs and non-SOEs.9
Clearly, it is necessary to examine the CSR-performance issue separately for SOEs and non-SOEs.

4.3. Dynamic relationship between CSR and firm performance

Ownership structure can explain the positive and negative relation between performance and CSR. The other alternative plausible
explanation may be attributable to the dynamic nature of their relationship. Brammer and Millington (2008) find that firms that
exhibit unusually high levels of CSR activities do not necessarily outperform and in the short run may in fact underperform rivals that
are relatively less socially responsible.
We divide the sample period into two subsample periods. The early subsample period is from 2008 to 2010; the more recent
subsample period is from 2011 to 2012. We present results of the simultaneous models in various subsamples. To conserve space, we
report the interaction coefficients between firm performance (Q) and corporate social responsibility (using the CSR-S measure) as

9
We have also used 2SLS method to confirm the results obtained using the simultaneous structural estimation for the SOEs and non-SOEs subsample. The 2SLS
results are not reported for space consideration but are available upon request.

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Table 8
Main results of simultaneous regressions and OLS model for SOEs and non-SOEs.
The table reports the GMM estimation (Lewbel, 2012) for simultaneous equations models are reported. The standard errors reported in par-
entheses. The Durbin-Wu-Hausman (DWH) test for endogeneity indicates that the OLS estimates are inconsistent. The endogeneity test was first
proposed by Durbin (1954) and separately by Wu (1973) and Hausman (1978). P-values are in brackets. ⁎⁎⁎, ⁎⁎, ⁎ are statistically significant at the
1%, 5%, and 10% levels, respectively.
SOEs Non-SOEs

Dependent variable Dependent variable

(1) (2) (3) (4) (5) (6) (7) (8)

Q CSR_D Q CSR_S Q CSR_D Q CSR_S

⁎
CSR_D −0.215 0.331
(0.46) (0.19)
CSR_S −0.013 0.012⁎⁎
(0.01) (0.01)
Q −0.072⁎⁎ −2.957⁎⁎⁎ 0.020 2.104
(0.04) (1.16) (0.03) (1.81)
Intercept 1.385⁎⁎ −0.671⁎⁎ 1.003⁎ −38.150⁎⁎⁎ 1.058⁎⁎ −0.861⁎⁎⁎ 1.337⁎⁎⁎ −38.564⁎⁎⁎
(0.55) (0.31) (0.58) (11.27) (0.46) (0.19) (0.47) (8.03)
FINSUB −0.005 0.013⁎ −0.001 0.849⁎⁎⁎ −0.040⁎⁎⁎ 0.006 −0.043⁎⁎⁎ 0.402⁎⁎⁎
(0.01) (0.01) (0.01) (0.28) (0.01) (0.00) (0.01) (0.16)
SIZE 0.031 0.054⁎⁎⁎ 0.050⁎ 2.346⁎⁎⁎ 0.070⁎⁎⁎ 0.026⁎⁎⁎ 0.059⁎⁎⁎ 0.974⁎⁎⁎
(0.03) (0.01) (0.03) (0.41) (0.02) (0.01) (0.02) (0.33)
RD −0.142 2.849 0.469 74.849 0.847 0.332 0.749 23.687
(2.07) (1.82) (1.91) (58.91) (1.97) (0.58) (1.96) (25.12)
DEBT −1.149⁎⁎⁎ −0.277⁎⁎ −1.164⁎⁎⁎ −14.429⁎⁎⁎ −1.455⁎⁎⁎ 0.243⁎⁎⁎ −1.376⁎⁎⁎ 10.955⁎⁎⁎
(0.25) (0.14) (0.27) (5.30) (0.27) (0.05) (0.27) (2.56)
TAT 0.154⁎⁎⁎ 0.027 0.128⁎⁎⁎ 1.154⁎ 0.082⁎ 0.016 0.069 1.064
(0.05) (0.02) (0.05) (0.64) (0.05) (0.02) (0.05) (0.75)
INDS −0.152⁎⁎⁎ 0.010 −0.157⁎⁎⁎ −0.810 −0.025 0.134⁎⁎⁎ −0.042 5.617⁎⁎⁎
(0.06) (0.05) (0.06) (1.80) (0.10) (0.03) (0.10) (1.38)
DUALITY −0.243 0.254⁎⁎⁎ −0.137 10.214⁎⁎⁎ 0.074 0.173⁎⁎⁎ 0.020 6.843⁎⁎⁎
(0.16) (0.07) (0.13) (2.68) (0.15) (0.05) (0.15) (1.95)
TOP_10 0.236⁎⁎ 0.115 0.243⁎⁎ 5.622⁎⁎ 0.746⁎⁎⁎ −0.081⁎ 0.735⁎⁎⁎ −3.388⁎
(0.11) (0.08) (0.12) (2.86) (0.17) (0.05) (0.16) (2.06)
CONTROL −0.216⁎ 0.055 −0.104 8.019⁎⁎ −0.612⁎⁎⁎ 0.027 −0.631⁎⁎⁎ 2.799
(0.13) (0.11) (0.16) (3.87) (0.17) (0.05) (0.17) (2.25)
#Obs. 535 715

follows.10
Panel A of Table 9 presents the results of SOEs and non-SOEs in the entire sample period. Regression results with CSR used as the
dependent variable for the all firms (in column 2) and sub-sample SOEs (in column 4) support our Hypothesis 2 of managerial
opportunism hypothesis, which explains the negative effect of firm performance (Q) on CSR. As CSR engagement entails numerous costs
upfront, most stakeholders or investors might doubt the need to engage in CSR and perceive CSRs as self-serving or window dressing
behaviors. Thus, firms performing well might have less incentives to invest in CSR. In contrast, managers at poorly performing firms
have a greater incentive to engage in CSR for window dressing. For SOEs, the politically connected CEOs are not closely related to
shareholders, they have severe agency problem than non-SOEs, ignoring the potential benefits of CSRs.
In case of non-SOEs, we do not find negative effects of Q on CSR. When Q is the dependent variable, CSR has a positive and
significant effect on firm performance (Q) for non-SOEs (in column 5), a result that supports our Hypothesis 3 of good management
hypothesis. This result contrasts the result that CSR has a negative and insignificant effect on Tobin's Q for the all firms and SOEs. The
overall results in Panel A indicate that implications from the entire sample period may be misleading in light of ownership.11
Panel B reports the relationship between performance (Q) and CSR in the early subsample period (2008–2010). For all firms (in
column 1), the coefficient of CSR_S on performance (Q as the dependent variable) is significant and negative (−0.0064). In column 3,
the coefficient of CSR_S on performance (Q as the dependent variable) is 0.0084, which is insignificant for SOEs. But the effect of
CSR_S on Q (column 5) is 0.0175 for non-SOEs, which is positive and significant, indicating engagement in CSR can increase firm
performance, confirming the good management hypothesis for non-SOEs. When the CSR variable is used as the dependent variable, we

10
The performance-CSR relation is also examined using a CSR dummy variable (CSR_D) to proxy the CSR. Similar results to Table 9 are found. Thus, the results are
not reported for saving space. We thank the reviewer for suggesting this.
11
Since our sample period covers the global financial crisis in the 2008–2009 period, we use a dummy variable of CRISIS, which equals to one for the years from
2008 to 2009 and zero otherwise, to control for the financial crisis effect. Our results show that coefficients of CRISIS in the regressions are insignificant. Thus, we
believe the performance-CSR relation is not affected significantly by the global financial crisis in China as the Chinese government implemented aggressive monetary
policies to neutralize its impact on the Chinese economy. These results are not reported for space consideration.

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Table 9
Main results under simultaneous in various subsample periods by CSR scores.
This table shows the results from GMM estimation method described in Lewbel (2012) for simultaneous equations models. The proxy variable of
CSR is CSR score measurement. Standard errors are in parentheses. For the sake of brevity, we report only the interaction variables between firm
performance (Q) and corporate social responsibility (CSR_S) for brevity. ⁎⁎⁎, ⁎⁎, and ⁎ are statistically significant at the 1%, 5%, and 10% levels,
respectively.
Dependent variable

All firms Subsample of SOEs Subsample of non-SOEs

(1) (2) (3) (4) (5) (6)

Q CSR_S Q CSR_S Q CSR_S

Panel A: Sample period over 2008–2012

CSR_S −0.0041 −0.0130 0.0124⁎⁎
(0.0037) (0.0102) (0.0056)
Q −1.9045⁎⁎⁎ −2.9573⁎⁎⁎ 2.1042
(0.7615) (1.1635) (1.8087)
# Obs. 1250 535 715

Panel B: Sample period over 2008–2010

CSR_S −0.0064⁎ 0.0084 0.0175⁎⁎
(0.0038) (0.0205) (0.0074)
Q −1.6563⁎⁎⁎ −5.0452⁎⁎⁎ −0.2567
(0.6667) (1.6745) (2.3841)
# Obs. 750 321 429

Panel C: Sample period over 2011–2012

CSR_S −0.0037 −0.0083 0.0087⁎
(0.0053) (0.0064) (0.0050)
Q 3.0021⁎⁎ 3.3691⁎⁎⁎ 2.6898⁎
(1.5089) (1.7026) (1.5722)
# Obs. 500 214 286

find the coefficient of firm performance (Q) on CSR is −5.0452 (in column 4) for SOEs, which is significant at the 1% level, indicating
that poor performance SOEs have more incentives to engage in CSR. The result is similar with results in Panel A and consistent with
Chen et al. (2011), who suggest that SOEs with politically connected executives are more likely to engage in investments that do not
maximize firm value but achieve government objectives (Shleifer and Vishny, 1994), supporting the managerial opportunism hy-
pothesis for SOEs (H2).
Panel C presents the relationship between performance (Q) and CSR_S in the later period (2011–2012). Very interesting, the
relationship between CSR and performance changes over time. The effect of performance on CSR is 3.3691 for SOEs in column 4 and
2.6898 for non-SOEs in column 6. Both are statistically significant, supporting the slack resource hypothesis. Columns 5–6 in panel C
show a positive relationship between firm performance (Q) and CSRs at non-SOEs, combining the good management hypothesis and
the slack resource hypothesis, supporting the argument of a virtuous circle for non-SOEs (Makni et al., 2009; Waddock and Graves,
1997) in recent years.
In sum, Table 9 confirms the results of Brammer and Millington (2008) that it takes time to realize the benefits of CSR. The
negative CSR-performance relation in 2008–2010 changes to the positive relation in 2011–2012. The change implies that CSR
development is a dynamic process and supports our Hypothesis 5 that the negative relationship between CSR and performance is
found in the short run because of the initial costs of social investments while the relation between CSR and performance will become
positive over longer time (in the second period) as benefits of CSR materialize. Our results provide direct empirical evidence for the
argument of Lin (2010), who suggests a time gap for realizing the gains of CSR initiatives.

5. Conclusions

In recent years CSR engagement in China has been a topic of interest for stakeholders, investors, the government, and academic
researchers. Few studies examine the CSR effect by ownership types in emerging markets. We use SOEs and non-SOEs, which have
different organizational and ownership structures, for our analysis from 2008 to 2012. To solve endogeneity problems between CSR
and firm performance in this study, we apply a heteroskedasticity-based simultaneous equations model. Our results are robust
regardless of whether we use CSR_D or CSR_S to proxy for CSR engagement.
Several findings are noted as follows. First, SOEs have severe government agency problems, which often result in lackluster firm
performance. Managers at the SOEs in China are appointed by the government and have strong incentives for overinvesting in CSR to
serve state interests or to ensure their survival, supporting the managerial opportunism hypothesis based on the agency problem. For
non-SOEs, which have less government intervention, we find that CSR engagement affects firm performance positively, supporting
the good management hypothesis based on stakeholder theory.
Second, consistent with the findings of Chen et al. (2011), who suggest that political connections make CSR investment inefficient

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at SOEs, we do not find significant effect of CSR on performance for SOEs for the entire period and the two subperiods. However, we
do find evidence showing a positive effect of CSR on performance for non-SOEs. The result implies that ownership and government
intervention are important factors in examining CSR-firm performance relationship.
Third, the relationship between performance and CSR appears to change over time. Structural change explains the presence of
both positive and negative relationships between firm performance and CSR in the literature, depending on the stage in the cycle. As
CSR is a long-term process, the negative effect that CSR has on performance reflects the initial costs of CSR engagement, while the
positive effect summarizes the overall net benefits. For example, we find a negative and significant effect of Tobin's Q on CSR in the
entire period and first subperiod. However, in the recent period, Tobin's Q is positively correlated with CSR, demonstrating the
misleading results of the entire-sample period because of the dynamic nature of the CSR.
Our study has several important implications. First, we show that the CSR-performance relationship depends critically on the
firm's ownership structure. If firms (such as privately owned firms) do not entail substantial agency costs, the stock market will
respond favorably to their CSR activities. However, if firms with high agency costs (such as SOEs) engage in CSR, the stock market
will not reward those activities. That is, managers cannot easily trick market participants and investors by engaging in CSR for
window dressing, even in the case of China's emerging financial market.
Second, Chinese managers appear to engage in CSR randomly at first but are able to align their CSR activities to firm performance
over time, indicating that they learn the long-term benefits to a firm's sustainable development of CSR. Managers can use CSR as a
strategic resource to improve stakeholder relations and a firm's reputation.
Finally, our results provide useful information for firm owners and policymakers to rethink how to prevent opportunistic behavior
among managers from diverting firm resources for their own self-interests. Overall, this study complements the CSR literature by
providing evidence of the important role that ownership plays in the dynamic CSR-performance relationship.

Appendix A. The simultaneity bias problem

To focus mainly on a simple system of simultaneous equations as follows.

Qi = β1 Πi + ε1i (A1)

Πi = β2 Qi + ε2i (A2)
where i = 1, 2, …, n, ε1i~(0, σ12) and ε2i~(0, σ22) are uncorrelated structural shocks to “firm performance” and “CSR” regressions in
Eqs. (A1) and (A2), respectively.
Clearly, the simultaneous system allows a joint determination of firm performance and CSR. Existing studies focus primarily on
the estimate of β1, which measures the effect of CSR on firm performance. We are interested in estimating β2, which assesses the effect
of changes in firm performance on CSR.
Let us suppose that we estimate Eq. (A1) using the ordinary least squares (OLS) method without taking into account the en-
dogeneity problem. Specifically, the OLS estimator is given by

β1 = (Π′Π)−1Π′Q,

where Π = (Π1, Π2, …, Πn)' and Q = (Q1, Q2, …, Qn)'. The estimated coefficient β1 will then be biased because the shock term ε1i is
β2 σ12
correlated with the (endogenous) regressor Π1 as Cov (ε1i , Πi) = 1 − β1 β2
≠ 0 . To see this, we take the expected value of the estimator
β2 σ12
E (β1) = β1 + (1 − β1 β2 ) . The estimate is clearly biased and different from its true value, β1, due to the simultaneity bias (i.e., if
β22 σ12 + σ22

β2 ≠ 0 and σ1 > 0). Similarly, the estimator β2 is also biased.

2

Appendix B. Identification and estimation of simultaneous equations model

Qit = α1 Πit + x it′ γ1 + ε1it (B1)

Πit = α2 Qit + x it′ γ2 + ε2it (B2)

Identification of the structural parameters given Eqs. (B1)–(B2) can be obtained by using exclusionary restrictions. That is, we
assume that some elements of γ1 or γ2 are zero. Because variables that affect firm performance (CSR) but do not affect CSR (firm
performance) are difficult to find, we follow Lewbel (2012) by relying on heteroskedasticity in the errors to identify the structural
parameters.12
In particular, Lewbel (2012) shows that the structural parameters in Eqs. (B1) and (B2) can be identified if
E (x it ε1it ) = 0 (B3)

E (x it ε2it ) = 0 (B4)

12
Rigobon (2003) proposes another approach that relies on heteroskedasticity in errors to obtain identification of endogenous regressors. Recent applications of
Rigobon's identification method can be found in Kearns and Rigobon (2005), Lee et al. (2004), and Rigobon and Sack (2003, 2004, 2005).

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Cov (z it , ε1it ε2it ) = 0 (B5)

and Cov(zit, εjit ) ≠ 0 for both j = 1 and j = 2. Let zit be a vector of observed exogenous variables, in particular, zit could be a sub-
2

vector of xit, or zit could equal xit, i.e., the observed zit may be, but does not necessarily have to be, a subset of xit. Consider an
estimation of the structural model of Eqs. (B1) and (B2). In addition, we define sitto be the vector of elements of Qit and Πit and the
elements of zit that are not already contained in explanatory variables, if any. Let θ represent the set of parameters {α1, α2, γ1, γ2, μ}
where μ = E(zit). Now, define the vector value functions:
G1 (θ, πit ) = (Qit − α1 Πit − x it′ γ1) (B6)

G2 (θ, πit ) = (∏ − α2 Qit − x it′ γ2) (B7)

it

G3 (θ, πit ) = z it − μ (B8)

G4 (θ, πit ) = (z it − μ)(Qit − α1 ∏ − x it′ γ1 )(∏ − α2 Qit − x it′ γ2) (B9)

it it

stacking the above four vectors into one long vector, G(θ, sit). Let Θ be the set of all values θ might take, and let θ0 denote the true
value of θ. Where θ = θ0, it is straightforward that the only value of θ ∈ Θ satisfies
E [G (θ, πit )] = 0. (B10)
Because the population moments E[G(θ, πit)] are unobservable, we are unable to solve for θ directly. Instead, we proceed to define
the corresponding sample moments as
n
1
Gn (θ) =
n
∑ G (θ, πit )
n=1 (B11)
and estimate θ using Hansen's (1982) GMM.
GMM estimation mimics the population moment conditions by minimizing a quadratic form of the sample counterpart Eq. (B9).
The standard Hansen's (1982) GMM estimator is:
arg min
θ = Gn (θ)′Ω−n 1Gn (θ)
θ (B12)
where Ωn is a positive definite weighting matrix. Hansen (1982) shows that, under some conditions, the resulting GMM estimator can
be obtained by setting the weighting matrix at Ωn(θ) = Vn−1, where Vn−1 = n × Var[Gn(θ)].

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