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Internal control, corporate governance attributes, and corporate social responsibility (CSR) disclosure: Evidence from the power and chemical industries in China

Gao, Xue (2021) Internal control, corporate governance attributes, and corporate social responsibility (CSR) disclosure: Evidence from the power and chemical industries in China. Masters by Research thesis, Murdoch University.

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Abstract

Corporate social responsibility (CSR) has been attracting attention, especially in the context of the power and chemical industries in China, which are known to be heavy environmental polluters and raise significant concerns for the Chinese government and the international community. However, the impact of internal control and the CEO’s political connections on CSR disclosure are under-researched in the previous literature.

This study investigates the relationship between internal control, corporate governance attributes, the CEO’s political connections and corporate social responsibility (CSR) disclosure in China’s power and chemical industries. The companies in the sample are selected from the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) in China. The main reason for selecting the power and chemical industries is that they are known as heavy environmental polluters in China. This study uses the Dibo Internal Control Index from Shenzhen Dibo Enterprise Risk Management Technology Co. Ltd. to measure the level of internal control. This study also collects available CSR and annual reports to measure CSR disclosure. Finally, this study selects 265 companies from China’s power and chemical industries with 892 company-year observations from 2013–2016.

Based on multiple theories (institutional theory, legitimacy theory and stakeholder theory), a model is designed to examine the impact of internal control, corporate governance and the CEO’s political connections on CSR disclosure practices. The results suggest a significant and positive relationship between internal control and CSR disclosure. It is also found that corporate governance attributes, such as state ownership, board independence and existence of an audit committee, have a significant positive impact on CSR disclosure. However, no significant relationship is found between the CEO’s political connections and CSR disclosure in the context of China’s power and chemical industries. This study also finds that company size, the company’s industry and the company’s location significantly impact on the extent of CSR disclosure.

Overall, the results suggest that internal control and sound corporate governance play a significant role in CSR disclosure in heavily polluting companies in China.

The study has two significant distinguishing features from other research. Firstly, two variables, namely, internal control and the CEO’s political connections, are underresearched in the previous literature have been included in this study, providing insights for CSR research. Secondly, this study investigates CSR disclosure in the context of the power and chemical industries in China, which are known to be heavy environmental polluters. This study also provides empirical support to institutional, legitimacy and stakeholder theories. For example, the study’s findings imply that regulations have a significant impact on CSR in China’s power and chemical industries which supports institutional theory. Similarly, in line with legitimacy theory and stakeholder theory, China’s power and chemical companies implement CSR to survive, to avoid legitimacy threats and to meet the expectations of different stakeholders.

The study’s findings provide useful information to regulators of China’s heavily polluting industries. Firstly, the positive impact of internal control on CSR disclosure provides theoretical support for regulatory policy on internal control; thus, Chinese regulators could enhance CSR disclosure by improving internal control. Secondly, policy makers and regulators can improve CSR disclosure by encouraging improvements in corporate governance due to the positive relationship between corporate governance and CSR disclosure. Thirdly, the non-significant relationship between the CEO’s political connections and CSR disclosure supports regulatory policies on heavily polluting industries, as China's regulation of these industries has moved from relying on local governments to reliance on laws, supervision and information disclosure which avoids adverse political impacts. Finally, this study has practical implications for investors and managers. Investors should pay attention on internal control, the corporate governance structure and CSR disclosure when investing in China’s power and chemical companies. Moreover, investors and managers can improve CSR disclosure by improving internal control and optimising the corporate governance structure, thereby improving the company’s legitimacy and viability.

Item Type: Thesis (Masters by Research)
Murdoch Affiliation(s): Murdoch Business School
Supervisor(s): Alam, Manzurul and Hossain, MD Moazzem
URI: http://researchrepository.murdoch.edu.au/id/eprint/63411
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