Social and Environmental Regulations and Corporate Innovation

Abstract

In this study, we investigate the effects of mandatory social and environmental regulations (MSER) on firm innovation. In 2008, the Shanghai and Shenzhen Stock Exchange in China published regulations that mandate some public firms to disclose their social and environmental governance information in their annual reports. As the MSER apply only to selected firms, this provides an ideal setting for us to observe the effects of MSER on firm innovation. Using a difference-in-differences with propensity-score-matching methodology, we find that the treatment firms experience a significant increase in innovation in terms of the number of total patents and invention patents. More importantly, we further explore three possible mechanisms underlying this association, that is, the corporate social responsibility (CSR)-improving effect, information-disclosing effect, and market-reaction effect, and demonstrate that this positive relationship is mainly driven by the CSR-improving effect and market-reaction effect, manifesting in an improvement in CSR performance and a decline in transient institutional investors for the treatment firms, respectively.