Firms in China with higher corporate social responsibility (CSR) performance may not substantially reduce their cost of equity capital versus firms in developed countries. To compare the different capital structures between developing and developed countries, this study examines whether CSR affects a firm’s cost of equity and debt capital in China. Our results show that Chinese firms with higher CSR performance can rapidly reduce their cost of debt capital. When we use capital structure (CS) as a moderator to evaluate the relationship between CSR and the cost of capital, the findings present that CS does not play a moderating role. The CSR value curve indicates that CSR investment by Chinese firms is still at legal and compliant levels, incurring more information asymmetry and less market efficiency in the country’s financial sector.

Introduction

The dramatic growth in international financial markets has caused corporate social responsibility (CSR) to become increasingly important. A firm now has to focus its attention on both increasing its revenue and being a good corporate citizen. Such a major transformation requires national and global companies to approach their business from the perspective of sustainable development and support CSR activity in order to benefit from any positive financial impact. CSR can be regarded as a manner in which companies consider environmental, social, and governance factors in their business decisions and processes, along with the strength of their relationships with various corporate stakeholders (Oikonomou, Brooks, & Pavelin, 2014). In developed markets such as the United States, firms prefer to raise their funds through the equity market, but in China, a uniquely fast developing country, firms tend to raise funds from the external debt market rather than the external equity market (Pessarossia & Weill, 2013). Fig. 1 demonstrates that U.S firms raise at least 70% of their corporate funds from the equity market, while less than 60% of Chinese corporate funds come from the equity market. There indeed is a huge gap in capital structure (CS) between China and developed markets such as the U.S (see Fig. 1).