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.

Introduction

With rapid economic development, there is an increasing awareness of social and environmental problems. Ho & Williams (2003) believe that the effectiveness of capital markets depends on how information is shared among the participants. Better management of the relationships with stakeholders is an effective way for a firm to improve operation efficiency. According to Rankings (RKS), a private company specializing in tracking the corporate social responsibility (CSR) reports of Chinese listed firms, an increasing number of firms have joined the ranks of disclosing a social responsibility report since 2006, after the first official regulation “Chinese Listed Company Social Responsibility Guidelines” was released. Although many firms respond actively, CSR-disclosing firms represent only a small fraction of the population of publicly listed Chinese firms. Disclosure of a social responsibility report is still a relatively casual and spontaneous behavior in China. In an emerging market, due to information asymmetry and agency problems, the cost of external financing is generally higher than that of internal sources, thus resulting in firms facing binding financial constraints. Most of the prior studies conclude that CSR disclosure can ease the financial constraints (e.g., El Ghoul et al., 2011). These studies implicitly assume that firms are homogeneous in terms of their stage within the industry life cycle. Considering the dynamic development and heterogeneity of firms, most prior literature ignore an important fact that firms reasonably have a capability boundary to undertake CSR. Firms be in a certain life cycle phase could exhibit unique CSR capability and objective. We find that as firms progress from the initial phase to the growth phase, and further to the mature phase, the mean CSR score increases, whereas there is a sharp reduction in the declining stage (as shown in Figure 1). Thus, firms are not homogeneous in the context of their respective positions in the life cycle. However, few studies consider the impact of life cycle when they investigate the economic effect of firms’ social responsibility.