Lei Gao (et al.) from the George Mason University (Virginia, USA) took a sample of domestically listed Chinese stocks from 2010~2018 and wanted to see if there was a reliable relationship between short-selling activity and their Corporate Social Responsibility (CSR) credentials?
As this is a summary and you can read the work in full here CSR and Short Selling I’ll get straight to the key practitioner point. Companies in the survey with the shiniest CSR credentials attracted the most short-selling activity. That is to say professionals, who are the most capable short sellers in China, seemed to systematically detect problems in high-scoring CSR firms. This isn’t as counterintuitive as it at first may seem and studies in other markets have found evidence of the same phenomenon.
In fact, the tradition of crooks performing ostentatious acts of charity goes back to Roman times (and probably before), here’s a link to a great example from the last century Al Capone’s Soup Kitchen; and from the paper “Hui Ka Yan, Founder of Evergrande Group, China’s second-largest property developer by sales, has been for many years on the Hurun China Philanthropy List, a well-known ranking of the most generous philanthropists in Greater China.” Ahem!
CSR boosters may wish to chime in here that firms not run by shabby operators often have their share prices punished when they make non-economic use of shareholders’ funds. This may be so but there’s no evidence in this study of that. What the researchers find here is that it’s good ol’ earnings manipulation practiced by the CSR high scorers that’s ultimately encouraging the short sellers to take their negative bets.
As the team pithily conclude “..[Their] findings have important policy implications as Chinese regulators have been increasingly encouraging the development and exercise of corporate social responsibility.” Perhaps the regulators could do with a crash course in the Law of Unintended Consequences (意外后果定律)?
My bottom line. Good-CSR, is a good-thing and to be encouraged and I use analysis of it always when trying to establish the character of a company and its managers.
CSR when used as a fig-leaf of respectability by shabby operators however is a contemptible practice and one which a diligent analyst can usually spot quickly. Something institutional managers in China seem to have been onto for some time.
Now, if somebody could just persuade those smart managers to have a word with those no doubt well-meaning regulators?
Happy Sunday.