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http://e-journal.uum.edu.my/index.php/ijbf

INTERNATIONAL JOURNAL 
OF BANKING AND FINANCE

How to cite this article:
Wenhao, M., Jaidi, J., & Mohidin, R. (2022). Board independence, corporate social 
responsibility and firm performance: Evidence from China. International Journal of 
Banking and Finance, 17(1), 109 - 130. https://doi.org/10.32890/ ijbf2022.17.1.5

BOARD INDEPENDENCE, CORPORATE SOCIAL 
RESPONSIBILITY AND FIRM PERFORMANCE: 

EVIDENCE FROM CHINA

1Miao Wenhao, 2Junainah Jaidi & 3Rosle Mohidin 
Faculty of Business, Economics and Accountancy 

Universiti Malaysia Sabah, Malaysia

2Corresponding author: nenjaidi@ums.edu.my

Received: 8/12/2020     Revised: 8/4/2021     Accepted: 16/4/2021    Published: 2/12/2021

ABSTRACT

The purpose of this paper was to investigate the relationship between 
board independence and the firm performance of Chinese firms listed in 
the Shanghai Stock Exchange, under the moderating role of Corporate 
Social Responsibility (CSR). A total of 860 firm-year observations 
over a period of ten years, that is from 2010 to 2019 was collected. 
The panel data regression technique was employed to analyze the data 
and determine the relationship between board independence and the 
firm performance of the Chinese firms under investigation. After a 
robustness check, the empirical results showed that the level of the 
CSR moderated (reduced) the positive relationship between board 
independence and firm performance. Therefore, the results seemed 
to imply that although the CSR has been seen as a useful business 
strategy, the level of the CSR in China still needed to be improved. 



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In order to improve firm performance through practicing the CSR, 
the Chinese government and enterprises should be encouraged to 
continuously improve the level of the CSR. 

Keywords: Board independence, firm performance, CSR, panel data 
regression, China stock market.

JEL Classification: G3. 

INTRODUCTION

The world market in the 21st century has already undergone profound 
and complex changes due to the accelerated development of economic 
globalization. today’s enterprises are facing great challenges and even 
cutthroat market competition as a result of the unstable and uncertain 
business environment in this new century (Taouab, 2019). It seems 
that high and stable business performance is the key driving force 
for the firm’s long-term sustainability in today’s dynamic business 
environment. The rapid growth in the capital market in Asia, especially 
in China, has emphatically underscored the contribution of corporate 
governance (CG) performs in influencing future firm’s performance. 

Corporate governance is considered an important element in 
improving a firm’s performance. Li et al. (2012) highlighted that 
the topic of corporate governance has become a central discussion 
among academicians after the 1997 Asian financial crisis as a result 
of frequent outbreaks of disgraceful incidents such as the infamous 
Enron and WorldCom scandals. As a result of these corporate scandals, 
corporate governance has become increasingly important for firms 
to establish reasonable and good practices of corporate governance 
mechanisms. According to al-Matari et al. (2014), good corporate 
governance played a momentous role in preventing the likelihood of 
a financial crisis, attract more investment for enterprises to maximize 
its capital, as well as to solidify the pillars of the firm, which could 
boost firm’s performance. It is undeniable that independent directors 
have a significant role in corporate governance codes and guidance 
(Merendino & Melville, 2019). Jensen and Meckling, (1976) stated 
that directors had to be independent as they represent the interests of 
shareholders, and their main function was to monitor the behaviour 
of managers to protect the shareholders’ interests. In response to 



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the widespread concern of corporate governance issues, most of the 
governance reforms implemented by various countries have mainly 
concentrated on the board of directors’ effectiveness in performing 
their responsibility as board directors. It has been suggested that there 
is an urgent need to raise the number of independent directors in the 
firm so that the board could be more effectively play a supervisory role 
(Gaur et al., 2015). According to report published by The Organization 
for Economic Co-operation & Development (OECD) in 2004, good 
corporate governance should be encompassed of an active board of 
directors,  chairperson and chief executive officer (CEO) should be 
held by two different persons, outside directors should constitute the 
majority members of the board, and there should be a two-tier board 
which to be the supervisory board ( tier-one) and the other being the 
board of directors as tier-two. In terms of the role of independent 
directors in China, one of the key provisions of the corporate governance 
code has been the requirement that the composition of boards should 
consist of outside directors or independent directors. In August 2001, 
the China Securities Regulatory Commission (CSRC) had published 
a guidelines that highlighted on the requirement of independent 
directors sitting on the company’s board in listed companies in China. 
It is clearly stated in the guidelines that all listed companies in China 
are required to have at least one-third of their board members as 
independent directors by 2003. As a consequence, both theory and 
practice emphasized the importance of board independence.

Kao et al. (2019) argued that independent directors in China could 
indeed reduce agency problems, as these independent directors 
could be regarded as a bridge between managers and stakeholders. 
However, Dian (2014) claimed that there was no conclusive research 
finding on the connection between firm performance and board 
independence in the unique setting of the Chinese listed firms. The 
reason behind that is whether the so-called good corporate governance 
practices depend on whether those practices fit into the institutional 
environment. Empirical findings from the West might not necessarily 
have a positive impact on the firm performance of Chinese companies 
because of the different institutional environments and culture, such 
as the role of the independent directors. In western countries, the 
agency cost between internal managers and external shareholders 
could be effectively mitigated by board independence. However, in 
the case of Chinese companies, controlling-shareholder expropriation, 
which has become an increasingly common phenomenon, meant 



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that independent directors were usually not independent to large 
or controlling shareholders, and even considered as having a low 
status and weak power. Under these circumstances, the independent 
directors could not play an effective supervisory role in a company, 
and therefore, will not be able to achieve the independent directors’ 
goal of helping to enhance firm performance. Therefore, due to the 
institutional differences between advanced and developing countries, 
this paper will fill the research gap by examine the association between 
board independence and firm performance,  especially in the case of 
growing economies like China.

Given the foregoing description of the background situation, the 
present study has, therefore, sought to examine the relationship 
between board independence and firm performance in the context 
of listed firms in China can be moderated by the Corporate Social 
Responsibility (CSR) disclosure. The idea of CSR, which was 
initiated from the West, has created a mixed reaction in China 
market. As a consequence of the imposition of the Chinese Firm 
Law in 2005, which required that enterprises had to undertake social 
responsibilities while engaging in business activities. Yang et al. 
(2019) has highlighted that since the 20th century, the field of CSR 
has begun to develop in value creation, especially the business value 
it could bring, including attracting, retaining and motivating valuable 
employees; reducing costs by saving energy and reducing a firm’s 
unnecessary inputs; promoting corporate innovation; improving firm 
brand image by developing new products and providing services to 
help deal with social problems. 

Yang et al. (2019) further pointed out another important reason why 
the CSR issue has received much attention; it is basically because 
CSR could promote sustainable corporate development. This view 
was in line with Mohr et al.(2001), who argued that CSR is seen as 
a commitment by companies to maximize and minimize their long-
term positive and negative impact on society. Similarly, numerous 
past studies support that  CSR was related to a firm’s sustainable 
development (Cheng et al., 2016a; Feng et al., 2017; Liu and Zhang, 
2016) and there was the consensus that firm performance would be 
improved along with the enhancement of corporate competitiveness 
as a result of implementing the CSR (Famiyeh, 2017). Therefore, 
awareness of the critical role of social responsibility incorporates 
sustainable development has been increasing over the years, and 



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firms wanting to undertake more social responsibility has become 
an indispensable part of the corporate management system when 
ensuring a firm’s sustainable development. 

However, Kao et al. (2018) believed that most empirical studies on 
CSR have been concentrated on developed economies, such as the 
United States and Europe, where the agency cost between managers 
and shareholders was low, so it was widely reported that CSR has 
had a positive impact on firm performance. Companies in emerging 
and developed markets were seen to practice organizational and 
behavioural differences as compared to firms from developed 
countries (Fan et al., 2011). In particular, the study by Yang et al. 
(2019) indicated that developing countries had incomplete CSR 
frameworks, which has made it interesting to see how CSR activities 
could affect firm performance in emerging markets such as China.

The foregoing discussions of some past studies have shown that both 
board independence and CSR did have a significant influence on firm 
performance. Hence, it has become clear the relationship between 
board independence and firm performance can be moderated by the 
level of CSR (either enhance or reduce). However, there remains a 
paucity of evidence on the role the CSR disclosure as a moderator of 
the relationship between board independence and firm performance. 
Therefore,  this paper will fill this research gap through further 
investigating the contribution of CSR in moderating the relationship 
between board independence and firm performance of listed firms in 
China.

LITERATURE REVIEW

Theoretical Discussion

In this paper, the agency theory was employed to investigate the 
association between board independence and firm performance under 
the unique Chinese market environment. According to Hu, Tam & 
Tan (2010), Chinese enterprise reform and corporate governance 
reform in China, were largely influenced by the agency theory.  In 
China itself, China Securities Regulatory Commission (CSRC) is the 
authority given the responsibility to introduce the guidelines with 
regards to monitoring the role of independent directors, In addition, 



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Chinese listed companies were required to have at least one-third of 
their board members as independent directors by 2003.

Referring to Jensen and Meckling (1976), the principal (shareholder) 
and the agent (manager) are agency relationships. Under this agency 
relationship, the principal grants certain power to the agent, such as 
giving the agent decision-making power, and the agent can carry out 
certain services on behalf of the principal. However, the interests of the 
two parties are not always in alignment under this agency relationship. 
Therefore,  agency theorists of corporate governance have held the idea 
that under any given situation, it would be impossible for managers 
to maximize shareholders’ interests unless there was in place a proper 
governance structure (used to monitor costs) to protect shareholders’ 
interests. therefore, an appropriate corporate governance structure 
could guarantee that the managers would be able to act to maximize 
the interests of shareholders, instead of their interests. To protect the 
interests of shareholders, monitoring the managers’ behaviours has 
been considered as the primary function of the boards. Therefore, 
the directors in the boards must be independent. In this paper, an 
independent director was defined as an outside director who had no 
business relationship with the company, except for having one seat on 
the board (Shao, 2019).

In terms of the CSR-firm performance relationship, there is still an 
ongoing debate as to whether engaging the CSR hurts or improves 
performance. In this paper, two quite different theories were used 
to explain the CSR-firm performance relationship. Firstly, based on 
the classic agency theory, the CSR engagement was considered as a 
relationship between principal-agent or in other words relationship 
between shareholders and managers. According to this perspective, as 
was best exemplified by Friedman (1970), it was believed that CSR 
could be seen as a selfish act by corporate management to improve 
their public image at the expense of shareholders’ interests. Barnea 
and Rubin (2010) further argued that under the agency relationship, 
managers were interested in overinvesting in CSR since managers 
could build a good reputation as social citizens through participating 
in CSR, but it might damage the interests of shareholders and hurt firm 
performance. Furthermore, Barnea and Rubin (2010) highlighted that 
the negative impact of the CSR on firm performance was due to a large 
number of agency costs in the process of implementing the CSR, and 
the high costs outweighed the benefit, which would then lower firm 



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performance and put the firm at an economic disadvantage. Li et al. 
(2015) noted that these additional costs associated with implementing 
the CSR might include substantial charitable contributions, extensive 
investments in projects to promote community development, and the 
cost of establishing environmental protection programs. 

Contrary to the over-investment hypothesis based on the agency theory, 
the stakeholder theory (Freeman & McVea, 1984) has extended the 
agency problem to a multilateral relationship amongst all stakeholders, 
such as employees, stockholders, customers, community and other 
related stakeholders. Under the perspective of the stakeholder theory, 
managers need to pay attention to all the groups that affect and are 
affected by the activities of the business, rather than simply serving 
the shareholders’ interests. The stakeholder theory highlighted 
the point that firms and society are interdependent. Therefore, the 
implementation of CSR enables firms to increase value. Empirically, 
the study by Jo and Harjoto (2011) confirmed that managers’ active 
participation in CSR indeed could eliminate conflicts among various 
stakeholders, and thus, enhance firm performance. Consistent with 
the research results of Jo and Harjoto (2011), Li et al. (2015) who 
based their study on the assumptions of the agency theory, studied 
whether CEOs with considerable power were more likely to invest in 
more social responsibility to improve firm performance. The results 
showed that the implementation of the CSR was value enhancement 
rather than value destruction, which supported the conflict resolution 
hypothesis based on the stakeholder theory,  yet did not support 
the over-investment hypothesis based on the agency theory. In this 
paper, CSR has been regarded as a broad concept, which referred to 
the responsibility that firms had to perform for its impact on society 
(Cheng et al., 2016a).

Literature Review and Hypothesis Development

To date, there has been no consensus on how board independence 
could influence firm performance. Fuzi Fuzi et al. (2016) stated 
that independent directors are persons entrusted by shareholders to 
represent the organization. Thus, independent directors should act in 
the interest of shareholders. The results showed that there was a mixed 
relationship between the proportion of independent directors and firm 
performance. Although the company had one of the largest numbers 
of independent directors, this did not guarantee the improvement 



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of company performance. Therefore, to bring positive value to 
shareholders, independent directors should be effectively supervised.

Numerous empirical studies of agency theory ( Gaur et al., 2015; 
Assenga et al., 2018; Kao et al., 2019) have found that there was a 
significant positive relationship between board independence and firm 
performance. In particular, Donadelli et al. (2014) documented the 
proportion of independent directors was positively correlated with 
firm performance The study employed data from eight countries, 
namely the USA, Canada, France, Germany, UK and Australia, Italy 
and Japan. Their findings were consistent with previous literature that 
independent directors were perceived to be better able to supervise 
managers and CEOs (Fama & Jensen, 1983). Kao et al. (2019) 
pointed out that the supervisory value of independent directors 
was more significant in a market with weak corporate governance 
mechanisms. Therefore, the findings seemly to imply that the policy 
to reform the corporate governance of the independent director system 
was successful and that it had to be implemented by newly listed 
companies.  Liu et al. (2015)  provided comprehensive evidence on 
the relationship between board independence and firm performance 
in Chinese firms. The study found that independent directors had 
a significant positive impact on the firm performance of Chinese 
enterprises.

Conversely, there have been some other studies that showed that 
there was a negative correlation or even no correlation between 
board independence and firm performance (Allam, 2018; Merendino 
& Melville, 2019; Rashid, 2018). Merendino and Melville (2019) 
attributed these negative findings to the adherence of Italian independent 
directors to soft and hard laws on corporate governance, which would 
increase firm’s costs and thus, negatively impacted firm performance. 
Another reason might be that the CEOs could use some strategies to 
offset the power of independent directors, and as such the independent 
directors would be unable to play an effective role in the company. 
In addition, Fan et al. (2020) has pointed out that the fundamental 
reason behind the value loss caused by the proportion of independent 
directors might be that enterprises were more willing to substitute the 
existing non-independent directors with new independent directors. 
New independent and non-independent directors might have the same 
qualifications, but engagement and responsibility toward shareholder 
maximization may differ. Therefore, the short supply of qualified 
independent directors might explain the negative valuation effect.



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Considering the literature review of previous studies in the importance 
of understanding the role of board directors and shareholder wealth 
maximization, therefore, this paper hypothesis is:

H1: There is a positive relationship between board independence and 
firm performance in the capital market in China.

Empirical studies on firm CSR and firm performance by several 
scholars have generally shown mixed results. Friedman’s (1970) 
classic argument was that CSR was an agency problem and claimed 
that it had a negative impact on firm performance because it had 
imposed costs directly or implicitly. Kao et. Al (2018) also believed 
that the relationship between CSR and firm performance was negative 
because opportunistic managers might pursue their private interests 
at the expense of the interests of shareholders and stakeholders. 
Especially when a company’s performance has been poor, managers 
might engage in more social programs, such as CSR activities, to cover 
up their disappointing performance results. In addition, Brammer, 
Brooks, and Pavelin (2006) also found that THE firm performance is 
affected natively by CSR. In other different study, Nelling and Webb 
(2009) found that contradict finding where there was no significant 
connection between firm performance and CSR.

In supporting the effect of CSR on firm performance, Malik (2015) 
had documented the a positive relationship between CSR Disclosure 
and firm performance. The study of  Li et al. (2015), Jo and Harjoto 
(2011) showed that companies engaging in more CSR activities 
could indeed improve firm performance as the CSR activities could 
resolve conflicts between managers and stakeholders by reducing 
information asymmetry and agency costs. Firms with a higher level 
of CSR would bring additional social capital to firms, attract more 
investors for them and therefore, improve their firm performance. 
Studies by Yeh et al. (2019) and El Ghoul et al. (2011) also disclosed 
that the CSR activities as a useful business strategy, might increase 
the satisfaction of all stakeholders, strengthen the company brand 
image, and therefore, increase firm performance and lower the cost of 
capital. In the Chinese context, many scholars, for example, Chen and 
Wang (2011), Jo and Harjoto (2011), Famiyeh (2017); and Rahman 
and Fang (2019), have revealed that the more Chinese firms invested 



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in the CSR, the better its firm performance was. Therefore, according 
to these previous studies, both board independence and CSR could 
influence firm performance. The findings seemed to suggest that it 
would be reasonable to assume that the relationship between corporate 
governance and firm performance is moderated by CSR the. In light 
of this consensus, the research reported hypothesis is:

H2: the relationship between board independence and firm performance 
in the capital market in China is moderated by CSR.

METHODOLOGY
Data and Sample

The data consists of 860 firm-year observations spanning from 2010 to 
2019.  Panel data regression technique was used in order the determine 
the relationship between variables used. The SSE 180 index is known 
as the core index among all the A-shares listed on the Shanghai Stock 
Exchange. The SSE 180 index is represented by the industry’s leading 
enterprises. This index acts as a market barometer of the overall 
performance and operation of the Shanghai securities market.  Hence, 
this study used the individual stock composition represented by the 
index to represent the sample data.  Data for this study was collected 
from the Accounting Research Database (CSMAR) and the China 
Stock Market. If there was missing data, a reference was made to the 
annual report. All the data collected from the database were analyzed 
through the E-VIEWS and STATA software. 

Model Design

This paper used a panel data analysis. Both the Fixed Effect model 
and the Random Effect model are used in the analysis. Hausman 
test was performed to detect the problem of endogeneity and the 
appropriateness of either the Fixed Effect model or the Random 
Effect model. The Ordinary Least Squares (OLS) or Random Effect 
could obtain a more efficient estimation will be employed if all the 
independent variables were exogenous. Furthermore, the Lagrange 
Multiplier (LM) test was used to test whether the OLS or the Random 
Effect model was more appropriate for this paper’s data set. According 
to the results, the econometric model was specified as follows:



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                                                                                                        (1)
(i =1,…,N; t=1,…T)    
  
where,
FPit represents the ROA to measure firm performance for firm i at  
time t. In this paper, the ROA has been defined as the ratio of 
consolidated net earnings to average assets. 

The econometric model of this paper has included three key variables, 
which were the BI, CSR and interaction beta BI*CSR respectively. 
If the interaction coefficient beta is significant, it would indicate that 
the existence of moderation effect. In this paper, Board Independence 
(BI)is computed the the percentage of the total number of independent 
directors sitting in the board. The CSR was a moderator variable. 
Following the study of Yang et al. (2019), the CSR was obtained via 
the score rating of A-shares listed in the firms’ CSR reports, which 
could be found at the following URL, http://www.hexun.com/. The 
quality of the CSR disclosure is based on the CSR score.  According 
to Yang et al. (2019) Hexun evaluation system was more widely used 
in the performance evaluation of CSR activities in Chinese firms..

In addition, CEO duality (CD), CEO Compensation(CC), State 
Ownership (SO), Debt (DEBT) and  board size (BS), and were 
employed as control variables in this paper, as these variables could 
also have an impact on firm performance (Jiang, Fuxiu & Kim, 2015; 
Kao et al., 2019). Board Size (BS) was obtained by calculating the 
total number of directors representing the board. dummy variable 
equal to 1 was used to represent CEO duality (CD) if the CEO acted 
as the chairman of the company’s board, and 0 otherwise (Kao et al., 
2019). On the other hand, CEO compensation (CC) is calculated as an 
average of top 3 executives’ salaries in the firm, excluding allowance 
received by them. State ownership (SO) embodies the  ratio of state-
owned shares in proportion to the total number of shares (Hu et. al., 
2010). DEBT on the other hand was calculated by  the total debt over 
the total assets to measure the firm’s capital structure. In addition to 
that, FSit represented the firm size, which was the control variable 
that was included to ensure the robustness of the analysis. The 
methodology of this study is adopted by Kao et al. (2019).  They also 



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used year and industrial dummy variables in the model able to capture 
the regulation effect. 

EMPIRICAL ANALYSIS

Descriptive and Correlation Analysis

Table 1 shows the descriptive analysis variables used in this study. 
The range of Firm performance (ROA) is in between -11.9635 
(minimum value)) and 47.7017 (maximum value), respectively with 
an average mean of 6.9889. This indicated that there are significant 
differences among these sample firms, and some firms demonstrated 
poor performance. In addition, the average proportion of independent 
directors (Board Independence) was 38.85 percent, and the median 
was 36.36 percent, which was in line with the provisions on the 
composition of the board of directors of listed companies in China 
(as of 2003, one-third of the board members must be independent). 
However, the minimum of BI was 12.50 percent, implying that 
a small number of companies in the sample did not have enough 
independent directors on their boards. In terms of CSR, the quality 
of CSR disclosure varied widely (the score of CSR disclosure ranged 
from 0 to 85.77).

Table 1 

The Descriptive Statistics of the Main Variables  

Variables Mean Median Maximum Minimum Std. Dev.
ROA (%) 6.9889 5.6762 47.7017 -11.9635 6.1267
CSR 37.4673 28.9400 85.7700 0.0000 20.8460
BI 0.3885 0.3636 0.8000 0.1250 0.0781
BS 9.5488 9.0000 17.0000 5.0000 1.9079
CD 0.1267 0.0000 1.0000 0.0000 0.3302
SO 0.0544 0.0000 0.7682 0.0000 0.1406
InCC 14.8625 14.7930 17.7457 11.8241 0.7664
DEBT 0.5127 0.5168 0.8858 6.1700 0.1842
InFS 24.3930 24.3337 28.6364 19.7325 1.6891
Observations 860

Table 2 shows the Variance Inflation Factor (VIF) analysis for each 
variable. The results seemed to imply that the regression models 



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applied to test the research hypotheses were free from the problems of 
multi-collinearity effect, as all the VIF values were less than 10 (Ali et 
al., 2020). In addition to that, Table 3 provides the correlation matrix 
among all key variables in the regression analysis. The correlation 
coefficient between all independent variables was -0.6090 to 0.2434, 
implying that there was no multicollinearity problem. Based on the 
study by Shao (2019), multi-collinearity problem might exist if the 
correlation between independent variables higher than the absolute 
value of 0.7. This is consistent with the results of the VIF analysis in 
the present study.

Table 2   

Inflation Factor Statistics

Variables VIF Tolerance
BI 1.31 0.7617
CSR 1.04 0.9629
BS 1.27 0.7809
CD 1.06 0.9447
SO 1.06 0.9456
CC 1.15 0.8725
DEBT 1.28 0.7809
FS 1.48 0.6766
Mean VIF 1.21

Regression Results

The Hausman-test (Prob.=1.000) showed that the Random Effect 
model is appropriate for the data set. However, if one or more 
independent variables in the model correlated with the random 
disturbance term, the panel regression results might suffer from 
the problem of endogeneity. If all the independent variables were 
exogenous, the Ordinary Least Squares (OLS) or Random Effect 
(RE) could obtain a more efficient estimation. To check the problem 
of endogeneity, the Hausman test was carried out and the results  
X2 =11.08, Prob=0.9953) showed that there were no endogeneity 
problems in the research model. Furthermore, to test whether the 
OLS and RE were appropriate for the data set used in this research, 
the Lagrange Multiplier (LM) test was also conducted. The results  
X2 = 461.18, Prob=0.000) strongly confirmed that the Random Effect 



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    123      

The International Journal of Banking and Finance, Vol. 17, Number 1 (January) 2022, pp: 109–130

was valid. After controlling the endogeneity problems, the ROE 
was used to replace the ROA to measure the robustness test for firm 
performance. The specific results are as shown in Table 4, which 
displays the influence of CSR on the relationship between board 
independence and firm performance. 

Table 4  

The Influence of the CSR on the Relationship Between Board 
Independence and Firm Performance (with Probability)

Dependent Variable (DV): ROA Random Effect
BI 9.6891** (0.029)
CSR 0.1446***(0.000)
BI*CSR -0.2726***(0.001)
BS 0.2930***(0.009)
CD 1.0069* (0.052)
SO 0.2465 (0.824)
CC 1.5085*** (0.000)
DEBT -19.7961*** (0.000)
FS 0.6775*** (0.004)
C (Constant term) -26.2766*** (0.000)
Industry Yes
Year Yes
N
R2

860 
0.328

F-statistic 15.6296***(0.000)
Hausman-test for choosing model P=1.000
Hausman-test for Endogeneity problem          X2 =11.08, Prob=0.9953
LM test         X2 = 461.18, Prob=0.000

Note. ***, **, * represent significance at the 0.01 level, 0.05 level, 0.1 level 
respectively.

As shown in Table 4, the coefficient of board independence was 
positive and statistically significant for the ROA at the level of 1 
percent, implying that board independence was positively related to 
firm performance. It is worth noting that the regression coefficient 
of the interaction term (BI*CSR) was negatively related to firm 
performance at the significance level of 1 percent, indicating that 



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the CSR could negatively moderate the positive effect of board 
independence on firm performance. In other words, CSR has reduced 
the relationship between board independence and firm performance. 
In addition, there was a positive relationship between board size and 
firm performance; both CEO duality and CEO compensation could 
improve firm performance, and debt was negatively related to firm 
performance. 

DISCUSSION AND CONCLUSION

The research reported here has studied the relationship between board 
independence and corporate performance under the moderating effect 
of CSR. To test the relationship among these three variables, the study 
has adopted the panel data regression method to analyze the data from 
the SSE 180 Index of the capital market in China. The empirical 
results showed that board independence has had a positive impact 
on firm performance. More importantly, the results showed that CSR 
could reduce the positive relationship between board independence 
and firm performance. The findings of the present research have made 
it possible to draw the following conclusions.

Firstly, it was found that board independence could improve firm 
performance, a standpoint that was consistent with the agency theory. 
According to the agency theory, outside directors would carry out 
their responsibility to monitor top management because they had 
the incentive to develop their reputation in decision control (Fama 
& Jensen, 1983). They were believed to bring more diversity and 
greater objectivity to decision-making, and consequently were 
better representatives of shareholders’ interests (Mutlu et al., 2018). 
Therefore, the possibility of collusion and expropriation of shareholder 
wealth by top management might be lowered with a greater proportion 
of outside directors on the board, which further reduce the agency 
costs and improve firm performance.

More importantly, in terms of the moderating role of the CSR, the 
interaction term BI*CSR has a negative impact on firm performance, 
which means that the CSR reduces the positive relationship between 
board independence and firm performance.  According to Sial et al. 
(2018),  one might be the possible reason is that the development of 
Chinese firms was at a stage of excitement ed a feeling for quick success 
and quick profits. With the rapid development of China’s economy, 
most firms practice disclosure of CSR only to meet the requirements 



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of the government. The boundary of CSR has not been captured by 
Chinese firms. As a result, a lot of firms have been indecisive about 
what CSR actions to undertake and what CSR activities to report.  
Inevitably, the managers or shareholders may sometimes overinvest 
in the CSR or cover up a firm’s improper behaviours in pursuit of 
their interests, engaging in themselves in negative actions which will 
maximizing the shareholder wealth.

Because of China’s relevant laws, regulations and policies which are 
less compromise to encourage corporate social responsibility, the 
CSR did not effectively optimize the corporate governance structure, 
which in turn, could not improve firm performance. Although the 
number of CSR disclosure has been increasing, the quality of the 
CSR was low and many firms published information that lacked third-
party certification (Cheng et al., 2016b).  Therefore, managers should 
carefully consider CSR and invest in CSR according to a firm’s ability 
when they make CSR decisions. 

The study recommended that to strengthen the relationship between 
board independence and firm performance through CSR, there are 
alternatives implications for regulators and managers. First, law 
enforcement through national legislation and power execution by the 
government need to be reviewed and strengthened to enlighten the 
whole society. Firms need to emphasize the role of CSR as part of 
the business philosophy and social responsibility as a kind of good 
business strategy. Meanwhile, under the supervision of stakeholders 
and society, firms should create a good corporate social image and 
improve core competitiveness On top of that, relevant departments 
should construct a suitable CSR evaluation system and implement the 
CSR standard certification to make China’s CSR management in line 
with the relevant international standards.

The study reported here has been able to contribute to the field in 
studies. Firstly, the research found that board independence can 
increase firm performance in China capital market increasing 
the proportion of independent directors and put forward clear 
requirements for the selection and appointment of independent 
directors. Secondly, this study can be used as a business strategy in 
improving firm performance and maximizing shareholder’s wealth. 
Therefore, improvise a firm’s CSR  strategy might improve firm 
business visibility and sustainability. The results also have important 
implications for managers involved in making CSR decisions, and 
they should not overinvest in resources and energy that can undermine 
the profitability of their businesses.



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It also recommended that further study should be conducted by 
including a larger sample size that is categorized by industries sectors 
or even share type available in Shanghai Stock Exchange. This study 
only used A-share listing on the Shanghai Stock Exchange, only 86 
representative listed large companies were selected as they represent 
the SSE 180 Index It is also recommended that future studies on 
CSR need to be conducted using various methods and other related 
variables such as CSR disclosure levels, CSR ranking scores and 
others which help to provide greater robustness to the study findings.

ACKNOWLEDGMENT

This  research received  no  specific  grant  from  any funding  agency  
in the public, commercial, or not-for-profit sectors.

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