Fighting poverty: a win-win for Chinese listed firms and society 

By Dr Guanming He and Zhiachao Li, January 2024

Guanming He, Associate Professor in Accounting, Zhichao Li, PhD graduate and University of Exeter Lecturer in Finance and Accounting share their research on poverty alleviation by listed companies.

Poverty is a gnawing malaise of global communities, wreaking havoc on society and casting shadows of hunger, disease, and social unrest. The United Nations (UN), recognising the gravity of this issue, prioritises poverty eradication in its 2030 Agenda for sustainable development. As one of the permanent members of the UN Security Council, China is an upper-middle income country, but grapples with nearly 200 million people eking out a living below the International Poverty Line as of 2020. To echo the UN’s clarion call for worldwide poverty eradication and to resolve its domestic problems, China stood in the spotlight and held the National Conference on Development-driven Poverty Alleviation in 2015. This conference emphasised corporate participation in poverty alleviation and decided to implement the 13th Five-Year Plan in 2016, with a goal to end extreme poverty nationwide. Later, in 2016, Shanghai and Shenzhen Stock Exchanges mandated all Chinese listed firms to disclose their poverty alleviation contributions in their annual reports  

These policies pressure Chinese firms into engaging in poverty alleviation. Yet, these noble pursuits come with economic implications. The primary concern is the cost of financing. A firm’s cost of capital directly reflects investors’ perceptions of the firm’s risk and performance. Engaging in poverty alleviation is a double-edged sword. While it demands significant resources, potentially seen as a divergence from maximising shareholder value, it also elevates a company’s reputation and fosters trust among stakeholders. Detractors argue that resources diverted to poverty alleviation might not be optimally utilised, especially if driven by managerial whims rather than strategic vision. Historical studies indicate managers occasionally tap into corporate coffers for personal gains, such as enhancing their social stature. Such actions could potentially raise a firm’s risk profile, leading to an increase in the cost of capital. Conversely, there’s an undeniable upside. Unlike other corporate social responsibility practices, corporate poverty alleviation takes care of the poor, who have little influence on firm performance. Hence, it may involve little motivation for profit-seeking and can better reflect a firm’s empathy and compassion towards others, potentially bolstering corporate reputation. A revered corporate image not only fosters customer loyalty but also enhances creditworthiness towards suppliers. Furthermore, proactive contributions align firms favourably with government goals, opening doors to government-controlled resources, such as land, tax benefits, and financial grants. Therefore, considering the economic pros and cons of engaging in poverty alleviation, its influence on the firm’s cost of capital can differ significantly based on how investors view the corporate risks and performance resulting from poverty alleviation. 

China’s unique financial environment, marked by a dominance of retail investors accounting for nearly 70% of daily stock trade volume, adds another layer of complexity. Retail investors, with a more myopic view than their institutional counterparts, might overlook the long-term benefits that corporate poverty alleviation can bring to the organisation. As the general investors perception of benefits vis-à-vis costs of poverty alleviation to a firm is ambiguous, how poverty alleviation affects the investors’ willingness to provide capital to the firm (and hence its cost of equity) remains an open question. Additionally, when considering debt financing, an alternative to equity, there are also unanswered questions. Poverty alleviation can strain cash and liquid assets in the short term, whereas it promises long-term stability, an aspect that lenders value, due to the potentially increased corporate reputation. It’s therefore unclear whether the lenders and underwriters would put more emphasis on the long-term stable cash inflows or the near-term cash outflows. So, the impact of poverty alleviation on the cost of debt for firms is another issue worth exploring. 

Our recent study on Chinese listed firms presents a compelling narrative that firms actively participating in poverty alleviation enjoy a decrease in both the cost of equity and the cost of debt. Interestingly, this mitigating effect on the cost of capital is more pronounced for non-state-owned firms, financially healthy firms, firms receiving more financial subsidies from local governments, and firms with larger advertising expenditure. Empirical evidence further suggests that the enhanced reputation and trust among stakeholders are the mechanisms through which corporate contributions to poverty alleviation reduce financing costs.  

These findings uncover significant insights that hold profound implications for businesses and investors alike – active corporate participation in poverty alleviation seems more than just a noble endeavour; it’s also an activity that will bring clear benefits for firms. With this in mind, companies are urged to intensify their poverty eradication endeavours, paving the way for more sustainable economic and societal growth. Yet noticeably, the benefits of engaging in poverty alleviation hinge on stakeholder recognition and support. Therefore, to amplify these benefits, it’s also imperative for governments and media outlets to champion the cause of poverty alleviation, emphasising its importance and rallying support.