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Does corporate social responsibility matter in the food industry? Evidence

from a nature experiment in China

Dongmin Kong

⇑

School of Economics, Huazhong University of Science & Technology, Wuhan 430074, China

article info

Article history:
Received 9 February 2011
Received in revised form 26 February 2012
Accepted 6 March 2012

Keywords:
Food industry
Corporate social responsibility
Event study
Investors’ behaviors
Emerging markets

abstract

Using the melamine contamination incident in China as an exogenous shock, this paper studies how the
investors respond to corporate social responsibilities (CSRs) of listed firms in food industry. We find that
investors’ or consumers’ concerns for CSR in the food industry could be significantly influenced by the
mounting attention given to CSR-related events. This study offers important policy implications. First,
the government, as well as supervisors, should release appropriate policies to improve various firms’
activities on CSR, especially in the food industry. Second, firms, particularly those in the food industry,
can obtain long-term benefits by strengthening their CSR-related activities.
Ó2012 Elsevier Ltd. All rights reserved.

Introduction

One of the most significant corporate trends of the last decade is
the rapid growth in activities associated to corporate social respon-
sibility (CSR). According to Business for Social Responsibility (BSR),
CSR is defined as ‘‘achieving commercial success in ways that honor
ethical values and respect people, communities, and the natural
environment’’.McWilliams and Siegel (2000)andMcWilliams and
Siegel (2001)describe CSR as ‘‘actions that appear to further some
social good, beyond the interest of the firm and that which is
required by law.’’ Although definitions of CSR vary, the term gener-
ally refers to actions taken by firms beyond their legal duties, with
respect to their employees, communities, and the environment.
Recently, a large number of companies worldwide have en-
gaged in efforts to integrate CSR into all aspects of their businesses.
Meanwhile, with the current financial scandals, investment losses,
and reputational damage to listed companies, an increasing num-
ber of shareholders, analysts, regulators, employees, and news
media outlets are focusing more on CSR-related issues. Although
debates are still ongoing on whether a good CSR performance in-
deed contributes to a firm’s success (e.,Posnikoff, 1997; Wright
and Ferris, 1997), the damage of a deficient response to CSR is
indubitable. The cases of Toyota and BP are two recent examples.
Food safety is a key issue for any society and economy as it re-
quires the attention and awareness of the government and all stake-
holders in the industry. Consistent with the goal of ensuring food

safety,CSRin the food industry is particularly important due to its
wide range of potential benefits. Though CSR issues associated to
the food industry are complicated, food safety rises as the ultimate
CSR concern, and thus, receives the most attention. Using data
collected from 333 food handlers at agricultural food-processing
companies or restaurants in Taiwan,Ko (2010)points out that food
safety exposes consumers to diseases and even death, prompting
the public’s increasing concern with food quality and food safety in
recentyears-
ceptionsSurveyreleasedbyPennSchoenBerland,LandorAssociates,
and Burson-Marsteller, more than 75% of consumers say that exam-

iningcompanies’CSRstrategiesisimportant. 1 Thissurveyalsoshows

thatconsumersprioritizesocial responsibilityacrossbusinesssectors,

and 55% are more likely to purchase a product with added social ben-

efit. Moreover, 70% of respondents are willing to pay a premium on

products from a socially responsible company.

Given its importance in the food industry, there is a need for a
study that shows how CSR affects the reaction of investors or con-
sumers in food companies. The analysis of this relation could shed
light on the channel through which CSR affects asset returns, mar-
ket reaction, and shareholder wealth, so we believe this research
has important implications for regulators, listed firms, consumers,
and capital market participants. However, there are limited estab-
lished empirical research studies on the relation of CSR and the
reactions of the capital market.
In this paper, we use China’s melamine contamination incident
in 2008 as the springboard for the study of the above issues. The

0306-9192/$ – see front matterÓ2012 Elsevier Ltd. All rights reserved.
dx.doi/10.1016/j.foodpol.2012.03.

⇑Tel.: +86 159 2706 8886.

####### E-mail address:kongdm@mail.hust.edu 1 slideshare/BMGlobalNews/csr-branding-survey-2010-final.

Food Policy 37 (2012) 323–

Contents lists available atSciVerse ScienceDirect

Food Policy

journal homepage: elsevier/locate/foodpol

Federation (CCF), and theChina Enterprises News. Since 2008, it
grants awards to 50 companies operating in China according to
their performances in moral value, employee right, environment
protection, product quality management, consumer benefit, supply
chain management, science and technology development, tax con-
tribution and the public image; (2) the China CSR International For-
um is co-sponsored by theChina Newsweekand the Chinese Red
Cross Foundation (CRCF). Since 2006, it grants awards to 12 CSR
leaders every year on the basis of public voting, media rating and
expert evaluation. This is a high-profile authoritative platform to
recognize CSR in China; and (3) theHurun Report, released by Ru-
pert Hoogewerf since 2005, publish Top 50 CSR companies in China
every year. This ranking is a weighted result of expert assessment,
companies’ employment and tax payment and companies’ charita-
ble donations and environmental protection efforts.

Melamine incident in China

Melamine is a chemical rich in nitrogen and has been used by
milk producers to boost the detected amount of nitrogen (as a
proxy for protein content) in milk quality tests. Melamine is usu-
ally used in plastics and lethal to infants. It is also harmful to adults
if a large dose is taken. The most common chronic diseases caused
by melamine-contaminated food are bladder and kidney stones,
which can lead to bladder cancer. As a result, the US Food and Drug
Administration allow amounts less than 2 ppm in adult foods and
zero in infant foods. Melamine has been used as an adulterant in
milk to boost the nitrogen content in diluted or poor quality raw
milk (melamine is about 66% nitrogen), since many milk quality
tests rely on the detected amount of nitrogen to infer the amount
of protein, the most important attribute of raw milk. Previously,
the chemical had also been used in pet foods that were exported
to the United States and Canada, causing the death of more than
4000 dogs and cats and resulting in a large number of product re-
calls (Weise and Schmit, 2007).
The most important consequence of the melamine contamina-
tion was that more than 290,000 people (most of them infant chil-
dren) were poisoned. It was confirmed as a cause of death for six
infants who consumed the melamine contaminated infant milk
powder, and more than 800 infants were hospitalized (McDonald,
2008 ;Xiu and Klein, 2010). Though melamine can be detected
from urine and blood in laboratories, consumers cannot detect
melamine when it is added to milk.
The melamine contamination incident broke out on September
11, 2008, when Sanlu Corporation, one of China’s largest dairy
manufacturers, announced that its products on sale had been con-
taminated by melamine. Sanlu immediately recalled all of its prod-
ucts from the market. Since melamine was added to raw milk,
consumers suspected that all kinds of dairy products could poten-
tially contain the chemical. The fear was confirmed two days later
when products of 22 brands (with total market shares exceeding
90% in liquid milk and 50% in powdered milk) were found to con-
tain melamine (Chao, 2008).
Later, in-depth reports revealed that the top management of the
dairy companies involved knew that their products contained mel-
amine long before the incident, but they were afraid that product
recalls would heavily hurt their reputations and market shares.
This disclosure further angered both consumers and regulators.
These dairy companies were accused of intentional delay of prod-
uct recall, making the incident the most seriousCSRcrisis in China.
Through the rapid and extensive media coverage, the incident
soon became a catastrophe that plagued the whole dairy industry
and, to some extent, extended to all the food industry. In the month
following the incident, the total sales went down by 20% in pow-
dered milk, and 19% in liquid milk (ACNielsen, 2009). It took more
thanayearforsalestoreturntopre-incidentlevels

led to the bankruptcy of Sanlu Corporation, with its CEO sentenced
tolifeimprisonmentplusapersonalfineof2468 millionRMB(about
3 million USD).Therefore,themagnitudeofthe impactofthe 2008
melamine incident on the industry exceeds that of the 1997 straw-
berry incident (Calvin et al., 2004) and the spinach incident (Calvin,
2007 ) in the US. This incident finally causes a new Food Safety Law
went into effect on June 1, 2009 in China. Though the Food Safety
Law had been under development for several years as a result of
previous food safety incidents, the new law was given increased
urgency following the melamine problem (Xiu and Klein, 2010).

Literature review and hypothesis development

To our knowledge, there is no academic paper focusing on the
relation betweenCSRand firms’ performance in food industry.
Actually, studies onCSRand general firms’ performance report
mixed findings (McWilliams and Siegel, 1997) even though some
specific investors (e., socially responsible investment funds)
explicitly favor firms that are socially responsible. Some research-
ers detect a positive relationship between a firm’s profit margin
and CSR performance (e.,Waddock and Graves, 1997;Posnikoff,
1997 ), some discover a negative relationship (e.,Wright and Fer-
ris, 1997), and others find no relationship (e.,Teoh et al., 1999).
Recently,Hill et al. (2007)examine the relationship between CSR
and stock valuation across three regions of the world. They find
that European investors appear to value CSR, and that Asian inves-
tors may be trending to mirror US investors.
While most researches focusing on developed markets, there
are several recently studies investigate the CSR performance in
emerging markets. For instance,Cheung et al. (2010)address
whether CSR matters in Asian Emerging Markets. They find that
the positive relation between CSR and market is significantly and
Asian firms are rewarded by the market for improving their CSR
practice et al. (2010)examine the different investors’ pref-
erences on CSR and find that only institutional investors’ behaviors
are significantly influenced by firms’ CSR performance that exceeds
a certain threshold, and firms’ CSR performance and investors’
behaviors jointly affect firms’ stock prices.
In addition, previous studies also document links between CSR
and profitability, corporate governance, ownership structure, firm
size, leverage, employees, industry, and environmental pressures
(Deniz-Deniz and Garcia-Falcon, 2002; Graves and Waddock,
1994; Li and Zhang, 2010; Johnson and Greening, 1999; Stanwick
and Stanwick, 1998; Zu and Song, 2009).
Since a firm’s financial performance is directly affected by
investors’ buying and selling behaviors, to understand how inves-
tors perceiveCSRis critical in understanding the relationship be-
tween a firm’sCSR activities and its financial performance.
Nevertheless, given its importance, this area is quite under-
explored.
There are some papers examining the investor behavior onCSR.
Proponents of socially responsible investments argue that social
screens are filters to select firms with higher quality of manage-
ment, and firms with high levelCSRwill benefit from improved
performance in the long run (e.,Hill et al., 2007).Ruf et al.
(2001)highlight a positive link amongCSR, growth in sales, and re-
turns on sales.
As for the food industry, to the best of our knowledge, there are
only two related researches and Brown (2006)developed a
framework ofCSRin the food supply chain which consisted of eight
categories: health and safety, animal welfare, biotechnology, com-
munity, environment, financial practices, labor, and procurement.
Few studies have focused onCSRin the food industry. Based on a
case study of the United Kingdom’s top 10 food retailers,Jones
et al. (2008)examinedCSRas a tool to communicate with their

D. Kong/Food Policy 37 (2012) 323–334 325

customers and to build retail brand awareness within stores. Obvi-
ously, these two studies are very different with the points of our
study.
Another important strand of research related to our study fo-
cuses on stock market reaction to product recalls and food safety.
Several studies examine the impact of product recalls on firm va-
lue, but results are mixed. For example,Jarrell and Peltzman
(1985)find that automobile and drug recalls are companied with
negative abnormal stock returns et al. (1988)reexamine
the same data and find that, after controlling for potential con-
founding events, these recall announcements do not significantly
affect firm value and Marcus (1989)find that the stock
market reaction is small and is a weak instrument of social control
to deter producing hazardous automobiles and Worrell
(1992)examine the impact of different types of non-automobile
recall announcements on stock prices. They show the stock market
has a significant negative reaction to recall announcements. By
conducting a cross-industry event study,Chu et al. (2005)find that
the drugs and cosmetics industries suffer more loss, while the rub-
ber and automotive industries are less affected and Kim (2008)
study the case of Bovine Spongiform Encephalopathy (BSE) in 2003
in the United States, and they find that the beef industry was sig-
nificantly, negatively affected, but other meat industries benefited
significantly. For the sectors not immediately involved with beef
products, the effects were small or negligible et al. (2009)
identify proactive and passive recall strategies and find that proac-
tive recall strategies had more negative share losses than passive
strategies.

While most studies focus on automobile recall, 3 there are two

papers investigating recalls of food companies. Thomsen and

McKenzie (2001)examine the shareholder losses when publicly

traded food companies are involved in a serious food recall of differ-

ent hazard levels. They find that the recalls of more serious hazards

suffer significant negative losses, while the recalls of less serious

hazards have no negative impact. Based on a sample of 29 product

recall announcements by China’s listed companies during the period

2002–2008,Zhao et al. (2009)investigate the impact of a recall on

shareholder. They find a significant negative abnormal return in

the China’s stock market, and these companies suffer greater finan-

cial losses from product recalls. They further describe the case of the

melamine tainted milk crisis in China and investigate the stock mar-

ket reaction. Their results show that all of the affected companies

suffer from significant negative financial losses, while their compet-

itors benefitted from the recall.

In this paper, we introduce the event-study approach to exam-
ine how the influence of CSR on investors’ behaviors changes upon
an event that potentially affects investors’ attention to CSR in food
industry. This approach uses changes of stock prices to measure
the impact of a specific event on the values of firms. According to
Fama (1970), a stock market is efficient if all the event information
(i. all currently available information) can be reflected immedi-
ately in stock prices. Using stock prices over a relatively short time
period, the economic impact of an event can be measured (see
Brown and Warner, 1985;MacKinlay, 1997).
We hypothesize thatCSRinfluences significantly investor reac-
tion in the food industry within the event period. Since the mela-
mine contamination crisis in China significantly promotes the
importance ofCSRin food industry among regulators, investors
and the general public. We expect that the investors will express
their concerns regardingCSRwith the incident. This intuition leads
to our first hypothesis:

Hypothesis 1 reaction of the investor (or financial market) is
positively related to the level of CSR in food industry.
Furthermore, considering the fact that the general public in this
emerging market only begin to pay attention toCSRafter the crisis,
we postulate the influence is manifested after the event date (i.
September 11, 2008) and not before it. Namely, the relation be-
tweenCSRand firm’s financial performance will be significantly
only after the event. The underlying intuition is, a firm’sCSRper-
formance should be positively affecting investors’ buying or selling
only after the investor recognize the important ofCSR. Thus, we
propose that:

Hypothesis 2 relation between the firm’s level of CSR in food
industry and the reaction of the investor (or financial market) is
different before and after the event date. Specially, there is no
significant relation before the event date and there is a signifi-
cantly positive relation after the event date.

Data and methodology

Data

Our sample consists of all the 43 firms in food industry listed on
China’s stock market in the 2008 fiscal year. We obtain the data
from CCER Database, a widely used database for research of China’s
listed firms. We collect variables of firm size, daily return, and
book-to-market ratio and market return from CCER Database.
There are only three firms out of our sample related to milk pro-
duction (our results are robust removing these three firms). Most
of our sample firms do not directly involve in the milk accident. Gi-
ven that our sample firms are not involved in melamine accident
and this exogenous accident isCSR-related, we believe that our re-
sults show that the investments inCSRgenerally can partially
immunize non-offending firms from guilt-by-association when
one member of an industry does something very bad.
OurCSRvariable comes from Shanghai National Accounting
Institute’s (SNAIs) listed-firms’ social responsibility ranking. SNAI
issues a set of indexes that provided scores and ranking ofCSR
for China’s listed firms on December 24, 2008. It is the first set of
CSRindexes covering all China’s listed firms, totally more than
1000 firms. Thus, our sample can include all China’s listed firms
in food industry. The SNAI system ofCSRindex was formulated
according to the standard of SA8000 issued by Social Accountabil-

ity International (SAI). 4 SNAI argued that the general motivation of

issuing theCSRindex was to encourage listed firms to make more

CSRdisclosure and improve the firm value. The system groups the

36 questions into eight categories: environment, energy saving,

employees, employment and promotion, social problems, consumer

satisfaction, other stakeholders, law and business ethics 1pre-

sents the full list of questions of SNAICSRindex, see alsoLi and

Zhang (2010). 5

It is worth to note that CSR measures are released on December
24, 2008, and this is more than three months after the event date of
melamine contamination incident (i. September 11, 2008). One
concern is that CSR measures may reflect contamination event. 6

####### 3 Product recalls in the automobile industry are more frequent than in other

####### industries and Worrell (1992)point out that the number of recalls from the

####### automakers of ‘‘big three’’ is larger than all other recalls combined.

####### 4 As a global social accountability standard for decent working conditions, SA

####### is developed and overseen by Social Accountability International.

####### 5 One concern with the CSR measure is that it is inherently subjective. The CSR

####### categories and weights assigned to each are probably influenced by the agenda and

####### political goals of the released institutions. Thus, it is not too surprising prior studies

####### only get mixed relationship between performance and CSR. On the other hand, our

####### finding that high CSRs mitigate adverse market reactions to a highly publicized event

####### would suggest that the CSR measure, despite being open to criticism, is meaningful in

####### the marketplace. We thank one of the referees for pointing out this issue.

####### 6 We thank both referees for pointing out this issue.

326 D. Kong/Food Policy 37 (2012) 323–

theCARroughly is firm’s return minus the market return, the neg-
ativeCARin food industry means that investors tend to sell the
stock in their hands on average.
Table 3lists all the sample firms’ primary business focusing,
CAR[T 0 5,T0+5], CARPre½T 0 5 ;T 0 1 Š, and CARPost½T 0 þ 1 ;T 0 þ 5 Š as Jin and Kim
(2008). For these 43 firms, there are three dairy firms (Bright Dairy
& Food, Yili and Sanyuan) in all.
Since the scandal is only limited indairy industry, it is reasonable
to expect dairy firms will experience stronger market responses
than firmsinothersegments of thefood system,wedo find
firms in the dairy industry, on average, to have experienced a stron-
ger market response than firms in other segments of the food sys-
tem. As for two listed dairy firms involved in melamine
contamination incident (Bright Dairy&Food and Yili), their stock
prices show stronger negative market responses (CARs are8%
and14% in [T 0 5,T 0 + 5], respectively). However, Sanyuan,
the only innocent dairy firm in China, shows stronger positive mar-
ket responses with a 8%CARin [T 0 5,T 0 + 5]. To a certain extent,
the positive and negative market reaction counteracts each other.
As primary tests, we adopt the event study methodology to plot
the averageCARforcompaniesinthefood industryaroundtheevent
date inFig. 1. It shows the investors’ reaction to the incident around
the event day (September 11, 2008). We find that there is significant
downward sloping during the event window. Our null hypothesis
here is that there is no price pattern in the investor reaction to the
event and thus there is no abnormal return existing. However,
Fig. 1supports the alternative hypothesis. The cumulative abnormal
returns show a clear downward sloping pattern in food industry and
the food companies’ financial performance below the average re-
turn in the stock market. This finding indicates that, indeed, the rel-
atively low performance of food industry reflect the incident
negatively impact the food-related companies. If we buy the firms’
stocks in food industry before the event day (no matter inT 0 5
orT 0 10), the cumulative abnormal returns (i. roughly equal to
raw return minus market return) are nearly5% in a 10 days hold-
ing period and3% in a 5 days holding period after the event. Be-
sides, we also report thet-ratios forCARs in different event date.
Obviously, as time goes by, the significance ofCARs is goes up.
As forFig. 1, there are two big market drops in the period of
[T 0 4,T 0 3] and [T 0 +4,T 0 + 7]. These patterns indicate that the
market received information prior toT 0 and received additional
information several days after the event. In fact, even though the
incident formally breaks out on September 11, 2008, there were
already many related-reports disclosed by newspapers, local TV
channels, and websites. The time line of 2008 China’s milk scandal
in Appendix B shows this is true. The first drop on the day ofT 0 4
(i. 5 September) is corresponding with that the New Zealand
Fonterra Co-operative Group, which owns 43% of Sanlu shares,
reports information to the New Zealand government after a failure
of trying to persuade the China local government recall of toxic
Sanlu milk powder. The second drop is in the calendar period from
17 September to 22 September (including no-trading days in
weekend). In this event window, the impact of this incident even
is more severe. The toll of ill babies in this incident rises to
53,000 (with the death toll to at least four), two other famous milk
firms in China, Mengniu and Yili, are involved into this incident.

Collectively, these results indicate that, as for food industry, the
incident has significant negative impact on firm financial perfor-
mance in stock market.
Our next question is how different CSRs of food companies af-
fect the sensitivity of event impact on the stock prices. Basically,
this is the intuition of ourHypothesis 1. 2presents the pattern
roughly, and there is an obviously upward sloping relation be-
tween CSR and CAR. Despite the clear pattern shown inFig. 2,it
possibly comes from the bias without control the common vari-
ables in literature such as firm size or book-to-market ratio
4 reveals that this is not the case.
Table 4presents estimation results of Eq.(2)with robust stan-
dard errors adjusted by sample size (MacKinnon and White, 1985).
Overall, all regressions show significantF-stats and significantly re-
ject the null hypothesis that independent variables cannot explain
the dependent variables, no matter we use all samples or sub-sam-
ple excluding three dairy firms. It means thatCSRdoes affect inves-
tor reaction in the market. We take bothCARs in the event window
[T 0 5,T 0 + 5] and [T 0 10,T 0 + 10] as the dependent variable in
test. Since results with different dependent variables are very sim-
ilar, we only focus on the result withCARin [T 0 5,T 0 + 5].
The first two columns inTable 4show the estimation with and
without control variables for the whole sample. The coefficients of
CSR,b 1 , are positively significant, which reject the null hypothesis
(i.e 1 = 0) in 1% significant level. When we exclude dairy firms in
columns 5 and 6, results still stay the same.
Jointly, these two estimates suggest thatCSRperformance in
food industry positively affects investors’ behaviors and investors
have greater interests in buying stocks of firms with a high level
ofCSRscores than those of the firms receiving lowCSRscores. This
suggests that firms with poorCSRperformance alienate their inves-
tors and implies that investors tend to worry that lowCSRperfor-
mance will undermine firms’ performance or operation finally.
Taken together, our result supportsHypothesis 1.
To test theHypothesis 2, we conduct regressions as Eqs.(3a) and
(3b).Table 5provides the estimation results. Since results inTable 4
show our tests are robust toCARs with different event windows,
thereafter, we only report results with [T 0 5,T 0 + 5] for brevity.
As shown inPanel AofTable 5, for the pre-event window (col-
umns 1 and 2), the coefficients ofCSRare not significant whether
we include control variables or not. Thus, we cannot reject the null
hypothesis that coefficient ofCSRis different with zero in the pre-
event window. Based on this result, it is easy to conclude that
investors in general do not respond to food companies’CSRperfor-
mance before the crisis. This is consistent with ourHypothesis 2.
The results of post-event window are reported in columns 3 and
4. Since we conjecture the general public in China only begins to
pay attention toCSR, especially in food industry, after the crisis,
we postulate the influence is manifested after the event. Consistent
with our expectation, the coefficients ofCSRare significant at 5%
significant level and far more than zero no matter we regress with
or without control variables. This result supports our intuition:
firms’CSRperformances are positively affecting investors’ buying
or selling only after they recognize the important ofCSR.
Considered together, the results inTable 5suggest that the
effects ofCSRare evident only after the incident, and perfectly
support ourHypothesis 2.

Additional test 7

We thus far show thatCSRis vital for strengthening the food
safety in the food industry, especially in emerging markets. Given
our limited sample size, it is reasonable to combine the event study

####### Table 2

####### Summary statistics.

Variables Obs. Mean Std. Dev. Min Max
CSRfood 43 0 0 0 0.
CSRall 1494 0 0 0 0.
CARfood,[T 0 5,T0+5] 43 0 0 0 0.
CARfood,[T 0 10,T0+10] 43 0 0 0 0.
Ln(Size)food 43 21 1 20 25.
Ln(M/B)food 43 1 0 0 3.

####### 7 We thank one of the referees for suggesting to conduct this section.

328 D. Kong/Food Policy 37 (2012) 323–

and regression analysis. However, a more effective and simpler ap-
proach in regression is to conduct the following empirical
specification:

CARij¼aþb 1 CSRijþb 2 Crisisiþb 3 Ageijþb 4 SOEij

þb 5 LnðSizeÞijþb 6 LnðM=BÞijþeij ð 4 Þ

whereCARijisCARof theith firm in thejth month the actual
score of social responsibility index issued by SNAI and it is not vary
across month the dummy variable for dividing into pre-
and post-crisis the age of theith firm in thejth month since
the firm was established. TheSOEijis a dummy variable to index if
the firm is controlled by the government. If the firm is state-owned,
SOE= 1; otherwise,SOE=0(Size)ijandLn(M/B)ijare the same
with Eq.(2).
By this manner, we can consider a relatively long time horizon
to examine the mid-term or long-term impacts of the milk scandal.
Although the crisis was disclosed on September 11, 2008, most of
the policy interventions were announced months later on. Using
Eq.(4), we can further address the long-term impacts.
It is worth to note that, in Eq.(4), we also introduce two new
variables:Age(to measure how many years the firm has been
established) andSOE(to measure if the firm is owned by the state).
Both of these two variables help us to address a much larger issue
under the institution environment of China. As a matter of fact,

many of the dairy firms (which were disclosed for manipulating
the safety and quality of raw milk and dairy products) were qua-
si-state-owned and/or had fame for a long time in. Lots of SOE
firms were even exempt from inspection before the crisis. The
dairy scandal reveals that China’s food industry was poorly gov-
erned and coordinated.
Table 6presents our estimation results AandPanel B
report results with the dependent variables ofCARin months
[5,+12] andCARin months [5,+24], respectively. Since it is hard

####### Table 3

####### Listed firms in food industry and their cumulative abnormal returns.

Company name Main business CAR[5,+5] CARPre½ 5 ;þ 5 Š CARPost½þ 1 ;þ 5 Š

Company name Main business CAR[5,+5] CARPre½ 5 ;þ 5 Š CARPost½þ 1 ;þ 5 Š

1 Bright Dairy & Food Dairy products 0 0 0.
2 Sanyuan Foods Dairy products 0 0 0.
3 Yili Industrial Dairy products 0 0 0.
4 Mogao Industrial Development Barley malt and farming 0 0 0.
5 Huanghe Enterprise Barley malt, beer, drinks 0 0 0.
6 Beijing Yanjing Brewery Beer 0 0 0.
7 Chong Qing Brewery Beer 0 0 0.
8 Tibet Galaxy Sci&Tech Development Beer 0 0 0.
9 Tsingtao Brewery Beer 0 0 0.
10 Yanjing Huiquan Brewery Beer 0 0 0.
11 Jinjian Cereals Industry Cereals and flour 0 0 0.
12 Zhengbang Technology Complete feed, concentrate feeds 0 0 0.
13 Ningbo Tech-bank Feeds production 0 0 0.
14 Zhenghong Sci&Tech Development Feeds sales and protein feeds 0 0 0.
15 New Hope Agribusiness Feeds, dairy, slaughtering and meat production 0 0 0.
16 Tecon Animal Science Bio-technology Feeds, veterinary drug 0 0 0.
17 Ronghua Industry Food and feed 0 0 0.
18 Shanghai Maling Aquarius Food and meat productions 0 0 0.
19 Lianhua Gourmet Powder Gourmet powder and flour 0 0 0.
20 Tonghua Grape Wine Grape wine 0 0 0.
21 Changyu Pioneer Wine Grape wine, brandy, healthy wine, champagne 0 0 0.
22 Xinghuacun Fen Wine Liquor series 0 0 0.
23 Gaojin Food Pork sales 0 0 0.
24 Haitong Food Quick frozen/dehydration product and canned goods 0 0 0.
25 Anhui Gujing Distillery Spirits alcoholic 0 0 0.
26 Huazi Industry Sugar 0 0 0.
27 Shenbao Industrial Teas, condiments, and soft drinks 0 0 0.
28 Cofco Tunhe Tomato products and beets products 0 0 0.
29 Xingjiang Chalkis Tomato products and fruits juice 0 0 0.
30 Cheng De Lolo Vegetable, protein drinks 0 0 0.
31 Hengshun Vinegar Vinegar and other condiments 0 0 0.
32 Nanning Sugar White crystal sugar, brown granulated sugar 0 0 0.
33 Guyuelongshan Wine 0 0 0.
34 Huangtai Wine-Marketing Wine 0 0 0.
35 Jiuguijiu Company Wine 0 0 0.
36 Kweichow Moutai Wine 0 0 0.
37 Luzhoulaojiao Wine 0 0 0.
38 Wulianngye Wine 0 0 0.
39 Golden seed Winery Wine 0 0 0.
40 Hainan Yedao Wine and drinks 0 0 0.
41 Yilite Industry Wine and fruit juice 0 0 0.
42 VV Food & Beverage Wine, soybean milk powder, vegetable protein drinks 0 0 0.
43 Angel Yeast Yeast 0 0 0.

Fig. 1 market reaction of food industry in the event windows.

D. Kong/Food Policy 37 (2012) 323–334 329

Conclusion

This paper presents the influences of CSR level on investors’
behaviors in the food industry. Although CSR is an important issue,
and in a recent survey by China Academy of Social Science, inves-
tors have expressed their concerns regarding firms’ CSR activities,
we do not find any significant pattern between the level of firms’
CSR and investors’ trading behaviors in the pre-event window.
Nevertheless, in the post-event window, we detect significant ef-
fects of CSR on investors’ behaviors. Our findings suggest that
CSRcan influence investors’ trading behaviors at least in a short
period of time after the event, but not before it.
This study offers three important policy implications. First, we
find that in China, investors in the food industry significantly react
negatively to the melamine contamination incident. Our findings
directly suggest that the Chinese government, as well supervisors,
should release appropriate policies to strengthen the current food
safety laws, enact new and stricter laws on food safety, and en-
hance the tolerance standards in the food industry. Policies along
this channel would ensure the safety and quality of food, and ulti-
mately, protect the consumers.
Second, we also find that when facing shock, the firms’ CSR lev-
els significantly mitigate the negative investors’ responses in the
food industry, thereby providing another channel for the Chinese
government to prevent the emergence of catastrophic conse-
quences, namely, improving the firms’ activities on CSR. Given
the profit motivation of those in the private sector, we suggest that
supervisors and monitors release appropriate policies and efficient
mechanisms to strength firms’ incentives to participate in CSR
activities, especially in the aspects of production, marketing, and
product consumption. For instance,Holleran et al. (1999)point
out that financial incentives are important for all participants in
the supply chain to provide clean, safe, and healthy products.
Our findings in this paper imply that investors, in the manner of
‘‘voting by foot’’, only partially monitor CSR after their recognition
of the exogenous CSR shock. Although this mechanism works in
the monitoring, it is insufficient to secure food safety and does
not serve as a substitute to the roles of the government and the
supervising organization.

Third, our findings also provide implication on socially respon-
sible investments (Sparkes and Cowton, 2004). We show that
investors take food companies’ CSR activities as important factors
in their investment decisions. Investor trades can affect firm price,
which is the main concern of shareholders. Thus, we suggest that
socially responsible investment funds, at least in the food industry,
can acquire long-term benefits by integrating firms’ CSR levels in
their portfolio constructions.
This paper has two limitations: 1) We only focus on China’s
listed firms in the food industry. Although we can obtain signifi-
cant results in this study, our findings should be cautiously applied
to non-listed firms and to other countries. 2) Our research is based
on cross-section data of 43 listed firms in China’s food industry.
The observation parameters may reduce our test power. Therefore,
future studies can be conducted in two ways: 1) By offering inter-
national or non-listed firm facts, the effect of CSR on firm perfor-
mances can be evaluated in a more general sense, and 2) with a
time-series CSR measure, we can further investigate how CSR
affects firm performance in the long run.

Acknowledgements

I thank Satoru Shimokawa (the editor), two anonymous referees,
Zhijian Feng, Yan Sheng, and seminar participants at Huazhong Uni-
versity of Science & Technology for helpful comments and valuable
suggestions. All remaining errors and omissions are my own. I
gratefully acknowledge the financial support from National Natural
Science Foundation of China (Grant Nos. 71173078 and 70803013).

Appendix A. Procedures to deriveARi,t

We use the market model to estimate the expected stock re-
turns for firmiat timet, denoted asRi,t, over the estimation win-
dow [T 0 155,T 0 6]:

Ri;t¼aiþbiMRtþei;t ðA: 1 Þ

wheretis fromT 0 155 toT 0 6 andMRtis the expected return for
the whole stock market on dayt. Through regression in Eq.(A),we

####### Table 6

####### Regression of long termCARonCSRand firms’ characteristics.

Panel A: CAR in months [5,+12] Panel B: CAR in months [5,+24]
Model(1) Model(2) Model(3) Model(1) Model(2) Model(3)
CSR 0 0* 0** 0 0* 0**
(0) (0) (0) (0) (0) (0)
Crisis 0*** 0*** 0* 0*** 0*** 0*
(0) (0) (0) (0) (0) (0)
Age 0 0*** 0 0***
(0) (0) (0) (0)
SOE 0*** 0*** 0*** 0***
(0) (0) (0) (0)
Ln(M/B) 0*** 0***
(0) (0)
Ln(Size) 0*** 0***
(0) (0)
Constant 0 0 0*** 0 0 0***
(0) (0) (0) (0) (0) (0)
Obs. 1376 1376 1376 1548 1548 1505
Adj-R 2 0*** 0*** 0*** 0*** 0*** 0***

Note: This table reports estimated results based on Eq.(4). Robust standard errors are in parentheses AandPanel Breport results with the dependent variables ofCAR in
months[5,+12] andCAR in months[5,+24], respectively estimated based on the simplified AR (stock return minus the market return).CSRis the actual score of
social responsibility index issued by SNAI the age firm since it was established a dummy variable to index if the firm is controlled by the government. If the firm
is state-owned,SOE= 1; otherwise,SOE=0(Size) andLn(M/B) are the logarithm of market capitalization (prices multiply outstanding shares) and market-to-book ratio in
the end of last fiscal year.
*Statistical significance at the 10% significance level.
**Statistical significance at the 5% significance level.
***Statistical significance at the 1% significance level.

D. Kong/Food Policy 37 (2012) 323–334 331

obtain the estimated intercept coefficient^ai(also called alpha va-
lue) and the estimated coefficient forMRtwhich is^bi(also called
beta value). Then we use the following equation to estimate the ex-
pected return for stock i, E(Ri,t) in the pre-event window
[T 0 5,T 0 1] and the post-event window [T 0 +1,T 0 + 5]:

EðRi;tÞ¼^aiþ^biMRt ðA: 2 Þ

The abnormal return for stockion daytis then computed as:

ARi;t¼Ri;tEðRi;tÞðA: 3 Þ

Finally, the cumulative abnormal returns (CAR) for stockiover
the window [TE,TS] is:

CARi¼

PTE

t¼TS

ARi;t ðA: 4 Þ

Appendix B. Timeline of the 2008 China’s milk scandal

Date The events
5 September After the failure of trying to persuade the
China’s local government (i. Hebei
province) recall of toxic Sanlu milk
powder, the New Zealand Fonterra Co-
operative Group, which owns 43% of Sanlu
shares, had to report information to the
New Zealand government
6 September Complaint was delivered to General
Administration of Quality Supervision,
Inspection and Quarantine of China
(AQSIQ) that several babies have got renal
calculus (kidney stones) because a long
time consumption of Sanlu milk powder
8 September Officials of New Zealand were ordered to
report this emergency to the China central
government without permission of Local
officials in Hebei province
9 September New Zealand Government directed its
embassy to inform China’s food safety
authorities in Beijing of the Sanlu milk
contamination
The government of Shijiazhuang (capital
of Hebei) reported to the Hebei
government on the quality problem of
Sanlu milk powder
10 September Sanlu claimed that Sanlu milk powder was
free of quality problem
More than 70 sick babies had kidney
stones and Sanlu Milk powder was
blamed to be the prime culprit. There
were 59 cases (including one death)
reported by Gansu province. 6 cases were
reported by Shaanxi, Gansu and Ningxia
provinces, and 10 cases by Nanjing City.
Similar cases of illness were reported in
Henan, Jiangxi, and Hubei provinces
11 September
(Event Date)

ADongfang Dailyreporter, Jian
Guangzhou, reported the connection
between Sanlu’s baby formula and infant
kidney stones to the public. This was the

Appendix B(continued)

Date The events
first time that Sanlu was identified as
being responsible for the cases on a public
media
The Ministry of Health warned people to
stop consuming the polluted Sanlu milk
powder immediately at 9:00 p.
(Actually, even at 5:00 p., Sanlu still
state that ‘‘we are of high social
responsibility.. can surely say that all
the Sanlu products have got no quality
problem)
Sanlu recalled some batches of milk
powder had been polluted by melamine,
the total quantity of which was around
700 tons at 10:00 p.
12 September Sanlu admitted that its milk powder was
contaminated with melamine
AQSIQ issued a command to examine the
quality of milk powder throughout the
nation
13 September Production halted at Sanlu
Nineteen people are arrested
Baidu, a China’s top search engine, denied
ever agreeing to bury Sanlu negative news
15 September Vice-President of the Sanlu Group
apologized to the public for the
contaminated milk powder
Sanlu was ordered to halt production, and
to destroy all unsold and recalled
products. Authorities reportedly seized
10,000 tons of products
Beijing confirms two babies’ death
Ministry of Health claimed that: up to the
present, there were 1353 sick babies
16 September Milk powder from 22 China’s companies
tested positive for melamine, Sanlu tops
the rankings

17 September MD of Sanlu was detained on criminal
charges;
Shijiazhuang Mayor Chuntang Ji resigned
Health Minister Chen Zhu declared toll of
‘‘more than 6200 children, and that more
than 1300 others, mostly newborns,
remain hospitalized with 158 suffering
from acute kidney failure’’

18 September One case was sickbaby death was reported
by Xinjiang Autonomous Region
China revokes ‘Inspection-Free’ right of
top dairy companies
Yili products recalled in Hong Kong after
testing positive for melamine
Yili and Mengniu made public apology
19 September Melamine found in ordinary milk from
three well-known dairies
One of the firms involved – Mengniu dairy
issued blanket recall on all its products
21 September Additional Hong Kong victim diagnosed
China’s Premier Wen Jiabao makes a visit

332 D. Kong/Food Policy 37 (2012) 323–

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