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A Journal Providing Further Evidence on the Association Between Corporate Social Responsibility and Financial Performance.

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Relevant to research undertaken in Corporate Social Responsibility Year of publication: 2012
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  Further evidence on theassociation between corporatesocial responsibility and financialperformance Li Sun  Department of Accounting, Miller College of Business, Ball State University, Muncie, Indiana, USA Abstract Purpose  – The purpose of this paper is to examine the association between corporate socialresponsibility (CSR) and financial performance. Design/methodology/approach  – This paper performs an empirical test on the associationbetween CSR and financial performance of a firm. Findings  – The regression analysis reveals a significant and positive association between CSR andfinancialperformance.Inaddition,itfindsthattheageoflong-termassetsishighlycorrelatedwithCSR. Originality/value  – This paper extends Cochran and Wood by using a larger and more recentsample to examine the association between CSR and financial performance of a firm. It contributes tothe CSR literature. Keywords  Corporate social responsibility, Financial performance, Age of long-term assets, Assets,Assets management Paper type  Research paper Introduction Cochran and Wood (1984) examine the association between corporate socialresponsibility (CSR) and financial performance by using approximately 400 firm-yearobservations.Theyfindthat,aftercontrollingforfirmsize,risk,industry,andtheageof long-termassets,CSRispositivelyassociatedwithfinancialperformanceatasignificantlevel. One interesting finding in their study is that the age of long-term assets issignificantly related to CSR ratings. That is, firms with younger assets seem to havebetter CSR performance than firms with older assets. Cochran and Wood (1984) call formoreempiricalevidenceontheassociationbetweenCSRandfinancialperformance,andalso on the link between the age of long-term assets and CSR.ThepurposeofthispaperistoextendCochranandWood(1984)byusingalargerandmore recent sample to examine the association between CSR and financial performanceof a firm. I also investigate whether the age of long-term assets is highly related to CSR.I obtain CSR data from Kinder, Lydenberg, andDomini’s(KLD’s)database.The sampleconsists of 11,432 firm-year observations for the period of 1999-2009. This studydocuments two major findings. First, regression analysis reveals a significant andpositive association between CSR and financial performance. This evidence, consistentwith many prior studies, suggests doing CSR can be beneficial to firms. Second, the ageoflong-termassetsishighlycorrelatedwithCSR.Thissuggeststhatfirmswithyoungerassets demonstrate better CSR performance than firms with older assets. The current issue and full text archive of this journal is available at www.emeraldinsight.com/1754-243X.htm IJLMA54,6 472 International Journal of Law andManagementVol. 54 No. 6, 2012pp. 472-484 q Emerald Group Publishing Limited1754-243XDOI 10.1108/17542431211281954  This study makes several contributions. First, it extends Cochran and Wood (1984)by using a larger and more recent sample and delivers new evidence on the associationbetween CSR and financial performance of a firm. It contributes to the CSR literature.Second, it responds to the Cochran and Wood (1984) call for more empirical evidence onthe association between CSR and the age of long-term assets. Although there are manystudies examining the relationship between CSR and financial performance, very fewstudies have examined the correlation between the age of long-term assets and CSR.I deliver new empirical evidence on the relation between CSR and the age of long-termassets. This significant correlation between CSR and the age of long-term assetssuggests that future CSR studiesneedtoincludetheageoflong-termassetsasacontrolvariable in their regression analysis. Last, from a practical perspective, the resultsshould be of interest to managers who contemplate engaging in socially responsibleactivities, investors and financial analysts who assess firm performance, and policymakers who design and implement guidelines on CSR.The remainder of the paper is organized as follows. The second section reviewsprior research. The third section describes the research design. The fourth sectiondescribes sample selection and descriptive statistics, while the fifth section reports theresults from the regression analysis. The sixth section summarizes the study. Review of prior research CSR is defined as “the voluntary integration of social and environmental concerns intobusinessoperationsandintotheirinteractionwithstakeholders”(EuropeanCommission,2002).Vilannova etal. (2008)proposethatthedefinitionofCSRconsistsoffivedimensions,includingvision(Carter etal. ,2003;Freeman,1999;Humble etal. ,1994;JoynerandPayne,2002; Pruzan and Thyssen, 1990; Sison, 2000), community relations (Freeman, 1999;Frooman,1999;Grey,1996;Hess etal. ,2002;Jones,1995;JonesandWicks,1999),workplace(European Commission, 2002; United Nations Global Compact, 2000; International LaborOrganization, 2007; Sum and Nagi, 2005), accountability (Elkington, 1998; GlobalReporting Initiative, 2002), and marketplace (Fan, 2005; Schnietz and Epstein, 2005;Whetten  et al. , 2001). For example, vision includes CSR conceptual development, codes,and value within the organization. Community relations include partnerships withdifferent stakeholders, like customers, supplier, etc. Workplace includes human rightsand labor practices within the organization. Accountability includes the transparency incommunication and financial reporting. Marketplace includes the relationship betweenCSR and core business processes, like sales, purchase process, etc.The topic of CSR has received increasing attention in recent years. The practice of CSR is still controversial since it requires firms to undertake additional investments inCSR. These CSR investments are often examined through the economic cost-benefitanalytical lens, and assumed benefits from CSR activities drive CSR decisions. Someargue that CSR activities increase costs without sufficient offsetting benefits, hurtperformance and compete with value-maximizing activities. Examples of theseadditional costs include making charitable donations, developing plans for communityimprovement, and establishing procedures to reduce pollution. The majority of CSRstudies have focused on examining the link between CSR and financial performance of a firm. Empirical results are somewhat mixed. For example, Aupperle  et al.  (1985) usesurvey to assess chief executive officer (CEO)’s perspectives on CSR activities andreport a significant and negative association between CSR and accounting-based CSR andfinancialperformance 473  performance measures. Moore (2001) focuses on eight main companies in the UKsupermarket industry and finds a negative temporaneous relationship between CSRand financial performance. Nelling and Webb (2009) use the KLD index as the measureof CSR and return on assets (ROA) to measure financial performance. They find noevidence that CSR is related to a firm’s financial performance.Many other CSR-financial performance studies document a positive relationshipbetweenCSRandfinancialperformance.EarlyworkbyCochranandWood(1984)findapositive link between CSR and financial performance. Cochran and Wood (1984) pointoutthatmorecomprehensivemeasuresofCSRareneededtofurtherresearchinthisarea.McGuire  et al.  (1988) document a positive association between CSR andaccounting-based and market-based financial performance measures. In particular,their results suggest that, compared to a firm’s subsequent performance, its priorperformanceismorecloselyrelatedtoCSR.WaddockandGraves(1997)useKLDdatatomeasure CSR performance, ROA, return on equity (ROE), and return on sales (ROS) tomeasure financial performance, and document two major findings:(1) better financial performance leads to better future CSR performance; and(2) better CSR performance leads to better future financial performance.Similar to Waddock and Graves (1997) and Tsoutsoura (2004) uses firms selected onthe S&P 500 Index for the period of 1996-2000 to measure the effect of CSR on financialperformance measures. Tsoutsoura (2004) finds a significant and positive associationbetween KLD data and financial performance, including ROA, ROE, and ROS.Dhaliwal  et al.  (2011) find firms with a high cost of capital in the previous year are morelikely to disclose CSR activities in current year, and those firms with superior CSRperformance receive a low cost of capital in subsequent year. In addition, those firmswith superior CSR performance also receive favorable analyst coverage and achievelower absolute forecast errors and dispersion. Thus, Dhaliwal  et al.  (2011) conclude thatengaging in CSR activities may bring future benefits to firms.A recent literature review (Beurden and Go¨ssling, 2008) and meta-analysis(Orlitzky  et al. , 2003) both conclude a positive relationship between CSR and financialperformance. They suggest that being socially responsible can bring firms economicbenefits that contribute to wealth maximization. CSR activities improve relationshipswithstakeholderswhichcanultimatelyleadtoimprovedreturns.Asociallyresponsiblefirm may face fewer labor problems, fewer complaints from the community, and fewerenvironmental concerns from the government. In addition, socially responsible firmsmay have improved relationships with their investors, bankers, and governmentofficials.Theabovefactorssuggestthatfirmsthatcareabouttheirsocialresponsibilitiesmay perform well in today’s society. Research design  Measurement of the dependent variable – CSR  KLD, a Boston-based consulting firm, has been actively providing rating data on CSRsince 1991. KLD data is an influential measure of CSR. While many investmentmanagers rely on KLD data when making social screening, the KLD data are alsofrequently used in academic literature. It is “the largest multidimensional corporatesocial performance database available to the public and is used extensively in researchon corporate social performance” (Deckop  et al. , 2006, p. 334). KLD accumulates CSR IJLMA54,6 474  information for more firms than other CSR data sources. It has become “the de factocorporatesocialperformanceresearchstandardatthemoment”(Waddock,2003,p.369).KLDprovidesratingdataforapproximately80variablesinsevenqualitativeareasforeachselectedfirm.Thesevenareasincludecommunity,corporategovernance,diversity,employee relations, environment, human rights, and product. For each qualitativevariable, positive ratings indicate strengths, and negative ratings indicate concerns. Forexample,theenvironmentareacontainssixstrengthitems(beneficialproducts,pollutionprevention, recycling, clean energy, property plant and equipment, and other strengths)andsixconcernitems(hazardouswaste,regulatoryproblems,ozonedepletingchemicals,substantial emissions, agriculture chemicals, and other concerns). In addition to thesesevenqualitativeareas,KLDalsoevaluatessixcontroversialissuesthatinclude,alcohol,gambling,firearms,military,nuclearpower,andtobaccoactivities.Involvementinanyof thesesixcontroversialissuesresultsinanegativerating.Acompletelistingofstrengthsand concerns for KLD variables is provided in the Appendix table.Consistent with prior research (Chen  et al. , 2008; Cho  et al. , 2006; Deckop  et al. , 2006;Nelling and Webb, 2009; Ruf   et al. , 2001; Johnson and Greening, 1999; Griffin andMahon, 1997; Shropshire and Hillman, 2007; Waddock and Graves, 1997; Graves andWaddock, 1994), I subtract total concerns from total strengths and assign equalimportance/weight to each area in calculating the KLD index score.The KLD index score is computed as follows:KLD  ¼ ð Total strengths of Community 2 Total concerns of Community Þþ ð Total strengths of Corporate Governance 2 Total concerns of Corporate Governance Þþ ð Total strengths of Diversity 2 Total concerns of Diversity Þþ ð Total strengths of Employee Relations 2 Total concerns of Employee Relations Þþ ð Total strengths of Environment 2 Total concerns of Environment Þþ ð Total strengths of Human Rights 2 Total concerns of Human Rights Þ þ ð Total strengths of Product 2 Total concerns of Product Þ 2 Any concerns of Alcohol 2  Any concerns of Gambling 2 Any concerns of Firearm 2 Any concerns of Military 2 Any concerns of Nuclear Power 2 Any concerns of Tobacco  Empirical specification I use the following regression model to test the association between CSR and financialperformance of a firm. The CSR performance is the regression model’s dependentvariable, while the financial performance is the independent variable of interest.Consistent with Cochran and Wood (1984) and other prior studies, additional variablesare included to control for firm size (ASSETS), risk (LEV), the age of long-term assets(ASSETAGE), and industry (IND):Model  : KLD it  ¼  a 0  þ a 1 *ROA it  þ a 2 *ASSETS it  þ a 3 *LEV it  þ a 4 *ASSETAGE it þ a 5 2 19 *IND þ 1 it CSR andfinancialperformance 475

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Jul 29, 2017
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