Does a firm get financially rewarded for being Corporate Social
Responsible?
Name: Hendrik Hagedoorn
Student number: 10643532
Track: Economics
Field: Economics
Number of Credit thesis: 12
Supervisor: Ron van Maurik
Abstract
Since our environment is facing serious threats nowadays and the growing number of stakeholders that hold firms responsible for their actions, Corporate Social Responsibility (CSR) became a dominant theme for firms. However, there is still some uncertainty regarding the relationship between Corporate Social Responsibility and Financial
Performance (FP), as firms still have little incentives for acting socially responsible. Although there has been a lot of research about this relationship, the outcomes and results demonstrate inconsistency. While some researchers argue that CSR engagement has a negative effect on FP, other researchers claim that there is a positive effect. The purpose of this study is to further analyse this relationship by using a large sample over a time-period of six years. For determining the effect of CSR on FP each of the firms in the used sample received a CSR score for every year. These scores are developed and published by Thomson Reuters. Next to that, for measuring FP this study uses Return On Equity (ROE) and Earnings Per Share (EPS), since these are suggested in prior research. In contrast to other studies, this study will also account for factors that possibly influence the financial performance and therefore are needed to control for. These are the variables number of employees and total assets for the size of a firm and the debt to capital ratio for risk. To test this relationship between the dependent variables for FP and the predictors for CSR, a multiple linear regression is
employed. In terms of ROE the results show a significant negative relationship between CSR engagement and ROE, while in terms of EPS the results show an insignificant relationship. This paper also conducted a robustness analysis by adding a dummy variable for Industry and Year to the initial regression. The results show that the original regression is robust for both EPS and ROE.
Table of contents
1. Introduction………..….4
2. Corporate Social Responsibility……….….……5
2.1 Definition CSR………...……...5 2.2 Principles of CSR……….………..….….….6 2.3 CSR initiatives………..7 2.4 Benefits CSR……….……….….……..8 2.5 Costs of CSR……….……….….10 3. Literature Review……….….….…11 3.1 Empirical. ………...………12
3.1.1 Studies indicating negative sign of relationship………..……….12
3.1.2 Studies indicating insignificant sign of relationship………13
3.1.3 Studies indicating positive sign of relationship………..………..…14
3.2 Theoretical……….………..15
4. Shortcomings and limitations prior research………...………16
5. Hypothesis………..………...………...16
6. Method and Data……….………17
6.1 CSR measurement………..………..…………...17
6.2 FP measurement………..………..………..18
6.3 Control variables………..………..……….…19
7. Empirical Methodology………..21
8. Results………..………...……….23
8.1 Multiple linear regression………...………23
8.2 Robustness analysis………...………..25
9. Conclusion………..……….26
10. Discussion………..……….………27
11. Limitations and future research……….……….…28
12. References………..…………29
1. Introduction
Since the UN conference of Human Environment was held in 1972 in Stockholm and the issuance of the Bruntland report in 1987, Corporate Social Responsibility has become an important and well-known concept. Next to that, as our environment is facing seriously treats from pollution and the growing number of stakeholders holding films responsible for their actions, Corporate Social Responsibility has climbed in the ranking of corporate governance (Hussain et al., 2016). These stakeholders keep firms accountable for their impact on the environment, but also on how they threat their employees. Despite the fact that the importance and necessity of Corporate Social Responsibility is widely recognized, it is still a voluntary act. Furthermore, fierce competition in certain markets ensures that firms reconsider their strategy and start to cut costs, which often happens at the expense of environmental and social responsible programs (Weber, 2008).
However, there is still an increasing demand for transparency and growing expectations for firms to report, measure and constantly improve their economic, social and environmental performance (Tsoutsoura, 2004). In addition, ninety per cent of the Fortune 500 list engages in CSR activities.
Although lots of extensive research has been done regarding this relationship, there is still no clear result and limited knowledge. Therefore, the research question of this study is as
followed: “Does Corporate Social Responsibility has a significant positive effect on the Financial Performance of a firm?”
The contributions of this study are as followed. First, I have employed a new dataset of Corporate Social Responsibility measures, which covers all European countries over a timespan of six years. Prior research resulted in ambiguous results due to different proxies used for all measurements. Lopez et al. (2007) investigated the effect of CSR on the profit divided by loss before taxes. They found a negative relation between CSR and FP, since they stated that the effect of CSR is always negative in the first years. By contrast, Waddock and Graves (1997) found a positive effect. They found that a high CSR score will led to higher Returns On Equity, Returns On Assets and Returns On Sales. Moreover, there are also studies that found an insignificant relationship between CSR and FP. Aupperle et al. (1985) for example argue that there is no significant relationship between their CSR measures and
Return On Assets. This study will use a new measurement for Corporate Social Responsibility that can be seen as objective and authoritative in contrast to the CSR measures used in prior
studies. Next to that, this study also uses a combination of two profitability ratios that never have been investigated together, Earnings Per Share and Return On Equity. Furthermore, I tested this relationship by using a multiple linear regression model, which is controlled for risk and size. Since prior studies also suggest adding a dummy for Industry and Time, this paper also conducted a robustness analysis by adding a dummy variable for Industry and Year to the initial regression.
The findings of this test are as followed, engagement in CSR activities has a
significant negative effect on the Return On Equity of a firm. For Earnings Per Share, I found an insignificant relationship with CSR engagement. The results of the robustness analysis show that the original regression is robust for both EPS and ROE.
The remainder of this paper will have the following structure. First CSR will be defined, initiatives of CSR will be given and the costs and benefits of CSR will be debated. In section 3 the relationship between CSR and FP will be outlined. Prior empirical studies will be discussed and grouped in the sign of relationship and prior theoretical research will be shortly discussed. Subsequently, in section 4 the shortcomings and limitations of prior
research will be outlined. In section 5 the hypothesis of this research will be formulated and in section 6 the research method will be presented. In section 7 the empirical methodology will be discussed and in section 8 the results will be presented. Furthermore, in section 9 the results are concluded and will be followed by the discussion in section 10. Lastly, the limitations and suggestions for future research will be debated.
2. Corporate Social Responsibilities
In this section the definitions of CSR in prior studies, the main principles and examples of CSR activities per principle and the possible benefits and costs of engaging in CSR will be outlined and discussed.
2.1 Definition of CSR
Corporate Social Responsibility has been studied for years now. It came into use in the early 70’s with the rise of multinational corporations. It has many different definitions, which makes its definition equivocal. According to Dahlsrud (2008) there are 37 different
definitions of CSR with a high variation in their perceptions. On the one hand, you have CSR theorists that describe CSR in a short and concrete manner, on the other hand are there theorists that describe CSR in a dynamic and developed manner.
Davis (1973) and Friedman (1970) for example described CSR in a short and concrete manner. Davis (1973) states that CSR requires “consideration of issues beyond the narrow, technical and legal requirements of the company”, while Friedman (1970) defines CSR as “The only social responsibility of a company is to increase its profits while staying within the rules of the game”. Moreover, these two definitions show the above-mentioned equivocation between definitions of CSR. Lin, Yang and Liou (2009) defined CSR more recently as a firm’s obligation to improve and protect the social welfare now and in the future by creating sustainable benefits for the organizations its stakeholders.
In contrast with the short definitions, now the longer and more dynamic definitions will be discussed. Khoury et al. (1999) for example described CSR as “The overall
relationship of the corporation with all of its stakeholders. These include customers,
employees, communities, owners/investors, government, suppliers and competitors. Elements of social responsibility include investment in community outreach, employee relations, creation and maintenance of employment, environmental stewardship and financial
performance.” Similarly, Tsoutsoura (2004) came up with the following explanation: “CSR is viewed, then, as a comprehensive set of policies, practices, and programs that are integrated into business operations, supply chains, and decision-making processes throughout the company and usually include issues related to business ethics, community investment, environmental concerns, governance, human rights, the marketplace as well as the
workplace.” These are two more dynamic definitions and are more in line with each other. Two more concise definitions will follow.
Firstly, McWilliams and Siegel (2001) stated CSR as “Actions that appear to further some social good, beyond the interests of the firm and that which is required by law”. Another noteworthy definition is the one of the EU Commission, which is the highest legislative body within the EU. They defined CSR as “A concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis”. Moreover, this is the most used definition of CSR (Dahlsrud, 2008).
2.2 Principles of CSR
Although there are numerous definitions and explanations for Corporate Social
Responsibility, almost every article recognizes the following three principles of CSR. 1) Environmental
2) Social
3) (Corporate) Governance
Therefore, the definition of CSR this study will use is:
Corporate Social Responsibility is the degree and commitment to which a firm acts
responsible towards growing environmental issues (e.g. waste and pollution), social issues (e.g. human rights and sexism) and governance (e.g. transparency) inside and outside the limits given by the law.
2.3 CSR initiatives Environmental:
Effective environmental programs mainly include pollution prevention, sustainable and biological products, clean energy and recycling. These efforts are based on the most important principle: minimising the environmental footprint and maximising sustainability (Kotler and Lee, 2005). Unilever for example started the Unilever Sustainable Living Plan (USPL) in 2010. The vision of this project is: “Growing our business while at the same time losing our environmental footprint from our growth and increasing our positive social impact”. By this way Unilever is doing business where not only the shareholders, but also the stakeholders play a key role. The results show that Corporate Social Responsibility can be beneficial for the financial performance of a firm. In addition, the 18 sustainability brands of Unilever have grown 50 per cent faster and have accounted for 60 per cent of their total growth (Unilever, 2017).
Social:
Socially effective programs consist of community, employee relations, diversity, human rights and product safety initiatives.
Community initiatives can be achieved in two different ways, corporate philanthropy and cause-related marketing. When a firm directly donates money to a charity or a natural disaster, it is called corporate philanthropy. Cause-related marketing occurs when a firm commits itself to donate or contribute a particular percentage of the revenues of one product to a specific charity or cause. This usually happens when a firm collaborates with a non-profit organization. Hereby, both the firm and the non-profit organization (E.g. NGO’S) will benefit
good cause on the other hand. Employee relation initiatives consist of strong health programs, strong benefit programs and good union relations. Diversity initiatives contain actions that increase minority populations and women of the firm, by increasing their representation in the board for example. When a firm has strong human rights initiatives, it does not violate rights such as privacy, child labour and fairness. Next to that, it ensures a two-way communication between customers, employees and executives. Lastly, product safety ensures that products are safe for using (Kotler and Lee, 2005).
Corporate governance:
Corporate governance is “the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and community” (Investopedia, 2017). This applies to CSR since it is crucial that firms issue high-quality and comprehensive CSR reports. When a firm does not report about its CSR activities, it will not affect the financial performance since the
stakeholders will not know about these activities. Therefore, good corporate governance with transparent and complete CSR reporting is an essential part for an effective CSR program (Kotler and Lee, 2005).
2.4 Benefits CSR
As mentioned before, when a firm engages in CSR activities it can be beneficial, but it can also be detrimental. In this section, the benefits will be discussed. Weber (2008) stated in his article that there are five main areas where CSR activities can be beneficial for a firm.
1) Effects on company image and reputation: CSR activities can be an important source for the competitive advantage of a firm. More specifically, CSR activities can result in a better sustainable image and reputation of a company, which will increase the competitiveness of the firm and therefore can be beneficial (Weber, 2008; Galant and Cadez. 2017).
2) Effects on employee motivation, retention and recruitment: CSR activities can ensure an improved motivation of employees. Since they will be more motivated when working in a better environment. Next to that, it can result in an increased productivity and therefore cost reduction. It can also have a direct-or indirect effect
on the attractiveness of a firm for potential and more qualified employees (Weber, 2008; Barnett and Salomon, 2006).
3) Cost savings: When a firm realizes a sustainable strategy, this can have several benefits. For example, decreasing energy consumption and substitution of
materials used can stimulate efficiency. This will not only result in cost saving, but it can also result in customer awareness, which can ensure a higher consumption level (Weber, 2008; Barnett and Salomon, 2006). Moreover, Epstein and Roy (2001) also argued that a sustainable strategy could make a firm more attractive for investors and could have a positive effect on financial analysts.
4) Revenue increases due to higher sales and market share: As a result of all benefits created by CSR activities the firm will have an increase in revenues. Researchers argue that CSR activities can directly or indirectly improve the reputation of the firm and therefore its brand image. Moreover, this could lead to a higher market share and increasing sales, which ultimately is the sole driver for a firm (Weber, 2008).
5) Risk reduction: this goes hand in hand with the improved image of a firm. Because of this improved image as a result of CSR activities, the firm will not have
negative publicity, no NGO/Customer boycotts and no fines for irresponsible behaviour (Weber, 2008).
Weber (2008) also visualized the impact of CSR on businesses by developing a model. He classified the benefits from CSR into monetary and non-monetary benefits. Monetary benefits are the direct financial effects and the benefits that do not directly result in cash flows, but can be measured in monetary terms. On the other hand, non-monetary benefits consist of the benefits that cannot be measured in monetary terms, but do influence the financial success and competitiveness of a firm. The monetary benefits can be seen as primary drivers, since these are the most desirable for a firm.
Figure 2.1. The CSR Impact Model (Weber, 2008).
In figure 2.1 the relation between CSR and economic success is presented. Both monetary and non-monetary benefits will lead to economic success. However monetary benefits can only be quantitative, while non-monetary benefits can be quantitative and qualitative. All in all, Weber (2008) concludes CSR definitely benefits the competitiveness of a firm and therefore the economic success. Next to that, Galant & Cadez (2017) state that CSR action is becoming a prerequisite for a firm to boost shareholder value and protect the bottom line.
2.5 Costs CSR
Although after previous section it seems that there are no disadvantages of CSR activities, there certainly are. These disadvantages mainly consist of costs.
According to Weber (2008) one distinction can be made when looking at the costs of CSR. On the one hand we have one-time costs, which include one-time donations,
investments costs and installation costs. For instance, when a firm installs production
methods, which are beyond legal requirements. On the other hand, we have continuous CSR costs. These include more than one-time donations, fees for licenses, patents, personnel costs, material costs and promoting activities for marketing campaigns.
Another possible cost for CSR activities is the one that comes up with risk. Due to active involvement in CSR it is possible that a firm gets exposed to additional risks. This could result in a loss of credibility and an increased risk of boycotts since a firm might become an easier target for NGO’s, because it can come across as pretended. Starbucks for example became a more preferred target for NGO’s to boycott since its strong CSR
involvement. This resulted in bad publicity and therefore a decrease in investments and consumptions (Weber, 2008).
Other critics of CSR indicate that CSR activities are costly and that it is an
administrative burden for a firm to engage in CSR. They argue that providing employee day, corporate philanthropy, reducing environmental impact and pair parental leave will for example result in administrative burdens and additional costs. This will directly harm the bottom line and so result in a competitive disadvantage for the firm, especially compared to firm that do not engage in CSR activities (McWilliams and Siegel, 1997; Jensen, 2002).
3. Literature review
In this section the relationship and link between Corporate Social Responsibility and Financial Performance will be outlined first. Subsequently, this section will focus on prior empirical studies and group them in the sign of relationship. Lastly, prior theoretical research will be shortly discussed.
In the last decade most customers, suppliers, employees, governments, community groups and even some shareholders encourage firms to engage in social responsible actions.
Consequently, a lot of firms have responded by engaging CSR activities (McWilliams & Siegel, 2000). Moreover, when a firm successfully engages CSR activities and so avoids the unnecessary costs while at the same time utilize the benefits, it will enhance the Financial Performance of the firm. As making profit is still the main purpose of a firm, the relationship between CSR and FP is getting an interesting and important topic for investors and the management of a firm. However, it is anything but certain that CSR activities will lead to better Financial Performance, since it is also possible that CSR activities harm a firm’s bottom line and therefore its Financial Performance (Weber, 2008; McWilliams and Siegel, 1997; Jensen, 2002).Because of this uncertainty a lot of research has been done last decades regarding this relationship, both empirical as theoretical. Both important empirical and theoretical studies will be discussed, since the results can significantly differ.
3.1 Empirical
Most research regarding the relationship between CSR and FP has been done empirical. Margolis and Walsh (2002) pointed out that only just between 1971 and 2001 already one hundred twenty-two studies, which empirically investigated the relationship, have been published. The first person that studied the relationship between CSR and FP was Narver in 1971 (Tsoutsoura 2004). When researching the relationship between CSR and FP, both qualitative and quantitative research can be done. Qualitative studies focus on how CSR influences a firm’s reputation, image and position in the market. Most of the time best practice examples or case studies are used in this area to examine the effect of CSR on the competitiveness of a firm. Moreover, these qualitative studies do provide valuable insights about the benefits of CSR but do not entirely focus on the business case of CSR (Weber, 2008). On the other hand, quantitative studies focus on how CSR influences FP indicators such as return on equity (ROE), return on assets (ROA) and earnings per share (EPS). Therefore, most quantitative studies make use of regression analyses, where FP is the dependent variable and CSR activities serve as independent variables. The results of these quantitative studies are mixed, they range from a significantly negative relationship between FP and CSR to a significant positive or even an insignificant relationship.
3.1.1 Significant negative relationship
First the prior studies with a negative relationship between CSR and FP will be discussed. Vance (1975) was the first who indicated a significant negative relationship between CSR and FP. In his study, he used the impression of students and businessmen towards a specific firm as measurement for CSR. Moreover, he used an observation period of three years and for the measurement of FP he used the stock price of a firm. As a result, he found out that firms that have high CSR rankings are less attractive for investors since they have significant lower stock prices (Vance, 1975).
A second study that demonstrates a significant negative relationship between CSR and FP is conducted by Lopez et al. (2007). For measuring FP, he used the accounting measure profit/loss before taxes, for measuring CSR he used the Dow Jones Sustainability Index (DJSI) and as control variables he chose for size, industry and risk. He carried out his research across the years 2002-2004 with a sample that contained 110 European firms. The theory behind the negative result is that engaging in CSR activities will result in a disadvantage for the firm in question due to the avoidable and unnecessary costs. However, the study had one limitation, it only analysed the short-run relation. Since the effect of CSR activities on
financial performance indicators is argued to be always negative in the first years (Lopez et al., 2007).
Hassel, Nilsson & Nyquist (2011) also found similar results. For measuring FP they used a firm’s market value and evaluated CSR as the efforts of the firms and the
environmental performance. In short, they also concluded that engaging in environmental activities is too costly and therefore has a negative effect on the market value of a firm and so are less attractive for investors (Hassel, Nilsson & Nyquist, 2011).
3.1.2 Insignificant relationship
There are also studies that indicate that there is no significant relationship between CSR and FP.
Alexander & Buchholz (1978) are one of the first who investigated the link between CSR and FP and concluded that there was no significant relationship. They used surveys with businessmen, students and top managements for the measurement of CSR and used stock price returns as FP measurement. When examining the financial performance of five consecutive years of US firms they found out that US firms that ranked high on CSR
measures did not display exceptional stock returns when compared to low ranked CSR firms. Therefore, they concluded that CSR activities do not enhance the FP of a firm (Alexander & Buchholtz 1978).
A few years later Aupperle et al. (1985) had the same approach for measuring CSR. They used a survey where CEO’s of US firm had to determine the level of engagement in CSR activities of their firm. On the basis of the answers to this survey they ranked every firm, which they used as CSR measurement. Aupperle et al. (1985) tested if there was a
relationship between this CSR measurement and the returns on assets, the FP measurement. Consequently, they found an insignificant relationship between this CSR ranking and the return on assets.
Moreover, McWilliams & Siegel (2000) stressed the importance of including
investments in Research and Development (R&D). They found out that when the investments in R&D and industry factors were left out, the sign of relationship is significant and positive. By contrast, when including these factors the sign of relationship between CSR and FP becomes neutral. Despite this study had some important limitations, especially when looking at CSR Measures, including R&D as control variable became important in further studies. (McWilliams and Siegel, 2000)
3.1.3 Significant positive relationship
When comparing to studies with an insignificant or negative relationship as result, the amount of studies with a positive significant relationship is predominant. In the beginning, it was assumed that investors are not willing to pay a price for socially responsible behaviour. Present–day this assumption is moving since being socially responsible became very
important. Especially after the financial crisis in 2008 this perspective changed from the neo-classical theory to the stakeholder theory. Where from the neo-neo-classical the shareholders are the most important, in the stakeholder theory the stakeholders are the most important. In addition, only benefiting the shareholders is not sufficient anymore. In line with this theory that it can be profitable for a firm to engage in CSR activities, lots of studies indicate a positive sign of relationship.
Moskowitz (1972) was one of the first who found a positive sign of relationship. He stated that managers who recognize the importance of engaging in CSR activities are generally more skilled and proficient managers. As a result, these managers establish more success and therefore make their companies more interesting for investors (Moskowitz, 1972).
Several years later Cochran & Wood (1984) also found a positive relationship. They evaluated the effect of CSR, measured by a reputation index, on some Financial Performance indicators. Moreover, they conducted their study over a period of five years and with a large sample of US firms. Cochran & Wood (1984) concluded that firms that score higher on CSR measures also report higher asset values, which on its turn has a positive effect on the
financial results of firms.
Waddock and Graves (1997) conducted a study regarding the relationship between CSR and FP. For measuring CSR, they used attributes derived from Kinder, Lydenberg and Domini (KLD), which is an independent research firm for investments and uses both external data sources and corporate data sources. The attributes derived from KLD are employee relations, product characteristics, performance with respect to the environment, community relations, participation in nuclear power, treatment of women and minorities, involvement in South Africa and military contracting. These attributes are all individually rated in order to obtain a CSR index.
The timeframe they used covers a period of two years, 1989-1991, and the sample consisted of 469 firms which are all from the S&P 500. On the other hand, for measuring FP they use return on equity (ROE), return on assets (ROA) and return on sales (ROS). The result of this
paper supports the presence of a positive significant relationship between CSR and FP (Waddock and Graves, 1997).
Tsoutsoura (2004) also investigated the sign of relationship between CSR and FP. She did this by using a dataset including the S&P 500 firms over the time period 1996-2000. Her results indicated a positive and significant sign, which confirmed her thoughts that CSR can be associated with bottom-line benefits, such as return on assets (ROA), return on equity (ROE) and return on sales (ROS) (Tsoutsoura, 2004).
A more recent study to test the presence of a relationship between CSR and FP was conducted by Peters and Mullen (2009). For measuring FP, they use return on assets (ROA) and for measuring they derived attributes from KLD such as product/safety quality, employee relations, natural environment, diversity and local communities. Moreover, the study had a sample of 81 companies, which all were selected from the Fortune 500 list, and the timeframe used was 1991-1996. The results confirm the presence of a positive significant relationship since CSR activities will create a sustainable advantage for a firm, which is positively correlated with the financial performance of a firm (Peters and Mullen, 2009).
All the above-discussed prior articles and their results are summarized and presented in a table, which can be found in Appendix A.
3.2 Theoretical
In contrast to the huge amount of empirical research that has been done regarding the relationship between CSR and FPS, the amount of theoretical research is relatively small. Theoretical researchers often state that the relationship between social/ecological performance and the economic performance of a company follows a curve with an inverse U-shape
(Weber, 2008). Moreover, this could explain the mixed results of the relationship found in prior empirical studies. Since the effect of CSR on the FP of a company depends on the position of this company on the curve. Furthermore, there are also theoretical researchers who claim that the economic success of engaging CSR activities will decrease anyway over time. Theoretical research does provide some extra support about the link between CSR and FP, but it does not help managers at evaluating whether to engage in CSR activities or not (Weber 2008).
4. Shortcomings and limitations prior research
All the different outcomes and results in the above-mentioned section are due to different kind of limitations. The most important limitations are due to the different proxies used in
determining the relationship. For instance, the different measurement of CSR is one crucial reason for the ambiguity of the relationship. The size of the sample used is also essential, since larger sample sizes ensure less outliers and a better average value.
Waddock and Graves (1997) state that the ambiguity in prior research can be explained by the way former researchers tried to measure CSR. They try to measure CSR with
one-dimensional measures, while CSR is a multi-one-dimensional concept. Since the concept can vary from environmental pollution to charity donations, a clear and advanced index is essential. Next to that, surveys and reputational rankings by businessmen and students for example are not acceptable anymore for measuring CSR in contrast to studies in the past. That is because those rankings can be highly subjective (Cochran and Wood, 1984). In addition, even when a survey can be regarded as authoritative, like the Fortune rakings, they still can be seen as subjective indicators. Therefore, content analysis instead of reputation indices can be more sufficient when measuring CSR. However, since these also rely on a firm itself the existence of a third and authorized party is really important (Pava and Krausz, 1996; Preston and O’Bannon, 1997).
A second shortcoming in prior research are the control variables used. As can be seen in the above section there is a wide variety in the control variables used in prior studies. The most important one however is risk, which can be found in practically every study regarding the relationship between CSR and FP. Next to risk, size alsoplays a major key role when investigating the relations. Size is important to control for since for example larger companies have more resources available to spend on CSR, while industry is important to control for since some industries are more pollutant than others.
5. Hypothesis
In this paper, the relationship between Corporate Social Responsibility and Financial
Performance will be tested. While the results of prior research are incomplete and ambiguous, the studies that claim a positive sign of relationship are predominant. According these
predominant positive prior studies and the growing demand for sustainability nowadays, this study expects a positive sign of relationship. Due to the global warming, food shortages and
the fact that we are running out of fossil fuels for example, the concept CSR is more
important than ever before for the consumers, investors and other stakeholders (Waddock and Graves, 1997).
Therefore, the hypothesis in this paper will be:
H1: Engaging in CSR activities has a positive effect on the Financial Performance of a firm
6. Method and Data
In this section, the measurements for both CSR and FP will be discussed and explained. Moreover, the control variables used will be discussed and the data used will be specified. 6.1 CSR measurement
When testing the relationship between Corporate Social Responsibility and Financial Performance, clear and proper measurements are essential. Incorrect and incomplete measurements of CSR have often led to invalid and unreliable results in prior studies. Therefore, this study will use a certain database that offers extensive data and perfectly matches the three principles of CSR (p.6). This database is called “ASSET 4 ESG” and is developed by Thomson Reuters and is retrieved from DataStream.
Thomson Reuters gives standardized and structured Environmental, Social and Governmental (ESG) research data, which objectively and transparently measures a firms CSR performance. They state that this is essential, since issues like executive remuneration and climate change are equally important as the traditional economic metrics when evaluating the corporate performance of a firm nowadays (Thomson Reuters). The ESG database
contains information and data on 6000 global firms and over 400 metrics, varying from ethical to sustainable aspects. About 150 content research analysts gather all the data from public available information sources and manually collect it and use their own analysis systems so that the information is comparable, standardized and reliable. After all, this results in objective scores for the CSR performance of all the firms. The resulting ESG score is the average score of the ten main themes, which are divided over three categories: the
environmental, social and governance category. Firstly, the environmental score is based upon three categories: resource use, emissions and innovations. Secondly, the social score is based upon four categories: workforce, human rights, community and product responsibility. Lastly,
categories and scores are defined can be found in Appendix B. All the created scores are on a scale from zero to hundred (Thomson Reuters, 2017).
Prior research suggested that a large sample size is needed for measuring the effects of CSR on FP (Weber, 2008). In this study, the measurement of CSR relies on the ASSET 4 ESG database as mentioned above. Within this database I took all the European firms, which are 1093 firms. The database contains 969 ESG scores out of the 1093 European firms, consisting of small, mid and large capitalization.
Since prior qualitative studies suggest that quantitative studies which only test the relationship for one year can generate misleading results due to for example unconventional events (e.g. technology developments, bankruptcy), I will use a time span of six years including 2011, 2012, 2013, 2014, 2015, 2016.
Over the years 2011 to 2016, the mean of the CSR scores increased from 57.2 to 59.3, an increase of 3,7 per cent. There was not only an increase in the mean of the CSR score, but also the number of observations increased, which implies that more firms started to engage in and report about CSR activities. Next to that, the overall mean of CSR is 57.74, with a
minimum score of 7.83 and a maximum score of 95.37 (Appendix C).
6.2 FP measurement
This study will use two financial ratios for determining the effect of Corporate Social Responsibility on Financial Performance.
The first profitability ratio used is Earnings Per Share (EPS). The EPS is calculated by dividing a firms profit by the amount of outstanding shares. Therefore, it is an important financial tool since it measures the profit of a firm on a per share basis. So, when a firm has high EPS, it means that the firm has more profit to divide among its shareholders. Hence, it makes the firm more interesting for investments, which will result in a better Financial Performance.
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝑃𝑟𝑒𝑓𝑓𝑒𝑟𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑆ℎ𝑎𝑟𝑒𝑠
As the other key variables of this study are indicated in percentages, EPS will be indicated in percentages as well. Therefore, I will divide Earnings Per Share by the book value per share.
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 (%) = 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
The other financial ratio used in this study is Return On Equity (ROE).
ROE is an indicator for measuring how profitable a firm is, which is done by dividing the net income of a firm by the average equity of its shareholders. To be more specific, it measures the value created for shareholders when making an investment. Therefore, a higher ROE is attractive for investors and so beneficial for the Financial Performance of a firm.
𝑅𝑒𝑡𝑢𝑟𝑛 𝑂𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝐸𝑞𝑢𝑖𝑡𝑦
The data used for these two ratios are both retrieved from DataStream. The overall mean for EPS is 10,75 per cent, while the overall mean for ROE is 11.77 per cent (Appendix D).
Moreover, the dependent variables ROE and EPS contained outliers, which will be filtered out since they can affect the overall results. I did this by winsorizing these variables at the extreme 1 and 99 per cent.
6.3 Control variables
In order to properly test the sign of relationship between CSR and FP, there are some
variables there is need to control for. In this study, the control variables will be Size and Risk, Industry and Time.
Size
Size is important to control for since the fact that larger firms have more financial resources to spend on CSR. Likewise, evidence has been found that larger firms do allocate more
resources than smaller companies to CSR. Next to that, larger firms also attract more attention of their stakeholders so they need to respond to the demand of their stakeholders (Waddock
and Graves, 1997). I will measure size by the number of employees and the total assets, which are both retrieved from Datastream. In addition, to ensure reliable coefficients in both models, I took the logarithm of the variables TOTALASSETS and EMPLOYEES. These new
variables are now referred to as log(TA) and log(EMP).
Risk
Since there is a strong relationship between risk and the financial performance of a firm, risk is also an important variable to control for. Alexander and Buchholz (1978) for example found out that firms that are less risky are more likely to engage in CSR activities. Therefore, controlling for risk is crucial when testing the sign of relationship. For measuring risk this study will use the debt to capital ratio (D/C). Since the debt to capital ratio also contained outliers, I did the same thing as for ROE and EPS and winsorized the debt to capital ratio at the extreme 1 and 99 per cent.
Industry
Industry is another variable that can be useful to control for, because every industry differs in terms of financial performance and ability to engage in CSR. Waddock and Graves (1997) state this necessity by emphasizing that firms from different industries cannot be treated as the same. Margolis et al. (2007) share this statement; they state that social responsibility activities can vary between different industries. Some industries for example can be seen as dirtier than others, like the manufacturing industry. Therefore, also more and different stakeholders come up for discussion. The control variable Industry will be used as Dummy variable and is retrieved from DataStream.
Time
Controlling for time can also be very useful. Since including a dummy for each of the years in your dataset, excluding the first year, will control for year effects.
7. Empirical Methodology
For testing H1: Engaging in CSR activities has a positive effect on the Financial Performance of a firm, we need to divide this hypothesis into two sub-hypotheses. This is due to the two different measurements for Financial Performance.
Sub-hypothesis 1:
H0: Corporate Social Responsibility has no effect on Return On Equity
H1.1: Corporate Social Responsibility has a positive effect on Return On Equity Sub-hypothesis 2:
H0: Corporate Social Responsibility has no effect on Earnings Per Share
H1.2: Corporate Social Responsibility has a positive effect on Earnings Per Share The programme this study will use is Statistical Package for the Social Sciences (SPSS). Firstly, this study will use the Descriptive Statistics function to analyse the CSR scores per industry. After that, all the control variables will be evaluated to see if and how there are correlated with each other by using a correlation analysis. The coefficient for correlation lies between -1.00 and 1.00, where -1.00 implies perfect negative correlation and +1.00 implies perfect positive correlation. The correlation matrix can be found in Appendix E. For testing the effect of the CSR scores on FP, a multiple linear regression model is used. This is a widely known and used statistical method, which is very useful when investigating the relationship between independent variables (predictors) and a single dependent variable (predicted).
Before I can use the multiple linear regression model, the required assumptions need to be checked. These assumptions are also known as the Ordinary Least Squares assumptions and have to be met to ensure reliable outcomes. Linearity, normality and homoscedasticity are three of those OLS assumptions. These assumptions are evaluated for both models, EPS and ROE. The histograms, P-plots and scatterplots that show both regression models meet these assumptions can be found in Appendix F.Another assumption is that there is no
multicollinearity among all independent variables. The Variance Inflation Factor (VIF) is a statistical way to check this. A VIF-value higher than 5, implies that there is a case of
multicollinearity between the independent variables. Since all VIF values are lower than 5, this model met the assumption for no multicollinearity. The VIF-values can be found in Appendix G.
The fact that a multiple linear regression is able to evaluate the direction and strength of the relationship between CSR and FP makes it very appropriate for this study. The multiple linear regression model will look as followed:
𝐹𝑃! = 𝑏!+ 𝐶𝑆𝑅! ∗ 𝑏!!+ 𝑆𝐼𝑍𝐸! ∗ 𝑏!!+ 𝑅𝐼𝑆𝐾!∗ 𝑏!!+ 𝑒! Where:
𝐹𝑃!= The Financial Performance of firm I (ROE & EPS)
𝐶𝑆𝑅! = Corporate Social Responsibility score of firm i (ESGScore) 𝑆𝐼𝑍𝐸! = Size of firm I (Total Assets & Number of employers) 𝑅𝐼𝑆𝐾! = Debt to Capital ratio (D/C) of firm i
This study will also apply a robustness analysis. I will add a dummy variable for Industry and Time to the above-mentioned regression. By this way, we can check the robustness of the results and check if the suggestions of prior research regarding a dummy for industry and time are indeed useful. The multiple linear regression model will in this case look as followed:
𝐹𝑃! = 𝑏!+ 𝐶𝑆𝑅!∗ 𝑏!!+ 𝑆𝐼𝑍𝐸!∗ 𝑏!!+ 𝑅𝐼𝑆𝐾!∗ 𝑏!!+ 𝐼𝑁𝐷! ∗ 𝑏!!+ 𝑇𝐼𝑀𝐸! ∗ 𝑏!!+ 𝑒! Where:
𝐼𝑁𝐷! = Industry of firm i dummy 𝑇𝐼𝑀𝐸! = Year dummy
8. Results
8.1 Multiple linear regression
Whereas firms that are active in the Integrated Oil & Gas industry score relatively and surprisingly high on their CSR score (ESG score), firms active in the Consumer Electronics and Private Equity sector score remarkably low. Moreover, the Coal industry is the poorest performer with a mean of 33.97, while the Aluminium sector is the best performer with an average score of 84.49. All the mean CSR scores per industry can be found in Appendix H. To test the null hypothesis of both hypotheses 1.1 and 1.2, I used two models. Both the models are the same, except for the dependent variable.
The multiple regression model that tests the impact of CSR on ROE is conducted first.
All independent variables entered the model (CSRScore, RISK, log(EMP)and log(TA)). The R-squared, which is a statistical measure for how close the data fits the regression line, equals 0.003. Despite this is a very low value, it cannot determine if the model is adequate. Since the profitability of a firm is determined on factors such as strategy and the quality of products and services, low R-squared values for the models are expected (McWilliams and Siegel, 2000). The model used in McWilliams and Siegel’s study showed a low R-squared value as well.
The ANOVA table shows that the model with predictors RISK, log(EMP), log(TA) and CSRScore and criterion ROE is significant since the F-value (4.282) is significant as P ≤ 0.05 (0.002). In other words, there is a significant relationship between the dependent variable and the set of predictors. The regression analysis shows that CSR has a significant effect on ROE since the t-value -2.158 is significant (p=0.031). However, despite the fact that CSR has a significant effect on the ROE, it has a negative effect since the coefficient is -0.045. The entire output can be found in Appendix I.
ROE Unstd. Coefficients Std. Coefficients t Sig.
CSRScore -0.045 -0.034 -2.158 0.031
Log(TA) 0.959 0.039 2.264 0.024
Log (EMP) -0.745 -0.028 -1.690 0.091
So, the null hypothesis can be rejected, but CSR has a negative instead of positive effect on ROE.
The next model estimates the effect of Corporate Social Responsibility on Earnings Per Share using the same variables conducted in the linear regression that tested the effect of CSR on ROE. So, all the independent variables entered the model.
The R-squared value of this model equals 0.001. Despite the fact that this is a very low value again, the R-squared value cannot determine if a model is adequate (McWilliams and Siegel, 2000). The ANOVA table of this second regression shows that the model with predictors RISK, log(EMP), log(TA) and CSRScore and the criterion EPS is not significant since the F-value (0.772) is insignificant as P≥0.05 (0.543). Thus, there is an insignificant relationship between the dependent variable and the set of predictors. Moreover, the results of the linear regression also show that the predictor CSR has an insignificant effect on the dependent variable EPS, since the t-value -1.210 is insignificant (p=0.226). The SPSS output can be found in Appendix J.
EPS Unstd. Coefficients Std. Coefficients t Sig.
CSRScore -0.031 -0.019 -1.210 0.226
Log(TA) 0.412 0.013 0.786 0.432
Log(EMP) 0.164 0.005 0.297 0.766 RISK -0.020 -0.019 -1.305 0.192
Therefore, the null-hypotheses cannot be rejected, Corporate Social Responsibility has no effect on Earnings Per Share.
8.2 Robustness analysis
For the robustness check I added a dummy variable for Industry and Time to the regression model, which from now on will be referred to as the original regression.
The multiple regression for ROE with the new variables is done first. The results are presented in the table below.
ROE Unstd. Coefficients Std. Coefficients t Sig.
CSRScore -0.053 -0.041 -2.291 0.022
Log(TA) 1.960 0.080 2.960 0.003
Log(EMP) -0.512 -0.019 -0.723 0.470 RISK -0.029 -0.034 -1.967 0.049 Although the fact that the R-squared increased from 0.003 to 0.067, most coefficients only slightly change. The coefficient for CSRscore decreases, while the coefficient for log(TA) increases. The coefficient for log(EMP) becomes a less negative, but log(EMP) does become insignificant. Lastly, the coefficient for RISK stays roughly the same, but does come less significant. Therefore, it can be stated that the original regression is robust in terms of ROE. Secondly the multiple regression for EPS with the new variables is executed. The results are presented in the table below.
EPS Unstd. Coefficients Std. Coefficients t Sig.
CSRScore -0.047 -0.029 -1.637 0.102
Log(TA) 0.950 0.031 1.159 0.246
Log(EMP) 1.839 0.055 2.095 0.036 RISK -0.016 -0.015 -0.878 0.380
Again, the R-squared value increased, this time from 0.001 to 0.05. The coefficient for CSRScore decreases again, but the effect of CSRScore stays insignificant. For log(TA) the coefficient increases again, but stays insignificant as well. The biggest difference with the original regression is with respect to log(EMP), the coefficient has a large increase and gets
significant. Lastly, Lastly, the coefficient for RISK stays roughly the same. Therefore, it can be stated that the original regression is robust in terms of EPS.
9. Conclusion
Corporate Social Responsible activities are very diverse and can together assure for a more socially responsible, ethical and sustainable business environment. A lot of researchers suggest that engaging in CSR activities is the right thing to do for a firm. However, since it is still a voluntary act and firms still have little incentives, profit is still the main driver for firms. Furthermore, fierce competition in certain markets ensures that firms reconsider their strategy and start to cut costs, which often happens at the expense of environmental and social responsible programs (Weber, 2008).
While several researchers argue that the sign of relationship between CSR and FP is positive, others argue that the relationship is negative.
The main objective of this thesis was to investigate the relationship between CSR and FP by employing an empirical test over a relative long-time frame and on a large sample. This study did this by developing adequate measurements for CSR using data from authoritative and reliable objective sources. Namely, the ESG database developed by Thomson Reuters. The ESG database contains information and data on 6000 global firms and over 400 metrics, varying from ethical to sustainable aspects. This study used a large sample of European firms in its analysis. The purpose was to analyse and measure the effect of CSR on two financial profitability ratios, which were used and suggested in prior research, ROE and EPS.
To investigate this, I employed a multiple linear regression as statistical test. The results are in contrast with the expected and desired results. In addition, CSR has a significant negative effect on ROE, while it has an insignificant effect on EPS. So in terms of ROE and EPS, engaging in CSR activities is not worth the while. So, if a firm wants to increase their EPS and ROE, engaging in CSR activities will not help in achieving this since CSR does not have a significant positive effect on FP.
A possible reason for this is that the costs of CSR activities outweigh the costs, especially on the short term. Nevertheless, acting social responsible will always be desirable since it contributes to a better and fair society. Fortunately, there is an upward trend towards CSR engagement, which is crucial for maintaining the current environment of our Earth. For better testing and understanding the effect of CSR on ROE and EPS, more, different and improved control variables are needed.
10. Discussion
For investigating this relationship between CSR and FP, some control variables have to be included in the model. This study used Earnings Per Share and Return On Equity as
dependent variables and predictors CSR, DEBT and SIZE. To test the hypothesis of this paper two multiple linear regression models were employed. The first regression analysis tested the impact of CSR on ROE. This resulted in a negative sign of relationship between CSR and ROE, which indicates that an increased engagement in CSR activities results in lower Returns On Equity. ROE measures the value that gets created for shareholders when making an investment. As Schaltenegger and Synnestveld (2002) argued, CSR activities result in marginal benefits which decreases over time. Next to that, Weber (2008) also stated that within his CSR impact model the benefits of CSR do often not outweigh the costs, such as material costs and licences. The second multiple linear regression model tested the effect of CSR on EPS. This resulted in an insignificant relationship between CSR and EPS. So, if a firm increases their CSR score by for example realizing environmental friendly policies, it will not affect the Earnings Per Share.
Hassel, Nillson and Nyquist (2011) also found a negative relationship between CSR and FP. They state that firms that highly engage in CSR activities, are not highly valued by investors. Their argument for this is in line with Weber (2008), high environmental
performance is costly and therefore has a negative effect on the financial performance of a firm. They also provided some suggestions for this negative relationship. Firstly, some investors perceive that social and environmental performance is used for window dressing of financial performance and book values. A second suggestion is that investors perceive corporate social responsibility activities happen at the expense of increasing profits. Since rational investors will react negatively to reductions in profitability and no corresponding risk reduction, this will lead to fewer investments. A third suggestion by Hassel, Nillson and Nyquist (2011) is that the market is oriented on the short-term and so investors do no take long-term environmental information into account when making an investment decision. Therefore, investors do not reward firms that score high in terms of CSR.
Lopez et al. (2007) state that firms that engage in CSR activities are at disadvantage when compared to firms who do not engage, because they obtain extra avoidable and unnecessary costs. However, they also state that the effect of CSR practices on financial performance indicators are always negative in the first years and therefore they suggest a long-term research needs to be done regarding this relationship.
These are all possible explanations for the results of this study. However, the uncommon result of this study compared with prior and similar empirical studies indicates that more research needs to be done regarding the relationship between CSR and FP.
11. Limitations and future research
In this study, the financial measurement Earnings Per Share formed an unstable dependent variable since the statistical test that EPS was subject to, did not show a significant effect. A possible reason is that the used sample consists of firms with large, middle and small
capitalization. A suggestion for further research is to also add the amount of total equity for the measurement of size. Apart from this, using more financial measurements will be beneficial, since it will increase the understanding of the impact and influence of CSR.
As McWilliams and Siegel (2000) suggested, there is also a need to control for investments in R&D. This is because there is a positive correlation between the financial performance of a firm and investments in R&D. However, due to the lack of availability of data on R&D in the used sample of European firms, including R&D would have led to a decrease of approximately 4000 observations out of the 6000 observations. After all, a large sample size is desired. Further research should focus on large indices for example, which do publish about their investments in R&D. Another possible suggestion for future research is to add a control variable for country. This can be valuable as the impact of engaging in CSR activities can significantly differ between countries. For example, countries in East-Europe are known to be more pollutant than countries in West-Europe.
What is more, many scholars state that focussing on a singly industry can be beneficial when investigating the relationship between CSR and FP. Prior studies and this study use large samples which contain multiple industries and assume that all the industries are
comparable. The use of samples with multiple industries can generate misleading results. So, focussing on one specific industry can be useful for future research.
The last limitation of this study is related to the Corporate Social Responsibility measurement. As the concept CSR is difficult to measure. Objective scores are crucial to avoid shortcomings in reliability. For this study, the criteria for CSR are closely matched to the main principles of CSR from the multiple definitions in prior research. However, the definition of CSR will always be dynamic and subjective. Despite the fact that the scores developed by Thomson Reuters are created and checked by professionals and authoritative institutions, total objectivity is hard to assure. Therefore, it is essential that both institutions and individuals continue to improve scores and ranks regarding CSR assigned to firms.
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13. Appendix
Appendix A: Summary of the results and measurements of prior studies
Author(s) CSR variable FP variable Control var. Result.
Vance (1975)
Reputation index Stock Prices
(EPS) x CSR negative effect on FP Lopez et al. (2007)
Dow Jones Sustainability Index Profit/loss before taxes Size, industry, risk CSR negative effect on FP Hassel, Nilsson & Nyquist (2011) Environmental performance/Environmental performance index
Market value Time,
industry (dummy) CSR negative effect on FP Alexander & Buchholz (1978)
Rankings by students and businessmen Stock Prices (EPS) Risk CSR no significant effect on FP Aupperle et al. (1985).
Surveys under CEO’s and created rankings. ROA Risk CSR no significant effect on FP Mc Williams & Siegel (2000)
KLD index ROE ROA Investments
R&D, size, risk, industry CSR no significant effect on FP Moskowitz (1972)
Reputation index Net income and
EPS
x CSR has a
positive effect on FP
Wood (1984) earnings/assets, Operating earnings/sales, Excess market valuation positive effect on FP Waddock and Graves (1997) KLD ROE, ROA, ROS Size, risk, industry CSR has a positive effect on FP Tsoutsoura (2004) KLD ROA, ROE, ROS Risk, size, industry, debt lvl, R & D CSR has a positive effect on FP Peters and Mullen (2009) KLD ROA Industry, size CSR has a positive effect on FP
Appendix B: The ASSET 4 ESG Score descriptions by Thomson Reuters.
Score Definition
ESG Resource Use Score The Resource Use Score reflects a company’s performance and capacity to reduce the use of materials, energy or water, and to find more eco-efficient solutions by improving supply chain management.
ESG Emissions Score The Emission Reduction Score measures a company’s
commitment and effectiveness towards reducing environmental emission in the production and operational processes.
ESG Innovation Score The Innovation Score reflects a company’s capacity to reduce the environmental costs and burdens for its customers, thereby creating new market opportunities through new environmental
technologies and processes or eco-designed products. ESG Workforce Score The Workforce Score measures a company’s effectiveness
towards job satisfaction, a healthy and safe workplace,
maintaining diversity and equal opportunities, and development opportunities for its workforce.
ESG Human Rights Score The Human Rights score measures a company’s effectiveness towards respecting the fundamental human rights conventions. ESG Community Score The Community Score measures the company’s commitment
towards being a good citizen, protecting public health and respecting business ethics.
ESG Product Responsibility Score
The Product Responsibility Score reflects a company’s capacity to produce quality goods and services integrating the customer’s health and safety, integrity and data privacy.
ESG Management Score The Management Score measures a company’s commitment and effectiveness towards following best practice corporate
governance principles.
ESG Shareholders Score The Shareholders Score measures a company’s effectiveness towards equal treatment of shareholders and the use of anti-takeover devices.
ESG CSR Strategy Score The CSR Strategy Score reflects a company’s practices to communicate that it integrates the economic (financial), social and environmental dimensions into it day-to-day decision-making processes.
Appendix C: CSR Score Descriptives
Descriptive Statistics
N Minimum Maximum Mean
Std. Deviation
ESGScore 5694 7.830 95.370 57.73811 17.059015
Appendix D: Key variables Descriptives. Descriptive Statistics Mean Std. Deviation N ROE 11.77014 21.858507 6223 EPS 10.75063 27.929257 6528 CSRScore 57.73811 17.059015 5694
Table 9.1. Definitions of the key variables
Appendix E: Correlation Matrix
Correlations RETURN ON EQUITY - TOTAL (%) EARNINGS PER SHARE
(%) ESG Score LogTA LogEmpl
TOTAL DEBT % TOTAL CAPITAL/STD RETURN ON EQUITY - TOTAL (%) Pearson Correlation 1 .769** -.044** .009 -.030* -.007 Sig. (2-tailed) .000 .001 .481 .020 .559 N 6223 6223 5457 6163 5798 6156
EARNINGS PER SHARE (%)
Pearson Correlation .769** 1 -.029* .005 -.006 -.006
Sig. (2-tailed) .000 .028 .661 .639 .638
N 6223 6528 5694 6453 6070 6446
ESG Score Pearson Correlation -.044** -.029* 1 .421** .447** .139**
Sig. (2-tailed) .001 .028 .000 .000 .000
N 5457 5694 5694 5688 5486 5685
LogTA Pearson Correlation .009 .005 .421** 1 .522** .349**
Sig. (2-tailed) .481 .661 .000 .000 .000
N 6163 6453 5688 6453 6068 6445
LogEmpl Pearson Correlation -.030* -.006 .447** .522** 1 .210**
Sig. (2-tailed) .020 .639 .000 .000 .000
N 5798 6070 5486 6068 6070 6065
TOTAL DEBT % TOTAL CAPITAL/STD
Pearson Correlation -.007 -.006 .139** .349** .210** 1
Sig. (2-tailed) .559 .638 .000 .000 .000
N 6156 6446 5685 6445 6065 6446
**. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed).
Appendix G: VIF-values Model Collinearity Statistics Tolerance VIF 1 (Constant) ESGScore 0.656 1.525 LogTA 0.373 2.679 LogEmpl 0.376 2.662 RISK 0.881 1.135
a. Dependent Variable: Return on Equity (%)
Model
Collinearity Statistics
Tolerance VIF
