Reputation in relationship with financial performance in a Dutch setting

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Reputation in relationship with financial performance in a Dutch setting Name: Mark Schram

Studentnumber: 6112978 Masterthesis: Accountancy&Control

Master Accountancy&Control

Date: 22-06-2015

First reader: Georgios Georgakopoulos Wordcount: 12386

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Abstract

Compared to twenty years ago society gives a lot more attention to corporate sustainability reporting (CSR). There are more guidelines and frameworks like the Global Reporting Initiative (GRI), International Organization for Standardization (ISO) and World Business Council for Sustainable Development (WBCSD), for how companies can monitor their CSR. The question that arises from this is whether CSR leads to higher profits or a competitive advantage. The research in many studies focuses on the relationship between CSR and firm financial performance. Their outcomes have shown neutral, mixed but overall mostly positive results. Some researchers state that there are moderators such as customer satisfaction, competitive advantage, customer loyalty and reputation that influences CSR. Reputation has been identified as an intangible source of competitive advantage and provide organizational benefits that leads to earn above average profits. Reputation is about a positive feeling, respect and trust that an individual has for a firm. Several researchers examine the relationship between reputation and firm financial performance and their results are mostly quite positive. This study examines whether reputation has a relationship with firm financial performance and vice versa in a Dutch setting. Reputation scores used in this study are from the Reputation Institute. For firm financial performance the accounting measures of return on assets, return on equity and return on sales are used. The Dutch setting is chosen because the Netherlands is one of the leading countries for CSR and until now research has not been performed in this setting. In contrast with prior studies this research shows no significant relationship between reputation and firm financial performance.

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Statement of Originality

This document is written by Student: Mark Schram who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Acknowledgements

I would like to thank my supervisors from both the UvA and KPMG, for responding to my questions in record time all the way through writing this thesis. Because of them, I was able to keep on writing. It was a hard process because of my injury at my shoulder.

Thank you Georgios, for your very thorough analysis of my writings, including all the references and numberings, which were not always consistent good. Also the mental support with all the e-mails which I send you with the updates of my thesis.

Thank you Ruben, Gijs and Marjo. You were absolutely amazing. Always positive and give me the support that I needed at some moments.

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2.3 CSR in the Netherlands ... 16 2.4 CSR-Financial performance... 18 2.5 Reputation Institute ... 22 3. Methodology ... 23 3.1 Development of hypotheses ... 23 3.2 Sample selection ... 24 3.3 Variables ... 25 3.4 Regression analysis ... 26 3.5 Descriptive Statics ... 28 3.6 Assumptions checked... 28 3.7 Correlation matrices ... 29 4. Regression Analysis ... 32 5. Conclusion ... 41 5.1 Limitations ... 43 Biblography ... 45 Appendix one ... 50 Appendix two ... 53

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1. Introduction

As defined by the European commission, corporate social responsibility (CSR) is “a process to integrate social, environmental, ethical and human rights concerns into their business operations and core strategy in close collaboration with their stakeholders” (Enterprise and industry, 2011). It has been a popular topic for the past few years, receiving a lot of attention from companies, stakeholders, interest groups and Non-Governmental Organizations (NGO’s). CSR is not only good for the environment, but it is often also beneficial for a company’s performance and reputation (Fombrun & Shanley, 1990; Gray et al., 2001). Therefore, it is expected that CSR disclosures will continue to increase in the future.

Today society gives a lot more attention to CSR than twenty years ago (Aras et al., 2010, p.229). There are more frameworks and guidelines1 for how companies can monitor their CSR Unerman et al. (2007). The quality of the reports are mixed between different countries and companies (Ingram and Farzier 1980). One of the variables2 that is directly linked with the quality of CSR reports is reputation (Saeidi et al., 2014). Saeidi et al. (2014) report that there is a positive effect of CSR on firm performance due to the positive effect CSR has on reputation. Reputation is seen as one of the moderators of CSR by Helm (2007) and Saeidi (2014).

With this growing attention to CSR, the question arises whether CSR leads to higher profits. So far research has reported all over the world about the relationship between financial firm performance and reputation Frombrun and Shanley (1990), (Roberts and Dowling (1997),

Deephouse, (1997) Srivastava, McInish, Wood and Comparo, (1997), Kotha et al. (2001), Robert and Dowling (2002), Orlitzky et al. (2003) Rose and Thomsen (2004), Eberl and Schwaiger (2005), Inglis, Morley and Sammut (2006) , Helm (2007), Cabral (2012) and Saeidi (2014). However, no research has been done on how the reputation of companies influences financial performance of companies in a Dutch setting. The Netherlands is one of the leading countries by performing CSR reports (KPMG,2011). Kolk (2003) says about the Netherlands that the small

1_{Different guidelines that perform frameworks how companies can monitor their CSR Global Report Initiative}

(GRI), International Organization for Standardization (ISO), World Business Council for Sustainable Development (WBCSD), AccountAbility and SIGMA Unerman et al. (2007).

2

Variables that linked as moderators are customer statistfaction, customer loyality, customer advantage and reputation (Saeidi et al.,2014)

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country effect3 may occur. Therefore, the research question of this study will be whether firm reputation is associated with the firm financial performance in a Dutch context and vice versa.

The structure of the research is as follows. The next paragraph conducts a literature review about corporate social responsibility and firm financial performance. Furthermore, different theories will be examined. The literature review goes on with an overview of the different research that has already been done about the relationships between Reputation, CSR and financial performance. Chapter three begins with formulating the hypotheses and continues with the methodology that is used in this study. Chapter four goes further with an analysis of the results. These results will be outlined in the conclusion in chapter five. This research ends with a discussion and the limitations that are found.

1.2 Research Objective

This research will focus on the relationship of financial performance with one of the moderators4 of CSR, i.e. reputation. Almost all research about reputation in relationship with financial performance is done based on U.S firms Frombrun and Shanley (1990), (Roberts and Dowling (1997), Deephouse, (1997) Srivastava, McInish, Wood and Comparo, (1997), Kotha et al. (2001), Roberts and Dowling (2002), Orlitzky et al. (2003), Cabral (2012).It will be interesting to see what this relationship looks like in the Netherlands. The Netherlands is one of the leading countries concerning CSR reporting (KPMG, 2011) and the social responsible savings increase every year (Scholtens, 2007, p.1094).

3_{Activities of multinationals are very visible because they are located in a relatively small economy. This provides}

an incentive to produce more CSR reports and they are familiar with the principals of them.

4_{Variables that linked as moderators are Customer statistfaction, customer loyality, customer advantage and}

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Figure 1 Socially responsible savings (Scholtens, 2007, p.1094)

Several companies create lists rating CSR reporting. In this research I will be using the rating list of the Reputation Institute. Every year the Reputation Institute5 reviews the 30 largest companies in The Netherlands and gives them a score between 0 and 100. The Reputation Institute conducts this research based on seven different pillars.

To measure the financial performance, I followed the paper from Waddock and Graves (1997). Waddock and Graves (1997) used in their study the following financial ratios return on assets (ROA), return on equity (ROE), return on sales (ROS). Besides this, this study also controls for risk (debt/assets) and size (total sales and total assets).

Data was collected from the Reputation Institute in 2014 for 30 companies. Next to this, financial data was collected for every firm by hand. From all 30 companies the financial statements were collected; this sample contains the years 2011-2014.This time lag is chosen because the Reputation Institute changed the RepTrak™ model in 2010 (Riel, 2011). The year 2010 is not in the sample used because too less available data. The overall sample consists of a total of 27 companies with the Reputation Institute index mark, financial ratios and control variables with a time frame from 2011-2014. Regression analysis will be used to test the hypotheses that are formulated in paragraph two.

5_{Reputation Institute is founded in 1999 by Fombrun and Van Riel in order to quantify reputations of companies}

by using there own model RepTrak™. This consists of 23 key performance indicators which are grouped with seven different reputation dimensions (Riel, 2011)

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2. Literature review

2.1 Corporate social responsibility

Figure 1 Corporate Sustainability (Werther and Chandler, 2006)

In this paragraph an overview will be presented of the evolution of CSR. This overview is given to form a definition for CSR, which is really important for this research.

The concept of corporate social responsibility has a long history. For decades there has been corporate social responsibility, but the first literature writings starts around 1950 (Carrol,1999). In order to clearly define the subject of CSR and the development of CSR through time, I will give an chronologic overview taken from Carroll’s research (1999).

The concept of Sustainability Reporting (SR) assumes that companies do not only have financial and legal duties but also responsibilities to society which go further than their duties. Bowen (1953) gives a definition about the social responsibilities of businessmen: ‘’It refers to the obligations of businessmen to pursue those policies to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society.’’ In

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the 1960’s there was a significant growth of writings about what CSR means. Davis (1960) says about SR that ‘’businessmen’s decisions and actions taken for reasons at least partially beyond the firm’s direct economic or technical interest’’(Davis, 1960, p. 70). Davis and Blomstorm (1966)defined together: “SR, refers to a person’s obligation to consider the effect of his decisions and actions on the whole social system’’.

Johnson (1971) is one of the first authors to write about CSR. Johnson (1971) specifies the following: ‘’a socially responsibly firm is one whose managerial staff balances a multiplicity of interests. Instead of striving only for larger profits for its stockholders, a responsible enterprise also takes into account employees, suppliers, dealer, local communities and the nation’’ (p.50). Johnson (1971) mentions the stakeholder approach, because he connects the responsibility of companies not only with employees but also with suppliers. Besides this first view, Johnson (1971) also presented another three views about CSR. The second view is that social responsibility helps to create long-run profit maximization. The third view offers a view that companies always want utility maximization instead of maximum profits. The fourth and last view is about “lexicographic view of social responsibility”. This means that enterprises want to do at least as well as their competitors under the same circumstances.

Eels & Walton (1974) did not focus on definitions but more on what CSR means and how it has developed overtime. They say about CSR: ‘’it represents a concern with the needs and goals of society which goes beyond the merely economic.” From the 1980’s there was more focus on empirical findings.

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Carrol (1999), argues there was growing acceptance of the notion of corporate social performance. (Wartick & Cochran, 1985) developed their “evolution of the corporate social performance model,” which extended the three-dimensional integration of responsibility, responsiveness, and social issues. Epstein (1987) defined corporate social responsiveness and business ethics as “corporate social policy process.” Epstein writes that organizations consist of three elements: CSR, business ethics and corporate social responsiveness. From the 1990’s there are no new CSR definitions but the focus changes to other related concepts. Van Marwijk (2003) states that CSR doesn’t mean the same thing to everybody. Orlitzky et al. (2003) and Van Beurden & Gossling (2008) believe that it is difficult to conduct empirical research on CSR because of missing a precise definition of CSR.

One thing where research agrees with each other from 2000 onwards is that firms have to meet the expectation of the society. Van Beurden and Gossling (2008) assume that CSR can be the solution to the uncertainties that firms have in a social context of global and technological business environment. Alternative themes such as legitimacy theory D.J Wood (1991), Gray et al. (1996), Deegan (200) and stakeholder theory (Freeman, 1984), Donald and Preston (1995) (Steurer (2010) will be discussed in the next paragraph.

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2.2 Why do organizations produce CSR reports?

A sustainability report has the objective to inform investors and stakeholders on the CSR performance of a company. Kolk (2008) gives an explanation that CSR reports are used to help companies present their economic, legal, ethical and philanthropic responsibility towards society and specific stakeholders. An increasing number of customers want to know more about CSR in organizations. Because of that organizations are reporting more accurate and precise information (Brammer and Pavelin, 2006). The greater involvement of customers also leads to the management of companies to need to think about how to prevent negative social impact on the organization (De la Cuesta-Gonzales et al., 2006). Kolk (2004) states in his paper that it is very important to have a stakeholder dialogue and to listen to the visions of the different stakeholders. As stated above CSR can prevent negative impacts that will influence the financial performance of companies. In the next subparagraph two theories will be discussed and linked with each other.

2.2.1 Legitimacy and Stakeholder theory

The legitimacy theory and stakeholder theory have a system-organized perspective (Gray et al., 1996). The organization will be affected by others and will have an impact on society. The idea behind the legitimacy theory is that an organization meets the norms and values of the society; otherwise the organization will bear more risk (Deegan, 2006). The stakeholder theory assumes that in addition to the shareholder an organization has to listen to other stakeholders and give them authority to make decisions (Gray et al., 1996). A link between both theories and the research question will be given next.

Legitimacy theory

D.J Wood (1991) states that the legitimacy theory addresses the responsibility of an organization as a social institution. In order to remain legitimate there are four ways to create or preserve legitimacy (Gray et al., 1996). 1) A company has to inform different stakeholders how to improve performance, 2) the company can try to change the perception about certain events

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and actions, 3) the company hopes to distract attention from the real issues that a company has, 4) the company tries to change the external expectation of its performance. Friedman (1984) states in his article that the legitimacy theory describes how something is, not how something has to be. This theory describes why organizations exhibit a certain behavior (Deegan, 2006). In case of this specific research the legitimacy theory states that the first case is that stakeholders satisfy the expectations of the norms and values of the organization. Stated in a report from KPMG (2011) almost 90 percent of the largest companies report about CSR. Also mentioned above, the legitimacy theory discusses how a company will act and therefore society expects that companies report about CSR or apply it. When the society does not mandate companies to apply it, according to this theory there is no reason to introduce CSR. In that case, on the basis of the legitimacy theory, CSR will be expected to have positive effect on the financial performance.

Stakeholder Theory

The stakeholder theory indicates that a company is not only accountable to its shareholder but also takes into consideration the interests of its stakeholders (Freeman, 1984).

Figure 3 Firm stakeholder (Werther and Chandler, 2006)

Donaldson and Preston (1995) states that there are four different streams: the descriptive, instrumental, normative and managerial approaches. The descriptive flow describes the behavior and the different characteristics of the organization. The instrumental approach describes the connection between stakeholders and the financial performance of the company. The normative

Social stakeholders Communities Government and regulator Nonprofit and NGO’s Environment Economic stakeholders Customer Creditors Distributor Suppliers Organizational stakeholders Employees Managers Stockholders Unions

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approach is the fundamental basis of the stakeholder theory and is based on the following ideas: 1) stakeholders are identified by their interests in the company, regardless of whether the organization has a corresponding interest. 2) The interest of all stakeholders are of intrinsic value. This means that each group of stakeholders deserves attention for its own sake and not only because of its ability such as shareholders. The managerial approach is about taking decisions with the respect to all the stakeholders. One of the big issues mentioned by Steurer (2010) is to establish the key stakeholders for the company. In this research the instrumental approach will have a positive effect on the financial performance of the company. This is because if the stakeholders are satisfied, this leads to more profit. This is the same for the normative approach. De la Cuesta Gonzaléz et al. (2006, p.292) support this, by stating the responsibility of a firm is to report to its shareholders; the main objective is to maximize profits.

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2.3 CSR in the Netherlands

From the 90’s there has been great development in the reporting of CSR. Every three years KPMG publishes a survey of CSR reporting all over the world. This report gives an overview of how CSR evolves and develops in different industries in different countries.

In Europe the Netherlands is in the top five of countries that reports about corporate responsibility initiatives. Europe has an overall rating in 2013 of 73% with the Netherlands rating 82%. In the world ranking the Netherlands is in tenth place (2011).

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The Netherlands can be considered as one of the leading countries in corporate sustainability reporting. Prior research by Kolk (2003) comes to the same conclusion. Small countries like Switzerland and Netherlands can be linked at the “small country” effect.

Sustainbility reporting of the Fortune Global 250 companies in ‘’small countries’’Figure 6 (Kolk, 2003, p.284)

This means that activities of multinationals are very visible because they are located in a relatively small economy. This provides an incentive to produce more CSR reports and they are familiar with the principals of them. Three important variables that are used by companies to deal with CSR are profit, planet and people. Also called the ‘’Triple-P bottom line’’, the three p’s have to be in balance with each other (Crane and Matten, 2007). Elkington (1997) describes this by saying: there must be harmony between economic, social and environmental sustainability. Crane and Matten (2007) means with this approach that firms undertake activities that lead to financial profit (bottom line), social profit (people) and environmental profit in order to be seen as sustainable. (MVO) Maatschappelijk Verantwoord Ondernemen Nederland calls the three p’s as the most important way to improve CSR in a company, because it creates value.

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2.4 CSR- Reputation- Financial firm performance

This section will discuss the literature about the relationship between change in CSR reporting and it effect on financial performance. An overview of all the prior research about CSR and reputation in relationship with financial firm performance is given in appendix one. There are some researchers who mention that CSR has a negative effect on the financial performance (Bragdon and Marlin, 1973), (Ingram and Frazier, 1983), Renneboog (2007 and ( Dam, 2008). The second result is that there is a neutral relationship or a mixed results (Aupperle et al. 1985), (McWilliams and Siegal, 2000), (Brammer et al., 2005) and (Scholtens, 2007). Third, some research has shown a positive relationship between CSR and firm performance (Verschoor, 1998, (Standwick and Stanwick, 1998), (Orlitzky et.al , 2003), (Wu, 2006), (Murray et al., 2006), (Galbreath, Lin et al., 2009),( Rettab et al., 2009), (Margolis, 2010), (Monerva et al., 2010), (Alafi and Hasoneh’s, 2012) and (Saeidi et al., 2014). Fourth, some research has shown a positive relationship between one of the moderators of CSR6, reputation7 and financial firm performance (Saeidi et al., 2014), (Helm, 2007), (Shamsie, 2003), (Kotha et al., 2001), (Frombrun and Shanley, 1990), (Cabral, 2012), Orlitzky et al., 2003) and (Robert and Dowling, 2003).

Some overview papers, as for example by Bragdon and Marlin (1973), say that CSR leads to economic disadvantage with respect to firms who do not have CSR. Ingram and Frazier (1983) agreed with this and conclude that there is negative relationship between CSR disclosure and Corporate financial performance. McGuire et al. (1988) conducted research on the comparison of a set of financial indicators based on a reputation-index of Fortune Magazine and concluded the same: it leads to higher costs and these additional costs lead to economic disadvantage compared to competitors (McGuire et al., 1988, p.855). Next to this, prior financial performance measures are better predictors than accounting based performance measures (McGuire et al., 1988, p.856). A negative relationship between CSR and financial performance is also found by Lopez, Garcia and Rodriguez (2007) and Renneboog (2008). Dam (2008) made a new statistics model to look whether there is a relationship between CSR and the financial market. Dam (2008)

6_{Variables that linked as moderators are customer statistfaction, customer loyality, customer advantage and}

reputation (Saeidi et al.,2014)

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found with his new model that prior data shows a negative relationship between CSR and financial performance.

In some research a neutral or mixed relationship between CSR and financial performance is found. Aupperle et al. (1985) used Carrol’s framework (1979) in order to measure CSR in the firm. By survey they asked CEOs how they think about CSR in the company and the authors used ROA for financial performance. With 241 responses this study did not find statically significant relationship in either direction. Brammer et al. (2005) also found mixed results. Firms with CSR scores of zero outperformed the market and firms with really high CSR scores underperformed in the FTSE index. Scholtens (2007) compare CSR investment portfolios with non-CSR portfolios but didn’t find a relationship. Aras et al., (2010) found a neutral relationship by doing a research in Turkish setting. They used ROA, ROE and ROS as financial measurement indicators and only found a significant relationship between company size and CSR. MCWilliams & Siegal (2000) found a neutral relation between CSR and financial performance, this result might have been found because it was only a one index-sample8. Furthermore, some researchers think that CSR has no effect on the total return of the firm (Abbot and Monsen, 1997).

As mentioned earlier in this section, the third possible result is that CSR has a positive relationship with financial performance. There are many studies that found a positive relationship (Verschoor, 1998), (Standwick and Stanwick, 1998), (Wu, 2006), (Murray et al., 2006), (Galbreath, Lin et al.,2009), (Rettab et al., 2009), (Margolis, 2010), (Alafi and Hasoneh’s, 2012) and (Saeidi et al., 2014). These researchers show a positive association between CSR and firm performance, this relationship is explained by two things beter CSR reporting leads to competitive advantage (Margolis, 2010). There are also researchers that did research at both ways. Instead of looking if CSR leads to better financial firm performance, Waddock and Graves (1997) looks also the other way around if higher financial firm performance leads to higher . Waddock and Graves (1997) conclude that there is causality between financial performance and CSR also in the other way around. Orlitzky et.al (2003) did a meta-analysis of 52 studies. Their findings show there is a positive correlation between CSR and CFP but also the other way around.

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Deegan (2002) identified a lot of reasons to report CSR activities, including economic considerations, market position and cost savings as drivers (KPMG, 2011, p.19). These drivers can lead to a positive relationship between financial performance and CSR-reporting. A positive relationship is also found by researchers that performed an analysis on prior literature. Roman et al. (1999) shows in his overview of 51 studies that there is clear indication that there is a positive relationship of 63% between CSR and financial performance, meaning that 31 firms shows a positive relationship between CSR and financial performance Margolish and Walsh (2001) also reviewed the existing literature of 95 studies and found 53% positive results. UNEP FI (2007) shows a 46% positive and 43% neutral relationship. Van Beurden an Gosseling (2008) reviewed prior studies and found a positive relationship of 68%. All studies that reviewed prior literature found for the largest part a positive relationship. A lot of reasons are given for the results, but most of time researchers give an overall conclusion due to pressure of stakeholders. Stakeholders give this pressure because if a firm don’t reports or not good about CSR this can lead to lower financial firm performance or damage of reputation of a firm (Fombrun & Shanley, 1990). Fombrun and Shanley (1990) states further that a better reputation leads to competitive advantage. This study wants to research if there is a direct relationship between reputation and financial firm performance instead of researching if there is an indirect relationship between reputation and financial firm performance which researched by (Barney, 1991), (Hall, 1992), (Rao, 1994), (Orlitzky et al., 2003). Saeidi (2014) and Siltaoja (2006) say that CSR influences the reputation of companies through different factors. Siltaoja (2006) concludes in her paper that the values that a company holds influence the relation between CSR and reputation. The organization and stakeholders share those values and most of the time this relation is positive. Siltaoja (2006) defines reputation in a CSR frame as: ‘’a collection of narratives, images and stories which are constructed in relation to the actions of the company and whose goodness or badness is determined by the extent to which it meets the value priorities of an individual, group or community’’ (p.103). Also Saeidi (2014) concludes that there is a link between CSR and reputation but also an indirect connection between reputation and financial performance. This indirect link is due the fact that other moderators which have an relationship with financial firm performance also effects reputation, see figure seven. In her paper she concludes that reputation is a good predictor of CSR. Robert and Dowling (2002) states in his study that sometimes the

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relationship between reputation and performance is not always consistent, and even firms with a superior reputation are at times likely to be no more profitable than firms without.

Main effects research Figure 7 (Saidi, 2015, p.7)

Shamsie (2003) and Frombrun and Shanley (1990) found a positive relationship among reputation and financial performance. Furthermore, Helm (2007) claimed in his research that companies that have a better reputation are less risky than firms with a lower reputation. This is one of the control variables that will be used in this research. Kotha et al. (2001) did research on the relationship between ROA and reputation. Their outcomes show that companies with higher reputation show higher sales growth and a higher ROA. Roberts and Dowling (2002) also did this study and their results agree with Kotha et al.. Cabral (2012) claimed that there is a positive correlation between reputation and an increasing firm performance. He concluded that a firm’s performance depends on its reputation. Orlitzky et al. (2003) states that reputation is an important moderator of the connection between CSR and CFP. Figure seven shows that an increase in companies with CSR reporting leads to a higher reputation.

Figure 8 Global business reporting drivers (KPMG, 2011, p.21)

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2.5 Reputation Institute

‘’Reputation is a perception about the degree of admiration, positive feelings, esteem and trust an individual has for an organization. Reputation is rooted in an assessment of the performance of an organization over time, including in the past and with expectations about the future.’’(Riel, 2014, p.4)

The Reputation Institute created the RepTrak method. This is a tool that tracks 23 key performance indicators which are grouped with seven different reputation dimensions. The reputation institute has examined that these seven dimensions have a positive influence on the stakeholder’s view of a company. A strong reputation is difficult to build as you have to deliver all the seven dimensions (products, innovation, workplace, governance, citizenship, leadership & performance). The 30 largest firms based on revenue are chosen and these firms are very familiar with the public in the Netherlands. For each firm 300 people get a survey every month about the company. Only people that are really familiar with the company get the survey and the results are adjusted for age and gender.

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3. Methodology

In this paragraph, the hypotheses is presented. Furthermore, the sample, methodology and different variables are explained. Last, the statistical tests are performed and it ends with the results. The methodology section relies on the research performed by Waddock and Graves (1997). A relation is made between reputation scores from the Reputation Institute and the financial performance of 30 companies from the Netherlands that are listed in the AEX and companies that are not listed on this index.

3.1 Development of hypotheses

From the literature review in the previous chapter emerges that it is interesting to see whether there is a relationship between reputation score and financial performance, or the other way around. Based on the literature section, it is expected that there is positive relationship between both relations. The legitimacy and stakeholder theory explain why firms make CSR reports (Gray et al., 1996). Those theories explain that a firm makes CSR reports to get financial benefits from it. In the long-term companies that perform CSR reports are seen as less risky by investors as compared to firms that do not perform CSR reports. One of the moderators of CSR is reputation. Saeidi (2014) states that a higher reputation leads to a better financial performance. There is not a lot of research that relates reputation with financial performance, but the research that is performed gives a positive relationship. The two hypothesis tested according to Waddock and Graves (1997) in this research are:

Hypothesis one: The reputation score of Dutch firms, according to the Reputation Institute, is positively related to prior financial performance.

Hypothesis two: Financial performance is positively related to prior reputation scores of Dutch firms, according to the Reputation Institute.

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3.2 Sample selection

The data that is used for this research is from the Reputation Institute and compromises 30 companies. Data from the year 2011 until 2014 is available on the website of the Reputation Institute. Data from 2010 and earlier is not used because the method from Reputation Institute changed in this year. This paper followed the study of Waddock and Graves (1997) and used data from four different years. Waddock and Graves (1997) states that it would be interesting for future research to research other time lags. The effects of reputation on financial firm performance need to be examine over a reasonably long period of time (minimum of three years) so that they can be assessed under changing circumstances (Fombrun and Shanley, 1990). The three periods that will be examine are 2011-2012 ,2012-2013, 2013-2014. After eliminating three companies because of a take-over by the Dutch government or a take-over of a company from the same sector, we are left with 27 Dutch companies. From DataStream financial data was gathered. The majority of the data is hand collected, due to the fact that most of the Dutch firms included in this research are not registered in the international databases from WRDS. The last step in the sample process is to remove outliners. Because of the small sample any outliners might have significant effects on the regression that is performed in this section. Field (2009) described in his paper that if a variable at the one percent top is more or less than 50% of the average it can been seen as an outliner. In this thesis there are no variables found that can be considered as an outliers.

One note has to be made. This research has a really small sample size with 108 observations over four years. Saunders et al. (2009) states that at least 79 cases need to be selected to get significant results. However, Stutely (2003), advises a minimum of 30 cases to get a normal distribution of the statistical analysis. After collecting the data, the different financial rations were calculated in Excel. The different ratios were then transferred to STATA and analyzed. In appendix two the list of companies used in this research can be found.

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3.3 Variables

This research is build up in two different research models. First a regression analysis is performed to check if there is a relationship of reputation proxied by the Reputation Institute on financial firm performance proxied by ROA, ROE and ROS. The second model is to check if there is a relationship of financial firm performance proxied by ROA, ROE and ROS on reputation proxied by the Reputation Institute. This exactly opposite relationship is tested because Waddock and Graves (1997) states in there paper that coporate social performance can be predicator and a consequence of firm financial performance (McGuire et al.,1990).The reputation score that is used to perform a statistical analysis is from the Reputation Institute. Paragraph 2.5 explains how the Reputation Institute works. To check whether there is positive relationship with firm financial performance (profitability) three different accounting variables are calculated, i.e. return on equity (ROE), return on assets (ROA) and return on sales (ROS) (Waddock and Graves, 1997). Most of the accounting variables are collected by hand because some companies are not listed at the Amsterdam Stock Exchange (AEX). The basis of this study is the Reputation list which is issued every year about the 30th largest firms of the Netherlands (Riel, 2014). The accounting numbers are collected from different financial statements of the different firms and different years. The control variables that are used are deducted from the paper of Waddock and Graves (1997). Two main differences with this paper are that there is no control for industry, because of the really small sample. The other difference is that there is no control for number of employees, the reason of this is also of the small sample. The control variables that are used from the paper of Waddock and Graves (1997) are firm size using total sales and total assets and as a proxy for the risk of a firm I used the long-term debt to total assets ratio. Waddock and Graves ( 1997) used these control variables because in previous research there is suggested that size and risk affects firm performance and CSR (Ullman, 1985).

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3.4 Regression analysis

A regression analysis is performed to check whether there is a relationship between reputation and firm performance and vice versa. There are two different analyses in this study. To check whether there is relationship of reputation on firm performance, the reputation score of the Reputation Institute is used as dependent variable. ROA ROE and ROS are separately used as independent variables. Firm Risk is used in every model as control variable and Total sales and Total assets are used separately in two different model. The regression model that is tested is accordance Waddock and Graves (1997) paper which run a regression analysis every time for one year.

MODEL: Reputation as dependent variable in relationship financial firm performance as independent variable

REP 2012 = β0 + β1 FP ROA 2011 + β2 Size sales 2011 + β3 Risk 2011 + ε

REP 2012 = β0 + β1 FP ROA 2011 + β2 Size assets 2011 + β3 Risk 2011 + ε

REP 2012 = β0 + β1 FP ROE 2011 + β2 Size sales 2011 + β3 Risk 2011 + ε

REP 2012 = β0 + β1 FP ROE 2011 + β2 Size assets 2011 + β3 Risk 2011 + ε

REP 2012 = β0 + β1 FP ROS 2011 + β2 Size sales 2011 + β3 Risk 2011 +ε

REP 2012 = β0 + β1 FP ROS 2011 + β2 Size assets 2011 + β3 Risk 2011 + ε

This regression is also done using 2014 and 2013 reputation as dependent variable and 2013 and 2012 financial performance as the key independent variable with 2013 and 2012 financial control variables respectively.

The research that analyses if there is a relationship with firm performance as dependent variable and reputation as independent variable is:

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MODEL: Financial firm performance as dependent variable in relationship with Reputation as independent variable

FP ROA 2012 = β0 + β1 REP 2011 + β2 Size Sales 2011 + β3 Risk 2011 + ε

FP ROA 2012 = β0 + β1 REP 2011 + β2 Size Assets 2011 + β3 Risk 2011 + ε

FP ROE 2012 = β0 + β1 REP 2011 + β2 Size Sales 2011 + β3 Risk 2011 + ε

FP ROE 2012 = β0 + β1 REP 2011 + β2 Size Assets 2011 + β3 Risk 2011 + ε

FP ROS 2012 = β0 + β1 REP 2011 + β2 Size Sales 2011 + β3 Risk 2011 + ε

FP ROS 2012 = β0 + β1 REP 2011 + β2 Size Assets 2011 + β3 Risk 2011 + ε

Note:

REP= Dependent Reputation score from Reputation Institute FP ROA= Dependent Financial performance by Return on Assets FP ROE= Dependent Financial performance by Return on Equity FP ROS= Dependent Financial performance by Return on Sales

β1 REP= Reputation score from Reputation Institute

β1 FP ROA= Financial performance by Return on Assets

β1 FP ROE= Financial performance by Return on Equity

β1 FP ROS= Financial performance by Return on Sales

β2 Size sales= Financial Control variable logarithm function of Total Sales

β2 Size assets= Financial Control variable logarithm function of Total Assets

β3 Risk= Financial Control variable long-term debt to total assets ratio

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3.5 Descriptive Statics

In table one the descriptive statistics for all the variables are presented. To shortly analyze the descriptive statistics, the mean of the REP stays almost the same between 2011-2014. Furthermore, the standard deviation stays almost the same over four years. In Table 1 you can see that for the control variables the whole time lag from 2011-2014 is included, this is done to see a total overview and corresponds with the correlation matrices in table two. ROA ROE and ROS are really big differences for example ROE has minimum from -64,25 and a maximum of 48,04. A reason for this is that sometimes companies have difficult year or a tax benefit. The control variables for size are SALES and ASSETS, they have a really high standard deviation. The reason for this is that there are really big companies in the sample are for example ING Groep NV, compared REED ELSEVIER is relative a small firm.

Table 1: Descriptive statics

Variable N Mean Std. Dev. Min Max

REP 2011-2014 108 66.18 6.19 49.1 80.5 ROA 2011 -2014 108 3.62 8.4 -11.08 45.47 ROE 2011 -2014 108 8.19 16.45 -64.35 48.04 ROS 2011 - 2014 108 8.05 9.36 -18.46 38.69 TOTAL SALES 2011-2014 108 27247.5 65787.47 1911 368153 TOTAL ASSETS 2011 – 2014 108 123851.3 255551,8 1364 1273580 FIRM RISK 2011 – 2014 108 0.16 0.11 0.01 0.56 3.6 Assumptions checked

To draw conclusions about the output of the regression analysis, you have to check several assumptions. In this research I looked at multicollinearity. this means that variables do not correlate too highly with each other and if there is a normal distribution of residuals. Both things are checked with STATA and nothing notable is found.

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3.7 Correlation matrices

The correlation matrix provided in Table 2 describes the correlation between two variables. The coefficient indicates the degree of linear relationship between two variables and is always between minus one and plus one. All the three financial variables are correlated with each other at a level around 0.5-0.7 and are significant with each other. The financial variables with reputation are relatively close to zero, indicating that there is probably no relation with reputation and financial performance in this research. More important the results between reputation and financial performance are not significant. Another important result is that ROE or ROS significant correlates with RISK. So if a firm have more risk this can lead to higher return on assets or return on sales both matrices are done in the same way as described in paragraph 3.4 of this study. To determine whether the relationship between financial firm performance and reputation and vice versa consist, a correlation analysis will be run below. This analysis consists three time periods: 2011-2012, 2012-2013 and 2013-2014.

MODEL: Reputation as dependent variable in relationship financial firm performance as independent

Table 2a Correlation with 2012 reputation performance, 2011 financial performance and 2011 financial control.

Reputation ROA ROE ROS Sales Assets Risk

Reputation 1 ROA -0.0880 1 ROE -0.0663 0.7235+ 1 ROS -0.0204 0.4863+ 0.5811+ 1 Sales -0.1328 0.1441 0.1499 0.0496 1 Assets -0.0256 -0.1613 -0.0372 0.3937+ 0.1476 1 Risk 0.3051 0.3256- 0.4972+ 0.3599* -0.1228 -0.3437* 1

Table 2b Correlation with 2013 reputation performance, 2012 financial performance and 2012 financial control.

Reputation 1 ROA -0.0205 1 ROE 0.0408 0.7239+ 1 ROS 0.0214 0.5401+ 0.7550+ 1 Sales -0.2555 0.0612 0.0889 0.0458 1 Assets -0.0219 -0.1195 0.0042 0.2758 0.1582 1 Risk 0.2136 0.2208 0.3381* 0.3724* -0.1406 -0.1595 1 *p<0.10;+p<0.05

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Table 2c Correlation with 2014 reputation performance, 2013 financial performance and 2013 financial control.

Reputation 1 ROA 0.0344 1 ROE -0.1276 0.7144+ 1 ROS -0.1271 0.4242+ 0.3874+ 1 Sales -0.1460 0.0098 0.0061 -0.0381 1 Assets -0.1361 -0.1649 -0.0242 0.3878+ 0.1464 1 Risk 0.2182 0.1368 -.01804 0.4314+ -0.0938 -0.1434 1 *p<0.10;+p<0.05

MODEL: financial firm performance as dependent variable in relationship with reputation as independent variable

Table 2d Correlation with 2012 financial performance, 2011 reputation performance and 2011 financial control.

Reputation 1 ROA 0.0148 1 ROE 0.1582 0.7239+ 1 ROS 0.0745 0.5401+ 0.7550+ 1 Sales -0.0808 0.0630 0.0908 0.0518 1 Assets 0.0303 -0.1188 0.0040 0.2695 0.1476 1 Risk 0.3079 0.2386 0.3322* 0.3516* -0.1228 -0.3437* 1 *p<0.10;+p<0.05

Table 2e Correlation with 2013 financial performance, 2012 reputation performance and 2012 financial control.

Reputation 1 ROA 0.0909 1 ROE -0.0123 0.7144+ 1 ROS -0.0758 0.4242+ 0.3874+ 1 Sales -0.1370 0.0053 0.0060 -0.0268 1 Assets -0.0255 -0.1630 -0.0241 0.3766* 0.1582 1 Risk 0.2427 0.1449 -0.1941 0.3789* -0.1406 -0.1595 1 *p<0.10;+p<0.05

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Table 2f Correlation with 2014 financial performance, 2013 reputation performance and 2013 financial control.

Reputation 1 ROA 0.1113 1 ROE 0.0505 0.7643+ 1 ROS -0.0097 0.4187+ 0.4336+ 1 Sales -0.2456 0.0108 0.0155 -0.0516 1 Assets -0.0321 -0.1642 -0.1204 0.3152 0.1464 1 Risk 0.2031 0.1603 -0.1191 0.4900+ -0.0938 -0.1434 1 *p<0.10;+p<0.05

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4. Regression Analysis

Chapter three has provided some insight in the averages of the variables as well as the relations between variables by looking at the descriptive statistics and correlation analysis. The main objective of this study is to research the relationship between reputation score as measured by the Reputation Institute and the prior and subsequent financial performance measured by financial ratios. Multiple regression analyses will now provide information on the effects of the independent variables on the dependent variable. This multiple regression has followed the paper from Waddock and Graves (1997) using a one-year time lag. The difference between this research and Waddock and Graves (1997) is that data in this study is used from four different time periods instead of two. Waddock and Graves (1997) also performed a three-year time lag, this paper does not do this. The study on the relation between reputation and financial performance is done for three different years and also examining on the exact opposite.

Hypothesis one: The reputation score of Dutch firms, according to the Reputation Institute is positive related to prior financial performance.

1. Regression analysis using 2012 financial performance as dependent variable and 2011 reputation performance as the key independent variable with 2011 financial control variables. (Table 3a-3c)

Hypothesis two: Financial performance is positively related to prior reputation scores of Dutch firms, according to the Reputation Institute.

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1. Regression analysis using 2012 reputation performance as dependent variable and 2011 financial performance as the key independent variable with 2011 financial control variables.

Hypothesis one will be tested by looking how reputation relates with firm performance. In tables three, four and five the regressions are summarized. Also mentioned above, all three different financial performance measures are measured independently from each other. In all the twelve models financial performance variables are used as independent and reputation as dependent variable. As discussed in paragraph 3.4 no significant correlations are found between reputation and the financial performance variables.

First starting analyzing table 3, no significant relationship is found between the financial performance measures and reputation score. The only significant difference is found in table 3c between return on sales and the control variable of Risk and total assets are significant at p<0.05. Furthermore, in table 3c model 6 is significant at a level of p<0.05. The unstandardized coefficients (B) presents the expected effect and the standardized coefficients (Beta) represent the individual effect of financial performance on reputation. For return on equity it is positive at 0.2013 and 0.1257 respectively. For ROA and ROS the model found a negative relationship between financial performance and CSR. In table four the model came with almost the same output. There is also no significant relationship found between financial performance and CSR. The only difference between model three and four is that ROA in relationship with reputation shows a positive beta. In table 5, there are also no significant results found between financial performance and reputation. The standardized coefficients (Beta) representing the individual effect of financial performance on reputation is positive only for ROA respectively: 0.1753 and 0.1628. The R^2 and the adjusted is R^2 really positive for model 5: 0.2535 and 0.1535 and for model 6 respectively 0.4039 and 0.3262. This score can be interpreted as that the coefficient of determination but is also really a weak score. Overall the results do not support hypothesis one

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stating that there is positive effect between financial performance and reputation, H0 can’t be rejected and because of no significant results nothing can be said about a possibility of a negative or no effect on reputation.

Hypothesis two will be tested by doing the same test as hypothesis one but then in the other way around. In all the twelve models reputation is used as the independent variable and financial performance measures as dependent variables. Waddock and Graves (1997) and Saeidi (2014) have investigated that there is a positive relationship between CSR/reputation and financial performance. In table six, seven and eight the summarized results are displayed. In three different tables no significant relationship is found between reputation and financial performance. Table six shows only significant results by table 6b and 6c in relationship with firm risk. This means that reputation has a positive beta with firm risk. Remarkable is that standardized coefficients (Beta) of the financial performance measured in relationship with reputation show a negative relationship instead of an expected positive relationship. The results of table seven also show a negative relationship between reputation (2013) and financial performance (2012) but no significant results. For table eight it is notable that reputation in relation with ROS has a high negative relationship of -0.173 and 0.182. For hypothesis two there are no significant results found, so it isn’t possible to reject H0. Consequently, none of the hypotheses can be confirmed after having run this regression analysis, since all independent variables have shown to have insignificant effect on financial performance and reputation. The limitations behind this study and the additions for further research will be discussed in the next chapter.

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Table 3a Regression analysis using 2012 financial performance as dependent variable and 2011 reputation performance as the key independent variable with 2011 financial control variables.

Table 3b

Dependent variable: Return on equity Model 3 Model 4 Independent variable: Reputation-CSR 0.2013 0.1257

Control variables:

Risk (debt/total assets) 55.278 61.157

Total sales 3.95E-4 Total assets 9.01E-7 R2 0.1321 0.1287 Adjusted R2 0.0190 0.0140 F 1.17 1.12 Tabel 3c

Dependent variable: Return on sales Model 5 Model 6 Independent variable: Reputation-CSR -0.053 -0.1736

Risk (debt/total assets) 34.893* 50.661+

Total sales 1.52E-4 Total assets 1.8E-4+ R2 0.1337 0.3063 Adjusted R2 0.0207 0.2159 F 1.18 3.39+ *p<0.10;+p<0.05

Dependent variable: Return on assets Model 1 Model 2 Independent variable: Reputation-CSR -0.086 -0.0851

Total sales 2.83E-4

Total assets -1.1E-6

R2 0.0689 0.0616

Adjusted R2 -0.0526 -0.0608

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Table 4a Regression analysis using 2013 financial performance as dependent variable and 2012 reputation performance as the key independent variable with 2012 financial control variables. Dependent variable: Return on assets Model 1 Model 2

Independent variable: Reputation-CSR 0.0938 0.0915

Total sales 4.36E-6 Total assets -4.98E-6 R2 0.0253 0.0446 Adjusted R2 -0.1018 -0.080 F 0.2 0.36 Table 4b

Dependent variable: Return on equity Model 3 Model 4 Independent variable: Reputation-CSR 0.1085 0.117

Risk (debt/total assets) -32.897 -34.05

Total sales -4.99E-6 Total assets -4.07E-6 R2 0.0393 0.0421 Adjusted R2 -0.086 -0.0828 F 0.31 0.34 Table 4c

Risk (debt/total assets) 32.453+ 38.012+

Total sales 1.11E-6 Total assets 1.54E-5+ R2 0.1735 0.3716 Adjusted R2 0.0657 0.2896 F 1.61 4.53+ *p<0.10;+p<0.05

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Table 5a Regression analysis using 2014 financial performance as dependent variable and 2013 reputation performance as the key independent variable with 2013 financial control variables. Dependent variable: Return on equity Model 3 Model 4

Independent variable: Reputation-CSR 0.1753 0.1628

Risk (debt/total assets) -16.74 -19.378

Total sales 4.92E-6 Total assets 7.53E-6 R2 0.0205 0.0392 Adjusted R2 -0.1072 -0.0861 F 0.16 0.31 Table 5b

Dependent variable: Return on assets Model 1 Model 2 Independent variable: Reputation-CSR 0.1200 0.1050

Total sales 6.09E-6 Total assets -4.73E-6 R2 0.0343 0.0524 Adjusted R2 -0.0917 -0.0712 F 0.27 0.42 Table 5c

Risk (debt/total assets) 39.061+ 43.464+

Total sales -4.31E-6 Total assets 1.29E-5+ R2 0.2535 0.4039 Adjusted R2 0.1562 0.3262 F 2.6* 5.2+ *p<0.10;+p<0.05

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Table 6a Regression analysis using 2012 reputation performance as dependent variable and 2011 financial performance as the key independent variable with 2011 financial control variables.

Table 6b

Dependent variable: Reputation-CSR Model 3 Model 4 Independent variable: Return on equity -0.1317 -0.1481

Risk (debt/total assets) 22.782* 26.363+

Total sales -3.29E-6 Total assets 2.99E-6 R2 0.1574 0.172 Adjusted R2 0.0475 0.064 F 1.43 1.6 Table 6c

Dependent variable: Reputation-CSR Model 5 Model 6 Independent variable: Return on sales -0.092 -0.204

Risk (debt/total assets) 17.911 26.493*

Total sales -7.42E-6 Total assets 5.93E-6 R2 0.119 0.155 Adjusted R2 0.004 0.045 F 1.04 1.41 *p<0.10;+p<0.05

Dependent variable: Reputation-CSR Model 1 Model 2 Independent variable: Return on assets -0.1762 -0.1833

Total sales -5.33E-6

Total assets 1.71E-6

R2 0.1357 0.1377

Adjusted R2 0.0230 0.0253

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Table 7a Regression analysis using 2013 reputation performance as dependent variable and 2012 financial performance as the key independent variable with 2012 financial control variables. Dependent variable: Reputation-CSR Model 1 Model 2

Independent variable: Return on assets -0.032 -0.046

Total sales -2.06E-4 Total assets 1.49E-7 R2 0.099 0.051 Adjusted R2 -0.017 -0.0734 F 0.85 0.41 Table 7b

Dependent variable: Reputation-CSR Model 3 Model 4 Independent variable: Return on equity -2.57E-3 -0.114

Total sales 3.45E-7 Total assets -2.1E-4 R2 0.097 0.046 Adjusted R2 -0.02 -0.077 F 0.83 0.38 Table 7c

Total sales -2.06E-4 Total assets 9.72E-7 R2 0.099 0.0510 Adjusted R2 -0.018 -0.0728 F 0.84 0.41 *p<0.10;+p<0.05

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Table 8a Regression analysis using 2014 reputation performance as dependent variable and 2013 financial performance as the key independent variable with 2013 financial control variables. Dependent variable: Reputation-CSR Model 1 Model 2

Independent variable: Return on assets 0.0048 -0.0072

Total sales -1.17E-5 Total assets -2.57E-6 R2 0.064 0.058 Adjusted R2 -0.058 -0.064 F 0.52 0.48 Table 8b

Dependent variable: Reputation-CSR Model 3 Model 4 Independent variable: Return on equity -0.028 -0.029

Total sales -1.18E-4 Total assets -2.65E-6 R2 0.072 0.067 Adjusted R2 -0.049 -0.054 F 0.59 0.56 Table 8c

Total sales -1.17E-4 Total assets 5.65E-7 R2 0.124 0.1081 Adjusted R2 0.009 -0.0082 F 1.08 0.93 *p<0.10;+p<0.05

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5. Conclusion

The conclusion of the research will be discussed and summarized in this chapter. This study has investigated if there is a relationship between reputation and financial firm performance and vice versa. Almost all current research that is done is about CSR in relationship with financial performance is done in the USA. It would be interesting to see how this relationship is in the Netherlands. The context of the Netherlands is selected because this country is one of the leading countries concerning CSR reporting (KPMG, 2011). Several researchers have examined that there are moderators that influence the financial firm performance such as customer satisfaction, competitive advantage and reputation. It would be interesting how one of those moderators has cohesion with financial firm performance. For example, Orlitzky et al. (2003) states that reputation is an important moderator of the connection between CSR and CFP. The reputation scores from the Reputation Institute are used as a proxy for reputation. This institute created the RepTrak method and this is a tool that tracks 23 key performance indicators which are grouped with seven different reputation dimensions. The Reputation Institute has examined that these seven dimensions have a positive influence on the stakeholder view of the different companies (Riel, 2014). The accounting measures that are used as a proxy for firm performance are ROA, ROE and ROS. Those measures are also used in other research that is performed to analyze the relationship between CSR or reputation with financial firm performance. This research has followed the paper of Waddock and Graves (1997) by focusing on a one year lag between reputation. To investigate this relationship the following research question was formulated: “in which relationship reputation is associated with the financial firm

performance in a Dutch context and vica versa?”

Prior studies have examined this relationship, Saeidi (2014) states that reputation is good predictor of financial performance. Shamsie (2003) and Frombrun and Shanley (1990) found a positive relationship among reputation and financial firm performance. Kotha et al. (2001) also did research on this relation by looking at ROA and reputation and his outcomes show that companies with higher reputation have a higher ROA. Some researchers found neutral or mixed results but this was examined in research between CSR and financial performance Abbot and Monsen (1997), McWilliams and Siegal (2000), Brammer et al. (2005), Aras et al. (2010). Most of the research examined has shown that there is a positive relationship between reputation and

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financial firm performance. Based on the literature review the following hypothesis were formulated:

Hypothesis one: The reputation score of Dutch firms, according to the Reputation Institute is positive related to prior financial performance.

Hypothesis two: Financial performance is positively related to prior reputation scores of Dutch firms, according to the Reputation Institute.

Overall the results from this study indicate that there are no significant results for both hypothesis. The 36 different regressions found only significant results with the control variable firm risk in a setting where ROS was the independent or the dependent variable. However most of the results shows no significant relationship between reputation and financial firm performance. An explanation for this is the small sample size and limitations of this research will be discussed in the next paragraph. In conclusion, it can be stated that there is not enough significant evidence in this study to conclude that there is relationship between reputation and financial firm performance in a Dutch setting.

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5.1 Limitations

This paragraph describes the limitations of the research, implications for future research and further the overall results will be discussed.

As seen in Appendix one numerous research is done about CSR/reputation in relation with financial performance. Almost 80% used ROA, ROE and ROS, so that could not be a reason why this study did not get significant results. One reason could be that the three control variable used needed to be extended by number of employees and owners’ equity. Field (2009) states about control variables that it is better to have too many control variables, than too little. For future research this is an opportunity. This research followed the paper of Waddock and Graves (1997), in that paper they perform two time lags. One for one year and one for three year. This study focus on one year time lags and if you compare it with the paper of Waddock and Graves (1997) there are two more years included in both settings. A three-year time lag would be interesting to study in the future.

Another limitation is the sample size that is used. Stutely (2003) states that a minimum of 30 cases for statistical analysis is okay, but several research states that a minimum of 100 cases needed for a statistical sample to find significant results. This study has a sample size of twenty-seven companies, this is too little to get significant results. This regression analysis consists mainly of companies that have their business in finance and services. With a larger sample it would be interesting to remove some industries out of your sample (for example the financial industry) and to examine how this impacts the results.

Remarkable are some results from the regression analysis at chapter four. Although the results are not significant, they show sometimes a negative relationship between reputation and financial firm performance measures. This conflicts with prior studies, which shows a positive relationship. A reason for this negative relationship can be the expenses in the previous years to get a higher reputation. These extra expenses could lead in the long term to a higher reputation. This study reflects a too short time lag and so this is a suggestion for future research.

This study is done in a Dutch setting. Mentioned in earlier sections, the Netherlands is a small country but is one of the leading countries by corporate sustainability reporting. Kolk

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(2007) examined the “small country effect”, this means that activities of multinationals are really visible because they have a relative small economy. It would be interesting if this “small country effect” also states for the reputation of firms by comparing different small countries with each other.

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