The effect of Corporate Social Responsibility on Corporate Financial Performance within the food & beverage industry.

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The effect of Corporate Social Responsibility on Corporate

Financial Performance within the food & beverage industry.

Job Visser, 10815333

Bachelor Thesis Economie & Bedrijfskunde

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2 Abstract

This thesis investigates the relationship of Corporate Social Responsibility (CSR) and Corporate Financial Performance (CFP) of public listed European and U.S. food and beverage corporations. Despite numerous of studies investigating the effect of CSR on CFP results are still ambiguous and inconclusive. This study focuses on the Food and Beverage industry, this industry is characterized by a rapidly increasing consumer awareness. This research empirically tested the effect of CSR on CFP of 45 European and 32 U.S. companies over the period of 2014-2018. The study regressed ESG on ROA, controlled for size, risk, R&D and advertising. This research do not support predominant positive prior research, concluding that the effect of CSR on CFP is insignificant.

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4 Introduction

Over the years society’s expectations towards a corporation have been changed. Corporations facing challenges being held responsible for social and environmental issues. Society demanding businesses to be more inclusive in their strategy planning and daily operations. Due to corporate scandals, financial crises and negative publicity of executive renumeration the demand for transparency rapidly increased, whereby CSR became a hot topic (Money & Scheepers, 2007). Thereby a rising concern of consumer awareness did an increasing amount of corporations commit to CSR disclosure. CSR activities became an integrated phenomenon into ‘doing business’, which was questioned by Friedman (1970). According to Friedman, traditionally, corporations should not engage into social nor environmental issues. The purpose of a company is to create wealth by making as much profits as possible in favour of their stockholders. A more modern perspective, the stakeholder view, requires corporations to consider both financial as moral consequences (Freeman, 1984). Scholars tried to justify CSR activities by investigating the empirical relationship of CSR with CFP, where findings have been ambiguous. Meta-analysis of Margolis and Walsh (2007) showed that studies are predominant positive, but relatively small and the direction have been questioned (Garcia-Castro et al., 2010). This study investigates the food and beverage industry, where consumer awareness and impact is high (Lee & Shin, 2010).

This thesis investigates the correlation of CSR with CFP. The goal of this study is to contribute in the ongoing debate of the empirical link of CSR with CFP, performing an analysis in an industry where consumer awareness and impact is high (Lee & Shin, 2010). Contributions to this debate by investigating an industry, which is hardly investigated. Secondly performing a time-lagged approach to tackle endogeneity issues and contributing to the debate about the direction of the relationship. This study performed a number of 10

regressions on two samples, an European and an US sample, over a period of 5 years, 2014-2018. ESG rankings of Sustainalytics are used as a measure of CSR, and ROA is used as a measure of CFP, controlling on size, leverage, R&D expenses and advertising expenses, gathered from Orbis, in order to answer the research question: Does the CSR performance of European and US public listed food and beverage companies positively affect the CFP? The results of this study showed an insignificant relationship of CSR, in exception of the model of US corporations in Year 2018.

The remainder of this paper will be structured as followed. First a literature review has been done, defining CSR, explaining theories and motives, to form the hypothesis. Next the methodology will be presented, including an explanation of measurement of CSR, CFP and the control variables. Followed by a section

providing the results of the performed regressions. At last the limitations of this study will be explained and recommendations will be done about further research.

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5 Literature Review

This chapter provides an overview of the theoretical background of the effects of Corporate Social Responsibility on corporate financial performance within the food and beverage industry. In this literature review, first CSR is defined, followed by a section where theories behind CSR are lined out. The third section discusses the motivations of engagement and implementation of CSR. Next the measurements of CSR and CFP will be described. The fifth and last section discusses formal literature, what can be learned from research, and which hypotheses can be formed from this.

Defining CSR

Corporate Social Responsibility has a long history in literature, where many have tried to identify the definition. Since the 50s research on CSR increases, where Bowen (1953, p.44) started, often named as the Father of CSR, and came up with the following definition “CSR refers to the obligations of the businessmen to pursue those policies, to make those decisions, or to follow those lines of actions which are desirable in terms of the objectives and values of our society”. The definition of Bowen is still vague, but with an exception of the word “businessmen” quite modern. Many have followed Bowen in the objective to shape the definition of CSR, some answered in a traditional way, others followed Bowen by providing a modern dynamic definition of the concept. As said, there are multiple ways to define CSR, still there is no clear definition and corporations find trouble in articulating a clear and formal definition of CSR (Johnston & Beatson, 2005; Sheehy, 2015).

Broadly CSR is defined as a company’s status and activities with respect to its societal obligations, or obligations to their stakeholders (Bhattacharya & Sen, 2004). Obligations here are not further defined. Friedman (1970, p. 178) completes it in a traditional way by stating that corporations only have one responsibility, “to use its resources and engage in activities designed to increase the profits as long as it stays within the rules of society, engages in open and free competition without deception or fraud.” Management acts as an agent of their principals, with a focus on shareholders’ value creation. Generally, this relates to earnings and profits but in case shareholders have other priorities, such as solving social issues naturally, this becomes the responsibility of their agents (Friedman, 1970). The modern view, a more dynamic, sustainable, and inclusive way of thinking, requires a definition where business and society are interwoven rather than distinct entities (Wood, 1991). A corporation should do and does more than just operating within the law, it should not only benefit the shareholders, but it should serve the stakeholders and society as a whole (Idowu et al., 2015).

The economic and legal factors are the more traditional, whereas the ethical en discretionary factors refer to the call for corporations to create a corporate value system. Society expects corporations to operate in an ethical manner which goes beyond the obedience of law and following regulations. Carroll also includes discretionary responsibility, a vaguer expectation, since this is a responsibility expected to be done on a voluntary base. Discretionary expectations are driven by social norms, guided by the desire of business to perform well in social practices. It differs from ethical responsibility, since it is not driven by strong social beliefs (Carroll, 1991).

Despite numerous efforts to define an unbiased and clear definition of CSR, still the concept and theory behind CSR is not framed and vagueness remains in every attempt. CSR needs a content-based approach, there is

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no standard solution that fits all, CSR needs more various and specific definitions matching development, awareness, and ambition levels of corporations (van Marrewijk, 2003). Instead of pointing out the differences, a content analysis shows the similarities. Consistently literature is referring to five dimensions, the environmental, the social, the economic, the stakeholder and the voluntariness dimension. Despite definition are phrased differently, the definitions are predominantly compatible. The definitions are describing a phenomenon but fail to provide guidance in the actual challenge facing the phenomenon of CSR. The problem is not so much in defining CSR, neither understanding the definition. The challenge is how to socially construct CSR in a specific context with respect to business strategies and daily operations (Dahlsrud, 2008).

Theories behind CSR

There is an increasing focus both by business on CSR and by society on the actions of corporations. A social contract is created between business and society, and the following three theories might explain how and why active CSR is present (Moir, 2001).

Stakeholder theory

A corporation is a series of managed connections and contracts with stakeholders. The stakeholder theory identifies the groups that address the corporation’s accountability. This can be any group or individual who can affect or is affected by the business of the corporation. Stakeholders can be classified into two groups, primary and secondary stakeholders. Primary stakeholders, stakeholders without whose continuing participation the corporation cannot survive as a going concern, like employees, suppliers, consumers, investors and shareholders, but also the public stakeholder (Clarkson, 1995). Secondary stakeholders are the groups who influence or affect or are influenced or affected by the corporation (Moir, 2001). Although they are not directly part of the daily operations and their continuing participation is not needed, secondary stakeholders are of relevance and could be part of the long-run performance of the corporation.

When today’s management, from the perspective of stakeholders’ alignment, is required to consider both financial and moral consequences, usually difficulties are being faced. The goal is to craft a purpose and role for the firm that builds internal coherence among competing and incommensurable objectives, duties and concerns (Richardson, 1997; Margolis & Walsh, 2001). The manager's role is to engage in balancing the stakeholders’ interest (Freeman et al., 2010)

Social contract theory

Society can be described as a series of social contracts between members of society and society itself. The social contract theory implies the existence of a social contract between business and society and in this context, it requires business to operate in a socially responsible manner, not on the basis of commercial interest but because this is how society works. Business is part of society, and society implicitly expects business to operate under moral rules in a responsible way (Moir, 2001). Donaldson & Dunfee (1999) developed the integrated social contracts theory, they distinguish two categories macrosocial contracts and microsocial contracts. Macrosocial contracts provide the overall framework and within this framework there are actual community based microsocial

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contracts. Corporations who are adopting the view of the social contract of business with society are fulfilling the public expectation, at the same time this could be a strategic response to changing circumstances and new corporate challenges as CSR (Mohamed et al., 2015; Moir, 2001).

Legitimacy theory

The legitimacy theory builds on the assumption of the existence of a social contract between business and the society within it operates (Deegan & Unerman, 2011). Legitimacy is defined as “a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs and definitions” and society should assess business activities as legitimate (Suchman, 1995, p. 574). As Wood suggested society grants legitimacy and power to business. Those who do not use power in a manner which society considers legitimate, will tend to lose it in the long-run (Wood, 1991). Corporate actions should meet myriad expectations of society, otherwise a legitimacy gap appears. Business continuity requires closing the legitimacy gap, which can be done by altering the expectations of society or change the corporate behaviour. Legitimacy could be a key reason for corporations in engaging in CSR activities, therefor obtaining societal approval. Using their corporate social responsibility as a form of publicity, influence and ensuring their continuing existence (Deegan and Unerman, 2011; Gray et al. 1996; Clarke 1998).

Motivation for engaging in CSR activities

Over the years corporations have realized the need for integration of the economic, social and environmental impact of their operations. Increasingly corporations support the idea of an integrated strategy, the presence of CSR is not exclusively about a desire to be environmentally conscious. A company that has the intention to be, and to remain competitive in its industry must be seen as a company that is socially responsible (Idowu & Papasolomou, 2007). On a wide range of issues corporations are encouraged to behave socially responsible (Welford & Frost 2006, Engle 2007). This section amplifies the motives of corporations for engaging in CSR activities.

First, corporations might have altruistic intentions, the CSR field remains strongly imbued with a moral imperative, a positive contribution to society (Porter & Kramer 2006). The moral appeal – corporations invest in CSR, because this is the “right thing to do” – doing business in a socially responsible manner is part of being a good global citizen (Sprinkle & Maines, 2010). Secondly, some will say corporations engage in CSR as a form of ‘window dressing’. This is an extension of the stakeholder - value creation, and the legitimacy theory – ‘license to operate’, corporations undertake CSR activities to appease stakeholder groups, CSR costs might be seen as a ‘cost of doing business’ (Sprinkle & Maines, 2010). Stakeholder groups as NGOs force corporations to act socially responsible by the threats of negative publicity or stringent actions. (Sprinkle & Maines, 2010). In addition, close to the latter argument, corporations engage in CSR as a tool of reputation enhancement, it would improve a company’s image and strengthen its brand (Paul & Siegel, 2006; Porter & Kramer 2006). For instance, high level of CSR disclosure are strongly associated with corporate reputation, playing a signal of improved social and environmental conducts (Branco & Rodrigues, 2008; Bayoud et al., 2012).

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A strong relationship was found between a company’s environmental performance and the consumers purchase intentions, this suggests that managing and developing a corporation with a sustainable environmental brand image delivers sufficient benefits (Grimmer & Bingham 2013). This is in line with the findings of Smith (2003), he stated that CSR activities enhance the ability of a firm to attract consumers, consumers claim to be influenced by a corporations CSR reputation, investors and employees. Literature reports that CSR helps to recruit, motivate, and retain employees, corporations protect the human capital assets (Doane, 2005). This argument has been reported by scholars as one of the most significant key driver of an active CSR program of corporations (Sprinkle & Maines, 2010; Carroll & Shabana 2010; Paul & Siegel, 2006). People are ‘seeking for meaning at work’, working at a socially responsible firm has become a key benchmark in this driver (Murray 2007). Greening and Turban (1997, 2000) found extensively evidence that indicated that job applicants are more attracted to corporations with a positive CSP reputation, they will pursue jobs, attempt job interviews, and have a higher probability of accepting a job of such firm. Employees perception about how a corporation is fulfilling their responsibilities regarding environmental and social conducts are part of the employees decision where to work, as a result corporations gain advantage by publishing CSR disclosures, such disclosures can play a role in positioning a corporation as an employer of choice. A corporation with a high-performance regarding CSR might enhance loyalty, reduce staff turnover, and increase the ability of the corporation to attract, retain and motivate high quality employees (Waddock et al., 2002; Needleman, 2008).

Finally, corporations engage in CSR to reduce costs and risks, by several reasons, among which the latter argument concerning human capital benefits (Sprinkle & Maines, 2010; Carroll & Shabana, 2010). Thereby, in the light of the stakeholder theory, the demands of stakeholders present potential threats to the viability of a corporation, mitigating these threats by performing in a socially sustainable manner will be in the economic interests of the organisation (Kurucz et al., 2008). High CSR performance and disclosure of CSR activities increases the access to capital and creates shareholder value. Investors invest in organizations demonstrating a high level of CSR (Roberts, 1992; Sprinkle & Maines 2010). Evidence say CSR enhances the firm efficiency and drive down the operating costs (Carroll & Shabana, 2010). Following the argument, directed at the natural environment,” being proactive on environmentally issues can lower the costs of complying with present and environmental regulations, and enhance the firm efficiencies and drive down operating costs” (Berman et al. 1999). A corporation building a positive relationship with the community could lead to tax advantages, easing legal or regulatory constraints contra the firm, since the firm is perceived as a sanctioned member of society (Carroll & Shabana, 2010; Sprinkle & Maines, 2010; Doane, 2005).

CSR-CFP relationship

The relationship between CSR and CFP has been researched extensively over the years (Margolis et al. 2007). In literature there has been an ongoing indecisive debate about the effect of CSR on financial performance. This section provides an overview of this existing literature, prior studies present ambiguous and inconclusive results. Scholars have shown positive, negative, and nonsignificant results, those result will be discussed next.

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Positive CSR-CFP relationship

According to the stakeholder theory, from the firm's’ perspective, the needs of their stakeholders are part of an environment that must be managed and satisfied, to ensure revenues, profits and ultimately return to shareholders. Within this theory an important pillar is the association of CSR with CFP (Berman et al. 1999). CSR has the possibility to function as a mean for firms to secure the acquisition of critical resources controlled by stakeholders, and is empirically positive related with CFP (Wang et al., 2008).

Waddock and Graves (1997) researched the effect of CSP on ROE, ROA and ROS, their findings show a positive relationship of CSP with prior financial performance and future financial performance. The research included data of 469 firms over a period of 2 years, all firms are listed on the S&P 500 and was controlled for size. KLD was used as a independent measure of CSR performance.

Tsoutsoura (2004) found evidence in line with the findings of Waddock and Graves, the dataset included most of the S&P 500 firms and covers a time period of 5 years, 1996-2000. Using OLS, controlled for size, debt level and industry, Tsoutsoura found a positive significant relationship between CSP and ROE, ROA and ROS. The study did not explore the direction of causality, but the evidence suggest that CSR can be associated with a series of bottom-line benefits (Tsoutsoura, 2004).

Inoue & Lee (2011) tested the effects of CSR on CFP within tourism related industry, which included airline, casino, hotel and restaurant. They tested the effect among 5 dimensions of CSR (1) employee relations, (2) product quality, (3) community relations, (4) environmental issues, and (5) diversity issues on two financial performance measures, ROA and Tobin's’ Q. Their results concluded that each dimension of CSR has a different impact on short-term and long-term financial impact. The results from this study can be explained by the notion that firms could gain different degrees of financial benefits and competitive advantages by engaging in a specific primary stakeholder issue. The findings indicate that different industries could improve their financial performance through each dimension of CSR to a different degree (Inoue & Lee, 2011).& Othman (2012) performed a study on the top 100 sustainable global companies over a period of 5 years, 2006-2010. The following financial measures were used, sales growth, ROA, profit before tax, and cash flows from operating activities, CSR is measured on the base of four indices, (1) Community Index, (2) Diversity Index, (3) Environment Index and (4) Ethical Index. The study concludes a positive relationship between CSR with ROA, profit before tax, and operating cash flow. That firms with higher performance on sustainability practices generate superior financial performance, than those firms that do not emphasize on sustainability practices (Zhang, 2016; Ameer & Othman, 2012).

Su et al. (2014) investigated the relationship between CSP and Tobin’s Q. The sample consist firms from ten Asian emerging countries. A regression is done with CSP as the independent variable and Tobin’s Q as the dependent variable, controlled for GDP per capita, FDI (foreign direct investment) as a percentage of GDP, size, slack, family business, year, industry. The study suggests a positive relationship between CSR and Tobin’s Q and concludes ‘first that CSR is a signal of high capabilities that may create value for firms and second that this effect is moderated by the development of institutions that facilitate the availability of high-quality information’ (Su et al., 2014). Likewise, Choi et al. (2010) found a positive relationship between CSR and Tobin’s Q. In their study

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the empirical relation between CSR and CFP is exposed, a sample is used of 1222 Korean firms during 2002-2008. CSR was measured by both an equal-weighted CSR index and a stakeholder-weighted CSR index suggested by Akpinar et al. (2008). Corporate financial performance is measured by return on equity, return on assets, and Tobin’s Q. The study found a positive correlation between stockholder-weighted CSR index and Tobin’s Q, but not the equal-weighted CSR index (Choi et al., 2010).

Another study supporting the CSR-CFP link is performed by Moneva and Orats (2010), this study concerns 230 European companies. The paper used a partial least square model for measuring the impact of CSR on CFP, resulting in a positive relationship and concluded enterprises which obtain high rates of environmental performance show better financial performance levels in the future (Moneva & Ortas, 2010).

Margolis & Walsh (2007) conducted a meta-analysis of 251 studies. They concluded a small positive link between CSR and CFP (r=0.13), they divided CSP into 9 dimensions, and check how each dimension behave towards CFP. Their findings enlightened the differences of influence of the 9 dimensions. Margolis & Walsh appointed the importance of existing problems that influence the research results such as measurement problems of CSR, CFP and which statistical method should be used (Margolis & Walsh, 2003).

Negative CSR-CFP relationship

An opposite way of thinking is the neoclassical economic view, supported by Friedman, a well-known critic on the stakeholder theory, clarified himself by arguing the fact that companies are spending much time, effort and resources improving their CSR performance. These resources and capabilities spent on social projects, donations, improving production process and other investments results in an increase in the production cost and the product price, which leads to a decrease in companies’ profits (Jensen, 2001; Chen et al., 2015). Critics hypothesizing a negative relationship of CSR with CFP are focusing on the shareholder value maximization principle, engaging in CSR activities is seen as an objectless cost driver and is not enhancing CFP, “which should be the main focus of the firm” (Jensen, 2001).

Where prior research on a positive relationship between CSR and CFP is extensively, empirical research exposing a negative relation is limited. Vance (1975) has shown first results in a negative correlation between CSR and CFP. Impressions of students and businessmen towards the organisations was used as a CSR performance measure, and stock value was used as financial performance measure. The study revealed CSR was negatively associated with stock value, where the portfolio of firms which scored significantly lower on CSR, ended up with a significant more valuable portfolio. The selection of sample firms relies upon two reputational survey, and therefore is limited and questionable.

A study of Moore (2001) presented a negative effect of CSR on CSP within the supermarket industry of the UK. Social performance was measured in relation to six stakeholder groups and regressed to both accounting-based measures and market-accounting-based measures, controlled for size, age and gearing. The study of Moore provided support for the negative synergy hypothesis has to be considered against that found for the available funding hypothesis. Moore suggests that a cycle of events is being uncovered here, with good financial performance leading to subsequent good social performance, which then distracts firms from “the business”, so leading to poor

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financial results in the following period. This can be confirmed only by further empirical and case study research. (Moore, 2001).

Lopez, Garcia & Rodriguez (2007) selected two groups of 55 European firms, of which one group of firms adopted CSR practices and the other group did not. Lopez et al. measured FP by an accounting-based measure, profit/loss before taxes and controlled for size, industry, and risk. Their findings suggest CSR has a negative impact on financial performance in the short-term. Investments made in CSR activities bring a competitive disadvantage compared to firms that do not engage in CSR. The regression controlled over time indicated, this effect will reduce over time (Lopez et al., 2007).

Hassel, Nilsson & Nyquist (2011) investigated the CSR-CFP link of a sample of listed Swedish companies. Hassel et al. used the residual income valuation model, they expressed market value of equity as a function of book value of equity, accounting earnings, and environmental performance, where the last variable is used as a proxy for other value-relevant information. Their findings suggest that firms engaging in CSR activities are driving up their cost, resulting in decreased earnings and lower market values. The results indicate that environmental performance is negatively associated with the market value of firms (Hassel, Nilsson & Nyquist, 2011).

More recent, the research of Rodrigo, Duran & Arenas (2016) enlightened the link between CSR and CFP in emerging countries and controversial industries. They found a negative correlation of CSR engagement with CFP, based on six Latin American countries within five controversial industries (agriculture, chemical, energy, forestry and mining), suggesting that institutional and market‐level forces play a major role in shaping this relationship (Rodrigo, Duran & Arenas, 2016). Moreover, In the study of Martinez-Ferrero & Frias-Aceituno (2015) tested an unbalanced sample of 1960 multinational non-financial listed companies from 25 countries and one administrative region for the period between 2002 and 2010, controlled for size, leverage, risk, operating liquidity, industry and R&D expenses. Due to the use of an international database and the differences among countries, divergence between institutional settings is observed. For this reason, a corporate governance system (Anglo‐Saxon, Germanic, Latin and Asian) is used as characteristic of the macro‐environment. Their findings suggested a positive link between CSR and market value, but at the Germanic level a significant negative correlation was found (Martinez-Ferrero & Frias-Aceituno, 2015).

Insignificant CSR-CFP relationship

Some empirical studies result in a conclusion that there is no relationship between CSR and CFP. Only a positive or negative relationship could be found when there is a misspecification of the applied model during research. This was supported by McWilliams & Siegel (2000), at first, they found a positive correlation between CSR and CFP, after the relation was controlled for R&D investments, there was no empirical link found. McWilliam & Siegel (2001) declared themselves by a simple example. Assuming two firms producing identical goods, except one firm adds a social characteristic to its product. In this theory, we assume each firm makes optimal choices, both producing at a profit-maximizing level of output, both firms will be equally profitable. The firm introducing a social characteristic, e.g. sustainable material, to their product will have higher production cost. Since the product is differentiated will charge a premium, so on will have higher revenues. Consequently, the firm producing with

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no CSR attributes will have lower cost, but can’t charge a premium, so will have lower revenues. Any other result will cause a firm to change their strategy (McWilliam & Siegel, 2000, 2001).

Alexander & Buchholz (1978) examined the relationship of social responsibility and stock market performance of U.S. corporations. They used reputation ratings as a measure of CSP and market return on security was used as a FP measure on a timeline of 5 years, 1970-1974. Their findings did not show any correlation of U.S. firms, which scored high on their CSR measure related to stock values. Consequently, they concluded that there was no significant effect of CSR on CFP. Although some limitations occur in their research, and conclusions can be questioned, Buchholz & Alexander were first at presenting empirical evidence for a non-existing link between CSR-CFP.

Another study in this field, done by Aupperle, Carroll & Hatfield (1985), did not provide any evidence of a significant relationship between CSR and CFP. CSR was measured based on the three-dimensional framework of Carroll (1979), conducted in a forced-choice survey, to minimize the social desirability of responses. Respondents were asked to allocate up to 10 points to each of 20 sets of statements measuring CSR. Their findings did not show any significant result, neither did CSR orientation was found associated with short-term ROA or long-term ROA. Their results did not provide any evidence of a difference in profitability of firms which employ social forecasting, of those that did not, with or without adjustment of risk. Their study indicated that it is neither beneficial nor harmful for a firm to be socially motivated to fulfil its social contract (Aupperle et al, 1985).

More recent Nelling & Webb (2009) at first found a small positive link between CSR and CFP using the traditional statistical techniques. However, using a time series fixed effects approach, they found a weaker effect of CSR on CFP. Their findings suggested that strong market performance leads to an increase of investments in CSR activities, but a non-significant relation was found of CSR associated with CFP. This emphasises the issue of reversed causality, and endogeneity issues in the traditional statistical model.

Hypotheses development

This section focuses on hypothesis development. The main focus of this thesis is to restudy the relationship between CSR and CFP. Contemporary beliefs argue for a socially integrated way of thinking, encouraging and motivating management to adopt a socially responsible policy. Changing consumer awareness and a society exerting pressure to improve and increase CSR activities shows the importance of the subject. The latter section exposed the crux, incompleteness, and ambiguity of the ongoing debate about an empirical link between CSR and CFP. Question marks remain, is there a relationship between CSR and CFP? If this link is significant, in which direction does it move? Prior research is predominant suggesting CSR is positive related to CFP, but the effect is relatively small. Evidence supporting both the stakeholder and legitimacy theory, which is promoting corporations to fulfil their social responsibilities. The findings of prior research in combination with an industry where consumer awareness and consumption have direct impact on financial performance implies the following hypothesis (Lee & Shin, 2010).

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13 Methodology

This section introduces the research method used in this thesis. First measurement of CSR and CFP will be discussed. Second control variables will be introduced and explained. Where after the empirical model will be presented. Finally, the sample and data collection will be declared.

Measurement CSR

CSR is a multidimensional construct and still not defined in one way, an integration of principles, beliefs, morals, processes, and policies to social issues. Defining CSR is as difficult as it is to measure it. It creates an obstacle in finding an empirical link of CSR with CFP. Different CSR measurement strategies will lead to systematically different effect sizes across empirical studies (Wang et al.,2015). In a meta-analysis constructed by Wang, Dou & Jia (2015) CSR measures are classified into 5 categories, (1) CSR reputation ratings, (2) content analysis, (3) surveys, (4) social auditing database and (5) one -dimensional proxy variable. This section will discuss the 5 categories of Wang, Dou & Jia.

First reputation ratings, ratios made by researchers and experts calculating a rate to the extent of performance concerning social issues (Soana, 2011). Moskowitz (1972) one of the first using a rating based on the evaluation of experts concerning CSR integration into corporate policies. The validity of this instrument depends on the skills, qualifications, and beliefs of the experts (Wang et al, 2015). Frequently used was the Fortune’s reputation rate, criticized because of the limitations. Reputation rates are subjective and is viewed as a measure of overall management (Waddock & Graves, 1997).

Second, content analysis is a method which measures the amount of content used regarding CSR in official corporate publications. Content analysis is a technique for gathering data that consists of codifying qualitative information in anecdotal and literary form into categories to derive quantitative scales of varying levels of complexity (Abbott & Monsen, 1979). Content analysis is widely used in the literature, for the simple reason that it is a cheap way of obtaining data. Reliability is limited, since reported social activities might differ from actual activities (Abbot & Mondsen, 1979; Wang et al., 2015).

Thirdly, surveys are often used as a measurement of CSR in prior research. Questionnaires organised and completed by management to rate the social responsibility of corporations (Soana, 2011). For instance, Aupperle et al. (1985) using a forced-choice survey instrument addressing CSP. The forced-choice survey was developed by Carroll (1979) and is often used, since it minimizes the desirability of responses (Wang et al., 2015). Still reliability is limited, since findings are affected by internal perception of management of social responsibility (Soana, 2011).

Fourth, social auditing database, multidimensional index calculated by third parties. Where the agency developed their own quantification model involving multiple indicators regarding different stakeholder groups. Scores obtained of each indicator provide an overall weighted performance on social responsibility (Soana, 2011). For instance, KLD, frequently used, “an independent rating service that focuses exclusively on assessment of corporate social performance across a range of dimensions related to stakeholder concerns” (Wang et al., 2015).

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Some critics are made about credulity problems, data is often stretched to meet the objectives of individual researchers (Godfrey et al., 2009).

Finally, some studies use the one-dimensional proxy, this instrument is viewed as a highly visible and objective component with specific attributes that make it particularly amenable to empirical research (Wang et al. 2015). For instance, often the dialogue with local community and philanthropy is used (Soana, 2011). Limitations about this instrument are that the instrument does not properly reflects the overall social performance, idem consistency is question marked across different industries and companies (Waddock & Graves, 2009).

This research will obtain ESG rankings of sustainalytics as a measurement of CSP. Sustainalytics constructs an objective multidimensional index conforming six categories (1) Corporate Governance, (2) Human Capital, (3) Carbon – own operations, (4) Business Ethics, (5) Product Governance and (6) Human Rights – Supply Chain. ESG ratings are often used by investors as a measure of risk assessment, since the data is an objective multidimensional construct of 220 indicators ESG ratings will be used in this research as a measure of risk.

Measurement CFP

Following prior research this study focuses on an accounting-based measure as a proxy for CFP), using return on assets (Aupperle et al., 1985; Waddock & Graves, 1997; Inoue & Lee, 2011; Ameer & Otman, 2012). ROA is a common tool for measuring a company’s profitability, widely used as an indicator of how efficient a company uses its assets to generate earnings. Using a time-lagged regression, where data of year t will be regressed on year t+1, to avoid endogeneity issues (Garcia-Castro et al., 2010). The calculation of this measure is as follows:

• ROA = Net Income / Total Assets

Sample and data collection

This research will focus on public listed European F&B and a control sample of U.S F&B companies, this way large institutional environmental differences among countries are being reduced. The sample consist 45 public listed firms in the European food and beverage market. The control group is introduced since Advertising expenses are unkown in Europe, the control group consist 32 U.S public listed F&B corporations. Since there is only one industry, food and beverage, a good comparison of numbers is possible. CSR and CFP will be measured and collected of the sample firms for a period of 5 years, 2014-2019.

Data regarding CSR scores will be gathered from sustainalytics in form of ESG score. The ESG data of sustainalytics is a comprehensive set of raw data points that covers a variety of environmental, social and governance themes. Our data set includes management, corporate governance, and controversial event indicators along with historical indicator-level data. Data regarding the measurements of size, risk ,R&D expenses and Advertising expenses will be obtained through year reports on Orbis.

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Control Variables

Prior research exposed the difficulty in assessing the link between CSR and CFP. Research in this field has shown every possible outcome, this might be due to a lack of consistency in control variables. Heterogeneity of empirical research might be related to circumstances regarding the empirical link, which may not be well enough understood to be embodied into control variables (McWilliams & Siegel, 2000; Garcia-Castro et al., 2010). Control variables can systematically impact the dependent, CFP and independent variable, CSR. Control variables must be properly specified to avoid bias and that is some of these measures are quadratically related to CFP (Callan & Thomas, 2009). McWilliams & Siegel (2000; 2001) argue that the CSP-CFP relationship is influenced by size, risk, industry, and industry adversity intensity. In this thesis research will be done for only one industry, the food and beverage industry, controlling on industry related difference is unnecessary and not. Moreover, they enlightened the importance of R&D expenses by their research of 2000, including R&D in to their model presented a different outcome. Furthermore, recent studies addressed the issue of excluding advertising expenses (Callan & Thomas 2009; Andersen & Dejoy, 2011; McWilliams & Siegel 2001). Concluding, the research model will include the following control variables, size, risk, R&D expenses and Advertising expenses. Furthermore, the model will include a time dummy variable.

Size

Past research addressed size as an attribute that affects the relationship of CSR and CFP. Size is suggested of importance, “smaller firms may not exhibit as many overt socially responsible behaviour as do larger firms” (Waddock & Graves, 1997). Common measures of size are sales, total assets, and total employees. In this study total sales will be the measure of the firms’ size.

Risk

Prior research models mostly contain a factor concerning the risk of the firm. This was elaborated by Orlitzky and Benjamin (2001), they stated that the relationship of CSP and risk appeared as one of reciprocal causality. Identifying the link between CSR and CFP asks for a measure of risk. Commonly used measures are leverage-ratios or beta. In this thesis the leverage ratio of debt-to-equity will be used.

R&D

More recently the importance of R&D expenses have been addressed by several studies (Andersen & Dejoy, 2011; Callan & Thomas, 2009) Excluding the R&D expenses upwardly bias the effect of CSR on firms’ profitability, this was already exposed by the work of McWilliams & Siegel (2001). All cost during the year related to develop new products and services, will be addressed as R&D expenses.

Advertising

Recent work has suggested that advertising expenses can be of influence on the relationship of CSR with CFP (Andersen & Dejoy, 2011; Callan & Thomas, 2009). Advertising expenses have a significant positive effect on

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long-term profitability and play a role in creating and fitting the consumption demand of consumers by determining the optimal level of CSR (McWilliams & Siegel, 2001).

Empirical Model

H1: Corporate Social Responsibility has a positive effect on Corporate Financial Performance of European food and beverage companies.

In this study panel data will be gathered to perform a study on the relationship of CSR and CFP over time. This study will use a multiple linear regression model to examine hypothesis mentioned above. The regression analyses will be performed in SPSS, controlling for correlation of the variables and testing for OLS-assumptions (1) ui is a random variable with E(ui |Xi) = 0, (2) (Yi ,Xi) are independently and identically distributed (i.i.d), (3) large outliers are unlikely and (4) no multicollinearity. The control variables added to avoid omitted variable bias. The performed regression will be tested one-sided on a significance level of 5%. When the correlation is positive and significant, H0 will be rejected. Only then will a positive relationship be empirically substantiated. The following regression model will be used.

𝐶𝐹𝑃𝑖𝑡+1= 𝛽0+ 𝛽1𝐶𝑆𝑅𝑖,𝑡+ 𝛽2𝑆𝑖𝑧𝑒𝑖,𝑡+ 𝛽3𝑅𝑖𝑠𝑘𝑖,𝑡+ 𝛽4𝑅&𝐷𝑖,𝑡+ 𝛽5𝐴𝑑𝐸𝑥𝑝𝑖,𝑡+ 𝜀𝑖

Results

This section presents the results of the research. First descriptive statistics will be introduced, where after the model specifications, correlation analysis and robustness analysis will be presented. Followed by a section where the results of the regression analysis will be shown.

Descriptive Statistics

The data in table 1 provide an overview of the number of observations, minimum, maximum, meaning and standard deviation of the data used in this research. The European sample contains data of 45 public listed firms. ROA was collected over the years 2015-2019, where the independent and control variables were gathered over

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the period of 2014-2018. Table 1 gives an overview of the descriptive statistics of the regression on ROA 2015. As can be seen from the table ESG score was collected for 43 firms, R&D expenses was collected for 30 firms, due to some firms not publishing these numbers. The mean value of ROA is 7,42. The mean value of ESG is 62,09 in 2014 and increases to 64,24 in 2018, which can be found in Appendix A. This could indicate the awareness of corporations regarding CSR activities.

Table 2 presents the descriptive statistics of the control group for 32 U.S. public listed firms over the year 2014. The sample contains the same variables as the European, and the additional control variable of advertising expenses. The independent, dependent and control variables were collected over the same periods as the European sample. As can be seen from the table information on ESG, R&D expenses and Advertising expenses was incomplete, and respectively collected for 26, 24 and 28 firms. The mean value of ROA is 11,21 of the sample, the mean of ESG score is 64,04 in 2014, which decreased to 60,23 in 2018, see Appendix A. Appendix A contains the descriptive statistics of all years used in this research.

Model specifications, correlation, and robustness analysis

The empirical link between CSR and financial performance is statistically tested using OLS regression. ROA data was tested for normality by the Kolmogorov-Smirnov test and the Shapiro-Wilk test. Since the sample is small the Shapiro-Wilk test is more significant, the test indicated the non-normality of the output (EU: ,084; ,000; ,000; ,000; ,000 - US: ,032; ,002; ,169; ,083; ,120, - p-value 0,05, see appendix D). Violating one of the OLS assumption commands to interpret the results with caution. To test H0, 10 regression are performed.

First, regressions are performed on the European sample, where after 5 regression are performed on the U.S. sample. To avoid problems of heteroscedasticity, robust standard errors are used in the regression. Multicollinearity was checked by correlation table 3 and 4, and the correlation heatmaps, which can be found in Appendix B. No strong correlations were found, a weak correlation was found for ESG with ROA. Despite the weak correlation values, some VIF values exceed the limit of 10 (Rev2015 – 11,116; RnD2016 – 12,271; RnD2017 – 15,571), which could be an indicator of multicollinearity. In this research robustness is checked for by first doing OLS regression on the European sample, followed by the OLS regression on the U.S. sample, with the additional variable of Advertising. Aiming at the R Squared of the models can’t be seen as convincing statistical evidence but can be seen as an indicator of how close the data fits the regression line. A closer view on

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R-squared showed that R-squared increases for model 1, 2, 4 and 5, see table 5 and 6. Furthermore the residuals have been controlled for heteroskedasticity, by plotting the Q-Q plots, no heteroskedasticity was found, appendix C.

Regression Analysis

The results of the multiple linear regression are presented in table 5 and 6. A total of 10 models are presented, the first 5 models regressed ESG score on ROA using data for 45 European public firms. The second 5 models regressed ESG score on ROA using data for 32 U.S. firms, with an additional variable of Advertising expenses.

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Specified in table 5, model 1-5 do not find a significant relationship between ESG and ROA. These findings on the European sample are not consistent with prior research (Tsoutsoura, 2004; Inoue & Lee, 2011; Ameer & Othman, 2012; Margolis & Walsh 2007). The results found, causes insecurity and question marks. There is no clear answer to those questions about the difference in outcome. One reason might be a difference in CSR measure, this research used ESG score, where some other research used KLD or surveys. Another reason could be a different set of control variables, which is hard to comprehend, since this research followed prior research and control variables are chosen carefully.

Furthermore Revenues, as measure of size, and R&D expenses, as measure of R&D intensity, also does not show any significant relationship. Remarkable is the insignificant relationship of R&D expenses with the dependent variable, since literature suggest and underscore the importance of this control variable (Andersen & Dejoy, 2011; Callan & Thomas, 2009). Only the leverage ratio D/E was found as a significant predictor of ROA in all 5 models, which indicates that risk is an important control variable.

In table 6 advertising is added as a control variable, measured in total expense on advertising reported in year reports. Model 6, 7, 8 and 9 report an insignificant relationship of ESG with ROA. The findings of model 10 show a positive significant relationship of ESG with ROA at a 5 percent level. Still findings are inconsistent with the literature in exception of model 10.

Size is still an insignificant control variable. The leverage ratio loses significance and is only significant in model 10 at 1 percent level. Moreover R&D intensity is still not of much value to the models. R&D now is significant in model 6 at a 5 percent level, but in model 7-10 it remains insignificant and is either positive or negative. The

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additional variable added to the regression Advertising is significantly negative in the models 6, 7 and 8. These findings might indicate the importance of advertising into the regression.

Conclusion

Modern society asks for a more inclusive way of thinking of corporations, a view where business and society are interwoven rather than distinct areas. Nowadays, corporations face challenges being held responsible for social issues, asking corporations to include CSR activities into their business strategies and daily operations. Although most corporations are more interested in their ‘primary’ responsibility, earning profits, an increasing number of corporations engage in CSR activities. Theories as the stakeholder theory, social contract theory and legitimacy theory try to identify why and how companies incorporate CSR. Researchers found ambiguous results researching the relationship between CSR and FP. The main objective of this research was to examine the link between CSR and FP concerning listed food and beverages companies.

This study performed an analysis on the relationship of CSR performance with financial performance, using two data samples, European listed F&B companies and U.S. listed F&B companies.. This industry was chosen, for reasons of high consumer awareness. CSR was collected from sustainalytics, an independent provider, in the form of an ESG score. Financial performance was measured on the accounting-based measure of ROA. Data was collected over a period of 5 years, ROA 2015-2019, ESG and control variables 2014-2018. A period of 5 years was chosen to investigate the relationship.

The results of this research are in contrast with prior research. The results did not show a significant relationship between CSR and FP, in exception of model the US 2018 market, in addition there is no statistical evidence to reject the H0. The results of this research showed ambiguous results and did not provide a significant relationship.

The results found were unexpected, engaging in CSR activities does not increase the financial performance. This might be due to the cost of engaging in CSR activities, this might indicate that engaging in CSR activities leads to higher revenues in time, but also increasing cost and does not cause a significant effect at the bottom-line. On the other hand, this research does not provide any significant evidence of a negative relationship between CSR and FP either. Corporate engagement in CSR activities does not affects the business in a negative way, at least that is in terms of financial performance.

Limitations and further research

This research is inconsistent with most of the literature in this field. Despite the models in this research were carefully conducted, this study is subject to some limitations. First, this study had to deal with a lack of data. Sustainalytics only provided ESG scores of 45 European listed F&B firms and 32 U.S, which limited this study. Since the dataset is relatively small, the models are sensitive to outliers. Moreover, the sample even more reduced

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in size, since data on ESG, R&D and Advertising was incomplete, since corporations are not obliged to provide those numbers, some values were missing.

In this research ESG score was used to measure CSR performance, this score is usually used as a measure of risk. Due to limited access to CSR performance measures, this score was used as measurement tool in this study. This study tried to address the problem of defining and measuring CSR. CSR is a dynamic concept and subject to subjectivity. Improving the results of this study asks for a narrower and more objective defined concept of CSR, so an improved objective measurement tool can be developed.

Another limitation is the problem of endogeneity, prior research suggested the possibility of a bidirectional relationship of CSR and FP (Waddock & Graves, 1997; Garcia-Castro et al., 2010). This study performed a regression with a lagged approach, to tackle the endogeneity problem. Unclear about the time-lagged approach is the question if CSR of previous years is an accurate measure for financial performance in the future. Future research might be better to include an instrumental variable to tackle the problem of endogeneity. Moreover, there might be omitted variable bias, control variables are carefully chosen based on existing literature. Future research should try to identify more significant control variables to create a more significant and inclusive. Additionally, this study might find some evidence of multicollinearity. Some of the VIF scores found in this study exceeds the boundary of 10, which could be an indicator of multicollinearity.

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U.S. sample

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Appendix B Correlation heatmap

European sample

U.S. sample

Appendix C

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U.S. sample

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Appendix D Normality test

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U.S. sample

The effect of Corporate Social Responsibility on Corporate Financial Performance within the food &amp; beverage industry.