The influence of CSR - CPA complementarity on CFP and the moderating effect of government dependence

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Master Thesis Business

Administration-Strategy

The influence of CSR - CPA complementarity on CFP and the moderating effect

of Government Dependence.

Author: Reinier Sombeek

Date: 23-06-2017

Student Number: 11421185

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1 Statement of originality

This thesis is written by student Reinier Sombeek who declares to take full responsibility for the contents of this document.

I declare that the information 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 Business and Economics of the University of Amsterdam is solely responsible for the supervision of completion of the work, not for the contents.

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In this study, the complementarity between Corporate Social Responsibility (CSR) and Corporate Political Activity (CPA), in relation to Corporate Financial Performance (CFP), is quantitatively tested for the first time. It is tested if these two nonmarket strategies combined (a nonmarket strategy is “a firm’s concerted pattern of actions to improve its performance by managing the institutional or societal context of economic competition” (Baron, 1995)) lead to higher corporate financial performance. Also, the complementarity of only positive CSR with CPA and only negative CSR with CPA was analysed. On the tested regressions, government dependency was tested as a moderator. The regression analysis did not show significant outcomes. CSR-CPA complementarity, positive CSR-CPA complementarity, and negative CSR-CPA complementarity were not found as a predictor of CFP. In none of these relations, government dependence was found to be a moderator. As this was the first time CSR-CPA complementarity was quantitatively measured and tested, the measurers and research design experienced several difficulties and limitations. This analysis of CSR-CPA complementarity with government dependence as the tested moderator suggests other, so far not theorised, factors, might influence the CSR-CPA complementarity - CFP relation. Future scholars can use this study to develop reasoning and testing of CSR-CPA complementarity and the factors surrounding it.

Keywords: Corporate Social Responsibility (CSR), Corporate Political Activity (CPA), complementarity, CSR-CPA complementarity, Government Dependence, Corporate Financial Performance (CFP), Nonmarket Strategy.

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1. Introduction

Corporate Social Responsibility (CSR) and Corporate Political Activity (CPA) can be considered two “nonmarket strategies” (Hadani & Schuler, 2013; Hond, Rehbein, Bakker, & Lankveld, 2014) as they are both strategies which are not directly aimed at the market a firm is active in. A firm’s CSR activity is argued to be political, because certain government tasks and responsibilities are taken over (Hond et al., 2014). Just like in CPA, this political

component of CSR might be used to influence the government in the firm’s advantage. Therefore, these two nonmarket strategies are expected to overlap each other to some extent (Lock & Seele, 2016; Mellahi, Frynas, Sun, & Siegel, 2016). The overlap between CPA and CSR suggests complementarities between the two nonmarket strategies might exist. However, possibly due to the uncoordinated ways nonmarket strategies are often developed, the

relationship between CSR and CPA and its consequences are frequently overlooked (Beloe & Harrison, 2007; Hond et al., 2014; ).

Nonmarket strategy is defined as “a firm’s concerted pattern of actions to improve its performance by managing the institutional or societal context of economic competition” (Baron, 1995). A growing amount of literature claims an effective implementation of nonmarket strategies can lead to positive organisational performance effects (Barney, Ketchen, Wright, McWilliams, & Siegel, 2011; Baron, 1995; Baron, 2001; Mellahi et al., 2016; Oliver & Holzinger, 2008). For example CSR, which is found to be positively related to financial performance on an organizational level by most scholars (Aguinis & Glavas, 2012;

Orlitzky, Schmidt, & Rynes, 2003). Thereby, financial motives are primarily found to be the reason of firms’ engagement in CSR activities (Aguinis & Glavas, 2012). Unlike CSR, no agreement on a positive or negative relation between CPA and CFP can be concluded from literature (Hadani & Schuler, 2013). However, scholars do generally agree that CFP

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5 improvement is the main objective for firms when engaging in CPA (Lux, Crook, & Woehr, 2011; Mitchell, Agle, & Wood, 1997; North, 1990).

In contrast to the well-developed individual nonmarket strategy literature, the combined CSR and CPA literature only recently has really started to develop (Anastasiadis, 2014; Hond et al., 2014; Lock & Seele, 2016; Mellahi et al., 2016; Rasche, 2015). Several scholars argue that alignment of CSR and CPA can have positive consequences, while non-alignment can turn out to be negative (Anastasiadis, 2014; Hond et al., 2014). Hond et al., (2014) theorise miss-alignment of CSR and CPA can result in reputation losses for a firm, while alignment can lead to complementarity resulting in reputation gains. Also Lock & Seele (2016) found that CPA-CSR alignment, in this article called "deliberative lobbying", can solve societal problems and have positive consequences for the firm’s reputation and

effectiveness of CSR and CPA (Lock & Seele, 2016). Related to positive reputation effects, is the creation of relations between the government and a firm that can result from CSR and CPA alignment. Consequently, alignment can positively influence particular government policy or enable the company to gain valuable information (Liedong, Ghobadian, Rajwani, & O’Regan, 2015). In the shared CSR-CPA literature, other scholars focus more on the ways the two can be complementary. For example, Hond et al., (2014) and Rasche (2015) who show various ways of how both strategies can solve negative consequences of the other, and therefore increase its individual effectiveness.

Despite the found importance of alignment and several ways CSR and CPA can be complementary, in practice, alignment is rarely found (Hond et al., 2014) or by some scholars alignment is not even found at all (Anastasiadis, 2014; Lock & Seele, 2016). This is due to the fact that CSR is still not considered to be helpful when performing lobbying activities

(Anastasiadis, 2014). However according to Hond et al. (2014), some firms do realise the possible advantages and take their CPA and CSR activities in a “shared scope”. This shared

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6 scope, meaning the mutual adaption of the CSR and CPA strategies, can enable the cross usage of gained resources from CSR and CPA practices. CPA’s and CSR’s effectiveness can be enlarged by the usage of the gained resources from these activities. As a result, managers will be able to improve the benefits resulting from the complementarities (Hond et al., 2014).

The benefits of CSR-CPA complementarity can vary across firms. This might be due to varying firm variables influencing the outcomes of CSR-CPA complementarity benefits (Hond et al., 2014). One of these factors might be an institutional factor like varying

dependence on the government. Firm dependency on the government, in this study seen as the level to which companies rely upon government contracts (Schuler, Rehbein, & Cramer, 2002), varies from one industry to another. Mellahi et al., (2016) state legitimacy within the institutional boundaries is essential for a firm’s growth. The CSR initiatives of a firm might enlarge its legitimacy and attractiveness to the government, as it helps the government with fulfilling its long-term goal of society well-being, through poverty reduction and protection of the environment (Albareda, Lozano, Tencati, Midttun, & Perrini, 2008; Marquis & Qian, 2013). While resource dependency theory (RDT) states CPA can change the environment, of which the government is an important one for government dependent firms, in the firm's advantage (Hillman, Zardkoohi, & Bierman, 1999). Therefore, RDT and legitimacy of firms might explain why increased efficiency of CSR and CPA resulting from complementarity, can have higher financial benefits for high government dependent firms than for low government dependent firms.

In summary, CSR and CPA's effectiveness is in literature theorized to increase due to crosswise complementarity effects. Apart from this, CSR and CPA its main goal is found to be the improvement of CFP (Lux et al., 2011; Mitchell et al., 1997; North, 1990). Following from RDT and political legitimacy, CSR-CPA complementarity is expected to be moderated by government dependence. This leads to the following research question of this thesis:

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Does CSR and CPA complementarity improve CFP and is this relation moderated by

a firm’s government dependence?

This study contributes to the academic literature by, for the first time, empirically testing the complementarity of the nonmarket strategies CSR and CPA, and its outcomes regarding CFP. Building on recent developed qualitative nonmarket strategy studies (Hond et al., 2014; Mellahi et al., 2016; Rasche, 2015), this study tests whether a combined nonmarket strategy, more specifically stated, a combined CSR and CPA strategy, can be complementary and lead to higher CFP outcomes. By testing this relation, a more comprehensive

understanding of the complementarity of CSR and CPA can be achieved, benefitting both the CSR and CPA fields of study (Mellahi et al., 2016). Besides, by testing the moderating role of government dependency, this study can contribute to the literature by increasing insight. Finally, by quantitatively testing CSR-CPA complementarity, a first research design to test complementarity can be developed, which can be used as a benchmark by future scholars. In this way, the difficulty of testing complementarity in this field of research will be diminished, leading to an increased amount of studies quantitatively testing CSR-CPA strategy

complementarity.

This paper is organised as follows: Chapter 2 provides a literature review and definitions of the core concepts of this study. Based on the literature review, the hypotheses are presented. In Chapter 3 the methodology of this research is presented, including the research design, sample selection, and the handling of validity concerns. Chapter 4 will describe the analyses of the study, followed by chapter 5 consisting of a discussion of the findings, the limitations and contributions of this study, and future research suggestions. This thesis will end with a general conclusion in chapter 6.

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8 Figure 1 Conceptual model of this thesis

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2. Theory and Hypotheses

In this chapter a literature review of the core concepts of this study, CPA, CSR, CSR-CPA complementarity, and firm‘s government dependence will be executed. Based on the reviewed literature, the hypotheses of this study will be introduced.

2.1 Corporate Social Responsibility and Corporate Financial

Performance

CSR in relation to CFP has been a widely studied concept for decades (Barnett & Salomon, 2012). This large amount of studies, and the evolving knowledge and interests of society in CSR in general, has led to a great variety of used definitions of CSR. Some scholars saw the concept from a resource perspective: “when a firm’s strategies include disbursing corporate resources through participation in social initiatives” (Godfrey, Merrill, & Hansen, 2009). While other scholars took a rather global scope for describing CSR: “an umbrella term that encompasses the policies, processes, and practices firms put in place to attend to societal

demands and/or expectations of the firm” (Mellahi et al., 2016). In this research the widely used definition of Aguinis, (2011) of CSR (Aguinis & Glavas, 2012; Rupp, Williams, & Aguilera, 2011), based on the “triple bottom line” (including social, environmental and

economic aspects) (Carter & Rogers, 2008; Elkington, 1994) is used, as it takes a broad

perspective of CSR and is focused on firm specific actions: “context-specific organizational

actions and policies that take into account stakeholders’ expectations and the triple bottom line of economic, social, and environmental performance.”

The fact CSR is being widely discussed means attention is paid to the concept, which is something positive. However, the scope of the concept is used in such a diverse manner, it might be put-upon as well. According to the European commission, “CSR is the responsibility of enterprises for their impacts on society and outlines what an enterprise should do to meet

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10 that responsibility” (European Commission, 2017). This statement shows that attention is paid to CSR on an international level. However, the way the European Union sees and defines CSR, leaves like many other CSR definitions a lot of space for industries, firms, and stakeholders to interpret and execute CSR activities differently (Hond et al., 2014).

Early CSR literature, led by Friedman (1970), argued that the only goal of firms is to maximize shareholder value. Therefore, the managers should only focus on the use of the firms’ resources to maximize profits for the firm (Friedman, 1970). Based on this reasoning, mostly negative relationships between CSR and CFP was found (Vance, 1975; Wright & Ferris, 1997). This changed in more recent literature, when more and more positive

relationships between CSR and CFP were found (Margolis, Elfenbein, & Walsh, 2009; Jo & Harjoto, 2012). Aguinis & Glavas (2012) conducted a literature study based on 588 journal articles and 102 books, to integrate knowledge on CSR. Based on this review a theoretical framework was introduced on all known CSR antecedents, moderators, mediators, and outcomes of CSR. The found mediators of CSR in relation to CFP on an institutional and organizational level included firm’s reputation (Brammer & Pavelin, 2006), improved customer loyalty (Maignan, Ferrell, & Hult, 1999), and improved evaluations of the firm and its products (Brown & Dacin, 1997; Ellen, Mohr, & Webb, 2000; Sen & Bhattacharya, 2001). Due to mainly the positive effect on firm reputation, an overall small but positive relation between CSR and financial outcomes on an organisational level was found (Aguinis & Glavas, 2012).

Although a positive relationship between CSR and CFP is often found nowadays (Aguinis & Glavas, 2012; Flammer, 2013; Jo & Harjoto, 2012; Margolis, et al., 2009;

Orlitzky et al., 2003), many scholars also find a negative relationship or no relationship at all between CSR and CFP (Barnett & Salomon, 2012). A common explanation for this is the

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11 difficulty in measuring CSR. The degree to which companies share information on their CSR activities, and the level of accuracy of the shared information significantly differs from firm to firm. Therefore, the used measurement levels of CSR have become an important aspect of CSR for many different stakeholders (Chatterji, Levine, & Toffel, 2009). The currently two most used CSR ratings are the Dow Jones Sustainability Index (DJSI) and the Kinder, Lydenberg, Domini Research & Analytics (KLD).

The often-found positive relation between CSR and CFP leads to companies engaging in CSR just to profit from the positive CFP effects. As a result, primarily financial motives in CSR engagement have been found to be the reason for firms’ engagement in CSR activities (Aguinis & Glavas, 2012; Orlitzky et al., 2003). This might not be a negative aspect per se. However, Mutti, Yakovleva, Vazquez-Brust, & Di Marco (2012), found Argentinian companies using a CSR message for their brand image without executing the promised benefits to communities. Therefore, I conclude that due to this often found mainly positive relationship between CSR activities and CFP, and the financial motives for engagement in CSR activities (Aguinis & Glavas, 2012; Orlitzky et al., 2003), the abuse of the CSR concept has become a constant threat.

2.1.2 Positive Corporate Social Responsibility and Negative Corporate Social Responsibility in relation to Corporate Financial Performance

In this thesis, the concept CSR is focused on actions of an organisation that takes

multiple stakeholder interests into account (Aguinis, 2011). However, in literature and

practice both positive and negative CSR activities can be identified (Bird, Hall, Momentè, &

Reggiani, 2007). From these negative and positive CSR actions, unequal perceptions and

reactions can result (Kang, Lee, & Huh, 2010). For example, a CSR study by Bird, et al.,

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firm performance found varying outcomes. These outcomes on different stakeholder groups

and positive and negative CSR, varied both in the effect size as the direction of impact in

relation to firm performance (Bird et al., 2007). Also, another study by Johnson (2003) found

that negative CSR, defined as “companies that act in an illegal or irresponsible manner”, hurt firms via decreased profits, while positive CSR performance did not increase the profits of a firm.

Taking these varying results between positive CSR activities and negative CSR activities into account, positive and negative CSR complementing CPA will be separated in

this thesis as well. In this way, it will be analysed whether the CFP effects vary between

positive CSR-CPA complementarity and negative CSR-CPA complementarity. In this thesis, like in other studies (Kang et al., 2010), positive CSR versus negative CSR is defined as the

positive or negative contribution to our general used CSR conceptualization: “context-specific

organizational actions and policies that take into account stakeholders’ expectations and the triple bottom line of economic, social, and environmental performance” (Aguinis, 2011).

2.2 Corporate political activity and corporate financial performance

CPA has been executed by firms for decades via participation in governments decision making (Epstein, 1969). These activities from firms can be complementary to other, market focused, activities that firms invest in (Baron, 1995; Baron, 1997). However, a limited amount of other attractive investment options is argued to be the reason for firms to engage in CPA as well (Lux et al., 2011). In general, CPA is not studied as often as CSR because it is seen in many countries as a generally accepted activity with relatively low impact (Hond et al., 2014). However, in recent years, concerns have grown about “firms crossing the line between

legitimate participation in democratic decision making and the opportunistic pursuit of self-interest” (Hond et al., 2014). In CPA literature, scholars find rather contradictory results

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13 whether CPA is positive, negative or neutrally related to the financial performance of a firm (Hadani & Schuler, 2013).

Just like the triple bottom line of CSR, CPA is a concept that consists of several

components. In early literature, two main components are often identified. These two main

components are called buffering and bridging (Blumentritt, 2003; Meznar & Nigh, 1995), or terminology with a similar meaning. Political bridging, also called non-bargaining behaviour by Boddewyn & Brewer (1994), consists of a firm’s efforts to track government regulation

and developments. Tracking the government regulation will allow a firm to anticipate on

changed legislation of the government. In this way firms will be less affected by the changes

in government legislation (Blumentritt, 2003).

Political buffering, or bargaining activity (Boddewyn & Brewer, 1994), is the more

proactive component of CPA. When firms are participating in buffering activities they try to

influence government regulation in their advantage. This buffering is actively done by firms

through lobbying, providing information and making contributions to campaigns, or political

action committees (Blumentritt, 2003). This active form of CPA is the one that will be

assessed in this research. Therefore, in this thesis CPA is defined as “the firm's policies, processes and practices that are intended to influence governmental policy or process” (Hond et al., 2014).

Studies on CPA often assume improved firm performance as the main objective when engaging in lobbying (Lux et al., 2011; Mitchell et al., 1997; North, 1990). Besides, improved financial performance is assumed to be the outcome when firms engage in CPA (Bonardi, Hillman, & Keim, 2005; Hillman, Keim, & Schuler, 2004). This reasoning is based on the best intentions and knowledge of managers in their decision-making process to maximise firm’s financial returns (Hadani & Schuler, 2013). According to the RDT, firms are motivated to engage in CPA if they depend on the government (Hillman et al., 2004; Hillman et al.,

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14 1999; Schuler et al., 2002). It can reduce possible negative effects and/or can ensure decision making from the government in the interest of the firm, resulting in positive firms’ financial performance effects (Blumentritt, 2003; Meznar & Nigh, 1995). Therefore, the managing of these political factors through CPA is said to be positively related with CFP (Baron, 1995; Baron, 1997; Lux et al., 2011).

In contrary, various studies also found a negative relation between CPA and CFP (Aggarwal, Meschke, & Wang, 2012; Coates & John, 2010; Hadani & Schuler, 2013). First, Lux et al., (2011) argue negative reputation effects can result from contributions to political action committees (PAC). These negative reputation effects from the public, occur due to the shady and non-transparent ways these contributions are often given. Second, information asymmetries are created due to the difficulties in reporting and checking of CPA (Chaney, Faccio, & Parsley, 2011; Hadani, 2012; Yu & Yu, 2011). Often, CPA spending is not reported in annual reports. This information asymmetry is regularly linked to moral hazards and a rise in agency costs (Igan, Mishra, & Tressel, 2012). Third, next to the information asymmetries, both accounting and market performance are argued to suffer from CPA (Hadani & Schuler, 2013). Using agency theory to explain this, they argue senior managers are overconfident and take too big risks when their firm participates in CPA. They believe failures or bad

performance will be covered with help of the government. Besides, the CPA investments are often chosen over more lucrative market investments (Bonardi, 2008). Therefore, CPA does not add something to the company, but rather replaces other possible resources that can be acquired. Fourth, CPA is often not profit-driven by managers. Rather, these managers are found to engage in CPA to higher their self-esteem, imitate other managers or they engage in CPA because of personal beliefs (Hadani & Schuler, 2013).

Unlike CSR, CPA is not generally agreed on to be positively, negatively or neutrally related to firm performance. However, a link with firm performance, either direct or indirect,

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and positive or negative, has been found often (Lux et al., 2011; Aggarwal, Meschke, & Wang, 2012). Therefore, I conclude CPA does influence firm performance.

2.3 CSR-CPA complementarity and Corporate financial performance

Having defined the positive relation of CSR with CFP, and the varying results of CPA influence on CFP, I next argue CSR-CPA complementarity can increase the effectiveness of both nonmarket strategy components resulting from several complementarity benefits.

Resource complementarity is defined as two resources that “are not identical, yet they complement each other”, thereby creating synergistic benefits (Harrison, Hitt, Hoskisson, & Ireland, 2001). As both CSR and CPA create resources, a shared scope can enable the cross usage of gained resources from CSR and CPA practices. This cross usage can enlarge CPA’s and CSR’s effectiveness (Hond et al., 2014). Since both CPA and CSR are initially intended to enlarge CFP (Lux et al., 2011; Mitchell et al., 1997; North, 1990), I argue an increased effectiveness of both individual nonmarket strategies will result in a higher CFP due to various possible benefits. Hond et al., (2014) theorize CSR and CPA complementarity can result in reputation gains or, if not aligned, in reputation losses for a firm. Besides, also first mover advantages (Marquis & Raynard, 2015) and replacement of firms political- versus

social strategies and vice versa (Mellahi et al., 2016) are theorised to be mediators in the CSR-CPA complementarity - CFP relation. In the section below the potential synergies from CSR – CPA are described in more detail.

CSR can create firm resources and effects like contact with specific politicians, positive reputation effects, and more transparent and social governance (Anastasiadis, 2006; Hond et al., 2014; Wang, 2011; Yaziji, 2004). These gained resources can be used by firms when performing CPA. Firstly, easier gained contact with politicians is in CPA already a resource which is very valuable (Bonardi, 2011). This can create a competitive advantage

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16 through influence on legislation and it is necessary if coalitions with politicians and other political players must be build (Hond et al., 2014; Schuler et al., 2002). Secondly, CSR creates positive reputation effects among politicians and within society (Wang, 2011).

Therefore, politicians will have no problems being associated with the firm (Wang, 2011) and strict supervision and regulations for the firm will be perceived unnecessary. As reputation is

extremely important when performing CPA (Anastasiadis, 2006), CSR can be very helpful

when performing CPA. Thirdly, CPA is argued to become to dominant sometimes and lead to increased agency costs and information asymmetries (Igan et al., 2012). Therefore, a need for controlled regulation of its practices is advocated for (Rasche, 2015). Often transparency of governance practices is very limited and cannot be well regulated (Rasche, 2015). Due to the goal of CSR to favour various stakeholders that are involved (Rasche, 2015), a more social way of decision making and corporate governance might result from CSR. This is because incorporating multiple stakeholder groups into the decision-making process is an important part of CSR practices (Rasche, 2015). Lastly, this contact leads to more knowledge and a more varied view on specific topics (Rehbein & Schuler, 2015; Schuler & Rehbein, 2005).

The increased knowledge leads to more thoughtful and powerful points of view in politics, which enlarges the efficiency (Hond et al., 2014).

CPA in its turn can also create resources and effects like, contact with politicians, possibilities to change government regulation, and insight about relevance of CSR actions (Hond et al., 2014; Peterson & Pfitzer, 2009; Rasche, 2015). CSR can profit from these activities in several ways. First, the legitimacy of firms raises through CSR (Bachmann & Ingenhoff, 2016). CPA can use, and enlarge these legitimacy effects from CSR (Caulkin & Collins, 2003). In contact with politicians more information about a specific project can be

shared and commitment on CSR can be emphasized. In this way, the firm proves it is not just

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Secondly, CSR activities can be achieved with CPA, without a firm performing CSR activities

itself (Rasche, 2015). Rasche (2015) illustrates this with an example of Levi’s. Motivated by the US government, Levi’s and its suppliers in Guatemala lobbied by the Guatemalan government to enforce labour laws. This ultimately resulted in better working conditions for

Guatemalan workers. Next to positive CSR results, the lobbying for government regulations

can ultimately result in significant cost raisings for competitors, improving the competitive

advantage of other firms as well (Hond et al., 2014). Finally, since CSR, is such a broad

concept, a lot of possible CSR activities can be picked. Through contact with politicians,

managers get a better idea of what socially responsible activities are relevant and will be

picked up by media and politics. As managers are often not up-to-date of socially ‘trending’

topics, contact with politicians might help firms to pick a CSR activity that is noted and found

to be relevant by society (Hond et al., 2014).

In summary, I conclude resources gained from CPA can be used to increase CSR

effectiveness. Similarly, CPA can profit from resources gained from CSR and enlarge its

efficiency. This increased effectiveness is expected to eventually lead to a higher CFP.

Therefore, the first hypothesis of this study is:

H1A: CSR-CPA complementarity will result in higher CFP

So far, CSR-CPA complementarity has been mostly argued around the positive

performed CSR actions of firms. The gained resources and effects like information about specific politicians, positive reputation effects, and more transparent governance are all due to positive performed CSR activities (Anastasiadis, 2006; Hond et al., 2014; Wang, 2011; Yaziji, 2004). These effects in combination with CPA are argued to result in positive performance effects in the argumentation around H1A. Taken this reasoning based on positive CSR

activities, also positive CSR-CPA complementarity is expected to be positively related to

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18 H1B: Positive CSR-CPA complementarity will result in higher CFP

In contrary to positive CSR activities, negative CSR activities have not been

extensively elaborated on. Next I will argue why negative CSR-CPA complementarity is also

expected to be positively related to CFP.

Negative CSR might result in problems meeting government regulations, and in

decreased legitimacy of the firm. These effects from firms negative CSR activities might be

decreased by resources gained from CPA (Cho, Patten, & Roberts, 2006). First, the gained

resource to influence certain regulations (e.g. work conditions, low polluting machines).

These regulations might be socially responsible and benefit firms that are already meeting the

regulation, resulting in significant cost for competitors who do not meet the regulations (Hond

et al., 2014). However, CPA can also be used to influence regulations in a non-socially

responsible way and with that cover up for their negative CSR performance (Rémi Bazillier &

Vauday, 2014). In this way, CPA can be complementary to negative CSR.

Second, the increased legitimacy gains of firms due to CPA (Caulkin & Collins, 2003)

can be used for negative CSR as well. If firms score low on CSR activities, connections with

politicians might very well be used to decrease the effects of the negative CSR performance.

Increased government supervision and reputation damage from this negative CSR can be

prevented via CPA. In this way, the goal of CPA and CSR can be the same and therefore lead

to lower CSR activity of a firm to reach the same goals (Cho et al., 2006; Hond et al., 2014).

All in all, gained resources from negative CSR activities can be used to reduce

competitive disadvantages, increased government supervision or negative reputation effects

performance. Taken this reasoning, hypothesis 1C is the following:

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2.4 Government dependence

Besides the economic and competitive characteristics surrounding a firm, governments can also influence a firm’s financial performance (Hillman & Hitt, 1999). By issuing laws and regulations of products or production externalities, enlarging or diminishing government purchases, creating entry and exit barriers in the market a firm is active in, and by raising or lowering taxes on specific products, firms' environments, processes and products can be significantly influenced (Gale & Buchholz, 1987). This government influence can result in large positive or negative effects. Therefore, the government is seen as source of uncertainty in a firm’s environment (Jacobson, Lenway, & Ring, 1993; Picard, Boddewyn, & Soehl, 1988).

Government dependency is very often reviewed based on RDT. RDT in relation to government dependency, states that firms have more interest in managing the government to ensure their revenues when there is more dependency (Hillman et al., 1999; Meznar & Nigh, 1995; Schüler, 1999). Besides, when firms are more influenced by government regulations it is found to be more beneficial to enrol CPA actions (Hadani & Schuler, 2013). Therefore, especially in relation to CPA, RDT can explain firm behaviour and the choices they make to financially perform better (Hillman et al., 2004). However, also financial performance benefits from CSR actions of firms might be positively moderated by government

dependency. RDT can explain the moderating effect effects of CSR actions through mostly legitimacy reasons (Mellahi et al., 2016).

In literature, not many clear definitions of government dependency are given. Schuler et al., (2002) use the RDT to test the relation between influence of dependency of firms on the federal government and the likeliness of combining political tactics. As government

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20 dependency: “companies that rely upon government contracts as a significant part of their revenues” (Schuler et al., 2002).

2.4.2 CPA and government dependence in relation to CFP

RDT talks about managing the environment a firm is dependent on (Hillman, Withers, & Collins, 2009). Therefore, the application of RDT to government dependent firms, points to political activity. As a result, government dependence is often found to be an important predictor of CPA (Hansen & Mitchell, 2000; Stigler, 1971; Zardkoohi, 1985).In addition, Hillman and Hitt (1999) argue higher government dependent companies are more likely to engage in longitudinal CPA activity, than firms that are less dependent on the government. According to them, the reasons for these dependent companies to engage in CPA, is to stabilise and preferably enlarge the financial performance of the company. This can be done through influencing the environment, of which the government is an important one for government dependent firms, in the firm's advantage (Hillman & Hitt, 1999). Since the government has the ability to largely influence markets by its acquisitions and legislation (Hillman & Hitt, 1999), influencing them by creating and keeping access to politicians may be the first priority for firms that are politically active (Grenzke, 1989; Hillman et al., 1999). In this way future contracts can be signed and future revenues can be ensured or even enlarged (Hadani & Schuler, 2013).

Also, partnerships like joint ventures and alliances can be argued to be in some way similar to CPA. Alliances with strategic partners are often founded to protect investments and a firm’s operations, but also generate access to important stakeholders (Dorobantu, Kaul, & Zelner, 2017). For government dependent firms, these alliances are realised through CPA. In this CPA, the important stakeholders are the politicians, and the protection of operations dependent on government contracts is the goal (Dorobantu et al., 2017). Through contact with the politicians, more value can be captured from government spending and subsidies,

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21 resulting in more operations for the firm and ultimately higher firm value (Faccio et al.,

2006).

2.4.3 CSR and Government dependence in relation to CFP

Also in the relation between CSR and CFP, government dependence can be argued to be a moderator. This moderation is expected to be mostly realised through the creation and enlargement of political legitimacy. Political legitimacy is defined “as the extent to which the government views the firm’s actions as being in accordance with norms and laws” (Marquis & Qian, 2013). Quite often financial performance is partially dependent on the acquisition and allocation of resources that are not directly owned by the company. Instead, the resources that can lead to increased financial performance, are owned by other stakeholders (Salancik & Pfeffer, 1978). As political legitimacy is argued to result in more access to resources owned by the government (Hillman, 2005), it can be seen as a strategic resource for a firm (Marquis & Qian, 2013). Increased access to government resources resulting from this legitimacy is realised through created “network connections to national political congresses (Hillman, 2005), political legacy (Marquis & Huang, 2010) , and financial resources (Marquis & Qian, 2013)”. All in all, Marquis and Qian (2013) conclude that no general conclusions can be drawn whether firms have increased concern in using political legitimacy to create resources. Instead, this is dependent on a firm’s specific situation. Based on RDT reasoning, government dependent firms have more interest in creating legitimacy through CSR activities. This is due to the higher benefits that can be gained from increased legitimacy due to firm’s dependence on the government (Wang, 2011) and the argued importance of legitimacy within the

institutional boundaries to realise firm’s growth (Mellahi et al., 2016).

In addition, also goodwill and increased cooperation effects can result in higher firm reputation (Hond et al., 2014) and therefore, lead to positive performance effects. According to stakeholder theory, CSR activities favouring various stakeholders create goodwill effects.

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22 The created goodwill and enlarged reputation creates a higher need for identification with the firm by stakeholders (Dutton, Dukerich, & Harquail, 1994),resulting in more cooperation (O'Reilly & Chatman, 1986; Organ, 1988). Hond et al, (2014) argue this also accounts for politicians, who will be more interested to be linked to firms that enrol CSR activities.In the long run goodwill amongst, and therefore cooperation with stakeholders, can result in positive performance effects (Schuler et al., 2002). CSR is expected to favour government dependent firms more than low government dependent firms. This is because CSR favours their most important stakeholder to help the government with fulfilling its long-term goal of society well-being, through poverty reduction and protection of the environment (Albareda, Lozano, Tencati, Midttun, & Perrini, 2008; Marquis & Qian, 2013). Therefore, higher positive firm performance effects are expected to happen for government dependent firms due to their CSR activities.

2.4.4 CSR-CPA complementarity and government dependence in relation to CFP

Since CSR-CPA complementarity is a relatively immature field of research, so far, no studies can be found on the moderating role of government dependence on CSR-CPA

complementarity in relation to CFP. Therefore, based on the individual moderating role of government dependence in the CSR-CFP relation and CPA-CFP relation, government dependence is argued to positively moderate the CSR-CPA complementarity - CFP relation.

As stated in the reasoning to hypothesis 1A, CSR can create e.g. new contacts with stakeholders due to more transparent governance and information about politicians that CPA can profit from (Hond et al., 2014; Peterson & Pfitzer, 2009; Rasche, 2015). These

complementarity effects might increase with higher government dependence of a firm. The effects of new contacts with stakeholders and information about politicians (Hond et al., 2014) is expected to be enlarged for high government dependent firms. For firms that traditionally generate a large part of their revenues from these government contracts,

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23 politicians are one of the most important stakeholders. More contact with the most important stakeholders often has the goal to ensure the protection of operations (Dorobantu et al., 2017). As a result, through contact with the politicians, more value in terms of government contracts can be realised (Faccio et al., 2006).

Next to created resources that CSR can create and that are strengthened by government dependence, CSR can also profit from created resources by CPA. These resources contain information about government legislation and specific processes, and contact with politicians. Government dependence is expected to enlarge the benefits of these resources. As stated above, increased contact with the most important stakeholders is often done to protect operations (Dorobantu et al., 2017). Therefore, as the government is one of the most important stakeholders for high government dependent firms, they might profit more from contacts, next to the already mentioned contact with politicians, that are created through CPA. Besides, the resources gained from CPA can increase the firm’s legitimacy in two ways. Firstly, CSR activities are expected to be, both politically and socially, increasingly relevant due to contact with politicians resulting from CPA (Hond et al., 2014). Secondly, information about government processes and government legislation can result in increased legitimacy (Oliver & Holzinger, 2008). These two outcomes of CPA resources will enlarge the credibility of the CSR activities and strengthen the ties with the government even more, resulting in more legitimacy for the firm (Hond et al., 2014; Oliver & Holzinger, 2008). As argued before, RDT reasoning results in expected increased effects from this information about government processes and legislation due to government dependency (Wang, 2011).

Taken the reasoning above, it is expected that government dependence will lead to an increase in the efficiency effects of CSR and CPA due to complementarity of CSR and CPA. Therefore, I expect government dependence to positively moderate the CSR-CPA

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24 H2A: The CSR-CPA complementarity - CFP relation is positively moderated by

government dependence.

To determine whether government dependence will also be a moderator for positive CSR-CPA complementarity and negative CSR-CPA complementarity, I next examine if the specific resources gained from positive CSR and negative CSR might be influenced by government dependence as well.

The new contacts with important stakeholders and the information about politicians, resulting from positive CSR can be strengthened by government dependence. The mentioned arguments on contact with politicians and other important contacts within the government can also be applied to positive CSR. Therefore, the contact with politicians and other contacts within the government, resulting from CSR will lead to more government contacts (Faccio et al., 2006).

The expected effect from negative CSR-CPA complementarity activities that might be

enlarged due to government dependence is the reduced harm from decreased legitimacy due

to negative CSR ((Hond et al., 2014). As stated before, firms might face fewer legitimacy

problems from negative CSR due to CPA, as it strengthens the ties with the most important

stakeholders (politicians) (Hond et al., 2014). Based on RDT, legitimacy reasoning is expected to result in higher benefits for firms that have a higher dependence on the government (Wang, 2011). Therefore, the reduction of legitimacy losses due to resources gained from CPA is expected to result in higher benefits for government dependent firms.

The reasoning above, leads to the expectation that also positive CSR-CPA complementarity and negative CSR-CPA complementarity are moderated by a firm’s government dependence. This results in hypothesis 2B and 2C of this thesis:

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25 H2B: The positive CSR-CPA complementarity - CFP relation is positively moderated

by government dependence.

H2C: The negative CSR-CPA complementarity - CFP relation is positively moderated

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26

3. Methodology

This chapter will describe the research design of this study, including the overall design, information sources to use and estimated sample size of the study.

3.1 Global methodology of this study

This study will be a deductive study based on secondary data, collected from various databases. A master thesis research team will collaborate to create a collective database with information of CSR, CPA data of US firms. The primary database for raw CPA data will be found on www.opensecrets.org (Opensecrets, 2017). For the measurement of CSR activities, the Wharton database KLD Research & Analytics (Wharton, 2017) will be the primary source of raw data. CFP data will be collected from Compustat. The data of government spending to determine a firm’s government dependency will be collected from government fiscal year reports.

3.2 Methods Sample and Data Collection

The initial data collection included 595 major firms that were located in the US in 2012. The firms were purposively picked based on their attendance in the annual Fortune 1000 list which is composed by the “Fortune” magazine. This list is picked as firm size is found to be the most important predictor of CPA (Hillman et al., 2004), while CSR scores are mostly given for larger US firms, and most large firms are obligated to publish annual reports due to their stock market listing. Fortune is thé known ranker of the largest US firms, based on the firm’s annual revenues. Therefore, the use of the Fortune 1000 list was used. Picking almost 600 samples from the Fortune 1000 list ensures a good representation of large US firms from various industries that are active in both CSR and CPA.

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27 Several found companies were taken out of the sample population because of their incomplete attendance in one or multiple databases over the years 2012 to 2015. Reasons for this are mergers or acquisitions, bankruptcy, or various other reasons. After the data

collection, the final sample consisted of 528 firms. This is a median sample size compared to other CPA and CSR studies (Hadani & Schuler, 2013; Tang, Hull, & Rothenberg, 2012).

3.3 Variables and Measures

3.3.1 Dependent variable

Corporate financial performance. In this study corporate financial performance

measured as the Tobin’s Q. The well-known Tobin’s Q is used to minimize the influence of various used accounting techniques (Hasan, Kobeissi, Liu, & Wang, 2016). Tobin’s Q is calculated by the book value of assets minus the sum of book value of equity and market value of equity, divided by the book value of total assets. This data over the years 2012 to 2015 will be collected from Compustat.

3.3.2 Independent variables

Corporate social responsibility will be measured by scores from the widely known

and used KLD scores (Hasan et al., 2016; Hillman & Keim, 2001; Waddock & Graves, 1997) collected from the Wharton Research Database (Wharton, 2017). Based on various

information sources, the KLD ratings show a firm’s CSR performance on 8 global topics: corporate governance, diversity, community, environment, employee relations, human rights, controversial business involvement, and product quality. For each of these topics, strengths indicators (positive CSR) and concerns indicators (negative CSR) are separated.

Corporate political activity will be measured as the number of lobbying reports per

issue of firm’s lobbying activities. Lobbying disclosure reports will be used to collect lobby spending per issue (Baumgartner & Leech), 2001). The number of reports per issue will show

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28 how active firms lobby on specific topics. This includes both direct lobbying as indirect lobbying via other organizations. This data is taken from www.opensecrets.org (Opensecrets, 2017). In this study, I have looked at the number of reports on the following issues:

accounting, advertising, civil rights/civil liberties, clean air & water (quality), consumer

product safety, copyright/patent/trademark, environmental/superfund, labor

issues/antitrust/workplace, natural resources, waste.

This operationalization of CPA is picked since no other CPA measures are available that can trace back lobbying activity to a specific issue. With this measurement possible CSR-CPA complementarities on specific topics can be identified.

CSR-CPA complementarity. Having specified on what specific CPA issues and KLD

indicators data will be collected. The measurement of complementarity consisting of these measurement levels must be defined. In literature, measuring complementarity is talked about a lot, but “often remains ill-defined” (Cassiman & Veugelers, 2006). Milgrom & Roberts (1990) introduced the mathematical theory “supermodularity” on which the measurement of complementarity in this thesis is based. Cassiman & Veugelers (2006), describe this as follows: “Suppose there are 2 activities A1 and A2, each activity can be done by the firm (Ai

= 1) or not (Ai = 0) and adding an activity i ∈{1, 2}, while already performing the other

activity has a higher incremental effect on performance (Π) than when doing the activity in isolation.”.

In this thesis the CSR-CPA complementarity is measured as the degree to which firms are active in both CSR and CPA. This is measured as the sum of the dummy variables of all the comparable issues data is collected on (e.g. CPA issue Clean air & water is combined with KLD indicator Pollution prevention) (see Table 12 in appendix 1). A complementarity score (1,1) means the company showed activity on a CPA issue ánd got a score on a KLD indicator

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29 that concern a similar topic. While a score of 0,0;1,0;0,1 means a firm is not active on one, or not active on both a KLD indicator and a CPA issue that are comparable (Table 12).

Because KLD indicators, are only defined as a 1 or 0, the level of complementarity will be limited to a variable measuring complementarity (1,1), reverse complementarity (1,0 or 0,1) or no activity (0,0).

Positive CSR-CPA complementarity. This form of complementarity will be measured

similarly to CSR-CPA complementarity with a 1,1; 1,0; 0,1; 0,0 score. The only difference is the taken KLD score that is used to measure CSR. As the KLD indicators are separated in “strengths” and “concerns”, only the KLD strengths are used in combination with CPA to measure positive CSR-CPA complementarity (Table 12 in appendix 1).

Negative CSR-CPA complementarity. This form of complementarity will be similarly

measured as positive CSR-CPA complementarity. However, only the KLD concerns indicators will be included in the complementarity score (Table 12 in appendix 1).

3.3.3 Moderator variable

Firm’s government dependence. To measure government dependence I use, like many

other studies, the total value of Defense contracts in dollars with the US government, divided by the total value of sales of the firm in dollars (Hansen & Mitchell, 2000; Schuler et al., 2002). In this way government dependence cannot be influenced by the size of the firm. This data was collected from government fiscal year reports.

3.3.4 Control variables

As CFP and CPA can be affected by many factors within a firm, control variables are included in this research. In this way, I ensure that the actual outcomes are due to CSR-CPA complementarity. I control for three firm characteristics that have a proved relationship with firm’s profitability: firm size (Hadani & Schuler, 2013), firm performance (Brown, 2016) and

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30 firm leverage (Campello, 2006). Therefore, the five control variables in this thesis are: logged

number of revenues, logged number of employees, return on assets, EBITA, and leverage

ratio.

Logged number of revenues is measured as the average amount of logged revenues

over the years 2012-2015.

Return on assets is measured as the average net income over the years 2012-2015.

Logged number of employees is measured as the average number logged employees

over the years 2012-2015.

EBITA is measured as the average net sum of sales minus the cost of goods sold minus

selling, general & administrative expense over the years 2012-2015.

Leverage ratio is measured as the average total liabilities / book value per share times

the common shares outstanding over the years 2012-2015.

3.4 Limitations of the research design

A limitation of this research design is that a firm’s lobbying spending lower than $20.500 over six months is not reported (Baumgartner & Leech, 2001), and therefore not accounted for in this research. Thereby, this measurement tool of issues has been used and recognized widely in CPA literature (Hillman et al., 2004; Mahoney, 2007). A second limitation of this research is the measurement of CPA and CSR complementarity on a specific issue. Coupling the various KLD indicators with a specific CPA issue remains difficult as the

conceptualization of the CPA issues is not comprehensively defined. Another limitation in this research design, is the measurement of CPA and CSR in number of reports per issue and KLD scores, rather than money spent on CPA and CSR. As I only measure the number of reports on a specific issue, instead of the amount of money spent on lobbying for a specific

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31 issue, differences in spending might remain undiscovered. Still, this measuring technique includes both direct and indirect lobbying actions and is therefore expected to give a reliable overview of lobbying activity per issue. The total value on lobbying just like total money spent on CSR activities are less relevant in this research due to the focus on complementarity of CSR and CPA rather than their individual effectiveness. Lastly, the creation of the CPA database by a team of eight researchers might be a limitation of this research. Since every researcher has to collect a part of the database, measurement errors might occur in the database. To minimize these errors the interrater reliability will be checked by measuring the agreement on ten randomly picked companies among four pair of researchers (McHugh, 2012). In this way, possible measurement errors due to different interpretations of data from researchers is minimized.

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32

4. Analysis

In the following part, complementarity of corporate social responsibility (CSR) and

corporate political activity (CPA), in relation to corporate financial performance (CFP) will be tested. In this relation, firm’s government dependency, will be measured as a moderator. The dependent variable CFP is measured in Tobin’s Q. The independent variable CSR-CPA complementarity is the degree to which firms are active in both CSR and CPA. The variables positive CSR-CPA complementarity and negative CSR-CPA complementarity are measured by only using the by the Wharton database (Wharton, 2017) specified KLD strengths or KLD concerns in combination with CPA. The moderator government dependency is measured as the total amount of sales to the government divided by the total sales of the company. In all the variables, an average over the years 2012-2015 is used.

4.1 Analytical strategy

Before the analysis of the hypotheses, a frequencies check was done on KLD scores. As expected, varying N amounts were found in the KLD scores due to missing data. The KLD scores “financial system instability” (year average N=33.5) “recycling” (year average N= 16.5) and “benefits to economically disadvantaged” (year average N=47.5) were not included in the created dummy variable that measured CSR-CPA complementarity per year on a specific issue (ISSUE.COMPLEMENTARITY.YEAR), as they had an average N lower than 50. Missing data from the KLD scores were pairwise excluded. Pairwise exclusion of these variables is chosen as complementarity (1,1) on a specific issue could still be achieved via complementarity of another KLD scores with the same CPA issue (Table 12). This resulted in no missing data on (the above mentioned) CSR-CPA complementarity indicators. In contrary, missing data on government dependence and Tobin’s Q were listwise excluded, as these dependent variables are essential in the regression analysis. Also, the control variables return

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33 on assets, logged revenues, leverage ratio, number of logged employees, and EBITA were listwise excluded.

To insert a complementarity score into the regression, a dummy variable had to be created. Therefore, recoding was done for the complementarity measure per category. As reasoned in the literature part, reverse complementarity (meaning activity on either CSR or CPA but not on both), might result in negative CFP effects (Hond et al., 2014). Therefore, the inclusion of negative complementarity score in the regression was desirable and could be measured as described in the paragraph above. However, several missing values on the KLD indicators were noted, and no full certainty exists that all relevant CSR and CPA variables were included in the database. This leads to the conclusion that including a negative score (-1) for reverse complementarity (0,1 or 1,0) would largely decrease validity. Therefore, next to complementarity and no activity, no negative score for reverse complementarity was included. A complementarity score (1,1) was recoded to a score of 1. Reverse complementarity

(1,0;0,1) or no activity (0,0) were recoded to a score of 0.

After the creation of a dummy variable of complementarity per issue, a variable measuring the average complementarity score of all the issues over the years 2012-2015 was created (AVTOTCOM), as well as the average complementarity score on KLD strengths score and KLD concerns score (TOTAV.COM.STR, TOTAV.CON.COM). In this way complementarity on positive CSR and complementarity effects to reduce negative CSR was separated.

With these created variables, and Tobin's Q (AV.TOBQ), government dependence (AV.GOVDEP), logged revenues (AV.LOGREV), return on assets (AV.ROA), leverage ratio (AV.LEV), number of logged employees (AV.LOG_emp), and EBITA (AV.EBITA), a descriptive statistics and a correlation analysis was performed (Table 1

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34 and Table 2). Mostly on Tobin’s Q missing data was found. Therefore, a total N of 454 could be used in the hypotheses testing.

Table 1 N, mean and standard deviation

Table 2 Correlations 1 2 3 4 5 6 7 8 9 Total complementarity KLD strengths complementarity .925** KLD concerns complementarity .934** .731** Tobin’s Q _-.74 _-.072 _-.059 Government Dependence -,31 -.003 -.053 -.68 Logged revenues _{.384** .343** .368**} _-.003 _.010 Return on assets _-.072* _-.021 _-1.07* _.537** _.012 _.125** Leverage _-.014 _.007 _-.032 _-.023 .137 ** .017 -.011 Logged employees _{.224** .236** .180**} _.126** _.056 _.590** _.198** _.029 EBITA _{.231** .187** .239**} _.177** _{-.029 .479**} _.096 _-.043 _.245** *Correlation is significant at p < .05 **Correlation is significant at p < .01 N M SD Total complementarity ₅₂₈ _,6187 _1,1087 KLD strengths complementarity ₅₂₈ _.3122 _,5734 KLD concerns complementarity ₅₂₈ _.3098 _.6205 Tobin’s Q ₄₅₇ _1,3369 _,9266 Government Dependence ₅₂₈ _,0143 _,0774 Logged revenues ₅₂₈ _4.0738 _.4514 Return on assets ₅₂₈ _,0464 _,0662 Leverage ₅₂₆ _4.8018 _28.019 Logged employees ₅₂₃ _1.3939 _.5439 EBITA ₅₂₈ _3294.3 ₈₃₀₅

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35 To test the moderating effect of government dependence on the relation between CSR-CPA complementarity, positive CSR-CSR-CPA complementarity, and negative CSR-CSR-CPA

complementarity, the used scores had to be standardized. Therefore, before performing an Andrew Hayes model 1 interaction analysis, the following variables were transformed into Zscores: government dependence (ZAV.GOV), total complementarity (ZCOM.ALL), KLD strengths complementarity (ZCOM.STR), KLD concerns complementarity (ZCOM.CON), and Tobin’s Q (ZTOBQ), logged revenues (ZLOGREV), return on assets (ZROA), leverage ratio (ZLEV), number of logged employees (ZLOGemp), and EBITA (ZEBITA).

4.2 Hypothesis analysis

H1A: CSR-CPA complementarity will result in higher CFP

A hierarchical multiple regression was performed to investigate if the total average complementarity between CSR and CPA can predict the CFP of a firm. In this test, return on assets, logged amount of revenues, leverage ratio, number of logged employees, and EBITA was controlled for. The control variables were entered at the first step of the hierarchical multiple regression. This model was statistically significant F (5, 445) = 39,05; p < .001 and explained 3.1% of variance in Tobin’s Q. In the second step, the total average

complementarity (TOTAV.COM.ALL) was entered. This model was significant as F (6, 444) = 32.54; p < .001. The variance explained by the total model was 3.1%. The entry of total average complementarity led to no increase in explanation of Tobin’s Q score (R2 Change = 0; F (1, 444) = .40; p < .581). In the final model only two predictors, return on assets and logged number of revenues, were found significant. Therefore, I conclude hypothesis 1A is rejected.

From the predictors that were significant, return on assets had a higher Beta (β = .52, p < .001) than logged revenues (β = -2.23, p < .05). This means for every one return on assets

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36 increases, Tobin’s Q will increase with 52%. While for every one logged revenues increase, Tobin’s Q will decrease with 223%. Since for total average complementarity, no significance was found, Beta cannot be used to predict a change in Tobin’s Q.

Table 3 Regression analysis of H1A

R R² R² Change B SE Beta t Model 1 .55 .31** Logged revenues -.29 .12 -.13 -2.39 Return on assets 6.98 .55 .53 12,60 Ratio leverage 0,00 0,00 -0,02 -0,44 Logged employees 0,09 0,09 0,05 1,11 EBITA 0,00 0,00 0,09 1,73 Model 2 .55 .31 .00 Logged revenues -.28 .12 -.13* -2.23 Return on assets 6.90 .54 .55** 13.66 Ratio leverage 0,00 0,00 -0,02 -0,45 Logged employees 0,09 0,09 0,05 1,07 EBITA 0,00 0,00 0,10 1,81 Total complementarity -0,02 0,04 -0,03 -0,55

Note: Statistical significance: *p<.05, **p<.001

H1B: Positive CSR-CPA complementarity will result in higher CFP

Also on positive CSR-CPA complementarity, a hierarchical multiple regression was performed. By performing this analysis, it could be tested if the positive CSR-CPA

complementarity can increase the CFP of a firm. For return on assets, logged amount of revenues, leverage ratio, number of logged employees, and EBITA was controlled. The control variables were entered at the first step of the hierarchical multiple regression. This

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37 model was statistically significant as F (5, 445) = 39.05; p < .001, and explained 3.1% of variance in Tobin’s Q. Hereafter positive CSR-CPA complementarity (TOTAV.COM.STR) was entered. Although this model was significant as F (6, 444) = 32.82; p < .001, the total model explained still only 3.1% variance. The inclusion of positive CSR-CPA

complementarity led to no increase in explanation of Tobin’s Q score (R2 Change = 0; F (1, 444) = .23; p = .23).

In the final model three predictors, logged revenues, return on assets, and EBITA were found to be significant. As positive CSR-CPA complementarity was not found significant, hypothesis 1B is rejected. Logged revenues had a Beta of -.123 and p .03. Return on assets had a Beta of .51 with p < .001. EBITA had a Beta of .10 and p value of .048. This means for every one logged revenues increases, Tobin’s Q will decrease with 12.3%, while for one increase in return on assets and EBITA, Tobin’s Q will respectively increase with 51% and 4.8%. Since for total positive CSR-CPA complementarity and the other control variables no significance was found, Beta is not relevant.

Table 4 Regression analysis of H1B

R R² R² Change B SE Beta t Model 1 .55 .31** Logged revenues -.29 .12 -.13 -2.39 Return on assets 6.98 .55 .53 12,60 Ratio leverage 0,00 0,00 -0,02 -0,44 Logged employees 0,09 0,09 0,05 1,11 EBITA 0,00 0,00 0,09 1,73 Model 2 .55 .31 .00 Logged revenues -0,27 0,12 -0,12* -2,17 Return on assets 6,86 0,56 0,52* 12,21

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38 Ratio leverage 0,00 0,00 -0,02 -0,43 Logged employees 0,10 0,09 0,05 1,11 EBITA 0,00 0,00 0,10* 1,98 KLD strengths complementarity -0,08 0,07 -0,05 -1,20

H1C: Negative CSR-CPA complementarity will result in higher CFP

To investigate if the negative CSR-CPA complementarity can predict the CFP of a firm, it was, like the previous regressions, tested via a hierarchical multiple regression. Again, return on assets, logged amount of revenues, leverage ratio, number of logged employees, and EBITA was controlled for. The control variables were entered at the first step of the

hierarchical multiple regression. This model was statistically significant F (5, 454) = 23.64; p < .001, and explained 3.1% of variance in Tobin’s Q. In the second step, the negative CSR-CPA complementarity (TOTAV.COM.CON) was entered. This model was also significant as F (6, 444) = 19.72; p <.001, and had a total variance explanation by the model of 3.1%. The entry of negative CSR-CPA complementarity led to no increase in explanation of Tobin’s Q score (R2 Change = .00; F (1, 444) = .14; p < .71). In contrary to return on assets and logged number of revenues, negative CSR-CPA complementarity was not found significant.

Therefore, hypothesis 1C is rejected.

From the significant predictors, return on assets had a Beta of .53, with p < .001 and logged revenues a β = -0.14 with p < .05. For every one return on assets increases, Tobin’s Q will increase with 53%. While for every one logged revenues increase, Tobin’s Q will

decrease with 14%.

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39 R R² R² Change B SE Beta t Model 1 .55 .31** Logged revenues -0,29 0,12 -0,13 -2,39 Return on assets 6,98 0,55 0,53 12,60 Ratio leverage 0,00 0,00 -0,02 -0,44 Logged employees 0,09 0,09 0,05 1,10 EBITA 0,00 0,00 0,09 1,73 Model 2 .55 .31 .00 Logged revenues -0,30 0,12 -0,14* -2,41 Return on assets 7,03 0,57 0,53** 12,25 Ratio leverage 0,00 0,00 -0,02 -0,42 Logged employees 0,10 0,09 0,06 1,13 EBITA 0,00 0,00 0,08 1,52 KLD concerns complementarity 0,02 0,07 0,02 0,37

H2A: The CSR-CPA complementarity - CFP relation is positively moderated by

government dependence.

After the regression analyses, the moderating effect of government dependence is tested. In this moderation, the same control variables including return on assets, logged amount of revenues, leverage ratio, number of logged employees, and EBITA were used. In Table 6 and Table 7 the results of the analysis of H2A is presented. Although the model of this analysis is significant t (8, 442) = 6.0093 p < .001. The interaction effect of government dependence with the regression between CPA-CSR complementarity and Tobin’s Q is not found to be significant (p = .8841). As this effect is not significant, I can conclude no moderation effect is present. Therefore, hypothesis 2A is rejected.

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40 Table 6 Model summary of the moderating effect of government dependence on CSR-CPA complementarity

Model Summary

R R-sq F df1 df2 P

.5568 .3100 6.0093 8.0000 442.0000 .0000

R-square increase due to interaction(s):

R2-chng F df1 df2 P

int_1 0.0001 .0213 1.0000 442.0000 .8841

Conditional effects of X on Y at values of the moderator(s): (Zscore) Government dependence Effect SE T P -.1853 -.0295 .0353 -.8354 .4039 -.1591 -.0291 .0349 -.8318 .4060

Table 7 Moderation analysis of H2A

Coefficient SE T p Intercept i1 -.0162 .0502 -.3218 .7477 Total complementarity c1 -.0266 .0376 -.7061 .4805 Government dependence c2 -.0589 .0599 -.9822 .3266 Government dependence*Total complementarity c3 .0156 .1073 .1459 .8841 Logged employees c4 .0580 .0599 .9677 .3337 Leverage ratio c5 -.0118 .0176 -.6705 .5029 EBITA c6 .1692 .1121 1.5086 .1321 Logged revenues c7 -.1386 .0757 -1.8308 .0678 Return on assets c8 .4917 .1701 2.8898 .0040

H2B: The positive CSR-CPA complementarity - CFP relation is positively moderated

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41 The moderating effect of government dependence is also tested on positive CSR-CPA complementarity. The same control variables as before were used. In Table 8 and Table 9 the results are presented. Just like in H2A the model of this analysis is significant t (8, 442) = 5.8788 p < .001. However, the interaction effect is not found to be significant (p = .6538). Therefore, no moderation effect is present and hypothesis 2B is rejected.

Table 8 Model summary of the moderating effect of government dependence on positive CSR-CPA complementarity Model Summary

R R-sq F df1 df2 P

.5590 .3124 5.8788 8.0000 442.0000 .0000

R-square increase due to interaction(s):

R2-chng F df1 df2 P

int_1 0.0008 .2014 1.0000 442.0000 .6538

Conditional effects of X on Y at values of the moderator(s): (Zscore) Government dependence Effect SE T P -.1853 -.0587 .0341 -1.7211 .0859 -.1591 -.0581 .0339 -1.7115 .0877

Table 9 Moderation analysis of H2B

Coefficient SE t p Intercept i1 -.0132 .0499 -.2637 .7921 KLD strengths complementarity c1 -.0544 .0341 -1.5946 .0803 Government dependence c2 -.609 .0348 -1.7528 .0803 Government dependence*KLD strengths complementarity c3 .0234 .0520 .4487 .6538 Logged employees c4 .0598 .0596 1.0023 .3168 Leverage ratio c5 -.0174 .0222 -.7834 .4338

The influence of CSR - CPA complementarity on CFP and the moderating effect of government dependence

Master Thesis Business

Administration-Strategy