Master Thesis MSc. Finance
The Relationship Between Corporate Social Responsibility and Corporate Financial Performance —Analysis based on Chinese Companies
Name: Yuan Liu Student number: S2681781 Supervisor: Dr. A. J. Meesters
Facualty of Economics and Business University of Groningen
Abstract
In this paper, the relationship between corporate social responsibility (CSR) and corporate financial performance (CFP) was analyzed to determine whether the CSR affects the CFP. In addition, I controlled firm size and the type of main shareholders of the company to examine whether they affect the relationship between CSR and CFP. Different from numerous previous papers, this study focuses on domestic companies located in a developing country, China. Four models have been developed, the first three models used financial indicator as independent variables (ROA, ROE and Tobin’s Q) and the last one used social performance indicator (CSR) as the independent variable. Through the regression analysis of 100 firms for 3 years, this study failed to find an expected statistically significant relationship between CSR and CFP. In practice, this result may encourage corporates to increase their investment in social activities because investing would not decrease the firm value.
1. Introduction
In recent years, the issue of taking corporate social responsibility has becoming more and more important for China. For example, many companies donated money and their products to poor people in rural areas, try to find alternative fuels in order to decrease environment pollution and enhance after sale services for customers. In addition, the number of firms that issued CSR reports has increasing during the past three years. In the year 2011, only 329 companies had issued their CSR reports. This number increased to 360 in 2012 and reached 391 in 2013. This increasing in number indicates that companies have paid more and more attention to CSR. This trend may because companies with better a better social performance may probably lead to companies’ better financial performance.
The purpose of this paper is to find the relationship between corporate social and corporate financial performance. First of all, what is the corporate social responsibility (CSR)? Currently, the most commonly used definition of CSR is established by Social Accountability International: “CSR is different from business liability, it is what an enterprise responsible for, in addition to the shareholders, society as a whole, and which usually includes compliance with business ethics, protection of human rights, environmental protection, protection of vulnerable groups, development of philanthropy, public donation and so forth.” In other words, companies not only need to maximize profit or to generate
income for shareholders, but also need to maximize the benefit for all stakeholders in society.
Keffas
traditional concept of sole objective requirement of profitmaking and emphasize on the concerns for human values, the contribution in the production process to the environment and society.
Nowadays, the publication of social responsibility information for Chinese domestic corporates is mainly through the disclosure of supplementary social responsibility information in the annual financial reports and the issue of separate CSR reports, which have been adapted from developed countries. With the increasing emphasis on corporate social responsibility information disclosure, the way to disclose CSR information by Chinese enterprises has changed from incorporation information into the financial statements to the preparation of separate corporate social responsibility reports. Compared with the supplementary report which information is dispersed, incomplete, and poor in comparability, independence report makes information more centralized, complete and comparable. Recently, more and more Chinese listed companies have issued independent corporate social responsibility reports to disclose related information.
But in general, there is still a big gap between companies’ consciousness of corporate social responsibility in China and in developed countries. The corporate social performance by Chinese domestic enterprises is still not satisfactory and many problems exist. As a member of society, companies not only need to ensure current high financial performance, they also have to maintain the long-term sustainable development of society. On the other hand, by undertaking social responsibilities for stakeholders such as employees, customers, and suppliers, companies can have better reputation and good social image, which may in turn bring benefits for these companies. Therefore, from the perspective of the enterprises, they should take the corporate social responsibility. But during the decision-making processes, some Chinese domestic enterprises have not yet regard the purpose of fulfillment of social responsibility as for long-term continuously development. When there is a conflict between the realize of relatively high economic benefits in short terms and the fulfillment of corpora social responsibility, it is highly likely that the enterprise will avoid taking the corporate social responsibility. Therefore, there is also another possibility that since fulfillment of corporate social responsibility will arise corresponding costs which will bring disadvantage to the company in the fierce market competition for the current year, resulting in a worse financial performance.
Companies with better financial performance tend to generate higher return for shareholders and have more excess money to make investment for expansion, which in turn will crate more profits for companies in the future.
Before this paper, many Chinese papers used financial ratios to analyzed CSR. However, that method has some disadvantages because it using one resource of data to measure both CSR and CFP. Using content analysis, my paper avoided this problem and provided a valid measure to evaluate CSR of Chinese domestic companies. Future study could construct an industry specific system to evaluate CSR.
The rest of this paper is presented as follows: section 2 reviewed related literature, section 3 described the data, variables, part 4 presented model and hypothesis, part 5 presented the regression results and discuss them, part 5 concluded with a summary and part 6 stated some limitations in this study.
2. Literature review
There are a lot of studies focusing on the relationship between CSR and CFP for companies in the developed countries and since they used different methods they obtained different conclusions. Previous researches that performed analysis on the link between CSR and CFP concluded three results. One is that the relation is positive. The papers obtained positive relations stated that the CSR has brought a positive social image to the company, thus improving sale revenue and reducing costs at the same time, leading to a higher profit margin. The second one is that the relation is negative since CSR only brought companies costs and has not improved revenues, therefore reducing profit. The last conclusion is that the relationship is neutral, which means that even though the CSR has lead to a good reputation and employee working efficiency, it has nothing to do with the financial performance. 2.1 literatures that the CSR and CFP have a positive relationship
Margolis et al. (2009) analyzed whether it is good to pay for CSR. They conduct a meta-analysis of 251 studies presented in 214 manuscripts and found that the effect is positive but not significant. They also concluded that shareholders have grounds for permitting corporate efforts to address social ill and citizens have grounds to rely on companies to redress social ill. Using financial ratios and frontier efficiency analysis, Keffa and Olulu-Briggs (2011) studied the banks located in Japan, United stated and United Kingdom, concluding that banks with better CSR have higher assets quality, and more efficiency in managing their portfolios and capital. They also stated that the geographical factor has an effect to the relation between CSR and CFP. Gregory et al. (2014) analyzed the effect of CSR on the enterprise value. They used the discounted cash flow method to measure the value of the company. As for CSR, they obtained from KLD database for a period of 17 years from 1992 to 2009. The main contribution of Gregory et al. (2014) is that they attempt to find whether the higher CSR was because these firms want to achieve higher short-term profits, higher long-term profits or lower cost of capital. In order to find the effect of CSR on firm value, Gregory et al. (2014) disaggregate these effects forecasted profitability, long-term growth and the cost of capital. Finally, they concluded that high CSR firms have higher abnormal returns.
2.2
Literatures that CSR and CFP have a negative or natural relationship
strategic choice, altruism and greenwashing and suggested that the relationships between CSR and CFP are positive, neutral and none exist respectively. Based on the level of participation of CSR, Wu and Shen (2013) divided all banks into four types. The results of their analysis indicated that CSR has positive relations with return on assets, net profit margin, net interest income and non-interest income.
In contrast, corporate social responsibility was negatively associated with bad loans.
They also found
that strategic choice is the main motivation for banks to engage in corporate social responsibility. 2.3 CSR studies in China
All above papers mentioned above only included researches on companies for developed countries or international companies, however, there are some differences for companies located in developing countries because the government of developing countries mostly focus on increasing national GDP and emphasis less on other responsibilities, thus enterprises are more interested in realizing financial profits and therefore prefer to scarify CSR for CFP. In their paper, Keffa and Olulu-Briggs (2011) described the difference of undertaken CSR between US, UK and Japan is due to the different macroeconomic environment. Therefore, we can assume that the levels of fulfillment of CSR in different countries could be different due to the variable market and economic conditions in each country, such as the differences in level of disposable income, demand, supply, money policy and fiscal policy, etc.
In China，researches on the relationship between CSR and CFP started late. Most of these studies drew their conclusions through theoretical discussions, or observation of the situation on one or few companies. However, such a conclusion is often not practice, do not represent the general situation on the market, therefore not convincing. In recent years, the number of empirical researches on the relation between corporate social responsibility and financial performance gradually increased. Zheng (2006) used 521 public listed companies on Shanghai stock exchange as the sample. He measured CSR by content analysis and measured values of companies by Tobin’s Q. The results demonstrated that the higher CSR, the lower in value of the company. This result means that CSR has a negative on CFP.
phenomenon is different form what for developed countries since companies located in developed countries have issued CSR reports for many years and most companies issue their CSR reports every year. According to When and Fang (2008), the effect of most of developing companies’ CSR on the current year’s CFP is negative. However, in the long-term, CSR has a positive effect on CFP
By analysis 256 manufacturing public listed companies, Zhang (2009) concluded that the CSR has a positive relationship with CFP. He used lagged model because evidence showed that the investment in CSR would reduce CFP in the current year.
Zhu and Yang (2009) stated that the responsibilities of companies for lenders and government have a statistically significant relationship with ROA; for employees, the relationship is significant negative; and for social welfare activities, the relationship is also negative. In addition, corporate size has a negative effect on firm value, and financial performance in pervious year has a positive effect on current year financial performance.
Most of these studies concluded a negative or neural relation between CSR and CFP. This may because that people in developing countries such as China have relatively low disposable income and therefore are less willing to pay premiums for products of companies that have high social performance. Residents in developing countries are more price-sensitive. If price change a lot, they would change their choice to purchase cheap substitutes even though these substitutes are harmful in terms of society’s long-term sustainable development.
2.4 Hypothesis Development
The key question of my paper is that whether Chinese companies that have better CSR can obtain better financial performance in later years? If so, which factor contributes to this higher performance? Because there are some differences for companies located in developing countries, it is worthwhile to analyze companies located in developing countries and encourage management to spend more time and money on social activities.
corporate social responsibility and financial performance, and combined with the theoretical analysis of the impact of corporate social responsibility on financial performance, it is likely that the corporate social responsibility will have a negative impact on financial performance for corporates located in China, and therefore I made the following assumptions:
Hypothesis 1: A better CSR leads to lower ROA; Hypothesis 2: A better CSR leads to lower ROA; Hypothesis 3: A better CSR leads to lower Tobin’s Q.
The data selected are based on the information for the year 2011,2012, and 2013 from the financial reports of those listed companies. Therefore, this study only focused on the impact of CSR on CFP in short term periods. However, as analyzed in the conclusion part it is difficult to observe the benefits from CSR to CFP in short terms because costs occurred in current year but benefits usually achieved later. So maybe the advantage of the disclosure of corporate social responsibility is not satisfactory. However, if the research to be extended to the long term, it is possible that the impact of CSR on CFP is more significant. Unfortunately due the unavailable of required date before the year 2010, a longer period data cannot be obtained. According to the previous studies in China, CSR usually has a negative impact on CFP in the short-term because it associated with extra costs. However, in the long-term, CSR probably bring more profits as a result of improved reputation.
3. Data and variables 3.1. Sample construction
companies in the sample. Annual corporate financial statements have been downloaded from the website of annual report collection (www.nbdqw.com) and the yearend share price have been found on the website of Sina Finance (www.vip.stock.finance.sina.com.cn). The structure of shareholders have been found on the official website of shanghai stock exchange (http://www.sse.com.cn/). CSR data have been obtained from the annual corporate social responsibility reports which can also downloaded from the official website of shanghai stock exchange. As financial reports, CSR reports of all companies in China must have been approved by auditors therefore can ensure the reliability of information.
3.2 Variables
3.2.1 Design the CSR index
The most common ways to measure corporate social performance in developed countries are reputation abroad index, content analysis, the Toxics Release Inventory, Corporate philanthropy and Kinder, Lydenberg Domini (KLD) index. Most of the research papers had obtained their CSR data from existing database. Fauzi et al. (2004) used both by Kinder, Lydenberg Domini (KLD), which is an index presented by a United States based independent rating company and by Michael Jantzi Research Associate (MJRA), which is an index presented by an independent rating company in Canada. The scores obtained from above evaluating system are relatively objective so avoid human bias. Because of lack of such data for Greek companies, Karagiorgos (2010) used the method of content analysis on CSR annual reports. Under this method, they designed some indicators to measure the social performance of companies, and the score for each indicator range form 0 to 3 according to the degree of disclosure made by that company. Hallerbach et al. (2004) designed a score list that contained 223 yes/no questions. Then they awarded “Yes” one point and “no” zero point. They then added all these points together and the CSR score were calculated as the difference between the maximum and minimum number of points.
indicator, the value of it was one if the target company had disclosed related social performance, otherwise, the value will be zero. Finally all scores were added together to get the score of CSR. Table 1 : Index of CSR
Community Corporate
Governance
Employee Relationship Environment Products
1. Generous Giving 2. Support for Education 3. Indigenous Peoples elations 1.Information disclosure 2.Investor communication 3. Internal control 4.Corporate governance structure 5.Taxation 1.Balance between
work and entertainment 2.Employ and Layoff Policy
3.Training and career development
4.Employee benefits 5. Health and Safety
1.Pollution Prevention 2. Recycling 3.Alternative Fuels
1. Beneficial Products and Services 2.Quality improvement
3. R&D Innovation
4.Relationship with suppliers,
customers and clients
3.2.2 Design the indicator of CFP
As described above, the main measurements of financial performance can be classified into two categories: market indicators and accounting earnings indicators. Market Indicators, which are mainly selected from the data in the capital market and research yields in the capital market or changes on corporate share price, focus on the return to shareholders. The accounting indicators of financial performance are based on financial data of enterprises, reflecting the overall operating outcome of enterprise. Financial data may not accurate even though annual reports had approved by auditors, if flawed may not have been found. According to Rahmawati et al. (2014), earning manipulation, which mainly used the selection of different accounting standards, can artificially enhanced financial performance. Share price may fluctuate significantly due to the immaturity stock exchange market for developing countries, leaving market returns not an appropriate reflection of the financial situation of companies. Therefore, my thesis will use both accounting indicators and income indicators to analyze corporate financial performance.
Usually the accounting indicators including return on total assets (ROA), return on net assets (ROE) and earnings per share (EPS), etc. In this paper, accounting indicators are ROA and ROE. ROA stands for return on assets, which reflects the ability of the entity to generate profits through using its resources. This indicator reflects the efficiency of the company to use its resources. Thus, the greater index value the higher asset utilization efficiency, indicating that the company perform good in the aspects of increasing revenue and saving financial resources. Similar to ROA, ROE measures how efficiency the company can generate profits by using the money that shareholders have invested. However, accounting indicators can be different due to the adoption of different accounting methods and management flawed in order to artificially improve the performance of their companies can also damage the accurate of accounting indicators. Therefore, I also used market index to enhance the comparability between companies and across time.
replacement cost. So when companies need capital, they should be funded through the sale of existing assets or equipment, because in this way the costs will be much less.
Tobin’s Q reflects market expectations of future profits for the company, and the company's investment impact. According to this principle, when the stock price goes up, the value of Tobin’s Q will increase, as a result companies will issue more shares in the capital markets to finance investment, leading to output increase. The high value of Tobin’s Q means that investors are optimistic about the growth rate, and are willing to invest in the company. Tobin’s Q value is calculated as follows: Tobin’s Q value=Total capital market value/replacement market value = (market value of equity + book value of debt) / Book value of total assets.
3.2.3 Control variables
Past studies suggest that size, risk, and industry affect both firm financial performance and CSR, so each of these variables are controlled for in this study. For this study, company size is measured using the natural logarithm of total assets. Ownership is measured through dummy variables and the value of it is one if the largest shareholder is state and zero otherwise. Lastly, risk is measured using total book value of debt to total book value of assets ratio. According to prior researches, the predicted effects of leverage and size on financial performance are negative and positive respectively.
Size: Firm size needs to be controlled because larger companies have more resources available to undertake CSR to establish a good social reputation, which will convince customers to purchase their products and therefore increase profits. Small companies usually just entry into its industry and must focus on earning profits to ensure its survival. This variable is measured as the natural logarithm of total assets;
Ownership: Due to the special nature of Chinese enterprises, corporate nature also has a great impact on the value of the company. If the company is state-owned, it is likely to generate more profits than other private or public listed companies in its industry because stated-owned companies have more funds allocated by the government and larger market share.
4. Methodology 4.2 Models
Regression analysis was then used to test the relationship between CSR practice and CFP. Similar to that had done by Fauzi et al. (2007), I established three models to reflect the assumed linear relationship between CSR and CFP. These models used CSR as the independent variable while CFP was the dependent variable. In addition, I added several factors other than CSR but which also are assumed to have an influence on the CFP, including size (natural logarithm of total assets), leveraged ratio (Total debt/Total equity) and the nature of ownership (whether the biggest shareholders are government or not). These factors were used as control variables.
Determine the financial metrics of corporate social responsibility, social responsibility information disclosed in accordance with our current annual report, collate and summarize the evaluation index system of corporate social responsibility. Quantitative analysis of the proposed hypothesis can be tested, application statistical software such as Eviews for data statistics descriptive, relationship analysis, regress test of hypothesis and proposed for validation.
Equation 1: ROA (i,t) =α0+α1*CSR(i,t)+α2*Size(i,t)+α3* LEV (i,t)+α4*OWN(i,t) + ε (i,t)
Equation 2:ROE (i,t) =β0+β1*CSR(i,t)+ β2*Size(i,t)+ β3* LEV (i,t)+ β4*OWN(i,t) + ε (i,t)
Equation 3:Tobin’s Q (i,t) =γ0+γ1*CSR(i,t)+ γ2*Size(i,t)+ γ3*OWN(i,t)+ γ4*LEV(i,t) + ε (i,t)
Where,
ROA (i,t) =the return on assets for the year t
Tobin’s Qi,t =the value of Tobin’s Q for the year t
CSR (i,t)=the index for CSR for the year t
Size (i,t)=the natural logarithm of total assets for the year t LEV (i,t)=the leverage ratio for the year t
5. Results
Regression analysis was based on the panel data of all 100 listed companies, excluding those that the financial and social data was missing and those that the financial reports have not been approved by auditors. Three years are considered, from 2011 to 2013.
5.1 Descriptive statistics Table 2: Industries in the sample
Industries N
Communications & media 8
Consumer products 35
Financial services 11
Gold & precious metals 6
Industrial products 17
Merchandizing 4
Utilities 8
Oil & gas 3
Metal & minerals 8
Table 3: Descriptive Statistics for variables by year
N Mean Median Standard
Ownership 100 0.470000 0.000000 0.501614 0.000000 1.000000
Table 2 describes the descriptive statistics of all variables used in this study. The mean value of Tobin’s Q decreased from 1.69 in 2011 to 1.52 in 2012, and almost remained the same for the year 2013 (which was 1.54). From this table it is evident that ROA for companies fluctuates significantly ranging from as low as – 7% to a high of 19% in 2011, -10% to 26% in 2012 and -29% to 14% in 2013. The mean value was more and more less for the past three years, decreasing form 4.5% in 2011 to 3.3% in 2013, which indicates a worse macro-economic condition. CSR score almost remains the same for the past 3 years with the mean fluctuate around 5.3. The maximum and minimum values of CSR scores are also the same for the observed 3 years. The maximum value was 15.00 and the minimum value was 1.00. As to the ownership, I assumed that it remained constant in a short period of time. As the result showed, the mean value of ownership is 0.47, which means that almost half of all companies are state owned and the rest half are private owned. Table 4 shows the descriptive statistics for all variables used in this study.
Table 4: Descriptive Statistics for all model’s variables
5.2 Relationship analysis
The relationship-matrix is used to analysis whether there are two or more variables that significantly correlated with each other. If so, the regression results could be biased because of this correlation. The
CSR ROA ROE TOBIN’S
Q
SIZE LEV IND
Mean 5.35 0.039 0.072 1.59 9.97 1.84 0.47
Std. Dev. 2.72 0.049 0.125 0.88 0.58 3.40 0.50
Maximum 15.00 0.27 0.451 6.97 12.22 33.40 1.00
table below shows that although not significant, both Tobin’s Q and ROA have a positive relationship with CSR, indicating that firms have better social performance tend to perform better in financial area. This result is inconsistent with the hypothesis provided above. This may because the extra is offset by the benefits bring form increased social performance. The size is also positive correlated with the value of CSR index, therefore, companies with higher assets value have better social performance. While the relationship between leverage and CSR and between ownership and CSR are negative, which means that firms with higher relative debt levels and not state-owned tend to perform worse in social perspective than lower debt and state-owned firms. The relationship between variables is regarded as significant if the relationship coefficient is larger than 0.8. If that were true, then one of these variables must be dropped out from the regression to ensure the accurate of the results. Table 4 provides the relationship matrices for the key variables. As the Table 5 shows, none of these variables are highly correlated with others, which means that the model with these variables could be used to analysis the relationship between CSR and CFP.
Table 5: Relationship matrix
CSR ROA TOBIN’S Q SIZE LEV IND
CSR 1.0000 ROA 0.0006 1.0000 TOBIN’S Q 0.0157 0.2293 1.0000 SIZE 0.0352 -0.0531 -0.1580 1.0000 LEV -0.0572 -0.2014 0.0310 0.3645 1.0000 IND -0.0438 -0.0151 -0.2046 0.1286 0.1074 1.0000 5.3 Test of hypotheses
5.3.1 Effect of Corporate social responsibility on ROA
controlling for size, leverage, and industry. Table 5 presents the results of the regression analysis using ROA as the dependent variables. CSR and Leverage are negatively related with ROA and size and
ownership are positively related with ROA. The results shows that the value of constant (α0) is 0.0249.
The model also indicates that for every one unit increase in CSR, ROA decreases by 0.000117 units, which means that there is no significant relationship between ROA and CSR. The P-value is used to predicate the significance of variables. If the P-value is less than 0.05 (at 95% confidence level) then the related independent variable is linearly related with the dependent variable. Only the P-Value of leverage is less than 0.05, therefore among all variables, only leverage has a significant linear relationship with ROA. The effect of other factors, including CSR, size and ownership, are not significant.
Table 6: Regression Results by regressing CSR with ROA when controlling for risk, size and ownership for 2011-2013
Dependent Variable: ROA
Coefficients t-value Sig. (P-Value)
B Std. Error Constant 0.024934 0.051363 0.051363 0.6277 CSR -0.000117 0.001030 -0.113385 0.9098 Size 0.001983 0.005226 0.379394 0.7047 Leverage -0.003028 0.000884 -3.426012 0.0007 Ownership 0.000417 0.005639 0.073924 0.9411
5.3.2 Effect of corporate social responsibility on ROE
from allocating more money into social activities because the better CSR will harm financial performance especially the accounting return. None of these relationship are significant as the P-values are larger than 0.05.
Table 7: Regression Results by regressing CSR with ROE when controlling for risk, size and ownership for 2011-2013
Dependent Variable: ROE
Coefficients t-value Sig. (P-Value)
B Std. Error Constant -0.062870 0.133369 -0.471400 0.6377 CSR -0.000430 0.002672 -0.160770 0.8724 Size 0.014533 0.005226 0.379394 0.7047 Leverage -0.003028 0.013569 1.071047 0.2850 Ownership 0.001163 0.014632 0.079488 0.9367
According to the analysis, there is a neural relationship between CSR and CFP. Conducting CSR will occur expenses with which reduce profits. These costs will be allocated to finished products and then transfer to customers when they purchased these products. However, even though residents in developing countries are less likely to pay for that high price, higher CSR performance is likely, for example, to reduce the fines due to conducting environmental pollution during the production process, and to reduce employee turnover which leads to less training costs. Therefore compensate for the reduced profits, resulting in a neural effect of CSR on CFP.
5.3.3 Effect of Corporate social responsibility on Tobin’s Q
Table 6 presents the results of the regression analysis using Tobin’s Q as the dependent variable. Different from the result of model 1 and model 2, here CSR are positively correlated with the financial
and is statistically significant (since the related p-value is 0). The model also indicates that for every one unit increases in CSR, Tobin’s Q increases by 0.006528 units. And this figure is much lager than that in the model 1and model 2. However, the P-value of it is much larger than 0.05, therefore, this result is not significant. Size and ownership are negative correlated with Tobin’s Q, indicating that lager and stated-owned firms tend to perform worse in respective of Tobin’s Q.
Table 8: Regression Results by regressing CSR with Tobin’s Q when controlling for risk, size and ownership for 2011-2013
Dependent Variable: Tobin’s Q
Coefficients t-value Sig. (P-Value)
B Std. Error Constant 4.353837 0.913111 4.768136 0.0000 CSR 0.006528 3.409567 -0.210866 0.8831 Size -0.270461 0.092904 -2.911171 0.0039 Leverage 0.030434 0.015712 1.936942 0.0537 Ownership -0.341927 0.100248 -3.410829 0.0007
5.4 Goodness of Fit Test
Goodness of fit tests discusses how the data actually fit the regression models used. That is how to explain the dependent variable with the independent variable in the model? As shown in Table 6 analysis, the relationship coefficient of model 1 as represented by R is 0.202729, indicating a positive relationship between dependent and independent variables. On the other hand, the coefficient of
determination 0.041099 (R2) shows that 4.2% in financial performance (ROA) changes is due to the
0.05, which indicates that there is a significant relationship between the dependent and independent variables used in the study.
The result of model 2 and model 3 is similar to that of model 1, CSR also has a statistical positive
relationship with Tobin’s Q at 95% confidence level (the value of R is 0.267298 and the value of R2 is
0.071448). 7.14% of changes in Tobin’s Q can be explained by the changes in CSR, and most percentage of the variances are to be explained by other factors. For ROE, the relationship is not significant as the P-value is 0.431917, which larger than 0.05.
In summary, all three models show similar results—both the R2 and Adjusted R2 are much smaller
than 1, indicating that the most percentage of the changes in dependent variables cannot be explained by independent variables. Consequently, the regression analysis demonstrates that the relationship between financial performance and social performance is quite weak.
Table 9: Model summary
6. Conclusions and implications
This study found the following results:
By using empirical analysis, I believe that there is no significant relationship between CSR and ROA, ROE and Tobin’s Q. The empirical result can be explained by some theoretical reasons. Preston and O'Bannon (1997) has presented six hypotheses that explain these causality relationships between CSR and CFP. Social impact hypothesis said that good social performance that meets the needs of different kinds of stakeholders improving financial performance and verse vice. Trade-off hypothesis asserts that social performance involves costs that will result in lower profits. Available funs hypothesis states that there is indeed a positive relationship between CSR and CFP, but the relationship is casual and lagged, from financial to social performance. Sometimes management tend to pursuit their own short-term benefits at the cost of long-term shareholders’ benefits, Managerial opportunism hypothesis states that this agency costs may lead to a negative relationship between CSR and CFP.
Therefore, the results may because, firstly, the undertaken of CSR usually needs funds to support in the current year, resulting in a lower profits margin. For example, according to the trade-off hypothesis of Preston and O'Bannon (1997), from the perspective of employees, improving employee benefits required higher salaries and wages, construction or renting apartment for employees to live in and the establishment of employee pension plan, etc. These costs will be charged to direct and indirect costs for the current and for several years from now (depreciation of real estate, for example) in related accounting account, reducing profits monetarily and in margin. At the same time, benefits come form improved employee loyalty and reduced employee turnover rate, will increase the profits in the current year, thus compensating the reduced profits due to costs related to the undertaken of CSR. In addition, according to managerial opportunism hypothesis, the agency costs may another reason for this neural relationship. If the net profit is relatively high, management may reduce social expenditure in order to improve their private short-term benefits. When the profits are low during some years, for example, recession occurred, management would try to engage social activities to improve the public impression to the company.
stock exchange market performed quite well.
Because of the stationary in Chinese real estate market price, worsen by the reduced interest rates offered by the central bank, general investors are tend to transfer their bank deposits into the investment in stock market. This trend not only further contributes the rising price in stock markets, but also leads to the economic bubble. Seven years ago, the reaction Shanghai and Shenzhen CSI 300 Index (CSI 300) dropped from the highest 5688 in 2007 to near 1600 in 2008, leading to a total loss of 3.5 trillion dollars for all investors in the market. In conclusion, the market return in China is more fluctuate and linked less to real economic performance. Therefore, the results are less reliable than that of the same study for companies in developed countries.
In addition, the leverage ratio and size of the company also have no significant influence on CSR respectively. With the value of debt increase, according to the Modigliani and Miller’s capital structure theory, the cost of capital firstly increases and after reaching the best debt to equity ratio, the cost of capital will increase again. Companies with high levels of leverage ratio will face more expensive contracts with stakeholders. For example, they may have to pay higher wages to attract the appropriate employees to undertake required tasks, to provide long-term credit cycle for suppliers or greater discount for customers and meanwhile paying higher price and quicker for raw materials bought form suppliers, resulting in lower profits. In addition, restrictive covenants make it more difficult to borrow money to support for future projects investments because high debt level may cause doubt on companies’ abilities to pay back all the money they had borrowed. With less profits and fewer funds available, these companies may not have enough funds to invest in corporate social responsibilities. This result means that Chinese firms may not believe the engagement in CSR has an important impact on the long-term financial performance and management may continue to focus on pursuing short-term high profits and pay little attention to the responsibilities for environment and society because many companies have the profit-related bonus for managers. However, shareholders should pay attention on the long-term development of their corporates. Since investment in SCR have no negative effect on financial results, shareholders can make decisions through shareholders’ meeting to allocate more money into CSR in the future.
companies, and require companies to undertaken CSR spontaneously, thus improving the overall high level of social responsibility performance. Meanwhile it is necessary to present the basic standards for the disclosure of CSR. Government should also establish a long-term mechanism for corporates to voluntarily and continuously release independent CSR reports. According to the actual situation, the government should require companies to expand the scope of disclosure of CSR information.
On the other hands, enterprises should pay great attention to the fulfillment of their social responsibility. In accordance with related laws and regulations, companies should prepare CSR reports regularly as required by the government and ensure the authenticity and validity of that report. For that purpose, corporates can establish of a specific CSR department, which have experts in the CSR area and full-time employees to undertaken suggestions made by those experts. Management should prevent the agency issues and focus on the long-term sustainable development of companies since CSR would probably reduce the current profits, but in the long term profits are likely to increase.
7. Limitations and further study
I only analyzed the effect of financial performance on corporate social responsibilities, however these two factors may interactive with each other. Companies that better financial performance usually have better social performance. On the other hands, the better social performance may lead to better financial performance. This assumption can be supported by many reasons. For example, environmental health and safety will be provided employees healthier and safer workplaces, thereby improving their working efficiency; in terms of revenue, companies that can produce environmentally sustainable products can sell their products to consumers who concerned about the environment, thereby increasing the competitive edge of products. In addition, environmentally friendly production process can reduce the possible the government fines because of pollution, and thus increasing companies’ net profits. Environmental sustainability of enterprises can also improve the company's goodwill which will benefit the long-term development. Therefore, future studies could analyze the interaction between CSR and CFP.
for companies that both have donated money to poor people or rural areas, but the donation amount may be quite different. For those donated more, their CSR performance may be better.
Lastly, it should be noted that in this paper I used the result from content analysis as the comprehensive evaluation index to measure the performance of corporate social responsibility and it is based on corporate social responsibility information disclosures. This index may include some flaws. On the one hand, the content of corporate social responsibility information disclosure does not fully reflect the actual situation of enterprises’ fulfillment of their social responsibility, since the disclosure mechanism is not mature enough so that there may be some bias.
Only by figure out the fundamental relationship between the CSR and CFP can we provide the motivation and the basis for enterprises to consciously fulfill their social responsibilities, and make a contribution to the establishment of the self-discipline, supervision mechanism for the fulfillment of corporate social responsibility, which is particularly important for achieving the human and social sustainable development.
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