CORPORATE SOCIAL RESPONSIBILITY ACROSS THE GLOBE A Study that Investigates the Difference of Importance assigned to CSR across Europe, Asia and North America.

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CORPORATE SOCIAL RESPONSIBILITY ACROSS THE GLOBE

A Study that Investigates the Difference of Importance assigned to

CSR across Europe, Asia and North America.

Jarno Kjeld de Jonge

University of Groningen, Faculty of Finance

Abstract: The number of firms that adopt corporate social responsibility (CSR) programs increases every year. These programs force the firms to take many issues into account, in addition to the usual way of doing business. Will this have a positive influence on financial performance? This paper examines the topic by means of a regression analysis using the CSR characteristics as defined by Asset4: the corporate governance- , the economic- , the environment- and the social pillar score. As control variables this paper uses: the Current Asset Total, Leverage, Cash flows divided by Sales and the Market to book value. This paper also investigates whether the relationship between CSR and financial performance is context specific across continents and countries. The results indicate that not every CSR characteristic has a positive influence on financial performance, and that the impact may depend on the region in which a firm operate.

Keywords: Corporate social responsibility (CSR), stock returns, financial performance. JEL classification: G32; M14

Msc Thesis Finance.

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1.0 Introduction.

1.1 Introduction.

‘Integrity, without it, nothing works’

- Micheal C. Jensen, Harvard professor.

With this statement, Jensen underlines the importance of integrity. In his article, he claims that an organization presents high integrity when it is whole and complete as it comes to its financial statement. This means that the organization has nothing to hide, displays no deceptions, no untruths and where there are no violations of property rights or contracts. Moreover, internal integrity towards the employees of a firm and external integrity towards different groups of stakeholders needs to be high (Jensen, 2009). Question remains: what does corporate social responsibility (CSR) provide to a company? No clear cut answer has been given to the proposed question and results are found to differ across countries. Therefore, this paper will strive to answer this question and add new knowledge to the debate. In the next sections, the topicality and value of this question are elaborated on.

‘The only social responsibility of companies is to maximize profit’

- Milton Friedman (1970)

This statement by Friedman is opposing the statement by Jensen and thereby illustrates that there is no coherence when it comes to opinions on the added value of corporate social responsibility. However, although Friedman is a respected economist, his statement is almost half a century ago, from an era in which the influence of business on society was not a major concern. When looking at the past decade, the importance of CSR has been increasing, which is reflected in a rise in scientific research that has been done on the topic. Correspondingly, out of the 250 largest corporations in the world, 95% report on their corporate social responsibility activities (KPMG, 2011). Moreover, according to the meta analysis of Margolis et al.(2009), most studies find a slightly positive relationship between CSR and financial performance. Therefore, the statement of Friedman might be outdated and thereby not reflect the importance of CSR today.

1.2 Scientific relevance.

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3 context specific. For instance, Salabar (2007) specifies that a nation’s culture and religion are found to have a great influence on the investors’ perception of strong versus weak CSR companies. Correspondingly, Lin et al.(2009) and Gregory et al.(2014) states that the influence of CSR on firm performance and firm value is context specific and therefore depends on variables such as industry, time and country. The latter is where this paper focus lies on. Moreover, Endacott (2003) finds that global consumers expect businesses to back ‘good causes’, however, he states that country specific factors have an effect on the type of causes costumers want to see supported. With these findings, the present concentration on Western society might cause a bias, as civilizations across the world vary into a great extent. Therefore, findings of these Western studies might not be generalizable across the globe. Furthermore, Momin and Parker (2013) performed a case study of multinational corporations (MNCs) subsidiaries in Bangladesh and found that “firms in a country such as Bangladesh may fear negative publicity when making positive CSR disclosures, due to a complex cultural, business and regulatory environment that discourages corporate self-praise, fails to consistently require and enforce such disclosures, and promotes a climate of secrecy in business dealings and accountability” (Momin and Parker, 2013, p225). This is a clear example showing that CSR does not necessary signify better financial performance, and that the influence of it is country specific. Additionally, other papers found context specific conditions such as state laws, regulations, institutions and the attitude of societies to influence the importance assigned to CSR (Dagiliené, 2013; Lin et al., 2009). Moreover, some studies that compare CSR importance in North America and Western Europe have found different attitudes towards CSR (Dagiliené, 2013; Maignan and Ralston’s, 2002). An explanation for these differences could be the different views on businesses’ role in society, or the variances in public opinion.

All things considered, nowadays the importance of CSR is widely agreed upon. Previous research has found a slightly positive relationship between the implementation of CSR and a firms’ financial performance (Margolis et al. 2009). However, the focus of previous research has merely been on the Western society. Some studies indicate that CSR can have negative influences on firms as well, and state that these differences in results are probably attributable to variation in context. Therefore, the main hypothesis of this paper will be:

The main hypothesis: The influence of corporate social responsibility characteristics on

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1.3 Structure.

The remainder of this paper is structured as follows: the second part provides a theoretical background of the topic of CSR, its importance, and its influence on financial performance. The third chapter contains the methodology of this research and in the fourth chapter the data is subscribed. Chapter 5 will contain the results, whereas chapter 6 will be used to discuss these results. Finally, the references and appendix can be found at the end of this paper.

2.0 Theoretical background.

2.1 Defining.

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5 diversities of activities, such as being environmental-friendly, employee-friendly, respectful of communities where the company subsidiaries are located, mindful of ethics, and even investor-friendly. In some cases, corporations extend their social responsibility even further, by supporting universities, arts and other good causes (Bénabou and Tirole, 2010). Lastly, the definition of financial performance can be a broad concept as well. In the remaining of this paper the meaning of financial performance will be a general measure of a corporations overall financial wealth over a given period of time. Stock returns for instance are an indicator of the financial wealth of a firm, this will be elaborated in the section 3.2.

2.2 Why firms conduct CSR.

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6 their waste. They create a cost advantage, save money and increase efficiency. In other words, it pays to be green (Hart and Ahuje, 1996; Clarkson et al., 2011)

2.3 Stakeholders and CSR.

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7 as the products are environmental friendly. However, since there are people who are willing to pay more, this should push firms to rethink their strategy. If this group of consumers is large enough, it may shift corporations towards more responsible (and environmental friendly) production techniques. This could create a similar movement as the principle of the green investors (Heikel et al., 2001). The above mentioned theory can create a win-win situation, where a good corporate citizen can increase a firms’ profitability (Bébadou and Tirole, 2010).

2.4 CSR is context specific.

The importance of CSR is a generally accepted fact, yet not every continent or nation assigns the same value to this phenomenon. There is a rather extensive amount of evidence showing that the importance of CSR is context specific. As mention before, Gregory et al.(2014) stated that the influence of CSR on firm performance depends on variables such as time, country and industry. They find that a firm with higher CSR indicators have a greater long term growth than the others, nevertheless, they add that this could relate to the framework, e.g. industry, country, time or differences in the characteristics of CSR observed (Gregory et al.,2014). Correspondingly, Salaber’s (2007) paper stated that a nations’ legal system and its religion shape investors’ perception of strong versus weak CSR businesses. Although she investigated the sin stocks of companies that are producing tobacco, alcohol and gaming, a similar conclusion can be drawn for companies that have relative good CSR, since they are very specific as well. Nevertheless, the majority of conclusions are based on data that has been retrieved in the US (e.g. Servaes and Tamayo, 2013; Gregory et al., 2014) and Western Europe (e.g. Dagiliené, 2013). If CSR is context specific, but most findings are based on Western society, are these conceptualizations of CSR applicable and can they be accepted in other countries? (Maignan and Ralston, 2002). Based on the literature above, the expectation is that corporate social responsibility will have a slightly positive influence on financial performance (Margolis et al. 2009). However, as CSR is context specific and the majority of existing literature is founded on the Western society, the following hypothesis is formulated:

Hypothesis: The influence of corporate social responsibility characteristics on financial

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2.5 CSR in the East.

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9 Sub-Hypothesis A: The influence of corporate social responsibility characteristics on firm

performance is positive, yet differs across nations within Asia. Sub-Hypothesis B: The influence of corporate social responsibility characteristics on firm

performance is positive, yet differs across nations within Europe. Sub-Hypothesis C: The influence of corporate social responsibility characteristics on firm

performance is positive, yet differs across nations within America.

3.0 Data.

3.1 Continents.

The data is collected from Datastream and is displayed as a Panel dataset. However, first, Orbis is used to obtain the ISI number of the necessary companies. An ISI number stands for International Securities Identification Number, and identifies a security. Due to ISIN, Datastream can recognize the firms. Of the three Continents, Europe, Asia and North America, nine nations are investigated, which are France, Germany, United Kingdom, Japan, India, China, United States, Canada and Mexico. These nations are chosen due to the fact that they are leading countries in finance terms of their continents. From each nation, a selection of firms is made based on the main stock exchange of that specific country, e.g. for the United States the Dow Jones is used. Then the top firms with respect to market capitalization of a certain index are selected. However, not every nation has such a top stock exchange index available, e.g. the Nikkei of Japan does not. For that reason, for each of these nations, a top 50 index is created based on market capitalization, hence, after this process there are 50 companies participating from the Nikkei instead of 299, see table 1 below.

Table 1: Participating Nations.

Nation Stock Exchange Total number of firms

Participating firms.

France CAC 40 40 40

Germany DAX 30 30 30

United Kingdom FTSE 100 101 50

Japan Nikkei 299 50

India Bombay Stock Exchange 100 50

China Shanghai Stock Exchange 864 50

United States Dow Jones 30 30

Canada S&P / TSX toronto 421 50

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10 The time frame that is chosen is set from 2003 until 2013. This time frame is chosen as Asset4 is founded in 2002, hence, previous data is not available. And because not all data in 2014 are released at the time of building the dataset, 2013 is the best option to set as the last year. 3.2 Variables.

The purpose of this paper is to investigate whether CSR influences financial performance. The stock price of every firm will be the dependent variable. Since the closing stock price gives a good representative on how the firm is performing financially, it will increase or decrease depending on the financial performance of the company and thereby a good indicator. The control variables will be the Current Asset Total, Leverage, Cash flows divided by Sales and the Market to book value. In the paper of El Ghoul (2011), who investigated the effect of CSR on cost of capital, similar control variables are used. Three of the four variables usually will have a positive influence on stock price. Leverage will have an opposite effect, when the leverage increases, the financial performance will decrease, whereas the other variables increase, so will the stock price. Furthermore, as mentioned in the previous sections, corporate social responsibility is a variable that is very difficult to measure. Asset4 is the world’s leading research firm on CSR, which is trying to provide information on CSR as objectively as possible. There are more parties who provide information on this topic, however, in some cases payments must be made to retrieve the data. In addition, Asset4 has the largest database of the world with respect to CSR1. Asset4 has four different pillar scores that provide the CSR score: Corporate governance, Economic, Environment and Social. The CSR score is the equally weighted rating of the mentioned scores. Of these four pillars, corporate governance score measures a firms system and processes, which guarantees that board members and executives act in the best interest of long term shareholders. The economic pillar score is a reflection of a firms overall financial health and its capacity to generate long term shareholder value through its use of best management practices. The environmental pillar score measures a firm’s impact on living and non-living natural systems, such as air, land and water, as well as complete ecosystems. Whereas, the social pillar score measures a firm’s ability to generate trust with its stakeholders, such as workforce, customers and society. It is a reflection of the firm’s reputation and the health of its license to operate. The final variable is the equally weighted rating of the previous four variables. This score is an overall score, hence can be shown as the CSR score (see for more information Appendix A).

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3.3 Adjust the data.

When analyzing the dataset, there are some issues that immediately arise. Firstly, none of the firms in Canada are found to display CSR variables, which implies that they do not give ratings. Perhaps a better assumption is that Datastream does not have access to these ratings. Consequently, Canada is dropped from the dataset since these variables are crucial for this paper. Furthermore, the firms in Mexico provide CSR variables after the year 2008 and by then only approximately 12 companies report on their CSR activities. Therefore, Mexico is dropped from the dataset as well. In order to replace a representative for North America, the Nasdaq is included. Therefore, this continent is now only represented by the United States. However, as the firms on the Dow Jones and Nasdaq do business in North America, it is still a good representative. Moreover, it might be possible that one index is more corporate social responsible than the other. Lastly, in Asia the CSR variables are only known after 2008 as well. Only Japan has almost a complete balanced dataset, however, the datasets of both China and India are very unbalanced. Subsequently, China and India are dropped for individual investigations. Asia can still be investigated, yet for a shorter timeframe, from 2008 until 2013.

4.0 Methodology.

4.1 Methodology.

Firstly, the log returns of all variables are calculated, such that the implication of each variable are similar. This will indicate the percentage growth or shrinkage of the variables. 𝑃 = 𝐿𝑂𝐺 ( 𝑃𝑡

𝑃𝑡−1) ∗ 100 (1)

Where P is the return of the stock price, 𝑃_𝑡 is the closing stock price of current year and 𝑃_𝑡−1 is the closing stock price of previous year. This equation (1) must be applied to the other variables as well, which will give a growth indicator. To determine the impact of CSR on financial performance, an Ordinary Least Squared regression model is used as shown below. 𝑃𝑖𝑗 = 𝛼𝑖𝑗+ 𝛽1𝑖𝑗𝐴4𝐼𝑅 + 𝛽2𝑖𝑗𝐶𝐴𝑇 + 𝛽3𝑖𝑗𝐿𝐸𝑉 + 𝛽4𝑖𝑗𝐶𝐴𝑆 + 𝛽5𝑖𝑗𝑀𝑇𝐵 + 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 (2)

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12 coefficient with the matching variable and a residual at the end. The parameters i and j are the year and area, respectively.

However, here, the equally weighted ratings are solely investigated, the other pillars are not. Since these variables determine the CSR score, A4IR is broken down to the pillar scores as shown in equation 3.

𝑃 = 𝛼𝑖+ 𝛽1𝑖𝑗𝐶𝐺𝑉 + 𝛽2𝑖𝑗𝐸𝐶𝑁 + 𝛽3𝑖𝑗𝐸𝑁𝑉 + 𝛽4𝑖𝑗𝑆𝑂𝐶

+ 𝛽5𝑖𝑗𝐶𝐴𝑇 + 𝛽6𝑖𝑗𝐿𝐸𝑉 + 𝛽7𝑖𝑗𝐶𝐴𝑆 + 𝛽8𝑖𝑗𝑀𝑇𝐵 + 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 (3)

Where CGV indicates corporate governance score, ECN indicates the Economic score, ENV indicates the Environmental score and SOC indicates the Social score. All other variables have the same meaning as in equation (2). In addition, since these variables are pillar score and there might be some overlapping with each other or the control variables. Therefore these variables are also investigated individually (equation 4 to 7).

𝑃 = 𝛼_𝑖+ 𝛽_1𝑖𝑗𝐶𝐺𝑉 + 𝛽_2𝑖𝑗𝐶𝐴𝑇 + 𝛽_3𝑖𝑗𝐿𝐸𝑉 + 𝛽_4𝑖𝑗𝐶𝐴𝑆 + 𝛽_5𝑖𝑗𝑀𝑇𝐵 + 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 (4) 𝑃 = 𝛼_𝑖+ 𝛽_1𝑖𝑗𝐸𝐶𝑁 + 𝛽_2𝑖𝑗𝐶𝐴𝑇 + 𝛽_3𝑖𝑗𝐿𝐸𝑉 + 𝛽_4𝑖𝑗𝐶𝐴𝑆 + 𝛽_5𝑖𝑗𝑀𝑇𝐵 + 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 (5) 𝑃 = 𝛼_𝑖+ 𝛽_1𝑖𝑗𝐸𝑁𝑉 + 𝛽_2𝑖𝑗𝐶𝐴𝑇 + 𝛽_3𝑖𝑗𝐿𝐸𝑉 + 𝛽_4𝑖𝑗𝐶𝐴𝑆 + 𝛽_5𝑖𝑗𝑀𝑇𝐵 + 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 (6) 𝑃 = 𝛼_𝑖+ 𝛽_1𝑖𝑗𝑆𝑂𝐶 + 𝛽_2𝑖𝑗𝐶𝐴𝑇 + 𝛽_3𝑖𝑗𝐿𝐸𝑉 + 𝛽_4𝑖𝑗𝐶𝐴𝑆 + 𝛽_5𝑖𝑗𝑀𝑇𝐵 + 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 (7)

The meaning of the parameters above are similar to those in previous equations. Equation 2 to 7 are investigated for every nation and every continent, in the time period 2003 to 2013. As mentioned before, Asia can only be investigated from 2008 to 2013. Consequently, Europe and North America are additionally regressed in the same time frame, to keep an equal comparison.

4.2 Statistics.

In order to compare the regressions, the significance of the coefficients are not the only important features, there are multiple factors that need to be enquired for the robustness of the research. The adjusted R-squared is a statistic that measures the goodness of fit of the model.

𝑅_𝐴2 _{= 1 −}𝑒′𝑒⁄(𝑛−𝑘)

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13 Where 𝑠_𝑦2 is the (unbiased) sample variance of the y data, and e is the OLS residual vector, n is number of observations and k is the rank. Clearly, choosing the model with the larger 𝑅_𝐴2 is equivalent to choosing the model with the smaller value of 𝑠_𝑦2. Hence, a larger adjusted R-squared (or smaller S-R-squared) means that the independent variables are better at explaining the model. Increasing the group of regressors can increase the adjusted R-squared, depending on whether the F-statistic for testing that their coefficients are all zero is greater than one in value, it will decrease when the coefficients are less than one in value2. The adjusted R-squared measures how well the observed outcomes are replicated by the model, and will penalize the use of extra variables. Another aspect is the fixed effects or random effects. While random effects are more detailed and efficient, it is rarely the case that the unobserved individual effects are uncorrelated with the explanatory variables. Fixed effects, on the other hand, analysis the impact of the variables that varies over time.3 In this paper, the business practices of a firm influences the stock price. The Hausman test will determine which effects are chosen. Another statistic is the Newey West estimator, which tries to correct the model for autocorrelation and heteroskedasticity. However, since a panel dataset is used and the statistical program that is used is eviews, it is not possible to use this estimator. Since the Newey West estimator is not an option, the Durbin-Watson (DW) statistic is a statistic that can detect the presence of autocorrelation in de residuals. When the DW is 0, there is perfect positive autocorrelation, if DW is 4, there is perfect negative autocorrelation and when DW is 2, there is no autocorrelation.

5.0 Results

First, the chosen method of effects is tested, where the whole sample is tested for random effects or fixed effect. As shown in appendix K, the Hausman test is rejected at 1% significance level, and the redundant fixed effect test in appendix L is not rejected in both cross sectional and period effect. Therefore, to keep all the regression analyses the same, in every analysis fixed effects are used. Another statistic mentioned was the adjusted R-squared. When examining the regressions, all variables are found to have a rather high adjusted R-squared. The lowest is the United States Nasdaq with on average 0,62 (appendix J), which is still very high. The adjusted R-squared is a method of how well the observed values are replicated by the model. Since these are high, the explanatory variables have a strong

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http://davegiles.blogspot.nl/2013/08/unbiased-model-selection-using-adjusted.html

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14 Table 2: Comparing Europe, North America and Japan. An OLS regression analysis.

Europe North America Japan

Dependent variable is stock price Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient

standard error standard error standard error standard error standard error standard error

C 1.899*** 1.935*** 2.349*** 2.370*** 2.536*** 2.600*** 0.252 0.252 0.354 0.358 0.272 0.271 Asset4 0.012 0.001 0.015 0.028 0.030 0.021 Corporate Governance 0.003 0.049 -0.003 0.016 0.045 0.013 Economic score 0.030** 0.002 0.020* 0.012 0.016 0.012 Environmental Score 0.017 -0.013 0.069* 0.030 0.025 0.037 Social score -0.138*** -0.014 -0.043** 0.032 0.028 0.022

Current asset total 0.215*** 0.220*** 0.235*** 0.232*** -0.162*** -0.171***

0.031 0.030 0.035 0.035 0.045 0.045

Leverage % of Capital -0.068*** -0.068*** -0.033*** -0.032*** -0.033 -0.034

0.015 0.015 0.010 0.011 0.023 0.023

Cash/Sales 0.058*** 0.053*** 0.089*** 0.087*** 0.061*** 0.060***

0.012 0.012 0.027 0.027 0.018 0.018

Market to Book Value 0.476*** 0.477*** 0.368*** 0.365*** 0.809*** 0.810***

0.020 0.019 0.022 0.022 0.028 0.028

R2A 0.731 0.738 0.650 0.649 0.898 0.900

Durbin Watson stat. 2.08 2.07 1.98 1.98 1.69 1.69

N 903 903 539 539 350 350

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15 Table 3: Comparing within Europe; France, Germany and United Kingdom. An OLS regression analysis.

France Germany United Kingdom

Variable Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient

C 0.645 0.67 2.177*** 2.024 3.001*** 3.195*** 0.423 0.418 0.414 0.414 0.432 0.433 Asset4 -0.026 0.054 -0.016 0.049 0.035 0.085 Corporate Governance -0.004 0.021 -0.008 0.024 0.022 0.046 Economic score 0.014 0.070*** -0.020 0.019 0.021 0.024 Environmental Score 0.025 -0.027 0.091 0.054 0.040 0.060 Social score -0.245*** -0.019 -0.180*** 0.062 0.045 0.066

Current asset total 0.238*** 0.291*** 0.127** 0.144*** 0.186*** 0.162***

0.066 0.066 0.049 0.049 0.047 0.047

Leverage % of Capital -0.075* -0.091** -0.073*** -0.067*** -0.065*** -0.072***

0.043 0.042 0.023 0.023 0.020 0.020

Cash/Sales 0.080*** 0.062** 0.042*** 0.043*** 0.073*** 0.067**

0.027 0.027 0.013 0.013 0.027 0.027

0.030 0.031 0.044 0.044 0.033 0.033

R2A 0.736 0.748 0.841 0.845 0.627 0.636

N 338 338 255 255 310 310

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16 prediction factor. As shown in almost all the regression tables, the Durbin-Watson statistic is roughly around 2. This indicates that there is no presence of autocorrelation. Only for Japan there is slightly negative autocorrelation and for United Kingdom there is some positive autocorrelation. However, these deviations are very low and therefore not damaging for the regression. The aim of this paper is to compare continents with each other regarding their attitude towards corporate social responsibility, however, in the previous section the dataset of Asia is found to be insufficient. Nevertheless, in table 2, Europe, North America and Japan are compared with each other, whereas Japan is being a representative for Asia. The results show that the total equally weighting CSR score is insignificant is all groups. When analyzing the individual pillar scores, the North American results are shown to be insignificant again. However, in Europe, the economic score and the social score are significant at 5% and 1% level, respectively. Indicating that when the economic score increases by one percentage, the stock price grows by 3 basis points, and when the social pillar grows by one percentage, the stock price decreases by 14 basis points. In Japan a similar relation is found, yet at slightly different coefficients and different significance levels. In addition, the environment score is found to be positive at a significant level of 10%. Indicating that when it increases by one percentage, the stock price will grow by 6 basis points. Furthermore, in Japan, the control variables are found to have other effects on financial performance, whereas current asset total has a negative significant effect of 17 basis points on the growth of the stock price. Lastly, it is not determined if leverage has any influence on the growth of the stock, since it is not found to be significant. In Appendix C, D and H the pillar scores are tested individually, however hardly any difference is found when they are compared to the coefficients in table 2.

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17 Table 4: Comparing within United States, Dow Jones and Nasdaq. An OLS Regression Analysis.

United States, Dow Jones United States, Nasdaq

Variable Coefficient Coefficient Coefficient Coefficient

standard error standard error standard error standard error

C 2.756*** 2.671*** 2.308*** 2.345*** 0.339 0.346 0.579 0.587 Asset4 -0.016 -0.010 0.058 0.039 Corporate Governance 0.078 0.034 0.075 0.061 Economic score 0.004 -0.004 0.024 0.021 Environmental Score 0.039 -0.019 0.042 0.033 Social score -0.016 -0.009 0.050 0.036

Current asset total 0.137*** 0.142*** 0.267*** 0.264***

0.043 0.043 0.050 0.051

Leverage % of Capital -0.108*** -0.112*** -0.027** -0.026**

0.027 0.029 0.013 0.013

Cash/Sales -0.033 -0.036 0.110*** 0.109***

0.039 0.039 0.037 0.037

Market to Book Value 0.458*** 0.459*** 0.337*** 0.334***

0.029 0.029 0.031 0.031

R2A 0.764 0.763 0.617 0.614

Durbin Watson stat. 2.24 2.24 1.98 1.98

N 236 236 303 303

***/**/* significance level at 1%, 5% and 10% respectively

basis points of the stock price. The control variables are found to be similar for all of the three countries.

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18 significant at even 1% level, indicating that when cash divided by sales grows by one percentage, the stock price will increase by 11 basis points.

Lastly, as mentioned in the previous section, for the time period 2008 to 2013, the dataset for Asia is found to be more balanced than in the earlier set time period. Therefore it would be possible to perform an OLS regression within this timeframe and compare the results with Europe and North America of the same time frame. Nevertheless, when inspecting appendix M, N and O, almost no variables are found to be significant. Only the control variables of Europe are found to be significant, and some of the control variables of North America and Asia.

6.0 Conclusion and Discussion

6.1 Conclusion.

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19 that of Europe and Japan. However, none of the CSR scores in North America are found to have a significant influence on financial performance. Apparently other factors play a more dominant role on financial performance, or these firms are of such magnitude that these scores do not have an impact on the stock price. In addition, some of the control variables are found to have a different influence on financial performance. In Japan, the current asset total is observed to have a significant negative influence on the stock price, while the influence of leverage remains undetermined. This result might be attributable to cultural differences, since in Europe and North America the current asset total has a significant positive influence on financial performance. To sum, when comparing CSR characteristics across continents, they do not seem to differ that much. Only the level of significance is found to differ. However, not all of them are found to have a positive influence on financial performance, some CSR characteristics are of negative influence. The main difference between western society and Japan is that the environmental score is found to have a significant positive influence on the financial performance.

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20 representatives of North America, since the firms of Mexico have similar issues as China and India. A strange finding is that none of the top 50 marker capitalized firms of Canada report any of the CSR characteristics. A possible explanation could be that Datastream does not have access to them. When comparing the equally weighted ratings of CSR of the Dow Jones and the Nasdaq, a negative, yet insignificant, influence is observed. The economic pillar score and the environmental pillar score found to have different signs, however, they are not found to be significant. Furthermore, for the control variables, cash divided by sales is found to have a positive significant influence when data of the Nasdaq is observed. While for the Dow Jones, it remains undetermined, it is positive yet not significant. Consequently, not all characteristics of CSR are found have a positive influence on stock price and the signs of the same characteristics of the indices are different.

With these results, it is still undetermined if Friedman was wrong. The overall coefficients of CSR characteristics are of positive influence, yet not always significant. Nonetheless, the social pillar score is found to be of significant negative effect on financial performance. Therefore, it depends on which characteristic the most weight is put on. In addition, it appears that the larger the economies of scale, Europe, North America and Japan, the more consensus on CSR characteristics and its effect on financial performance is found. However, when looking within the continent, the effects of the same CSR characteristic can be differing, where in one nation the effect is observed as positive while in the other there is a negative effect, although this is not always significant.

6.2 Discussion.

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7.0 References.

Baron, D. (2001). Private politics, corporate social responsibility and integrated strategy. Journal of Economics and Management Strategy 10, 7-45.

Bénabou, R. and Tirole, J., (2010). Individual and Corporate Social Responsibility, Economica, 77, 1-19.

Chapple, W. and Moon, J. (2005). Corporate Social Responsibility (CSR) in Asia. A Seven- Country Study of CSR Web Site Reporting. Business and Society, Vol. 44 No. 4, 415- 441

Chatterji, A.K., Levine, D.I. and Toffel, M.W., (2009). How well do social ratings actually measure corporate social responsibility? Journal of Economics and Management Strategy, 18, 125-169

Clarkson, P.M., Li, Y., Richardson, G.D. and Vasvari, F.P., Does it really pay to be green? Determinants and consequences of proactive environmental strategies. Journal of Accounting and Public Policy. Volume 30, Issue 2, Pages 122–144

Dagiliené, L. (2013). The influence of corporate social reporting to company's value in a developing economy. Procedia Economics and Finance. 5 (1), p.212-221.

Dam, L., Koetter, M., Scholtens, B., (2009). Why Do Firms Do Good? Evidence from Managerial Efficiency. In: 4th CORE Conference Working Paper Series, 1

El Ghoul, S., Guedhami, O, Kwok, C.Y.C. and Mishra, D.R. (2011), Does corporate social responsibility affect the cost of capital? Journal of Banking & Finance, Volume 35,

Issue 9, September 2011, Pages 2388–2406

Endacott, R.W.J. (2003). Consumers and CRM: a national and global perspective. Journal of Consumer Marketing. 21 (3), p.183-189.

Freeman, R.E. (1984) Strategic management: A stakeholder approach. Boston:Pitman Friedman, Milton (1970) “The social responsibility of business is to increase its profits”. New York Times Magazine, 13 September: 33ff.

Gregory, A., Tharyan, R. and Whittaker, J. (2014). Corporate Social Responsibility and Firm Value: Disaggregating the Effects on Cash Flow, Risk and Growth. Journal of

Business Ethics. 124 (1), p.633-657.

Hart, S.L. and Ahuja, G. (1996) Does it pay to be green? An empirical examination of the relationship between emission reduction and firm performance. Business Strategy and the Environment, Vol. 5, 30-37

Heinkel, R., Kraus, A. and Zechner, J., (2001). The effect of green investment on corporate behavior, Journal of Financial and Quantitative Analysis, 36, 431-449.

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23 Kitzmueller, M. and Shimshack, J. (2012). Economic Perspectives on Corporate Social

Responsibility. Journal of Economic Literature. 50 (1), p.51-84.

KPMG, (2011). KPMG international survey of corporate responsibility reporting, Amsterdam: KPMG International.

Laroche, M., Bergeron, J. and Barbaro-Forleo, G. (2001), “Targeting consumers who are willing to pay more for environmentally friendly products”, Journal of Consumer Marketing. 18 (6), p.503-20.

Lin, C.H., Yang, H.L. and Liou, D.Y. (2009). The impact of corporate social responsibility on financial performance: Evidence from business in Taiwan. Technology in Society. 31

(1), p.56-63.

Maignan, I. and Ralston, D.A. (2002). Corporate Social Responsibility in Europe and the U.S.: Insights from Businesses' Self-presentations. Journal of International Business Studies. 33 (3), p.497-514.

Margolis, J.D., Elfenbein, H.A. and Walsh, J.P., (2009). Does it pay to be good … and does it matter? A meta-analysis of the relationship between corporate social and financial performance, Social Science Research Network.

Momin, M.A. and Parker, L.D. (2013). Motivations of corporate social responsibility reporting by MNC subsidiaries in an emerging country: The case of Bangladesh. The British Accounting Review. 45 (1), p.215-228.

Salaber, J.M. (2007). The Determinants of Sin Stock Returns: Evidence on the European Market. Working Paper, University of Bath School of Management. Finance International meeting.

Servaes, H. and Tamayo, A. (2013). The Impact of Corporate Social Responsibility on Firm Value: The Role of Customer Awareness. Management Science. 59 (5), p.1045-1061. Wu , M. and Shen, C., (2013). Corporate social responsibility in the banking industry:

Motives and financial performance. Journal of Banking and Finance, 37, 3529-3547. Internetsites:

http://www.princeton.edu/~otorres/Panel101.pdf

extranet.datastream.com/data/ASSET4%20ESG/documents/ASSET4_ESG_Methdology_FA Q_0612.pdf

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8.0 Appendix.

Appendix A: Descriptors of Variables

ASSET4 ESG DATA GLOSSARY

Datapoint = "raw" value, used to calculate indicator value

Indicator Score = normalized, z-scored indicator value (see Scores Calc Methodology on the second tab)

Datastream Code

Pillar Name Description Scaling

A4IR

Equal-Weighted Rating

The Equal Weighted Rating reflects a balanced view of a company's performance in all four areas, economic, environmental, social and corporate governance

Positive

CGVSCORE Corporate

Governance

Corporate Governance

The corporate governance pillar measures a company's systems and processes, which ensure that its board members and

executives act in the best interests of its long term shareholders. It reflects a company's capacity, through its use of best

management practices, to direct and control its rights and responsibilities through the creation of incentives, as well as checks and balances in order to generate long term shareholder value.

Positive

ECNSCORE Economic Economic The economic pillar measures a company's

capacity to generate sustainable growth and a high return on investment through the efficient use of all its resources. It is reflection of a company's overall financial health and its ability to generate long term shareholder value through its use of best management practices.

Positive

ENVSCORE Environmental Environmental The environmental pillar measures a company's impact on living and non-living natural systems, including the air, land and water, as well as complete ecosystems. It reflects how well a company uses best management practices to avoid environmental risks and capitalize on environmental opportunities in order to generate long term shareholder value.

Positive

SOCSCORE Social Social The social pillar measures a company's

capacity to generate trust and loyalty with its workforce, customers and society, through its use of best management practices. It is a reflection of the company's reputation and the health of its license to operate, which are key factors in determining its ability to generate long term shareholder value.

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Appendix B: Total sample, OLS Regression analysis

Dependent variable is stock price Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient

C 1.968037*** 1.968232*** 1.962479*** 1.989157*** 2.027978*** 1.990128*** 0.187611 0.187659 0.186495 0.186946 0.187095 0.188305 Asset4 0.012446 0.017524 Corporate Governance 0.007942 0.010435 0.011507 0.011708 Economic score 0.014597* 0.017955** 0.00829 0.008457 Environmental Score -0.005417 0.002297 0.017066 0.018084 Social score -0.035151** -0.044563** 0.016219 0.017371

Current asset total 0.215258*** 0.216108*** 0.214832*** 0.216051*** 0.215373*** 0.214152***

0.021595 0.021579 0.021567 0.021585 0.021549 0.021552

Leverage % of Capital -0.044165*** -0.044574*** -0.043243*** -0.04441*** -0.044837*** -0.043503***

0.008248 0.008235 0.008258 0.008241 0.008225 0.008259

Cash/Sales 0.054894*** 0.05513*** 0.053761*** 0.05528*** 0.054624*** 0.05248***

0.010282 0.010272 0.010296 0.010272 0.010261 0.010294

0.013701 0.013701 0.013685 0.013709 0.013685 0.013684

R2A 0.70369 0.703684 0.704175 0.703614 0.704473 0.705

N 1792 1792 1792 1792 1792 1792

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Appendix C: Europe, OLS Regression analysis

C 1.898626*** 1.916248*** 1.863225*** 1.915631*** 1.993619*** 1.934701*** 0.252302 0.25375 0.251365 0.251269 0.249413 0.251591 Asset4 0.012453 0.028445 Corporate Governance -0.00287 0.003667 0.015522 0.015794 Economic score 0.025554** 0.030136** 0.012103 0.012117 Environmental Score -0.016465 0.016538 0.027873 0.029749 Social score -0.122724*** -0.137964*** 0.03025 0.032313

0.030649 0.030617 0.030535 0.030635 0.030325 0.030267

0.014615 0.014613 0.014625 0.014587 0.014452 0.014525

Cash/Sales 0.057689*** 0.057703*** 0.057026*** 0.057683*** 0.054434*** 0.053222***

0.011784 0.011786 0.011756 0.011783 0.011692 0.011675

0.019618 0.019667 0.019573 0.019619 0.019424 0.019448

R2A 0.730929 0.730875 0.732365 0.730982 0.736323 0.737647

N 903 903 903 903 903 903

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Appendix D: North America, OLS regression analysis

C 2.349403*** 2.327706*** 2.349791*** 2.375805*** 2.370922*** 2.370067*** 0.35427 0.352897 0.352711 0.355755 0.354109 0.357577 Asset4 0.000413 0.030434 Corporate Governance 0.047421 0.049196 0.044719 0.045163 Economic score 0.000672 0.002571 0.015029 0.015626 Environmental Score -0.013036 -0.012812 0.023768 0.024769 Social score -0.016439 -0.013986 0.02586 0.027569

0.035074 0.035033 0.03508 0.035045 0.035101 0.035233

0.010487 0.010468 0.010495 0.01048 0.010462 0.010549

Cash/Sales 0.088763*** 0.085686*** 0.08856*** 0.089829*** 0.089739*** 0.086251***

0.027043 0.026624 0.027205 0.026543 0.026516 0.027375

0.021938 0.021861 0.021909 0.021917 0.022053 0.022121

R2A 1.98 1.98 1.98 1.99 1.99 1.98

N 539 539 539 539 539 539

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Appendix E: France, OLS Regression Analysis

C 0.644835 0.636861 0.605279 0.63728 0.690788* 0.669978 0.4234 0.426317 0.420761 0.421799 0.409829 0.417612 Asset4 -0.026499 0.049349 Corporate Governance -0.006842 -0.004096 0.023776 0.024433 Economic score 0.008294 0.013666 0.01866 0.018731 Environmental Score -0.027776 0.024761 0.051078 0.053817 Social score -0.234074*** -0.244774*** 0.059506 0.062153

0.066109 0.066115 0.066081 0.066099 0.065802 0.066136

Leverage % of Capital -0.074917* -0.073968* -0.072507* -0.073207* -0.090762** -0.090877**

0.043117 0.043096 0.043033 0.042998 0.04215 0.042417

Cash/Sales 0.080339*** 0.080745*** 0.079735*** 0.081002*** 0.063951** 0.061658**

0.027221 0.027245 0.027276 0.027236 0.026863 0.027112

0.030371 0.030503 0.030507 0.030415 0.030365 0.030797

R2A 0.736277 0.736089 0.736194 0.736284 0.749429 0.747524

N 338 338 338 338 338 338

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29

Appendix F: Germany, OLS Regression Analysis

C 2.176901*** 2.165314*** 2.080457*** 2.207791*** 2.207746*** 2.024109 0.414139 0.41928 0.40819 0.415767 0.416624 0.414015 Asset4 0.053578 0.034806 Corporate Governance 0.016451 0.021424 0.021293 0.022003 Economic score 0.066969*** 0.070322*** 0.020854 0.021302 Environmental Score -0.013918 -0.026808 0.037003 0.040443 Social score 0.003402 -0.019326 0.039661 0.045252

Current asset total 0.12733** 0.135509*** 0.140803*** 0.141638*** 0.138745*** 0.14369***

0.04943 0.049262 0.047941 0.049444 0.049564 0.048801

0.022541 0.022721 0.022332 0.022619 0.022617 0.022606

Cash/Sales 0.042113*** 0.042185*** 0.043764*** 0.042752*** 0.042654*** 0.043391***

0.0134 0.013464*** 0.01316 0.013467 0.013469 0.013223

Market to Book Value 0.74306*** 0.743534 0.719311*** 0.73821*** 0.740374*** 0.717734***

0.043819 0.044173 0.043485 0.044316 0.044078 0.044161

R2A 0.840618 0.839301 0.846262 0.83896 0.838859 0.84522

N 255 255 255 255 255 255

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Appendix G: United Kingdom, OLS Regression analysis

C 3.001061*** 2.985582*** 3.044138*** 2.975799*** 3.162774*** 3.194502*** 0.432106 0.431356 0.43027 0.42908 0.428938 0.432736 Asset4 -0.016059 0.085344 Corporate Governance 0.005976 -0.007878 0.045921 0.045975 Economic score -0.02817 -0.020463 0.023922 0.024053 Environmental Score 0.043608 0.09085 0.057386 0.05952 Social score -0.162956** -0.180283*** 0.063311 0.066399

0.046684 0.046667 0.046577 0.04658 0.046729 0.046839

0.019771 0.019927 0.019864 0.019788 0.019574 0.01991

Cash/Sales 0.072636*** 0.073531*** 0.074856*** 0.074462*** 0.064477*** 0.067439**

0.02684 0.027255 0.026789 0.026858 0.026676 0.027247

0.033427 0.033344 0.0333 0.033348 0.03322 0.033329

R2A 0.627101 0.627074 0.629014 0.62787 0.636248 0.636163

N 310 310 310 310 310 310

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Appendix H: Japan, OLS Regression analysis

C 2.536074*** 2.574153*** 2.527425*** 2.548017*** 2.631367*** 2.600274*** 0.271545 0.268333 0.266933 0.266398 0.270436 0.270787 Asset4 0.014747 0.021466 Corporate Governance -0.0000161 -0.003255 0.012142 0.01264 Economic score 0.016987 0.019511* 0.011449 0.01165 Environmental Score 0.037904 0.068716* 0.032618 0.036925 Social score -0.02114 -0.043464** 0.018991 0.02154

Current asset total -0.162021*** -0.160857*** -0.16612*** -0.163152*** -0.16062*** -0.171087***

0.044777 0.044819 0.044756 0.044722 0.044688 0.044711

Leverage % of Capital -0.033371 -0.034006 -0.032476 -0.033975 -0.034916 -0.034184

0.022789 0.022793 0.022728 0.022737 0.022756 0.022652

Cash/Sales 0.060946*** 0.060988*** 0.059016*** 0.062567*** 0.060003*** 0.059627***

0.018126 0.018142 0.018122 0.01815 0.018124 0.018123

0.028265 0.028275 0.028199 0.028206 0.028238 0.028112

R2A 0.898244 0.898082 0.898832 0.898543 0.898505 0.899636

N 350 350 350 350 350 350

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Appendix I: United States, Dow Jones. OLS Regression analysis

C 2.759554*** 2.720535 2.758582 2.698048 2.757917 2.670827*** 0.339175 0.339486 0.339495 0.342348 0.339152 0.345682 Asset4 -0.015838 0.05813 Corporate Governance 0.081765 0.078402 0.070774 0.075084 Economic score 0.001785 0.003916 0.022082 0.023912 Environmental Score 0.044453 0.039319 0.040351 0.041534 Social score 0.006156 -0.016128 0.044975 0.050242

0.04268 0.042893 0.042709 0.042556 0.042783 0.043207

0.027348 0.027323 0.028047 0.027411 0.027311 0.028628

Cash/Sales -0.032876 -0.034711 -0.03514 -0.035117 -0.034633 -0.03634

0.038512 0.037976 0.039155 0.037992 0.038137 0.039281

Market to Book Value 0.458467*** 0.460244*** 0.458488*** 0.45769*** 0.458775** 0.45873***

0.028798 0.028748 0.028807 0.028723 0.0289 0.028998

R2A 0.763951 0.765459 0.76387 0.765315 0.763884 0.763009

N 236 236 236 236 236 236

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Appendix J: United States, Nasdaq. OLS Regression analysis

C 2.308174*** 2.271545*** 2.292604*** 2.341444*** 2.328708*** 2.344849*** 0.579339 0.574722 0.574228 0.579295 0.579647 0.586822 Asset4 -0.009954 0.039446 Corporate Governance 0.030557 0.034097 0.060389 0.061492 Economic score -0.005184 -0.003566 0.020405 0.021302 Environmental Score -0.020641 -0.019385 0.031592 0.032963 Social score -0.016594 -0.00923 0.033817 0.036037

0.050018 0.050085 0.050061 0.049943 0.050025 0.05051

Leverage % of Capital -0.026618** -0.025936*** -0.026577** -0.02609** -0.02659*** -0.025779**

0.012961 0.012966 0.012952 0.012937 0.012937 0.013064

Cash/Sales 0.109995*** 0.10607*** 0.110241*** 0.109706*** 0.108989*** 0.109094***

0.036606 0.036134 0.036796 0.035952 0.035928 0.037129

0.031121 0.0309 0.031015 0.030965 0.03121 0.03145

R2A 0.617155 0.617451 0.617156 0.617713 0.617427 0.613732

N 303 303 303 303 303 303

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Appendix K: Hausman test for random effects.

Correlated Random Effects - Hausman Test Equation: TOTAL_A4IR

Test cross-section random effects

Test Summary Chi-Sq. Statistic Chi-Sq. d.f. Prob.

Cross-section random 30.22987 5 0

** WARNING: estimated cross-section random effects variance is zero. Cross-section random effects test comparisons:

Variable Fixed Random Var(Diff.) Prob.

A4IR 0.028808 0.030971 0.000027 0.6791

CAT 0.253281 0.276665 0.000076 0.0073

LEV -0.04784 -0.04381 0.000007 0.1197

CAS 0.064731 0.069703 0.000005 0.0257

MTB 0.640097 0.632286 0.00001 0.0145

Appendix L: Redundant Fixed effect Test

Redundant Fixed Effects Tests Equation: EU

Test cross-section and period fixed effects

Effects Test Statistic d.f. Prob.

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Appendix M: Europe OLS Regression Analysis, timeframe 2008-2013

C 0.451469 0.484721 0.476109 0.468088 0.525951 0.483835 0.319746 0.318469 0.319904 0.317754 0.31903 0.321381 Asset4 0.057864 0.05834 Corporate Governance 0.008609 0.009924 0.03057 0.03232 Economic score 0.007687 0.012926 0.019391 0.019856 Environmental Score 0.071932 0.098851 0.064057 0.068896 Social score -0.072057 -0.124426 0.072763 0.080144

0.042099 0.042152 0.042262 0.042175 0.042178 0.042461

0.022294 0.022293 0.022328 0.022269 0.022269 0.02232

Cash/Sales 0.035604*** 0.035577*** 0.035686*** 0.03527*** 0.035053*** 0.033405***

0.013108 0.013142 0.013122 0.013111 0.013128 0.013187

0.028269 0.028286 0.028332 0.028275 0.028376 0.028565

R2A 0.76834 0.767855 0.767897 0.768488 0.768338 0.768231

N 535 535 535 535 535 535

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Appendix N: North America, OLS Regression Analysis, timeframe 2008-2013

C 2.816826*** 2.846987*** 2.833023*** 2.835623*** 2.830477*** 2.855199*** 0.365585 0.368688 0.364731 0.366178 0.365109 0.371745 Asset4 0.018976 0.042314 Corporate Governance -0.021379 -0.016587 0.06377 0.065324 Economic score 0.007425 0.007428 0.016524 0.016814 Environmental Score -0.006187 -0.005827 0.029572 0.030153 Social score -0.00387 -0.003734 0.037545 0.038259

0.037582 0.037467 0.037493 0.03756 0.03762 0.037911

0.012058 0.012041 0.012088 0.012062 0.01205 0.01221

Cash/Sales 0.026131 0.030045 0.025629 0.029777 0.029291 0.026708

0.028187 0.027401 0.028482 0.027413 0.02731 0.028855

Market to Book Value 0.576304** 0.575592*** 0.576629*** 0.575938*** 0.575674*** 0.576887***

0.029594 0.029563 0.029638 0.029599 0.029569 0.02985

R2A 0.792383 0.792313 0.792384 0.792259 0.792232 0.79009

N 335 335 335 335 335 335

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Appendix O: Asia, OLS Regression analysis, timeframe 2008-2013

C 2.24686*** 2.227215*** 2.237108*** 2.213801*** 2.220545*** 2.248414*** 0.37401 0.372129 0.369906 0.373808 0.370757 0.377982 Asset4 -0.018735 0.02984 Corporate Governance -0.006971 -0.005878 0.017165 0.018018 Economic score -0.013984 -0.013447 0.016389 0.017158 Environmental Score -0.005155 0.006785 0.0416 0.049233 Social score -0.011341 -0.003795 0.032048 0.039234

Current asset total 0.016893 0.014528 0.017183 0.014773 0.015217 0.017072

0.035934 0.03584 0.035878 0.035878 0.035829 0.03617

0.025673 0.025608 0.025751 0.025616 0.025608 0.025888

Cash/Sales -0.006367 -0.006899 -0.004623 -0.007245 -0.007152 -0.004393

0.021471 0.021451 0.02163 0.021447 0.02144 0.021773

0.029742 0.029754 0.029748 0.02976 0.029759 0.029921

R2A 0.838334 0.838206 0.838519 0.838123 0.838184 0.836911

N 380 380 380 380 380 380

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