The impact of community development initiatives on the market value of firms: the moderating role of firm size and annual household income

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The impact of community development initiatives on

the market value of firms: the moderating role of firm size

and annual household income

Master Thesis

Supply Chain Management

University of Groningen, Faculty of Economics and Business

21 June, 2018

Author: Weilei Zhang

Student number: S2863413

Email: w.zhang.12@student.rug.nl

Supervisor: Dr. X. (Bruce) Tong

Co-assessor: Dr. N.J. (Niels) Pulles

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Abstract

The goal of this paper is to investigate the relationship between the implementation of community development initiatives and market value of the firms listed on the US stock exchange market. Based on the contingency theory, two moderating effects of firm size and annual household income towards the community (US states) on the direct relationship are examined afterwards.

This paper is conducted by a short-term event study to identify how the implementation of community development initiatives (CDI) reacts immediately on the stock price/market value of firms. During this research, it follows several phases. Firstly, I collect the samples (announcements) and check whether the company is a listed firm in the Academic LexisNexis database. And then, I match the companies’ information (i.e. PERMNO) by using COMPUSTA database in Wharton Research Data Services (WRDS). Last but not least, I test the event study in the Eventus platform of WRDS and then examine the direct and moderating effects by utilizing SPSS to analyze the data.

The implementation of CDI is positively relating to the market value of firms. The large firms will negatively influence the increased market value. And the different annual household incomes show no positively significant effect on the direct relationship.

After investigating the relationship between CDI and market value of firms, as well as the moderating effects on the direct relationship. This study can assist firms’ managers to make managerial decisions on the implementation of CDI and help them to maximize their market value.

Keywords: community development, community development initiatives, market value, stock,

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Acknowledge

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List of tables

Table 1: Keywords and sources used in search for CDI announcements. ... 19 Table 2: Descriptive statistics on the 120 announcements of firms... 20 Table 3: Event Period Abnormal Returns for 192 announcements over the 18-year study

period (2000-2018) ... 24 Table 4: Event Period Abnormal Returns for 120 announcements within 5 years (2012-2016)

... 25 Table 5: Regression analysis for the sample of 120 CDI announcements ... 25 Table 6: The overview of the results ... 26

List of figures

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1. Introduction

Corporate social responsibility (CSR) has become a mainstream research topic in supply chain and operations management domain (Said et al., 2009: 212; Jamali, & Mirshak, 2007). An awareness towards social and environmental issues is increasing (Eweje, 2006). The population’s needs of improving the living condition drive the firms to do more for the society by implementing CSR practices (Jamali, & Mirshak, 2007: 243). To better understand CSR, Werther Jr and Chandler (2010) make a distinction between internal and external CSR due to the different recipients of CSR towards organizations. Internal CSR refers to the practices relating to the workforce, such as ethical labour and employees (Turker, 2009). External CSR focuses on the initiatives relevant to the local community, the nature, and customers (El Akremi et al., 2015). In order to satisfy the various demands towards CSR from different stakeholders, companies are required to be socially and environmentally responsible (Eweje and Sakaki, 2015). Melo and Garrido-Morgado (2012) point out that the implementation of CSR practices may enhance corporate reputation and create competitive advantages in adopter firms.

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with computers and softwares. This action helps Microsoft strengthen the relationship with local communities and create more shared values (Jamali, 2007). A positive relationship between the CSR initiatives and firms’ performance in this case is reflected. It is worth noting that some prior researches have investigated relationships between CSR and corporate financial performance, and found rather mixed results on that (Orlitzky et al., 2003; Barnett, 2007; Aupperle et al., 1985; Seifert et al., 2003). Some studies show that the implementation of CSR initiatives can result in a better corporate financial performance by the improved corporate reputation and customer loyalty (Orlitzky et al., 2003; Bhattacharya and Sen, 2004). However, the financial performance is not always keeping rising by implementing initiatives. Some scholars hold the point that there is a negative relationship (Barnett, 2007; Aupperle et al., 1985) or nonsignificant relationship between CSR practices and profit gains (Seifert et al., 2003). The possible reason may be that doing too much possibly cause an untrustworthiness to stakeholders, and they perceive that the firm is not good enough on the profit returns and still needs to extract more from the society (Barnett, 2007).

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example, the local customers’ requirements on the products or services with or without CSR depend on varying levels of annual household income (McWilliams and Siegel, 2001: 121). Considering about this issue, the characteristic of demographic statistics within the communities, such as citizens’ income level, may be another moderator that influences the relationship.

Referring to the prior studies, the implementation of CDI and its subsequent outcomes towards the firms’ market value are relatively underdeveloped by researchers. The purpose of this study is firstly to examine the direct relationship between the CDI implemented by the listed companies on the US stock exchange market and the immediate market value of those firms. And then the firm’s size and annual household income will be regarded as two moderators that may influence such relationship. Thus, two research questions in this study are conducted as follows:

1. What is the relationship between the community development initiatives (CDI) and market value of the firms?

2. How do the firm size and annual household income influence the relationship between CDI and market values?

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2. Theoretical background

This chapter aims to present a literature background of this research. Basically, the chapter starts with a theory of the corporate social responsibility (CSR) in general, and then extends to the concept of community development under CSR background. Furthermore, the relationship between CSR and corporate financial performance, as well as the possible moderating effects on the relationship between CDI and market value are elaborated in this section.

2.1 Corporate social responsibility

World Business Council for Sustainable Development (WBCSD) defines CSR as a commitment associated with business ethics and economic development when taking the conditions of employees’ life, local community, and the whole society into account (WBCSD, 1999). CSR is also treated as the duty of the organization that concerns stakeholders’ expectations and their impacts on the economic, social, and environmental performance towards the whole society (Aguinis, 2011: 855). In line with this definition, CSR practices encompass various activities, including environmental sustainability programs, community development programs, charitable giving and so on (Rupp and Mallory, 2015).

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2.2 Community development under CSR

For seeking companies’ development, organizations are expected to focus on the interests towards the sustainable performance of the communities where they operate ( ISO26000, 2011). Fisher et al. (2009) also deem that the implementation of CSR associated with communities development is aiming at maximizing businesses’ positive influence on the society, environment and financial welfare. Concerning about the interests of the society, corporations are realizing their responsibilities for local communities with respect to citizens’ rights and living conditions, such as implementing the donation activities for improving educational situations, creating the local employment and so forth (Werner, 2009). When the community is taken into account by the organizations that intent to achieve the goal of ‘doing the right thing’ (Branco and Rodrigues, 2006), CSR is defined as a commitment to improve the welfare of community by implementing discretionary initiatives and corporate resources (Kotler and Lee, 2005: 3). Synchronizing the activities of the community members towards the same goals is a significant factor to sucessfully obtain the achievement of community development (Luloff and Bridger, 2003). Brennan et al. (2004) also suggest that the local community and parties involved within the implementation of CSR process can be beneficial by utilizing the social and human resources. Thus, implementing CSR initiatives conjointly with the local community can assure that this program turns to be more effective and its economic development will become more mature.

2.3 The relationship between CSR and corporate financial performance

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corporate financial performance can be improved by improving relationships between firms and its relevant stakeholders. Specifically, some authors indicate that the implementation of CSR activities, such as donation or philanthropy to local communities, is beneficial for enhancing the trustworthiness and corporate reputations (Kolk, 2008; Othman et al., 2011; Barnett, 2007). Consequently, it will increase the satisfaction among stakeholders (e.g. employees’ attractiveness) (Laufer and Coombs, 2006; Turban and Greening, 1997), which is good for attracting and maintaining the preservation rate of employees (Greening and Turban, 2000; Turban and Greening, 1997) and pooling more talents with less recruitment and training costs. From the revenues’ perspective, improved stakeholders’ relationships may promote companies to charge premium price through the repeated and new coming customers (Fombrun et al., 2000; Porter, 1991; Porter and van der Linde, 1995).

However, there are still plenty of studies showing an opposite relationship between CSR and CFP (McWilliams and Siegel, 2001; Orlitzky et al. 2003; Aupperle et al., 1985). Some scholars assert that implementing CSR initiatives may harm the financial performance of the company (Aupperle et al., 1985). In other words, socially responsible firms do not have a competitive advantage, since the companies need to invest their money immediately associated with the environmentally friendly equipments or charitable donation actions to their local communities, but the benefits from sustainable and prosocial business processes are not always guranteed correspondingly (Tsoutsoura, 2004).

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intervening variables, such as the strategy of the organization (depending on different firm sizes) (Sweeney, 2007), the characteristics of the demographic scenarios (Starr, 2009; D’Alessio et al., 2008) and so forth.

Concerning the mixed relationships mentioned above between CSR (relevant to community development) and CFP, the contingency factors concerning the characteristic of the focal corporations (e.g., firm size) and the recipients of the initiatives (e.g., annual household income level) could possibly be the moderating variables influencing the direct relationship. Therefore, in this research, apart from the direct relationship between CDI and firms’ market value, I also take the potential moderating effects of firm size and communities’ annual household income level into account.

2.4 The moderating effect of what on the relationship between CDI and market value

As Ullmann (1985: 552) suggested, there are some intervening variables that influence the relationship between CDI and market value. The companies’ market value due to a certain event can be affected by the characteristics of the environmental variables. Since community development under CSR is treated as a very complicated and dynamic concept (Chavis & Wandersman, 1990), establishing collaborative efforts among different stakeholders is quite significant (Dentchev et al., 2015). Stakeholders’ (shareholders, community residents, employees) interests should be taken into account by the organization when implementing the initiatives (Clarkson, 1995; Starik, 1995). Therefore, I adopt a stakeholder theory (see Freeman, 1984) to guide the development of hypothesis regarding direct relationship between CID and market value of the adopter firms in the later section.

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regarding the contingency factors that may influence the direct relationship. Specifically, in this study, for investigating the impact of internal factor on firms’ market value, I treat the firm size as one moderator that may influence the relationship between CDI and the market value of firms. Based on the slack resource theory came up with by George (2005), the firms with larger slack resource inherences are more likely to have much more flexibility and freedom responding to the company’s competitor strategies (in this case, CDI is the strategy that make the company become competitiveness), and then impact on their performance. Due to the assumption that larger companies may have higher budgets and more resources to be invested in the CSR initiatives to the local community (Sandelin, 2008; Collier, 2005), a slack resource theory (George, 2005) is used for helping me point out how the firm size influence the relationship in the next part. Besides, in order to look into how the external issues (the characteristic of communities) influence the direct relationship, the inequality of residents’ annual household income is chosen as the second moderator. According to the slack resource theory, the citizens’ available resources of buying stocks are different due to their different levels of salaries.

3. Theory and hypothesis development

In this chapter, the stakeholder theory and slack resource theory are explained in detail, which provides a clue for coming up with three hypotheses.

3.1. Community development initiatives and market value of the firm.

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Freeman (1984) and Donaldson, & Preston (1995) mention that the firm acting as a social entity is expected to build up relationships with many parties whose welfares are considered to be influenced by the organizational actions. To ensure the continuing wealth or value for each stakeholders (shareholders, community residents, employees) (Clarkson, 1995; Starik, 1995), the corporation needs to take the stakeholders’ concerns into account and fulfill their responsibilities towards the whole society (Freeman, 1984; Clarkson, 1995: 107; De Wit et al., 2006). Heenetigala (2016: 42) reveals that the prosocial behavior of the companies whether they implement community development programs or not could be decided by the community demand. To be more specific, in some regions, improving the educational situation or the level of health awareness within the local communities is widely adopted by organizations. Subsequently, the implementation of those activities relating to CDI, such as philanthropy to local communities, could result in a better financial performance of the firm due to the obtained corporate reputation and customer loyalty (Husted and Allen, 2007; Barnett, 2007). This is because implementing CSR practices could improve the trustworthiness and reputation of a firm and thereby strengthen the relationships with stakeholders. As indicated by Ryan and Buchholt (1998), the shareholder’s stock trading decision is driven not only by the degree of risk they are able to take, but also the extent of their trust towards the firms’ behavior. In the current experience, the level of individuals’ trust could directly bring about the shareholders’ perceived risk of the situation, and then influence the shareholders’ stock buying behavior (Ryan and Buchholtz, 2001). From the perspective of psychology, when the firm is trustworthy, the investors are willing to have a presumption about companies’ consciousness of safeguarding their assets, and then opt to buy the companies’ stocks (Rotter, 1967).

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the workforce, which is essential for improving the employee morale and productivity (Tsoutsoura, 2004). The improved stakeholders’ relationship has an advance on gathering talents together with less transaction cost. Even though the initiatives are costly (additional investment on the resources), the increased productivity of the employees as well as improved quality of the products are possible to bring about positive cash flows that overflow costs (Fombrun et al., 2000). The shareholders may recognize a relatively considerable advantages of those prosocial initiatives and then have a confidence on the corporations’ development due to the event. Based on the traditional financial logic suggested by Jensen (2010), the market value of firms could be maximized by the increased value of their cash flow.

In the context of the social responsibility, corporations improve the relationship with the communities and their employees, which is helpful for achieving the success of organizations towards their market value. With a focus on the two important stakeholders (community and employee), I posit the following hypothesis:

H1: Community development initiatives are positively related to market value of the firms. 3.2. The effect of firm size on the relationship between CDI and market value of the firms

The concept of corporate social responsibility is increasingly concerned by many large companies as well as small-and-medium sized enterprises (SMEs) (Tantalo et al., 2012; Arevalo and Aravind, 2011; Sweeney, 2007). In order to investigate the influence of firm size on the relationship between CDI and the market value, the characteristic of the firm sizes (e.g., the ability to hold the CSR resources) should be taken into consideration.

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H2: Firm size positively moderates the relationship between CDI initiatives and market value

of the firms (the market value, i.e., abnormal return, is a relative measure compared with industry peers).

3.3. The moderating role of the annual household income level

Due to the fact that individuals who live in a community are treated as determinant of customer demand for companies’ social responsibility in some previous studies, the characteristics of the community where customers living are taken into account when investigating the moderating effect on the relationship (McWilliams and Siegel, 2001; Starr, 2009; & D’Alessio et al., 2008). Based on the stakeholder theory (Freeman, 1984), building good relationships with stakeholders, such as communities and customers, is essential for improving the firms’ financial performance. Implementing prosocial initiatives and serving for the local communities by businesses is an alternative to connect customers and consequently enhance the firms’ reputation and customer loyalty (Hillman and Keim, 2001). Specifically, the firms are expected to provide the products and services to their local communities with minimal negative impact on local citizens’ health and living conditions based on the community development guidance in ISO 26000 (2011: 33). The local customers’ recognition about CSR and their comsumption behaviors on the sustainable products or service are determined by the levels of household income (McWilliams and Siegel, 2001: 121). Notably, income inequality is a common phenomenon across the geographical communities in the United States (Olson, 2016: 879; Berrone et al., 2016: 1941; & Glaeser et al., 2009). Under this circumstance, it is expected to explore whether the annual households incomes may or may not influence the relationship between CDI and companies’ market value.

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under the thoughts of CSR (Starr, 2009). The possible reason is that the ethical products that with less pollution to the environment of community are at the expense of higher prices (De Pelsmacker et al., 2005; Hughner et al., 2007). Whether customers are willing to engage in the CDI with companies may depend on their annual household income levels. In light of this finding, D’Alessio et al. (2008) also show that the purchasing behaviours occurred with those socially concerned customers who earn medium or high level of income, will positively impact the companies’ profit. Correspondingly, for the short reaction of the market value, when the shareholders recognize that the firm maybe operate well and gain more profits in relatively rich regions due to the implementation of CDI, the high income level citizens’ stock buying behavior may be facilitaed as well. Compared to the affluent customers, the citizens with low income are more likely to prioritize self-interests and rather price sensitive due to their limited resources and capabilities, and therefore they have a lower sense of respecting others’ welfare and support of corporate social responsibility actions (Piff et al., 2010; McWilliams and Siegel, 2001) or even community development initiatives. In other words, the stock price is supposed to be improved by the stock buying behavior of the one group who erans much higher annual household income. Thus, I propose the following hypothesis:

H3: The level of annual houshold income positively moderates the relationship between CDI

initiatives and market value of the firms (the market value, i.e., abnormal return, is a relative measure compared with industry peers).

4. Sample and data description

I collected announcements with respect to community development initiatives from Academic LexisNexis1 database by searching for the valid combination of keywords. This online academic database is able to provide full-text documents that are related to the global business

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samples meeting the search criteria. After that, I decide to confirm the listed companies’ information (i.e. PERMNO) by using COMPUSTA database in Wharton Research Data Services (WRDS). In the light of the purpose of this study, the following announcements are excluded when generating useful samples:

• Announcements of CSR initiatives that are not related to the definition of the community development.

• Firms that are not publicly traded in the United States. • The announcements that were made earlier than 2000.

Table 1: Keywords and sources used in search for CDI announcements.

Panel A: Keywords used in search for CDI announcements

(research or laboratories or laboratory or local employment or creat* or disability or strengthen or employment opportunity or donation or donate or books or library or libraries or schools or philanthropic or resources or partnership or university or technology partnership or technology development partnership or science create or local employ* or strengthen* or employment opportunity promote* or disability or employment help or job or creation university or receive or give or resources or local philanthropic or resources philanthropic or scholarship or education or donate* or school help or aware* or AIDS supporthe* or services donatep* or park provide* or healthy* or food local or poverty choose* or local suppliers)

Panel B: Search sources Business Wire

The Wall Street Journal PR Newswire (US) Dow Jones News Service

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Table 2: Descriptive statistics on the 120 announcements of firms

Financial data Mean Median SD Min Max Total assets ($M) 266971,30 23690,50 644272,58 20,70 2573126,00 Annual household income ($) 56809,93 57020,00 7801,15 35521,00 76165,00 Operating income ($M) 11253,82 2822,90 17137,39 -22,41 61385,00

5. Methodology

I adopt an event study methodology to estimate the stock market reaction to announcements of community development initiatives. This methodology offers an approach to estimate market returns in terms of the events that the public companies implement CDI, while the market-wide influencing on stock prices are under control (Brown and Warner, 1985). The abnormal returns provide an estimation of the stock price change percentage with respect to a specific event. Basically, the fundamental of an event study methodology expresses that the wealth impact towards an event could be reacted directly in the stock price. Therefore, monitoring the stock price through a short period of time is an option for the investigation of such effects. It is worth noting that the reaction to an event should be under investigating instead of ex-ante or ex-post events study due to the quickness of stock market reaction.

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influences on market reaction towards community development announcements are probably equal, and thus, it has very limited impacts on the outcomes.

For conducting a short-term event study, it includes several basic steps (see Figure 2 in Appendix). Initially, the event window should be decided when executing an event study. It is a period of time for examing the effect of an event. For the purpose of converting calendar days into event days, the announcement publication day (event day) is appointed as Day 0 (see Figure 1). If the announcement is happened on either a non-trading day or on a trading day but after 4:00 pm Eastern Time, the succeeding trading day is regarded as Day 0. I assume all other trading days relating to Day 0. Under this condition, the trading day that is happened immediately before the announcement day is regarded as Day -1 (T2), whereas those days that are immediately subsequent to the announcement day is Day +1 (T1) (see Figure 1). In alignment with some event studies (Bharadwaj et al., 2009; Blackwell et al., 1990; Hendricks and Singhal, 2003), a two-day event period, involving the day of the announcement and the preceding trading day is always concentrated by some scholars. However, sometimes, it is wise and common to expand the event window to several days around the trading Day 0 in case the leakage or dissipation of the information for a period of time (Mackinlay, 1997). Thus, in this study, I set the window length from Day -1 to Day +1 for investigating the (cumulative) abnormal return, which were also did by lots of researchers in their previous work in the short-term event study (Hendricks et al., 2009; McGuire and Dilts, 2008).

In the following step, I need to predict the companies’ abnormal returns with an estimation model. I make use of the “Market-Adjusted Model” to estimate abnormal returns. Within a given period of time, this model reflects the return of the stock of observation i on day t, (i.e. Rit) over the return of the reference market on day t (Rmt) (Ding et al., 2018). The abnormal return is calculated as below:

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To determine the expected return for any observation in the chosen estimation model, I need to make sure the estimation window in the next step. Normally, the estimation window is rather long for avoiding the problems of bias in calculating the abnormal returns caused by out-of-sample estimation. In this research, I choose 200 days of estimation period. Specifically, the estimation window starts from Day -210 (T4) to Day -11 (T3) (see Figure 1). More importantly, the estimation window is not expected to be overlapped with the event window mentioned before. Concerning about that, the estimation window in this study ends up ten trading days before the day of the event (namely, the trading day gap) in order to mitigate the potential bias and avoid the influence of non-stationarity.

Figure 1: Timeline for event study

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Additionally, I come up with two control variables. First of all, concerning that the firm financial performance preceding to the event perhaps affects the market reaction (Jacob and Singhal, 2014), I operationalize the FirmFinPerf as the companies’ return on assets (ROA: operating income before depreciation divided by the total assets) for the fiscal year directly prior to the CDI announcements. Secondly, a factor relating to the types of industry is also taken into account. The different industry types may also generate an impact on the stock market returns. I label IndType as the other control variable and operationalize it as the value of 0 referring to the manufacturing industry, and 1 for service sector in the other way around.

6. Empirical Results

6.1 Analysis of impact of independent variables

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is not significantly (50%) under the one-sample binomial tests. The mean and median CAR for 3-day event periods (Day -1, 0, and 1) are both positively significant, but at the 10% level.

Table 3: Event Period Abnormal Returns for 192 announcements over the 18-year study period (2000-2018)

Abnormal Returns

Day -1 Day 0 Day 1 Day -1 and 0 Day 0 and 1 Day -1, 0, and 1 Mean -0.0012 0.0015 0.0035 0.00023 0.0050 0.0037 t-statistic -1.039 1.146 1.739** 0.131 2.137** 1.439* Median 0.00019 0.0012 0.00054 0.00090 0.0017 0.00067 Z-statistic (1) -0.048 1.038 0.719 0.717 1.790** 1.376* % Positive 53 47 47 54 53 53 Z-statistic (2) 0.759 -0.308 -0.308 0.817 0.759 0.759 Z-statistic (1) for medians are obtained by using Wilcoxon signed-rank tests.

Z-statistic (2) for % positive is gained by using Binomial sign test. All tests are two-tailed: *p<=0.10; **p<=0.05; ***p<=0.01.

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examine the moderating factors and detect what happens on Days (0 and 1) in the following investigation.

Table 4: Event Period Abnormal Returns for 120 announcements within 5 years (2012-2016)

Abnormal Returns

Day -1 Day 0 Day 1 CAR (-1, 0) CAR (0, 1) CAR ( -1, 0, 1) Market-Adjusted Model Mean -0.16% 0.13% 0.51% -0.031% 0.64% 0.48% t-statistic -1.146 0.788 1.784** -1.57 1.965** 1.417* Median 0.019% 0.12% 0.054% 0.090% 0.17% 0.067% Z-statistic (1) -0.048 1.038 0.719 0.717 1.790** 1.376* % Positive 54 54 49 55 54 57 Z-statistic (2) 0.817 0.817 -0.618 0.865 0.817 0.935* 6.2 Analysis of impact of moderating variables

In order to examine the moderating effect on the relationship between announcing the CDI and corporate market value, I use the following linear regression model:

CARi=+1IndType+2FirmFinPerf+3FirmSize+4AnuualHouseholdIncome+i

Where CARi is the CAR for Days 0 and 1; IndType, FirmFinPerf, FirmSize, and AnuualHouseholdIncome are all defined in the previous section; and i is the error term.

Because of some missing data for independent variables, the number of total samples is dropped to 120 observations for the regression analysis. In the following Table 5 represents the moderating result of the regression analysis.

Table 5: Regression analysis for the sample of 120 CDI announcements

Variables Coefficient

(t-statistic)

Firm size 0.001

(-1.783) ** Annual household income 0.024

(0.036) ROA 0.035 (-1.880) ** Industry type 0.007 (-0.309) Model F value 1.680* R2 _0.055 Adjusted R2 _0.022

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As shown from the above table 5, the coefficient for both ROA and FirmSize are stable in sign (negative ‘-’) and they both show the results of significance. One control factor (ROA) is negatively significant at the level of 5%, but the other one (IndType) indicates the result of insignificance. Apart from that, there are some interesting findings towards the independent variables. For instance, one independent variable (FirmSize) is negative significantly (-1.783, two-tailed) at the 5% level. The sign of the coefficient is not as predicted in the development of hypothesis H2. It is notable that the actual sign of the coefficient associated with FirmSize is totally opposite to what was forecasted in hypothesis H2 (positive ‘+’). This result indicates that the firm size plays a negative role on the relationship between the implementation of CDI and the captured companies’ stock value in the reality. Namely, the large company will significantly have a negative influence on the increased market reaction. This observed finding is totally different with the forecasting in the development of hypothesis H2. In other words, the hypothesis H2 is rejected (see Table 6). Additionally, I note that the sign of the coefficient is the same with the prediction of hypothesis H3 (positive ‘+’). However, the result does not show any significant effect. Unlike the forecast of hypothesis H3, the independent variable of AnnualHouseholdIncome has no positive significance in this regression. Various income levels in different community locations generate no significantly positive influence on the relationship between firms’ CDI and their market value. Thus, in this case, the hypothesis H3 is rejected as well (see Table 6). All in all, the results support hypothesis H1, but fail to support the hypothesis H2 and H3.

Table 6: The overview of the results

Hypothesis Results

Hypothesis H1 SUPPORTED

Hypothesis H2 REJECTED

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7. Discussion

7.1. Direct relationship between the implementation of CDI and firms’ market value

To analyze the whole sample of 192 companies who announced the practices in public relevant to the community development initiatives over the 18-year span from 2000 to 2018, I observed several statistically significant results for some event period. As shown in Table 3, the significantly positive cumulative abnormal returns (i.e., CAR (0,1)) are obvious to see. This finding suggests that the market seems to exhibit a positive reaction to the companies’ announcements. There is an evidence to support my hypothesis H1 and help to explain that the market value is increased when the companies announce CDI in public. Even though the cost of investments regarding to the donation or philanthropy is high, the significantly positive market value means that the benefits of announcing and implementing those events are indeed overwhelming the shortcoming.

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good relationship with companies’ stakeholders (Laufer and Coombs, 2006; Turban and Greening, 1997). And the strengthened stakeholders’ realtionship is helpful for maintaining and accumulating more shareholders who are willing to buy the companies’ stocks. Especially, as I mentioned before, the talented employees, one of the important stakeholders, is likely to be attracted when they recognize their workforce is surrounded by an atmosphere in a socially responsible manner (Tsoutsoura, 2004). Those internal staffs have an advantage of obtaining the first-hand news on what the companies do for the communities. Those prosocial actions are easily to be resonated by the employees because they could easily reach a consensus together with the companies’ goal and the development strategy. Notably, the employee is not only one part of the companies, but also can be turned into an important shareholder buying their own companies’ stocks. It is interesting to note that considering the employees’ interests is an opportunity for the firms who want to maximize their market value. Hence, in some degree, such CDI engagements will attract shareholders’ perception about the firms’ values, which will eventually have an immediate reflection on their positive stock price.

7.2. Impact of firm size on the firms’ market value

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Hendricks and Singhal, 1996), their proactive social behaviors are supposed to be obtained and noticed in a higher expectation by shareholders. Apparently, if the big firms put little effort on the implementation of community development compared to the small ones, for example, they only do the symbolic provision instead of addressing the inherent local problems, the citizens’ satisfaction will be dramatically dropped to a low level because the customers do not make sense on what the large firm actually does for the communities. In this case, the large firms will negatively influence their stock price even though they have publicized the CDI announcements. For better measuring the efforts that companies actually put on the programs, one suggestion mentioned in Jacobs (2014) could be learnt from in the future study. Given that the announcements are classified as either ‘intents’, implying that the companies’ announcements are preceding to the event, or as ‘achievements’ when the announcements are publicized after implementing CDI (Jacobs, 2014), the real efforts that the large companies put on the CDI programs could be in differences, and the market reactions on the announcement may also be influenced differently. Thus, the partition of the announcements could be considered as a further research when investigating the influence of firm size. In detail, the firm size factor on the market value should be examined separately for the case of ‘intents’ and ‘achievement’ in the future.

7.3. Impact of annual household income on the firms’ market value

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prosocial actions (Piff et al., 2010; McWilliams and Siegel, 2001). The possibly earned profit in the future may be recognized by the current shareholders, and it may result in the market value to be more attractive. However, based on the findings above, the nonsignificant result means that the real situation is not in light of the previous assumptions and the surprising result may be caused by other determining factors. In order to analyze why the income equality generates no significantly positive influence on the relationship, I conjecture several possible reasons as below.

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headquarter is the center of the information exchange between firms and their shareholders (Davis and Handerson, 2008). And the physical proximity has an advantage of promoting the transmission of the corporate CDI information among the members of community. For those companies whose headquarters are not positioned in the local region may encounter a shortage of the local residents’ attention, and the CDI implemented by the company is not fully followed and recognized by residents. Under this situation, it seems to be proved that the citizens with higher income cannot significantly improve the companies’ market value. This is also consistent with a research conducted by Schuler and Cording (2006), the scholars suggest that lacking of purchasers’ awareness towards the community programs is a critical limitation in shareholders’ abilities to respond to the firms’ prosocial behaviors. In order to conduct a further research in terms of the influence of income levels on the companies’ increased market value, this moderating effect is supposed to be examined only aiming at the donating communities in which companies’ headquarters locate.

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8. Summary and conclusions

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Appendix

Start

Collect samples

If the samples are

valid No Delete

Select the estimation model and estimation window

Yes

Calculate the abnornal return

Test significance

End

The impact of community development initiatives on the market value of firms: the moderating role of firm size and annual household income