The Relation between Corporate Social Responsibility and Corporate Financial Performance: Evidence from Asian firms

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MSc Finance

The Relation between Corporate Social Responsibility and

Corporate Financial Performance: Evidence from Asian firms

Liya Wang (S2650525)

L.Wang.26@student.rug.nl

Supervisor: Dr. J.H. (Henk) von Eije

Co-assessor: Ryanne van Dalen

Faculty of Economics and Business University of Groningen

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The Relation between Corporate Social Responsibility and Corporate Financial Performance: Evidence from Asian firms

ABSTRACT

As corporations in Asia increasingly participate in activities related to corporate social responsibility (CSR), it is important to know whether the market places a positive value on it. This thesis examines the empirical link between corporate social responsibility and corporate financial performance (CFP) for a large sample of firms in Asian emerging markets. The findings suggest that corporate social responsibility, especially environmental related CSR, negatively affects the market based measure of CFP, but not the accounting based measure.

JEL classification: D21 L21 M14

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Besides the traditional financial metrics when evaluating corporate performance, public pay an increasing attention on how companies respond to issues such as environmental pollution, health and safety, community development and wage gap. Companies who participate in solving these kinds of issues can be seen as social responsible. Sheldon (1924) coined the concept of corporate social responsibility (CSR). Companies may engage CSR in its development strategy, also can do things beyond the core business activities, donations for example. However, the raising engagement of CSR caused a problem to the conventional shareholder value maximization. The classical shareholder view recognizes that corporate social responsibility is costly if it does not enhance firm value, thus should be minimized whenever possible. But as public’s attention to firms’ CSR standards has been steadily growing over the past decades, it is doubtful whether this conventional view still holds.

To answer the question whether corporate social responsibility now violates shareholder value maximization, a lot of studies have investigated the relation between the corporate financial performance (CFP) and the corporate social responsibility performance from both theoretical and empirical aspects.

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the estimate of the association between CSR and CFP. Their results showed when the model is much more specifically designed, there is no relation between the CSR and CFP.

Besides, most of the empirical research applied to firms in the US or other industrialized countries, and only a few studies such as Cheung and Zhang (2010), Chapple and Moon (2007), and Baughn and McIntosh (2007) obtained CSR data from developing countries. Baughn and McIntosh (2007) compared CSR in Asia and other regions, and showed that there are regional differences in CSR. As CSR receives increasing public attention globally, especially in Asian countries during the past two decades, it is interesting to estimate the CSR-financial performance relation in Asia. Therefore, this thesis focuses on the CSR in Asia, to estimate the association between CSR and CFP, and the thesis constructs a sample of firms from 8 countries in Asian emerging markets.

The mixed empirical results of the CSR-CFP relationship associates with different theoretical views. Jiao (2010) summaries that when CSR is seen as an investment in intangible assets (e.g. reputation, human capital), it contributes to enhancing firms’ competitiveness. When CSR is seen as expenditures, such as public image and respect, then the effect of CSR on financial performance is negative. The goal of this thesis is to find out how Asian emerging market value CSR. More specifically, this thesis attempts to answer the question whether CSR pays off to Asian firms.

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insiders increase their private utilities through over-investing in CSR in order to receive a better reputation as good citizens, therefore CSR is costly to firms. It is also possible that both agency theory and stakeholder theory be equally valid, therefore, there is no significant association between CSR and CFP.

As Margolis and Walsh (2001) suggested that contrasting conclusions may derive from the methodology, this thesis is careful to the actual measure of CSR and CFP. For the measure of CFP, Tobin’s Q is used. Tobin’s Q is a market-based measure and likely to capture the long-term impacts of CSR. This thesis also adopts return on assets (ROA) as the accounting-based measure. For the measure of CSR, this thesis show results for both individual CSR and integrated CSR is estimated.

This thesis makes the following contributions. Firstly, it offers an empirical result on the estimation of the association between CSR and CFP in Asian countries. Secondly, this thesis contributes to the recent literature that examine the impacts of environmental CSR Third, thesis compare the CSR-CFP relation from market and accounting aspect.

Based upon a sample of 2640 firm year observations during the studied period from 2008 - 2013, I find that Asian companies with higher CSR have worse financial performance if I use a market based financial performance measure. For accounting based financial performance measure, I do not find an effect.

The reminder sections of this thesis proceed as followings. Section 2 provides the literature review related to the corporate social responsibility and the corporate financial performance. Section 3 provides the theoretical background on theories and hypotheses development. Section 4 presents a framework of the research, especially regarding the sample construction, variable measure and model used. Section 5 provides the results and robustness tests. Section 6 concludes and presents prospects for further research.

2. Literature review

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In 1924, Sheldon firstly introduced the concept of CSR, whereas it was not generally accepted by the public. However, from the 1950s, CSR has been studied by an increasing number of scholars (see Freeman (1984), Porter and Linde (1995), Bansal (2005) and Lemon (2011) for details). Dahlsrud (2008) analyzed 37 CSR definitions and summarized CSR into five dimensions, including: stakeholder, social, environmental, economic and voluntarily. Although CSR is often regarded as a general concept, the actual meaning of CSR varies over countries, organizations and researchers. The business for Social responsibility (2000) defines CSR as the ‘Business decision making linked to ethical values, compliance with legal requirements and respect for people, communities and the environment’. The World Bank defines CSR as the ‘economic commitment of businesses to behave ethically and to contribute to sustainable economic development by working with all relevant stakeholders to improve their lines in ways that are good for business, the sustainable development agenda, and society at large’. Jackson and Hawker (2001) summered that there is no single one dominates. The definitions of CSR are generally related to the nature, life support, people, society, economy and community. Elements like social values, ethical standards and norms, ethical norms and values: people, planet and profit (Triple P; Triple Bottom Line) are also considered by CSR.

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An alternative is to use data from third parties. Sturdivant and Günter (1977) used CSR data from a social rating institution instead of financial data to divide social responsibility into different degrees. Cheung and Zhang (2010) obtained CSR data from Credit Lyonnais Securities. The most commonly acknowledged third party social rating is MSCI ESG Research (formerly Kinder Lydenberg Domini (KLD) Research and Analytic) which focused on the corporate social responsibility of firms from developed countries used CSR data from MSCI ESG Research database. A lot of previous studies such as Hull and Rothenberg (2008), Scholtens and Zhou (2008) and Lioui and Sharma (2012) use CSR data from MSCI ESG Research. However, the MSCI ESG Research database is dominated by United State samples. Firms of Asian developing countries are not analyzed. Therefore, research studies (including El Ghoul et al. (2014), and Ioannou and Serafeim (2012)) aiming on a widely range of country samples adopted CSR data from Thomson Reuters ASSET4. ASSET4 offer CSR data for more than 4500 companies across the word, including the firms of Asian emerging market. The ASSET4 gives information on four dimensions of CSR: environmental, social, corporate governance and economic. How the CSR data is organized and cataloged in ASSET4 is explained in section 4.

2.2 The association between CSR and firm financial performance

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levels according to social responsibility. His research question was: does it pay to be good? And the answer was yes, but in a limited scale. He found that employee satisfaction and customer service related CSR is likely to pay off, on the contrast, CSR for complying legal mandates is no fiscal benefits to firms. Cheung and Zhang (2010) found that CSR is positively affects Tobin’s Q and market to book value by use a sample of 361 firms from Asian emerging market for the period 2001 to 2004. Gary and Kohers (2002) used a commercial bank to estimate the relation between banking industry social responsibility and financial performance. They used two indicators as dependent variables: return on assets and loan loss. Return on assets is common and loan loss is a special indicator for banking industry. By using community reinvestment as independent variable, they found that banking industry’s social responsibility is positively associated with bank financial performances.

Hillman and Keim (2001) used a sample of 308 American companies to estimate whether corporate responsibility effects shareholder’s value creation. They divided the independent variables into two types: stakeholder’s management and participation in social affairs, and these two are used in the study of corporate value individually. Shareholders’ value creation was expressed in terms of market value added. They found that stakeholder’s management was positively related with shareholders’ value, while social issue participation lowers shareholders’ value.

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value, environmental CSR shows a positive impact on corporate financial performance.

Moreover, some researchers offer overviews on CSR literature. Margolis and Walsh (2001) conduct a meta-analysis of 251 studies of CSR-CFP association. They found a positive relation between CSR and CFP. Although the relation is low, it is significant. Another review 52 earlier surveys offered by Orlitzky et al., (2003) also induce a positive correlation between CSR and company financial performance. Later, Beurden and Gössling (2008) examined 34 studies. In their study, 68% of results demonstrated a clearly positive association between the corporate social responsibility and financial performance.

Although a lot of studies are working on the relation between CSR and CFP from theory or empirical approach, but till now there has been no consensus. The main reason for these contrasting conclusions derives from the methodology (Margolis and Walsh (2001)), which is to say, the measurement of corporate social responsibility and financial performance is varying, and different measure may give different results. To be specific, there is no universal indicator system to measure CSR. For this reason the CSR is a general concept, the actual measure of corporate social performance is different in empirical studies. Besides, when estimating the association between CSR and CFP, different models were applied.

3. Hypothesis development

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does not exist. The mixed empirical results on the relation between CSR and CFP associate with different theoretical views. To evaluate whether higher CSR results in better financial performance, two theories, namely agency theory and stakeholder theory, are employed in this thesis.

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practices strengthen the relations with multiple stakeholders, customer loyalty may increase and transaction cost decrease. Thus, the investment in CSR is beneficial for firms.

Based on the two theories mentioned above, I hypotheses that there is a significant association between CSR and CFP in Asian firms. If the association is negative and significant, there is over-investment in CSR; if the association is positive and significant, the stakeholder theory dominates. It is also possible that both agency theory and stakeholder theory be equally valid, thus, there is no significant association between CSR and CFP. The hypotheses of this study are stated as follows:

H0: There is no significant effect of CSR on CFP of Asian firms; H1: There is a significant effect of CSR on CFP of Asian firms.

Further, if there is significant effect of CSR on CDP of Asian firms, then the hypothesis 1 is specified as:

H1a: The agency theory suggested a negative association between CSR and CFP H1b: The stakeholder theory suggested a positive association between CSR and CFP

4. Data and Methodology

The data used in this study are collected from several resources through DataStream. The CSR data is provided by ASSECT4, Thomson Reuters, and the financial data came from Word scope. Financial data is measured at the fiscal year-end. To study the association between CSR and CFP, this study estimated the relations in regressions. The following sections first describe the collection and selection of variables used in regressions. Second, the summary statistics and correlations for all variables are presented. Third, the methodology, which is used to estimate the relation between CSR and CFP, is stated in detail.

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In assessing the corporate financial performance or firm value, earlier studies (see Wagner (2010); Gary and Kohers (2002); Grefory and Whittaker (2013)) adopted either market or accounting based methods. These proxies include stock returns, free cash flow, Tobin’s Q, return on assets, and market share growth. As firms have different operational models, accounting measures may have some inherent problems such as the management of earnings, which can distort the relations between CSR and earnings and book values. Market based measure can capture both the cost of doing CSR and the potential positive externalities (through intangibles). This study follows Wagner (2010) to use Tobin’s Q as the proxy to measure the firm financial performance. This measure of corporate financial performance includes intangibles and is forward looking, and captures the effects for more than one period.

As prior empirical studies suggested that it is important to be careful about the measure of CFP, this study offers an accounting based measure (return on assets) as an alternative measurement. When corporate social responsibility practices are costs of a company, CSR reduces mechanically the profits, but it may also capture the positive overall effects of CSR on the profitability of the firm. .

This study shows the results on the relation between CSR and CFP for both market and accounting based corporate financial measures. The Tobin’s Q is measured by the sum of total book value of debt (as the market value of debt is not available) plus market value of equity to total assets; the return on assets (ROA) is the net income to total assets. These financial data are measured at the fiscal year-end. These measures allow a direct comparison of the existing findings in literature (Lioui and Sharma (2008) for example).

4.2 Independent variables

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As explained in the sectional part of this study, I obtain data on corporate social responsibility from Thomson Reuters Asset4 though DataStream. ASSET4 gives information on Environmental, Social and Governance of firms. It gives access to the current most comprehensive and objective measure for corporate social responsibility of firms in Asian countries. ASSET4 ensures high accuracy on CSR data through a multiple verification process. Firstly 750 CSR data points are collected from firms’ original data, then they are transformed into 280 key performance indicators, and those 280 key performance indicators are organized into 18 categories and are grouped within four pillars, each of which, presents one of the four areas (economic, environmental, social, and governance performance) of the corporate performance. Finally a normalized z-score between 0% and 100% is given on each firm and each pillar. Table 1 (obtained from the CSR data fact sheet through Thomson Reuters) presents the categories and pillars.

Table 1

CSR performance categories and pillars.

Environmental Social Corporate

Governance Economic Resource Reduction Employment Quality

Board Structure Client Loyalty

Emission Reduction

Health Safety Compensation Policy Shareholders Loyalty Production Innovation Training Development Board functions

Human Rights Shareholders Rights Community and Product Responsibility Vision and Strategy Diversity

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For accessing the corporate social responsibility performance, this study only uses the environmental and social pillars (ES). As Ioannou and Serafeim (2012) did, this study assumes equal importance on both pillars, thus an equal weighted score between 0% and 100% of corporate environmental and social performance serves as our measure for corporate social responsibility. Further, this study estimates the impact of environmental and social responsibility on corporate financial performance (Tobin’s Q and ROA) individually. This study finally offers the ESGE rating as an alternative measure for corporate social responsibility, the ESGE rating is a normalized z-score between 0% and 100% on all four pillars.

4.2.2 Control variables

In order to obtain correct statistical inference, controls for firm financial performance are considered. Important factors that should be included are likely to be company size and financial leverage. Hall (1987) showed an inverse relation between firm size and growth. Therefore, this study considers firm size measured by log assets as a major control variable. Another control is the leverage (debt) ratio measured by total debt divided by total assets. As Jensen and Meckling (1976) concluded debt financing plays a role to restrict the personal benefits of managers, thus decreases the agency cost and increasing the corporate benefits and firm value. Previous CSR studies like McWilliams and Siegel (2000) used leverages as a proxy for firms' risk level.

Besides, this study also includes the asset utilization ratio and total assets growth rate in the control variables. The asset utilization ratio is measured by capital expenditures to last year’s total assets while the total assets growth rate equals the growth in total assets divided by last year’s total assets.

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positive economic impact on firm performance (Chauvin and Hirschey, 1993) McWilliams and Siegel (2000) argued that R&D and CSR are positively related, also Hull and Rothenberg (2008), and Wagner (2010) considered R&D as an important variable. However, many firms of the sample do not have reported on R&D. If I follow Lioui and Sharma (2012) to include R&D in the main test, the observations will be very limited. An alternative is to include the R&D variable in a robustness test. The control variables are obtained directly from Wordscope or DataStream, or by recalculating their measures if there is no direct variables measure.

4.3 Summary Statistics

Based on ASSET4 database, this study obtains a sample of around 2640 firm-year observations during the period 2008 to 2013. The firms are from 8 countries which are included in the emerging markets of Asia Pacific region, namely, China, India, Indonesia, Malaysia, Pakistan, Philippine, Taiwan and Thailand.

To reduce the effects of the outliers, variables with extreme values need to be taken care of. I winsorize the data by setting all extreme values to a specified percentile of the data, at the 1st_{and 99}th_{percentiles respectively. That is to say, all data below the 1}st

percentile are ‘reset’ to the 1st percentile while data above the 99th_{percentile are set to}

the 99th_{percentile. Variables related to corporate financial performance (Tobin’s}

Q-ratio, ROA, size, leverage, asset utilization Q-ratio, and total assets growth rate) were winsorized.

Table 2

Descriptive statistics

Mean Median Maximum Minimum Std. Dev. Observatio

ns

Tobin's Q 2.735 1.294 26.095 0.131 4.175 2618

ROA% 7.815 6.215 40.330 -10.130 8.029 2564

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Size 18.940 18.608 25.934 14.389 2.232 2619 Leverage% 24.322 22.390 76.740 0.000 18.394 2606 CAPX/TA% 7.023 4.840 41.610 0.020 7.643 2511 Growth% 21.572 12.418 467.743 -56.208 55.481 2598 R&D/Sales% 2.322 0.985 35.320 0.000 3.896 934 Environment al% 42.511 34.980 94.760 8.530 28.707 1822 Social% 44.236 38.185 96.890 3.840 30.497 1822 ESGE% 36.081 26.795 96.810 2.770 29.524 1822

This table presents the descriptive statistics regarding CSR and firm variables for the 2640 firm-year observations in 8 countries of Asia between 2008 and 2013. All firm level financial information is obtained from the World scope or DataStream, the corporate social responsibility related data is collected from ASSET4. TOBIN’S Q is the ratio of total debt plus market value of equity divided by total assets. ROA is the return on assets calculated by net income to total assets. CSR is the corporate social responsibility measured as an equal weighted rating on corporate economy and environmental performance. LEVERAGE is the debt ration which is total debt to total asset. SIZE is the log of firm’s total asset. CAPX/TA is the asset utilization ratio is measured by capital expenditures to last year’s total assets. Growth is the total assets growth rate equal to the growth in total assets divided by last year’s total assets. RD_SALE is the ratio of research and development expense to net sales or revenues. Environmental and social are the scores on corporate environmental and social responsibility performance individually. Variables related to corporate financial performance (Tobin’s Q-ratio, ROA, size, leverage, asset utilization ratio, and total assets growth rate) were winsorized.

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Tobin’s Q is greater than one (1.294). The median return on assets and the median leverage of the firms in the sample is 6.215% and 22.390%, respectively. The maximum score on CSR is 95.595% while the minimum is 6.415%, which presents that firms have a very diverse CSR level. The median score on CSR in the sample is low (36.85%), showing that many firms are not doing CSR well, if compared with the average CSR score of 43.374%. The median asset utilization ratio, total assets growth rate and research and development expense to sales are 4.84%, 12.418 % and 0.985% respectively.

Table 3

Correlation among all variables

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1 1 ESGE 0.81 7 0.09 9 0.06 3 0.33 4 -0.02 7 0.07 7 -0.04 9 -0.08 5 0.76 6 0.80 3 1

This table presents correlations between CSR and financial performance variables as well as control variables for the 2640 firm-year observations in 8 countries of Asia between 2008 and 2013. All the variables are described in table 2. The CSR is positively correlated with Tobin’s Q while it is negatively correlated with ROA. The correlations between variables in regressions are not large.

Table 3 presents the correlations between the CSR and corporate financial performance variables as well as the controls. CSR is positively correlated with Tobin’s Q (0.065). In contrast, it is negatively correlated with ROA (-0.036). Both the corporate environmental and social performance are positively correlated with Tobin’s Q and negatively correlated with ROA, these movement are in consistence with CSR. Notice that the ESGE is positively correlated with both Tobin’s Q and ROA. CSR is also negatively correlated with the leverage ratio, growth rate and R&D expenses. Over all, the correlations between corporate social responsibility variables and corporate financial performance variables are small in regressions.

4.4 Methodology

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To estimate the relation between the corporate social performance and corporate social responsibility, the basic model tested in this thesis takes the following form: CFPit = β0 + β1CSR(i, t-1) + β2Size(i, t-1) + β3Leverage(i, t-1) + β4CAPX/TA(i. t-1) + β5Growth(i. t-1) + β6Companyi-Yeart +ɛit

The CFP is corporate financial performance, measured by Tobin’s Q or ROA (return on assets), for the ROA is likely to capture the direct impact of CSR while Tobin’s Q is likely to capture the indirect impact. The CSR in the integrated corporate environmental and social performance score, serves as the measure for a firm’s corporate social responsibility. I will further estimate the impact of environmental and social performance on corporate financial performance individually.

McWilliams and Segal (2000) argued for the importance of research and development expenditure in estimating the relation between CSR and CFP. Given including the research and development variable would largely diminish the number of observations, I include the research and development variable in the control variables as robustness test. This thesis also estimates the relation between CSR and CFP when considering corporate governance and client and shareholders loyalty, in that case, the z-score on four spills (environmental, social, governance and economic) of firms serves as the independent variable, which is the ESGE score obtained from ASSET4.

5. Results and Discussion

This part presents the results for the regressions of CFP on CSR. The following sections first present the direct and indirect impact of integrated CSR and individual CSR (environmental and social corporate performance) on the corporate financial performance measures. Second, this section presents the robustness checks.

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The first step of this investigation is to study the impact of integrated CSR on corporate financial performance (CFP). Tobin’s Q serves as the market based measure of CFP while return on assets (ROA) serves as the accounting based measure. Table 4 presents the results for CSR and CFP (Tobin’s Q and ROA) association.

As the results shown in Table 4, in column (1), the CSR shows a negative coefficient of -0.5%. That is to say, companies score higher on CSR associate with lower Tobin’s Q. Given the medium Tobin’s Q is 1.294, hence almost 4% of the average Tobin’s Q is reduced due to a one unit increase in CSR. The negatively impact of CSR is a little lower when both firm and year fixed effects are used as shown in column (2). In column (3) and (4), the CSR shows a positive coefficient sign on return on asset (ROA) although it is not statistically significant. The R2 _{and adjusted R}2 _{in Table4 are}

both close to 1, especially the regressions of the Tobin’s Q, suggests a good fit of the model.

Table4

CSR and CFP.

Dependent Variable: TOBINQ Dependent Variable: ROA

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This table presents the results for the panel regressions estimating the relation between CSR and CFP (Tobin’s Q and ROA). Column (1) and (3) presents the results with firm fixed effects, column (2) and (4) presents the results with both firm and year fixed effects. The equation estimated is

CFPit = β0 + β1CSR(i, t-1) + β2Size(i, t-1) + β3Leverage(i, t-1) + β4CAPX/TA(i, t-1) + β5Growth(i, t-1) + β6Companyi -Yeart + ɛit

The regressions are estimated on a panel data of 440 companies during 2008 to 2013. All the variables are described in table 2. Variables related to corporate financial performance (Tobin’s Q-ratio, ROA, size, leverage, asset utilization ratio, and total assets growth rate) were winsorized. Standard errors are clustered at firm level, t-statistics are reported in brackets. For significant statistics, ***, **, and * represent the level of significance 1%, 5%, and 10% respectively. CSR shows a negative impact on Tobin’s Q while it shows a positive sign on ROA. The divergent results may due to accounting manipulations or the direct and indirect impacts of CSR.

Overall, CSR shows divergent impacts on the two measures of CFP, it impacts negatively on Tobin’s Q while it gives a positive sign on ROA. ROA is an accounting based measure which may likely to capture the direct impact of CSR on CFP. The positive sign on the relation between CSR and CFP suggests CSR may be profitable in a short time. However, as explained in section 4.1, accounting based measures may have some inherent problems like earnings management. Therefore, it is hard to tell whether firms are manipulating earnings in order to ‘avoid’ losses caused by CSR. Tobin’s Q is a market based measure and can avoid accounting manipulations. Also, Tobin’s Q is likely to capture the impacts of CSR for a long term. The negative relation between CSR and Tobin’s Q suggests that the market do not value CSR in Asia and CSR is costly to firms in a long term.

5.1.2 Individual CSR and CFP

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CFP than corporate social performance, and corporate environmental performance has larger positive sign on accounting based measure of CFP than corporate social performance.

The coefficients with firm fixed effects between corporate environmental performance and Tobin’s Q is -0.4%, and it is -0.3% between social performance and Tobin’s Q. While with both firm and year fixed effects, the coefficient between corporate environmental performance and Tobin’s Q is a little lower, which is -0.3%. Notice the social performance shows a negatively sign on the Tobin’s Q when both firm and year fixed effects is used, it is not statistical significant. As shows in column (5), (6), (7) and (8), although the individual corporate environmental and social performance both show positive sign on return on assets, they are not statistical significant.

Table5

Individual CSR and CFP

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(0.692) (8.732) (16.224 ) (8.852) (11.886 ) (9.570) (11.906 ) (9.496) N 1369 1369 1369 1345 1345 1345 R2 _0.966 _0.966 _0.966 _0.966 _0.850 _0.853 _0.850 _0.850 Adjusted R2 0.952 0.952 0.951 0.952 0.785 0.787 0.785 0.785 F-statistic 66.535 66.440 66.278 66.237 12.959 12.999 12.939 12.939 This table presents the results for the panel regressions for firm’s CSR (Tobin’s Q and ROA) on Individual CSR variables (environmental and social performance). Column (1), (2), (5) and (6) presents the results for corporate environmental performance, among them, column (1) and (5) is for firm fixed effects, column (2) and (6) is for both firm and year fixed effects. Column (3), (4), (7) and (8) presents the results for corporate environmental performance, among them, column (3) and (7) is for firm fixed effects, column (4) and (8) is for both firm and year fixed effects. The equations estimated are

CFPit = β0 + β1Environmental (Social)(i, t-1) + β2Size(i, t-1) + β3Leverage(i, t-1) + β4CAPX/TA(i, t-1) + β5Growth(i, t-1) + β6Companyi -Yeart + ɛit

The regressions are estimated on a panel data of 440 companies during 2008 to 2013. All the variables are described in table 2. Variables related to corporate financial performance (Tobin’s Q-ratio, ROA, size, leverage, asset utilization ratio, and total assets growth rate) were winsorized. Standard errors are clustered at firm level, t-statistics are reported in brackets. For significant statistics, ***, **, and * represent the level of significance 1%, 5%, and 10% respectively. The corporate environmental performance has larger negative impact on Tobin’s Q than corporate social performance. The corporate environmental performance has larger positive sign on ROA than corporate social performance.

5.2 Robustness Checks

Two robustness tests are used in this paper. First, I control for research and development expenditures while estimate the relation between CSR and CFP. Second, an alternative measure of CSR is used.

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investment in research and development (R&D) as robustness check of the relation between CSR and CFP. The results are presented in Table 6.

The valid observations are 635 when the CFP is related to Tobin’s Q and 631 when the CFP is related to ROA. As shown in Table 6, the CSR shows even stronger negative impact on market based measure of CFP (compare the coefficient of -0.9% and -0.8% with control for R&D to the coefficient of -0.5% and -0.3% without control for R&D). As for the positive sign on accounting based measure of CFP -ROA, the impact is weakening and still not statistically significant.

Table6

CSR and CFP when controlled for R&D.

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CSRit = β0 + β1CSR(i, t-1) + β2Size(i, t-1) + β3Leverage(i, t-1) + β4CAPX/TA(i, t-1) + β5Growth(i, t-1) + β6Companyi-Yeart + ɛit

The regressions are estimated on a panel data of 440 companies during 2008 to 2013. All the variables are described in table 2. Variables related to corporate financial performance (Tobin’s Q-ratio, ROA, size, leverage, asset utilization ratio, and total assets growth rate) were winsorized. Standard errors are clustered at firm level. For significant statistics, ***, **, and * represent the level of significance 1%, 5%, and 10% respectively. CSR shows a negative impact on Tobin’s Q while it shows a positive sign on ROA. These results are similar as my earlier estimation of the relation between CSR and CFP.

Another problem surrounding the estimation of the relation between CSR and CFP is the actual measure of CSR. If one measures CSR differently, the meaning of CSR goes differently. Thus, this thesis offers an alternative measure of CSR, that is it considers the firm’s performance in four dimensions - environmental, social, governance and economic to obtain the CSR level of firms. This thesis uses the normalized z-score on this dimensions provided by Thomson Reuters ASSET4 from DataStream as the alternative measure of CSR (ESGE). The results for the regressions of CFP on ESGE are presented in Table7.

Table7

ESGE and CFP.

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(11.059) (6.187) (9.900) (8.213)

N 646 646 642 642

R2 _0.943 _0.944 _0.833 _0.836

Adjusted R2 _0.913 _0.915 _0.745 _0.748

F-statistic 31.710*** _31.680 _9.473*** _9.435

This table presents the results for the panel regressions for firm’s CFP (Tobin’s Q and ROA) on ESGE (environmental, social, governance, economic) variables. Column (1) and (3) presents the results with firm fixed effects, column (2) and (4) presents the results with both firm fixed effects. The equation estimated is CFPit = β0 + β1ESGE(i, t-1) + β2Size(i, t-1) + β3Leverage(i, t-1) + β4CAPX/TA(i, t-1) + β5Growth(i, t-1) + β6Companyi-Yeart +ɛit

The regressions are estimated on a panel data of 440 companies during 2008 to 2013. All the variables are described in table 2. Variables related to corporate financial performance (Tobin’s Q-ratio, ROA, size, leverage, asset utilization ratio, and total assets growth rate) were winsorized. Standard errors are clustered at firm and year level, t-statistics are reported in brackets. For significant statistics, ***, **, and * represent the level of significance 1%, 5%, and 10% respectively.

The regressions shown in Table7 do not give statistically significant results. When use firm fixed effects estimation, the coefficient between ESGE and Tobin’s Q is zero. However, this sign turns to positive when both firm and year fixed effects is used. For the influence on ROA, ESGE shows a positive sign for both firm fixed effects and firm-year fixed effects estimation. These results are consisted with my earlier estimation of the relation between CSR and ROA.

6. Conclusions

This thesis focuses on the relation between corporate social responsibility and corporate financial performance of 440 firms in 8 countries in Asia for the period from 2008 to 2013.

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database through DataStream. ASSET4 database provides a comprehensive ESGE (environmental, social, governance and economic) data of companies. This paper uses normalized z-score of ESGE as an alternative measure of CSR. The financial performance is presented as the Tobin’s Q and ROA. Tobin’s Q is the market based measure while ROA is the accounting based measure. When used the panel regressions to estimate the relation between CSR and CFP, first firm fixed effects is used then also for year fixed effects is used.

Although both the CSR and ESGE show positive sign on ROA, there is no significant relation found in Asian emerging markets. However, for CFP, CSR shows significantly negative impacts on Tobin’s Q. The divergent results for the impacts of CSR can be explained by two reasons. First, ROA capture the direct impacts of CSR while Tobin’s Q captures also the indirect impacts of CSR through intangibles. That is to say, CSR may show economic sign to firms but it is costly in a long term. Second, ROA is an accounting based measure which is hard to avoid some inherent problems, namely earnings management and accounting policy choices, which may distort the relations between earnings and book values. Therefore, the relation between CSR and CFP can be distort when use ROA as the measure of CFP. That is to say, there is over-investment in CSR in Asian firms.

In further estimations of the two dimensions of CSR, environmental performance show significantly negative impacts, social performance show significantly negative impacts only when the firm fixed effects is used. More specifically, better environmental performance is more costly to the market based financial performance measure than social performance. This thesis also estimate the CSR-CFP relation use ESGE as an alternative CSR, the coefficients show positive sign on both Tobin’s and ROA. That is to say, besides engaging in environmental and social CSR, firms also show responsible in corporate governance and economic areas are likely to have better financial performance..

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8. Appendix

Table A

Hausman Test

panel A1 Chi-Sq. Statistic Chi-Sq. d.f. Prob.

183.069 5 0

Firm random effects test comparisons:

Variable Fixed Random Var(Diff.) Prob.

CSP1 -0.005 -0.006 0.000 0.248

SIZE1 -1.398 -0.476 0.007 0.000

LEV1 0.013 -0.004 0.000 0.000

CAPX1 -0.009 -0.004 0.000 0.000

G1 0.040 0.019 0.000 0.001

Panel A2 Chi-Sq. Statistic Chi-Sq. d.f. Prob.

137.058 5 0

Firm random effects test comparisons:

Variable Fixed Random Var(Diff.) Prob.

CSP1 0.015 0.004 0.000 0.161

SIZE1 -6.502 -0.750 0.328 0.000

LEV1 0.029 -0.075 0.000 0.000

CAPX1 -0.072 -0.017 0.000 0.000

G1 0.311 0.227 0.007 0.323

This table presents the results for Hausman test of firm random effects. The equation estimated is

CFPit = β0 + β1CSR(i, t-1) + β2Size(i, t-1) + β3Leverage(i, t-1) + β4CAPX/TA(i, t-1) + β5Growth(i, t-1) + β6Companyi -Yeart + ɛit

The Relation between Corporate Social Responsibility and Corporate Financial Performance: Evidence from Asian firms

MSc Finance