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The Influence of Collaborative Corporate Social
Responsibility Practice on Firm’s Market Value
Master thesis, MSc, Supply Chain Management
University of Groningen, Faculty of Economics and Business
Venislav Dzhonov
Student Number: s3204979
Email Address: v.dzhonov@student.rug.nl
Supervisor:
Dr. X. (Bruce) Tong
Co-assessor:
prof. dr. D.P. (Dirk Pieter) van Donk
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Table of contents
Abstract ... 3
1. Introduction ... 3
2. Literature review ... 5
2.1 Corporate social responsibility ... 5
2.2 Environmental management ... 6
2.3 Collaborative practices and firm performance ... 7
3. Theory and hypothesis development ... 8
3.1 The positive influence of environmental collaboration endeavor on the market value .... 8
3.2 The negative influence of environmental collaboration endeavor on the market value . 10 3.3 The effects of different types of environmental collaboration endeavors on the market value ... 11
4. Sample and data description ... 13
5. Methodology ... 17
6. Results ... 18
6.1 Analysis of the influence of the environmental collaboration endeavors (all samples) on the market value ... 18
6.2 Analysis of the influence of differing environmental collaboration endeavors on the market value ... 19
7. Discussion ... 22
7.1 Theoretical implication ... 24
7.2 Managerial implication ... 24
7.3 Limitations and future research ... 25
References: ... 26
3 Abstract
Corporate social responsibility (CSR) is vital for all companies in improving reputation and operational performance. However, such CSR practices go hand in hand with environmental management, which makes their diffusion among supply chain partners more difficult. Thus, Blome et al. (2014) proposed the concept of environmental collaboration to mitigate the extension of these practices. This research aims to fill the gap in the existing literature regarding the impact of these environmental collaborations on firms’ market value. For this purpose, an event study was conducted based on 139 environmental collaborative announcements distributed across 81 firms. The majority of these firms are part of four major industry groups, namely automobile, food, electronics, and financial services. The results did not support that there is a significant difference between the market values of firms and collaborative environmental initiatives. Nevertheless, the findings provide useful theoretical and managerial insights on whether and how environmental collaborative initiatives may affect firms’ market value as well as which type of environmental collaborative initiatives improve or at least do not harm firms’ value.
Keywords: corporate social responsibility, environmental management, corporate social responsibility collaboration
1. Introduction
The importance of the strategic implications of corporate social responsibility (CSR) has been gradually growing for years as it has been recognized to affect firms’ operational performance and reputation (Campbell, 2007; Garriga & Melé, 2004; McWilliams et al., 2006). In spite of the widespread diffusion of CSR practices in the past decades, there is a number of diversified definitions of CSR (Dahlsrud, 2008). This study relies on the following CSR conceptualization which has been widely accepted in management literature. That is, CSR refers to “context-specific organizational actions and policies that take into account stakeholders’ expectations and the triple bottom line of economic, social, and environmental performance” (Aguinis, 2011, p. 855).
Among various CSR components provided by ISO 26000 which is an international standard concerning CSR regulations and promotions (see Castka & Balzarova, 2008), CSR practices related to environmental management have been continuously attracted attention by company’s stakeholder (e.g., government and customers). In the CSR practices’ diffusion, the environmental concerns have also been taken into consideration in the pursuit of CSR goals in the Triple Bottom Line paradigm, which suggests that the success of a corporation should not only be measured by financial bottom line but also by its environmental performance (Norman & MacDonald, 2004). However, studies suggested divergent views on the effectiveness of implementing environmental practices on focal firms’ performance. On the one hand, a stream of research argued that such practices are associated with substantial benefits such as cost savings due to their ability to reduce resource usage, provide innovative opportunities, and enhance buyer loyalty (Kassinis & Soterious, 2003). On the other hand, Lam et al. (2016) examined the environmental initiatives in Chinese firms and concluded that such practices are not related to revenue gain and cost reduction. Their work shows that these firms find it cheaper to pay fines rather than comply with costly environmental regulations so some customers are not environmentally aware and would not pay more for greener products.
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their supply chain partners (Economist Intelligence Unit, 2008). Focal firms are responsible for their supply chain partners (Hartmann & Moeller, 2014) as customers and other stakeholders do not recognize the multiple roles in a supply chain context (Seuring & Gold, 2013). Blome et al. (2014) proposed that environmental collaboration is a suitable instrument which can help firms to cushion the extension of CSR policies to their partners. The environmental collaboration is defined as a proactive instrument which can reduce the environmental impact of firms’ products (Blome et al., 2014) as well as enhance the development of sustainable products and processes (Darnall et al., 2008). For instance, Koontz & Thomas (2006) and Murray et al. (2010) emphasized that due to continuously changing environmental and social conditions (e.g., global warming and pressure from NGOs) the success of CSR practices is largely dependent on management of the collaboration with other partner organizations. In fact, this collaboration is vital because it can help companies not just to increase their profits but also to mitigate the impact of potential environmental harms, lower expenses, reduce waste through service, utility, and resource sharing (Gonela & Zhang, 2014). Furthermore, the importance of collaborative efforts is recognized not only in business benefits but also for purposes that go beyond the conventional view of CSR implementation, which focused on “simple cash donations and includes expertise, access to strategic knowledge, and in-kind resources” (Peloza & Falkenberg, 2009, p.1). Moreover, Peloza & Flkenberg (2009) believed that collaborative enterprises can acquire skills and preparedness enabling them to access to other collaborative opportunities within different CSR initiatives. For example, Wal-Mart and Tesco made use of their upstream and downstream supply chain partners’ capabilities to increase sales levels and improve the green characteristics of their products (Wu, 2016). As such, focal firms need to implement CSR practices that enhance and integrate collaborative environmental practices.
Yet, the literature presents controversial facts regarding the impact of collaborations on the firms’ value. For example, Austin & Seitanidi (2012) proposed “partnership design” which is associated with “interaction value” generation. However, this value generation is essentially associated with intangible resources such as knowledge, trust, learning, etc. and does not refer to financial benefits. On the contrary, it is believed that the collaboration with external partners leads to improvements in the product innovation activities, which is considered to have a positive impact on financial performance (Faems et al., 2010). This view is congruent with Palmatier et al. (2007) to whom prosperous inter-organizational relationships are of utmost importance to firms’ financial performance because the majority of these firms have to leverage the resources and capabilities of other firms to be able to compete in the market. The discussion above reinforces the need to resolve the controversy related to the beneficial impact of environmental collaborations.
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develop two compelling hypotheses1 which I sought to answer by employing Social Capital Theory (SCT) and Institutional Theory (IT). To this end, the first research question guiding this study is: What is the impact of environmental collaboration endeavor on the market value of a focal firm?
However, Cao & Zhang (2011) argued that the supply chain environmental collaboration has been studied from multiple perspectives, and they fall into two groups: process-focused and relationship-focused. They also defined the supply chain collaboration as interconnecting components (such as information sharing, resource sharing, etc.) and each component has a different impact on the collaboration in terms of cost reduction. Furthermore, Dangelico & Pontrandolfo (2015)’s work suggested that each collaborative initiative has distinct features. These features led to substantial benefits in terms of improved financial performance and demanded additional research to be conducted to examine the moderating effect of collaboration features on the relations between environmental collaborations and firms’ financial status (Dangelico & Pontrandolfo, 2015). Accordingly, I categorize public firms’ collaborative environmental initiatives into 3 different groups (i.e. recycling, energy consumption, and new product development collaborative environmental initiatives). Furthermore, I hypothesize that how certain types of initiatives may affect the market value more than other types do. Therefore, I present the second research question to guide this study: Which type of environmental collaboration practices has a stronger impact on market value?
To answer the research questions above, I conduct an event study based on 81 listed firms in the U.S. stock market which publicly announced their collaborative practices on environment management.
2. Literature review
2.1 Corporate social responsibility
Recent studies have suggested that the goals of CSR can be achieved by contributing to society by doing what is correct, using business power in an appropriate manner, social demand integration, and meeting long-term objectives that generate revenue (Garriga & Melé, 2004). The concept is also used as an assessment form in the evaluation of the impact that business has on society ensuring that it balances the social, economic, and environmental aspects of firms’ activities (Ciliberti et al., 2008). In the corporate financial dimension, There exist a substantial amount of evidence that CSRs are usually related to the well-being of their multiple stakeholders as well as the positive impact they have on firms’ market value (Carroll & Sabana, 2010; Luo & Bhattacharya, 2006; Mishra & Suar, 2010; Smith, 2003).
As such, some studies have examined the influence of CSR on firms’ corporate and financial performance; however, the findings do not suggest a conclusive proof and indicate a bi-directional relationship between CSR and firms’ financial status (Mikołajek-Gocejna, 2016). Also, Mikołajek-Gocejna (2016) claimed that in the past many researchers dealt with the relationship between CSR and financial performance but primarily from a theoretical arguments perspective. Some found a negative relation arguing that achieving higher responsibility is at the expense of additional costs, which can damage the profitability (Aupperle et al., 1985; Ullmann, 1985; Vance, 1975). An example of such situation would be
1 Compelling hypotheses were used because there were compelling theoretical explanations on the direct effect
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the investment in pollution control systems while other rivalries do not (Waddock & Graves, 1997). This is also in line with Friedman (1970), according to whom the relationship between CSR and financial performance is negative due to the numerous costs which tend to offset the readily observable economic benefits to socially responsible behavior which consequently leads to reduced profits and shareholder wealth. Value creation can also be negatively affected by CSR as the efforts to fulfill the requirements of an enlarged group of stakeholders may imply extra costs and additional agency conflicts (Lima Crisóstomo et al., 2011).
On the contrary, others argued that additional expenses can be compensated by other direct and indirect benefits, such as helping unconcerned stakeholders understand CSR and hence increasing their willingness to invest in CSR as well as to bring positive changes in employee’s productivity (Becchetti & Ciciretti, 2009; Soloman & Hansen, 1985). On the other hand, Russo & Fouts (1997) concluded that there is a positive relation between stock returns and environmental performance. More recently, those findings were confirmed by Aragon-Correa et al. (2008) who examined the same relation but on the basis of a small and medium-sized firm. Furthermore, Wahba (2008) empirically confirmed that environmental commitment as part of CSR positively impacts the market value of a firm. Another example is presented by Mackey et al. (2007) who showed how the supply of and demand for socially responsible investments influence firm’s market value.
Another stream of studies claimed that the relationship between CSR and firms’ financial performance is neutral. For example, McWilliams & Siegel (2001) examined the financial performance of firms employing CSR practices and concluded that this performance is not significantly different from other firms when expenditures related to R&D are added to the regression function. Others, such as Anderson & Frankle (1980) and Freedman & Jaggi (1988), have studied the same relationship but failed to conclude whether the impact of CSR on firms’ financial performance is either positive or negative.
Although the impact of CSR has been studied from different perspectives (e.g., empirical and theoretical), to my best knowledge, the impact of collaborative CSR practices on financial performance of adopter firms has been insufficiently researched. In addition, the interaction between financial performance and different types of collaborative environmental initiatives that may impact CSR are scarcely addressed by an event study methodology. This claim is also supported by McWilliams et al. (2006) and Servaes & Tamayo (2013) who debated that the recent literature on CSR still needs to identify further instruments and mechanisms, such as empirical methods and frameworks, through which CSR can add managerial implications to the firms. Wahba (2008) believed that even though researchers have employed different theoretical perspectives to show the relationship between CSR and profitability, the theories and empirical findings are still ambiguous regarding the impact of the engagement in environmentally responsible initiatives on the firms’ market value. The findings from this study intend to contribute to the existing research by clarifying the ambiguousness related to the impact of CSR on market value and revealing the mechanism in respective to how environmental collaborative initiatives, may influence the firms’ profitability.
2.2 Environmental management
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making process with regards to monitoring corporate environmental activities, assessment, and management (Melnyk et al., 2003). Klassen & McLaughlin (1996) also pointed out that the environmental management concept is important for firms’ corporate strategy because the performance of which can be observed by the public and therefore reflected in the stock price directly. This view is also echoed by Fraser et al. (2006) who stre ssed that the involvement of the community is of tremendous importance for the environmental management as it can identify performance indicators needed for monitoring the sustainable development.
Previous researchers have either empirically examined (e.g., using case studies and quantitative surveys) or established theoretical framework (e.g., Guenther et al., 2016; Goldstein, 2002) to study environmental management issues. Walton et al. (1998) demonstrated how purchasing and supply chain managers need to integrate suppliers into environmental management to reduce the environmental footprint left by the operations of the companies. Melnyk et al. (2003) examined the influence of environmental management system and their ability to reduce waste and pollution without compromising the overall performance. An environmental management strategy based on strategic resources is found to be associated with the establishment of sustained competitive advantages (Russo & Fouts, 1997). For example, undertaking proactive approach towards environmental management can be helpful in the development of some organizational capabilities such as easier embracement of technological changes (Russo & Fouts, 1997) and continuous improvement processes (Hart, 1995).
The findings from the following research echoe Yang et al. (2011)’s call for the development of instruments encompassing multiple dimensions of the environmental management. Furthermore, relying on Resource-based View of the firm, Guenther et al. (2016) argued that there is a need to examine whether environmental management practices can contribute to the development of organizational capabilities, which can result in competitive advantage for operational benefits. Also, this research is a response to Xie et al. (2016)’s note that additional research should explore the relationship between environmental management and economic output of the organizations.
2.3 Collaborative practices and firm performance
The collaborative practices are aimed at incorporating market objectives and environmental responsibility simultaneously which is believed to result in more sellable “green” products and consequently to increase the operational benefits for focal firms (Faems et al., 2010; Stafford et al., 2000). Moreover, firms tend to engage in collaboration with their supply chain partners to improve their CSR initiatives (e.g., satisfying the need for environmental resources which partner company is currently lacking); hence, these firms acquire a great deal of experience linked with the importance of collaboration (Wu, 2016). Moreover, Wu (2016) debated that the success of such collaborations largely depends on participants’ readiness to collaborative activities and this is why he also argued that sharing mechanisms should be in place to facilitate economic benefits for all the parties. For example, Hewlett-Packard aimed to improve their CSR practices by collaborating with its main suppliers but to motivate those suppliers to engage in CSR, it had to provide them with incentives such as sharing both investment costs and benefits (Rammohan, 2008).
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they used variational inequality to investigate the compensation status among partners in a supply chain. Hsueh & Chang (2008) also believed that the optimization of a supply chain can be achieved by allocating investments in CSR between manufacturers. As a result, a perceived production cost and the information sharing and investments in CSR activities among manufacturers in achieving a system-optimal solution are suggested. More recently, Hsueh (2014) proposed a new revenue-sharing contract, where CSR performance level is characterized by the investment made in CSR from a partner within the supply chain, which also have an impact on market demands. Also, if the parameters of the contract are adjusted appropriately, it is shown that it can simultaneously achieve improvement of the total supply chain profit, to ensure that each party within the supply chain benefits from the contract and can improve CSR performance (Hsueh, 2014). Horvath (2001) debated that by encouraging ongoing collaboration within the supply chain network, significant cost reductions can be achieved along with added value for customers as well as enable firms to detect critical demand changes such that they can be more responsive.
However, Anderson et al. (2007) debated that if firms are unable to manage activities in a complex CSR collaboration, hence the CSR collaboration practices can translate into massive recalls of products from the market and thus lead to revenue losses. Furthermore, Boehm (2002) took the focal firms’ perspective for CSR collaboration and concluded that the costs for such initiatives could be very high and the partners’ attitude towards the collaboration will be negative. Vachon & Klassen (2008) conducted a survey study based on North American manufacturers and found out that although the collaboration initiatives were positively linked with regards to quality improvements, they failed to provide a significant relationship between collaborative practices and cost performance.
Despite the fact that the impact on market value from collaborative environmental perspective is widely studied, this study intends to add some insights to the existing body of literature. For example, Stefan & Paul (2008) argued that extra effort regarding revenue enhancing opportunities while improving environmental performance and more cost-beneficial analyses are needed. Also, Boehm (2002)’s research examined the partners’ attitude towards collaborative CSR issues and found that failure to provide appropriate incentives would result in negative profitability of the collaboration. However, to complete the picture, Boehm (2002) proposed to examine the characteristics of the patterns of the partners’ cooperative work. Although Cheung et al. (2009) found out why companies engage in partnership with their supply chain partners (e.g., competitive advantages and improved environmental performance), they claimed that CSR partnership is a new concept which is still under development and therefore companies need further insight regarding how and to what extent it can affect firm performance.
3. Theory and hypothesis development
Fig. 1 gives the research framework in this study. Specifically, I develop compelling hypotheses to argue that the environmental collaboration practices can lead to either positive or negative impact on the focal firms’ market value (H1 and H2).
3.1 The positive influence of environmental collaboration endeavor on the market value
In this section, I use social capital theory (SCT) to explain the potential value of environmental collaboration endeavor on the market value. SCT asserts that knowledge exchange among partners in a network can enable the possible value creation.
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p. 861) defined a sub-concept as part of the social capital theory regarding group interactions, namely, “group social capital”. They described it as “the configuration of a group’s members’ social relationships within the social structure of the group itself, as well as in the broader social structure of the organization to which the group belongs, through which necessary resources for the group can be accessed”. Therefore, I argue that the SCT is beneficial for environmental collaboration practice as it can be helpful by enhancing the positive market value from cost reduction, providing opportunities to access new markets, accessing to new resources, and initiating more reliable service provision mechanisms.
The market value of a firm can be affected by either existent markets or access to new ones (Jacobs et al., 2010). The SCT suggest that network links grant access to information (e.g., knowledge) and resources (e.g. equipment and personnel) to assist the functioning of every firm within a network (Liao & Welsch, 2005). According to Krause et al. (2007) such resource exchange is central to creating benefits in existent markets, arguing that whenever two companies engage in information exchange through a governance mechanism, both parties will be able to benefit financially from it. For instance, Xerox decided to develop an Asset Recycle Management program to increase their profit by improving saving policy. To do so, the company had to apply a wide range of managerial practices; among which the most successful was the partnership with their suppliers to design more environmentally friendly products (Vachon & Klassen, 2008). Such an exchange helped the brand to design their product easier to re-manufacture and made them significantly more difficult to be imitated. As a result, improved operational, financial, and environmental performance was achieved for both sides, securing more stable market position (Vachon & Klassen, 2008). The SCTs which result in tight community networks are also useful for higher management as it would help them maintain discipline and compliance among those they are responsible for (Portes, 1998). This is not to be neglected as Cheng et al. (2008) noted that sharing green knowledge between partners can have a positive impact on firms’ markets only if it is achieved confirmation of their regulatory compliance. Furthermore, Cheng et al. (2008) concluded that the knowledge exchange among partners could be beneficial for the development of an environmental management system in compliance with the ISO 14000 standards. According to Corbett & Muthulingam (2008), the main reason for firms to adopt such environmental standards is to ensure that the company’s employees and customers are aware of its environmental concerns. Accordingly, releasing innovative products could enhance the financial performance in existing markets (Becker & Dietz, 2004). That is, the impact of knowledge transfer among firms can also be seen from Research & Development perspective, where gaining external knowledge is associated with technological capabilities and new product development initiatives. Besides, knowledge sharing can also contribute to the enhancement of operational performance by employing other environmentally friendly initiatives such as pollution reduction and alternative resource usage (Rosegrant & Cline, 2003). Such initiatives further expose firms’ environmental concerns and may have a positive effect on market value (Jacobs et al., 2010).
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Wernerfelt, 2012). Also, the knowledge exchange can affect cost in different ways. For instance, the environmental collaborations which include knowledge sharing are also proved to be beneficial in reducing waste in the logistics process due to the development of more sustainable packages (Bowen et al., 2001).
The SCT argues that a network with fewer redundant ties can provide a smooth flow of information throughout the entire network (Adler & Kwon, 2002). The importance of such advantage provided by the SCT is also recognized by Shih et al. (2012) as it can be helpful for preventing disruption and stabilize demand caused by the lack of efficient information flow within the entire network. It is believed that this will create lower production cost, faster deliveries, more reliable lead times, and better fulfillment of customer requirements (Shih et al., 2012; Uzzi, 1997). Based on the discussion above, I propose that the first hypothesis:
Hypothesis 1 (H1): The impact of environmental collaboration endeavors are positively
related to the focal firms’ market value.
3.2 The negative influence of environmental collaboration endeavor on the market value
While the aforementioned environmental collaborative perspective is assumed to be positive to firm’s market value, there still exists another reasoning on how environmental collaborative endeavors may harm the market value of the focal firms. I argue that the increased cost, namely investments in partner’s capabilities, higher operational costs, and costs related to the environmental regulations compliance could harm the market value of the firms. I also use the Institutional Theory (IT) to unravel the likelihood of the potentially negative effect of environmental collaboration endeavor on the market value.
The IT suggests that firms need to adjust their activities to the social norms in particular business environment because they would not be able to survive without a certain level of legitimacy (Meyer & Rowan, 1977). However, firms adjust their activities, not because of the legitimacy but because certain practices are taken for granted as the way things are done (Frynas & Yamahaki, 2016). For instance, firms concerned about environmental liability tend to engage in collaboration practices more often than others (Barry et al., 1993). However, the reason why buying firms participate in collaborations is to avoid violations of regulatory laws (Zhu et al., 2007). In other words, buying firms believe that the collaborations are not profitable, but they adopt them just as a precaution. According to the IT, instead of engaging in collaborations under the rational assumption of potential benefits, such precautionary behavior is adopted by corporations which are more likely to act in socially responsible ways only when encountering strong regulations (Campbell, 2007). Therefore, according to Zhu et al. (2007), firms avoid collaborations due to the additional costs they need to pay to their employees if they are to engage in collaboration for the sake of partner firms’ firm regulatory compliance.
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manufacturers may be attributable to that the return on investments cannot offset the operational cost, costs for training partners as well as high purchasing cost for environmentally friendly materials. Yardley (2005) also noted that a wide range of supply chain partners is facing pressure from governments, which promote programs to monitor the environmental burdens caused by manufacturers (e.g., air emission, natural resource, waste disposal) and mandate firms to comply with environmental regulations. While companies engage in collaborations with partners from many distinctive markets, firms’ environmental issues become globalized, resulting in noncompliance to these environmental initiatives due to the relatively high investments required for such programs and hence the inability of some firms to release profit (Chan, 2000). For example, many multinational enterprises such as IBM mandate that their suppliers must develop environmental management systems in compliance with ISO 14000 standards to become the legitimate suppliers for them which result in additional investments that have to be made from supplier’s side (GEMI, 2001).
Based on the above reasoning, I argue that the inter-organizational collaborations in the environmental project may have a negative impact on focal firms’ market value, which leads to the following hypothesis:
Hypothesis 2 (H2): The impact of environmental collaboration endeavors is negatively
related to the focal firms’ market value.
3.3 The effects of different types of environmental collaboration endeavors on the market value
Incorporating environmental dimensions into firms’ strategies may trigger various benefits (Dangelico & Pontrandolfo, 2015), including new market development, improved sales, enhanced corporate image, and increased return on investment (e.g., Ameer & Othman, 2012; Orsato, 2006). However, these benefits affect firms’ market value in different ways and therefore the influence of each of the collaborative endeavor could be different as well. Nevertheless, little attention has been given to which specific environmental action is more beneficial than others (Dangelico & Pontrandolfo, 2015).
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process. Finally, Littler et al. (1995) asserted that cost reduction can lead to enhanced market performance with regard to product development.
On the other hand, recycling initiatives are also considered to be profitable as they may trigger cost-effective in-energy usage, waste disposal, logistics, material handlings, and fewer taxes due. For instance, Youn et al. (2013) defined environmental supply chain management as an effort to tackle environmental issues through inter-organizational collaboration towards recycling, reduction, and reuse of products to achieve firms’ goals (e.g., enhanced market and financial performance). Youn et al. (2013) concluded that through environmental supply chain management, the financial performance of small- and medium-sized enterprises can be improved. Also, Mangan et al. (2011) focused on the by-product synergy (BPS) process which offers opportunities for developing solutions such as matching waste from one facility with potential users at another to increase profit. Mangan et al. (2011) further argued that the model can reduce waste disposal, leading to lower energy costs, transportation, and materials. Under certain circumstances, the waste through the BPS process can generate new profit opportunities by adding new market connections (since BPS matches waste from one facility with potential partners from another). Other benefits stemming from the waste disposal include less tax due to less material to the landfill, site charges, decreased landfill capacity usage, consumption of fewer resources can also result in savings of natural resources (e.g., water, energy, and fossil fuels) (Mangan et al., 2011). Beamon (1999) presented the concept of the green supply chain referring to the minimization of the environmental impact of collaborative firms throughout a products’ life cycle, such as recycling, reuse, resource saving, etc. Many firms in Asia believed that the green supply chains lead to the usage of eco-friendly raw materials, eco-friendly waste disposal, pollution mitigation and so forth (Rao, 2003). The results of these initiatives were improved environmental performance, reduced risk of non-compliance, and penalties threats of closure.
Another category of environmental collaboration in this research relates to energy consumption. Türkay et al. (2004) provided an example and illustrated the importance of multi-company collaborative supply chain management for energy consumption. A systematic approach was used to illustrate the importance of energy integration among companies operating in the same industrial zone (Türkay et al., 2004). The results showed that companies achieved substantial improvements in terms of financial benefits and environmental performance through the exchange of resources (e.g., electricity and steam) and conservation of massive and energy. Moreover, Soysal et al. (2016) suggested that horizontal collaboration among suppliers regarding transportation operations and logistics costs in the inventory routing problems could enable focal companies to obtain economic and environmental benefits. Their case study found out that the horizontal collaboration leads to aggregated total cost reduction and total energy usage (emissions) reduction from transportation operations. According to Ateş et al. (2012), investment in business processes improvements (e.g., engaging in collaborative recycling initiatives) to enhance the environmental sustainability is favorable not only for improving the environmental sustainability but also firms’ economic sustainability. On the other hand, Grekova et al. (2016) suggested that these sustainable process improvements can be beneficial in terms of energy savings, pollution prevention, etc. Additionally, lower liability and compliance costs can be achieved if pollution reduction technology is employed (Grekova et al., 2016).
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value differs significantly from each other, the resulting benefits may be different accordingly. This is in line with Jacobs et al. (2010)’s conjecture that the market is selective in responding to different environmental announcements. Consequently, I develop the following hypothesis to exam whether there is distinct market value among different types of practices:
Hypothesis 3 (H3): The influence of recycling, energy consumption, and new product
development initiatives on market value will be different.
Figure 1: Research framework.
4. Sample and data description
I used LexisNexis database as the primary source to search for environmental collaborative initiatives announcements. The publicly available announcements are deemed as valid indicators of implementation of corporate practices by public firms (Xia et al., 2016; Klassen & McLaughlin, 1996). I used keywords such as conservation, conservational, eco, ecosystem, ecology, ecological, environment, environmental, green, greener or greenest, greening, greened, recycle, recycles, and recycling. I searched the full texts of these announcements to identify additional words and phrases that are suitable for searching for more environmental collaborative initiatives announcements. The additional keywords used in my search include collaborative, collaboration, tie, partner, partnership, joint venture, relation, alliance, and relationship. I searched the Headlines and Lead Paragraphs of the mainstream business wire services, for instance, US and Europeans newspapers during the period 2006 - 2016. Additionally, I used the “near 5” rule, provided by the LexisNexis search platform, to combine the keywords from my preliminary set of keywords with one another such that I could more efficiently identify many environmental collaborative initiatives
ENVIRONMENTAL
COLLABORATION MARKET VALUE
H1: +
H2: - Increased costs: • Investments in partner’s
capabilities
• Higher operational costs • Costs related to environmental
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announcements. To include an announcement in my sample, it had to meet the above search criteria. Also, according to Jacobs et al. (2010), the followings should be excluded:
• Announcements that are made by firms which are not public firms.
• To avoid repetitions, an announcement that appeared in more than one publication should only be retained once with the earliest publication date.
• I also exclude similar announcements related to one company within a time frame of twenty trading days because this might cause disturbances in event analysis.
The contents of several announcements suggest that the environmental collaboration practices might have been revealed earlier. When this is the case, I checked alternative sources referring to earlier dates to verify whether there were earlier announcements. If an earlier one was identified, then I used the earlier publication date as the announcement date.
Table 1 provides descriptive statistics of my sample. The sample consists of 139 announcements spanning across multiple firms and industries. However, 27 abnormal returns were missing from the firms’ financial data in COMPUSTAT database and therefore they were excluded from the analysis. To investigate the impacts of specific environmental collaborative initiatives, I segmented the sample into the following three subcategories based on nature of the announcement content. That is, product development (33), recycling initiatives (47), and energy consumption improvements (60). One sample announcement under each category of the announcement is given as below (a comprehensive sample set can be found in Appendix B of the thesis):
• Product development environmental collaborative initiative - July 19, 2012 – Starbucks Coffee Company, LBP Manufacturing and Henkel announced the availability of EarthSleeve (TM), a new hot-cup sleeve that integrates proprietary technology that enables a reduction in overall material usage while at the same time increasing the post-consumer content.
• Recycling environmental collaborative initiative - October 27, 2009 - Boeing wants to collaborate with its chief rival to develop technologies for recycling aircraft materials, according to its programme manager of airplane and composite recycling Bill Carberry. Speaking at a briefing arranged by the Aircraft Fleet Recycling Association (AFRA), of which Boeing is a member, Carberry confirmed that the US airframer had approached Airbus to co-operate on a project aimed at finding profitable ways to recycle low-value materials.
• Energy consumption environmental collaborative initiative - December 12, 2007 - Shell is going to grow marine algae to convert into biofuel, the oil company announced yesterday. Shell has formed a joint venture company with HR Biopetroleum under which they will construct a demonstration facility on the Kona coast of Hawaii Island to harvest algae, which grows very rapidly and, they claim, can provide 15 times more oil a hectare than alternatives such as rape.
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Table 1. Distribution of sample by year.
Table 2 represents sample statistics based on the most recent fiscal year completed before the date of the environmental collaborative initiative. The median in the sample reports all the data among the firms from the sample with US$19675 million in the market value of equity, US$52431 million in total assets, and US$37770 million in assets. However, when these values were obtained, the market values of 41 were missing2, R&D expenses were not reported from 27, and only 1 firm failed to report its sales values. I also divided the sample into eight distinct industries using the SIC code (see Hendricks & Singhal, 2003).
2 Inevitably, the financial data of some firms in COMPUSTAT database is not comprehensive.
Year No. of announcements Percentage
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Table 2. Descriptive statistics for the sample. Sample statistics are based on the most recent fiscal year completed before the date of environmental collaborative initiative.
Measure Mean Median SD Minimum Maximum
Market value (million US$) 59 835,92 19 675,48 76 634,81 7,45 291 041,63 Total assets (million US$) 117 225,64 52 431,78 189 869,94 28,37 856 240,00 Sales (millions US$) 61 819,19 37 770,34 72 082,36 1,54 355 782,00 R&D expense (million US$) 2 877,05 1 748,00 2 939,69 0,00 9 571,00
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Table 3. Descriptive statistics for the sample. Industry groups.
5. Methodology
In order to measure how the market responses to environmental collaboration announcements, I employed event study methodology (Peterson, 1989). The event study method has been widely applied to estimate stock market reactions to announcements relating to specific corporate events (Xia et al., 2016; Klassen & McLaughlin, 1996). This methodology is suitable for estimating abnormal returns associated with specific corporate events by controlling for market and industry impacts on stock prices (more information about this methodology can be found in Brown & Warner, 1985). The “abnormal” returns represent the difference between a single stock and the expected return over a predefined period. The event study is based on the premise that information released to the markets might be unknown and transfers a signal to the market related to its influence of the company on a long-term basis. Thus, the stock prices would be with a potentially valid indicator of the information such that the abnormal returns can be estimated accordingly (Rieck & Doan, 2007). Hence, the influence of such event can be obtained by examining the stock prices over a short period.
In line with the previous study (e.g., Xia et al., 2016), I measured abnormal returns over a two-day event period. This period consists of the day before the announcement, the announcement day itself, and the day after the announcement has been made. However, if the environmental collaborative announcement was made before 4:00 PM Eastern Standard Time (EST), the event window consisting of the day of the announcement and the preceding trading day must consider the possibility that the information about the event could have been released the day before the announcement. On the contrary, if the announcement was made Group
No.
Industry description SIC code No. of
announcements
Percentage
1
Agriculture and natural
resources 0001–1999 2 1.44
2
Food, textiles, furniture,
paper, chemicals 2000–2999 31 22.30
3
Rubber, leather, stone, metals, machinery, and equipment
3000–3569, 3580–
3659, and 3800–3999 6 4.32
4
Computers, electronics, communications, and defense
3570–3579, 3660–
3699, and 3760–3789 24 17.27
5
Automobile, aircraft, and transportation
3700–3759, and
3790–3799 31 22.30
6 Logistics and supply 4000–4999 1 0.72
7 Wholesaling and retailing 5000–5999 5 3.60
8
Services and financial
services 6000-9999 23 16.55
9 Miscellaneous 16 11.51
18
after 4:00 PM Eastern Standard Time (EST), then the event window included the day of the announcement and the trading day after the announcement must take into account that the market cannot operate until the next trading day. The next step was to create the trading calendar, meaning to convert calendar days into event days. Therefore, I marked the announcement day as Day 0, the preceding day as Day – 1, and the day after the announcement as Day 1. For instance, for announcements made after 4:00 PM EST, the announcement in the calendar is marked as Day -1, the following trading day as Day 0, and the trading day before the announcement day as Day -2.
Consistent with previous event study, I used the “market model” to estimate the abnormal returns (Jacobs et al., 2010). It was also argued that this model establishes a linear relationship between the return on a stock and the market return over a given period (Jacobs et al., 2010). It is given as follows (I provide a detailed description of the model in Appendix A): 𝑅𝑖, 𝜏 = 𝐴𝑖 + 𝛽𝑖𝑅𝑚, 𝜏 + 𝐸𝑖, 𝜏 (1)
To calculate the expected return for each firm of the sample, I estimated 𝐴𝑖, 𝛽𝑖 and the variance of the error term 𝐸𝑖 (𝑆𝑒𝑖2) employing ordinary least squares regression over the
estimation period which is 200 trading days. I began estimating my period from Day -210 until Day -11. In order to protect the estimates from effects of the announcement and to make sure that the non-stationarities in the estimates would not cause bias, I ended the estimation period 10 trading days prior to the event day. However, some firms might not have their data completed over the estimation period, when this is the case, to calculate Eq. (1), I required that a firm must have at least 40 stock returns during the 200-day period.
The mean abnormal return for Day τ is given by: 𝐴𝜏 = ∑ 𝐴𝑖𝜏
𝑁 𝑁
𝑖=1 (2)
The test statistics TSτ for Day τ along with the t-test for the statistical significance of the mean abnormal return can be found in Appendix A. In addition, Appendix A also provides information about the test statistics TSτ for a period spanning over multiple days.
6. Results
6.1 Analysis of the influence of the environmental collaboration endeavors (all samples) on the market value
19
statistically larger than those abnormal returns released before the event was announced. Therefore, the H1 is not supported.
Table 4. Descriptive Statistics Associated with the Abnormal Returns of Firms for Day – 1 and Day 0.
Days N M SD Skew Kurtosis
Day -1 112 .0011 .0215 .384 6.29
Day 0 112 .0029 .0190 1.80 6.91
Furthermore, Table 5 shows that the median abnormal returns for Day-1, 0 during the two day period (0.14%, 0.12%, and 0.26%) are all positive but statistically insignificant. 53.13% of the abnormal returns for Day -1 and 0 are positive, however, insignificantly different from the percentage positive abnormal returns during the estimation period. Overall, the results suggest that the market values of the environmental collaborative practices are not significantly associated with the market value of the firms.
Table 5. Event Period Abnormal Returns for the 139 Environmental Collaborative Announcements
Day - 1 Day 0 Day -1 and Day 0
Median abnormal return 0,14% 0,12% 0,26% % Abnormal returns positive 52.68% 53.57% 53.13%
6.2 Analysis of the influence of differing environmental collaboration endeavors on the market value
It has been argued that the market could react differently by environmental collaborative initiatives subcategories (Jacobs et al., 2010). The market reaction could be either positively, negatively, or has no significant impact in a different type of endeavors. For this purpose, in order to examine what impact each type of environmental collaborative announcements has on firms’ market value, I further break down my data sample into three different subcategories, namely, environmental collaborations related to recycling initiatives, product development initiatives, and energy usage improvements, respectively.
20
distributions of the abnormal returns of firms employing either product development initiatives or recycling initiatives were sufficiently normal for the purposes of conducting a
t-test (Schmider et al., 2010). Also, the assumption of homogeneity of variances was tested and satisfied via Levene’s F test, F(129) = 5.71, p = .018. The independent samples t-test did not report statistically significant effect, t(129) = .239, p = .812 (2-tailed), based on the criterion of p < 0.05. However, assuming that the direction of the results may be sided, an one-tailed p-value is needed. Thus, I divide p = .812 (2-one-tailed) by 2 which equals p-value (1- tailed) of 0.406 which is not statistical significant at 5% level. Thus, the abnormal returns of collaborative recycling initiatives are not statistically different from those released by product development collaborative initiatives.
Table 6. Descriptive Statistics Associated with the Abnormal Returns of Firms
N M SD Skew Kurtosis Recycling initiatives 78 .0020 .0153 .788 4.730 Product development initiatives 53 .0011 .0268 1.636 5.565 Energy consumption improvements 94 .0020 .0197 -.214 5.008
On the other hand, I compare the product development group (N=53) which was associated with the abnormal returns at the day an event was announced with Mean = .0011 (SD = .0268) and the energy consumption improvements group (N=94) which was associated with numerically smaller abnormal returns Mean = .0020 (SD = .0197). I conduct a t-test to find out whether there is a statistically significant difference in the abnormal returns of the two groups. Table 6 displays the distributions of the abnormal returns of firms employing either product development initiatives or energy consumption improvements initiatives were sufficiently normal for the purposes of conducting a t-test (i.e., Schmider et al., 2010). The assumption of homogeneity of variances was also tested and satisfied via Levene’s F test, F(145) = 2.51, p = .115. The independent samples t-test was not associated with a statistically significant effect, t(145) = .233, p = .816 (2-tailed), based on the criterion of p < 0.05. Again, an one-tailed p-value is needed. Accordingly, I divide p = .816 (2-tailed) by 2 which equals tailed p-value (1- tailed) of 0.408 which is still significantly higher than p < 0.05. Thus, the abnormal returns of energy consumption environmental collaborative initiatives are not statistically different from those released by product development collaborative initiatives.
21
improvements initiatives were sufficiently normal for the purposes of conducting a t-test (i.e., Schmider et al., 2010). In addition, the assumption of homogeneity of variances was tested and satisfied via Levene’s F test, F(170) = .822, p = .336. As a result, the independent samples t-test was not associated with a statistically significant effect, t(170) = .009, p = .993 (2-tailed), based on p < 0.05. However, based on the origin of the hypotheses, an one-tailed p-value is needed. Therefore, I divide p = .993 (2-tailed) by 2 which equals p-p-value (1- tailed) of approximately 0.497 which is still higher than p < 0.05 to confirm a statistical difference between the two groups. Hence, the abnormal returns of energy consumption improvements environmental collaborations initiatives are not statistically larger than those released by recycling environmental collaborations initiatives group.
22
Table 8. Hypotheses results summary.
No. Hypothesis Status Outcome
H1
The impact of environmental collaboration endeavors are positively related to the shareholders’ perception of the focal firms’ market value.
Not supported
Since the results showed that
the environmental
collaborative initiatives are positively related to firms’
market value but
insignificant, then supply chain managers and supply firm owners should focus on different collaborative initiatives if they are willing to significantly increase the market value of their firms.
H2
The impact of environmental collaboration endeavors are negatively related to the shareholders’ perception of the focal firms’ market value.
Not supported
Although the results have not confirmed a significant relationship between environmental collaborative initiatives and firms’ market value, overall these initiatives suggest a marginally positive impact on firms’ profitability.
H3
The influence of
recycling, energy consumption, and new product development initiatives on shareholder value will be different.
Not supported
The influence on the market value of each of the three sub-categories that I developed varies. However,
the environmental
collaborative initiatives
related to energy
consumption improvements tend to have the strongest positive impact on firms financial performance.
Hence, supply chain
managers and supply firm owners can benefit from these findings as they will be aware of which sub-category can improve the financial status of their firms or at least do not harm it.
7. Discussion
23
environmental collaboration endeavors on the market value of the focal firms. Although previous researchers highlighted the importance of the environmental collaboration on firms’ market value (Faems et al., 2010; Palmatier et al., 2007), several questions remained unanswered. For instance, Austin & Seitanidi (2012) have warned that environmental collaborations are essentially associated with intangible resources (e.g., trust and learning) and does not refer to financial benefits, whereas Faems et al., (2010) argued that the collaboration with external partners leads to improvements in the product innovation activities, which is considered to have a positive impact on financial performance. This controversy has further triggered the interest upon this topic.
The results of data analysis have shown that the market does not significantly react to the environmental collaboration initiatives (t = -0.650, p >0.05), thus leading to the rejection of the first hypothesis. This finding is in line with McWilliams & Siegel (2001) who concluded that the market value of firms employing collaborative environmental practices is not significantly different from the market performance of other firms without such practices. Notwithstanding, this result is not congruent with the benefits related to the conceptualization of SCT. The theory pertains success in terms of a collaborative relationship between firms. Some authors such as Adler & Kwon (2002), Coleman (1990), Liao & Welsch (2005), and Portes (1998) asserted that collaborative environmental initiatives should be beneficial based on the social capital theoretical lens. Such predictions included knowledge and resource exchange, tight community networks, and provision of smooth information flow which taken together, should be helpful for enhancing firms’ market value. However, the results from my study proved these claims are not the case as firms’ market values do not react significantly to environmental collaborative initiatives. Yet, some believed that the positive outcomes associated with SCT are too one-sided and the negative side should be also taken into consideration (Adler & Kwon, 2002). Following this line of thought, the current findings further strengthens Hansen (1998)’s claims that social capital could be beneficial to a focal firm while at the same time can have a negative impact for the broader group of which the focal firm is a part, which consequently could result in overall negative market value of the participating firms. Also, the results of this study answered the call from Adler & Kwon (2002)’s note to systematically assess risks related to SCT. Particularly, Adler & Kwon (2002) sought to find out more about the downsides of SCT for the focal actors.
24
well as between subsidiaries and different organizations. However, drawing from the results of this paper and the insignificant relationship between such collaborations and organizations’ financial performance, I reject the notion made by Lammers & Barbour (2006). More recently, Jackson & Apostolakou (2010) debated that institutions have been neglected in the literature regarding CSR. Their study argued that literature on CSR is mainly focused on the outcomes on CSR rather than determinants. My study responded to this call by examining how such institutions affect certain types environmental collaborative initiatives employed by firms engaged in CSR and what causes them to react in a certain way.
Drawing conclusion from the findings, even though the environmental collaborative initiatives have been continuously dragging attention due to their ability to back multiple firms-related activities (e.g., by access to resources, risk sharing and etc.) (Cao & Zhang, 2011), it is not applicable to employ them for the sole purpose of achieving improved market value.
7.1 Theoretical implication
From a theoretical perspective, this study has enriched the existing body of literature by shedding light on several unexplored issues. First of all, despite the Jacobs et al. (2010)’s work, their study has approached the shareholder value effects of environmental performance by examining the stock market reaction to announcements related to environmental performance. In contrast, this study measures how environmental collaborative initiatives affect firms’ market value and thus answered the research call by Jacobs et al. (2010) who sought to examine the impact of the environmental collaboration on firms’ financial performance through cost reduction initiatives and market expansion. Secondly, this study has successfully contributed to resolving the controversy posed by Austin & Seitanidi (2012), Faems et al. (2010), and Palmatier et al. (2007) related to the impact of collaborations on the firms’ value. Indeed, the study has also revealed that firms’ market reaction differs per different subcategories. Furthermore, according to McWilliams et al. (2006) andServaes & Tamayo (2013), the literature lacks instruments and mechanisms, such as empirical methods and frameworks, through which CSR can add managerial implications to the firms. By examining this topic from a case study perspective, this paper enriches the literature by adding such instruments and mechanisms. Finally, my research brought some more insights related to CSR partnership which according to Cheung et al. (2009) are scarce and therefore firms do not widely adopt them.
7.2 Managerial implication
25
the findings of this study as they will be aware of what types of environmental collaborative initiatives improve or at least do not harm firms’ value.
7.3 Limitations and future research
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