The Impact of Corporate Social Responsibility on
Corporate Financial Performance: The Role of Brand
Equity
MASTER THESIS
MSc Marketing
Intelligence
The Impact of Corporate Social Responsibility on
Corporate Financial Performance: The Role of Brand
Equity
ABSTRACT
Corporate Social Responsibility (CSR) is acquiring strategic importance for firms and emerging as an “inescapable priority”. Previous studies report inconclusive, and in some cases even contradictory, results for the relationship between CSR and firm performance, pointing in different causal directions. Further, not much is known as to the mechanism through which CSR may link to financial performance. This paper identifies brand equity as a potential mediator of the CSR-CFP relationship. Specifically, it shows that corporate social responsibility (CSR) leads to greater corporate financial performance through brand equity. While, the impact of advertising expenses when it is accompanies with CSR is insignificant. These evidences are consistent with the view that CSR activities can add value to the firm but with different mechanisms, in this case through brand equity.
PREFACE
This is it. The most amazing work I have ever done during my whole education years. When I look back, I could have never imagined being able to study in a country so far away from my home country and be able to actually enjoy living and studying in it and call it home. During these two years of studying in the University of Groningen, not only I have learned so many interesting subjects, but also I have been able to be more confident every day with the path I have chosen as a graduate student. I trust I will always smile when I look back at the days I spent in Groningen.
This Master thesis was written under the supervision of Dr. Abhi Bhattacharya. His excellent supervision and constructive feedback played the most important role to successfully finish this thesis. I can safely say that writing this thesis opened up new doors towards amazing subjects like the importance of CSR and its effects in business. This thesis with support of my remarkable supervisor, has prepared me as a Marketing Intelligence graduate for more analytical and logical thinking and statistical challenges in my future career.
TABLE OF CONTENTS
ABSTRACT ... 3
PREFACE ... 4
1. INTRODUCTION ... 8
2. CONCEPTUAL FRAME WORK AND HYPOTHESIS ... 11
2.1 Defining CSR ... 11
2.2 CSR and corporate financial performance ... 12
2.3 CSR and Brand Equity ... 17
2.4 Brand equity and corporate performance ... 20
2.5 The mediating role of brand equity ... 23
2.6 The moderating role of advertising ... 25
3. DATA AND METHODOLOGY ... 28
3.1 Data description ... 28
3.2 Data cleaning and variable description ... 29
3.3 Descriptive statistics ... 31
3.4 Method ... 33
3.4.1 Model type ... 33
3.4.2 Mediation and Moderation ... 33
4. RESULTS ... 36
4.1 Model diagnostics ... 36
4.2 Results for mediating role of Brand equity ... 37
4.3 Results for moderating role of Advertising ... 40
4.4 Validations and Robustness check ... 41
4.4.1 Robustness tests ... 41
4.4.2 Treatment of missing values ... 43
5. DISCUSSION ... 46
5.1 Findings and theoretical implications ... 46
5.2 Managerial implications ... 48
5.3 Limitations and future research ... 49
TABLE OF TABLES
Table 1: Explanation of the variables included in the dataset. _______________________________ 30 Table 2: Within and between variation for variables. ______________________________________ 31 Table 3: Correlation between variables ______________________________________________ 32 Table 4: Panel models comparison __________________________________________________ 36 Table 5: Mediation analysis results _________________________________________________ 39 Table 6: Moderation analysis results ________________________________________________ 41 Table 7: Robustness check by 2 new models for mediation analysis _____________________ 42 Table 8: Robustness check by 2 new models for moderation analysis ____________________ 43 Table 9: Missing values treatment for mediation analysis ______________________________ 44 Table 10: Missing values treatment for moderation analysis ____________________________ 45
TABLE OF FIGURES
1. INTRODUCTION
Corporate Social Responsibility (CSR), defined as “a commitment to improve societal well-being through discretionary business practices and contributions of corporate resources” (Du et al. 2009) is getting more and more attention by different companies around the world. Therefore organization like Global CSR RepTrak announces the top 100 most socially reputable companies each year. Cisco as one of the top 10 companies in the RepTrak list invests $50 million in 2018 to solve the Silicon Valley’s homelessness issue. But why it is good for companies to be placed in RepTrak’s list? And why do companies like Cisco invest outstanding amount of monies to solve issues like homelessness?
Cisco Company says: “Through our CSR efforts, we are able to incubate new solutions and business models, attract and retain top talent, build relationships with governments, non-profits and customers, and contribute to the success of local economies. In short, everybody wins” (Forbes, 2018)1. So as Du et al. (2009) mention in their study, “These unprecedented CSR efforts are driven not just by ideological thinking that corporations can be a powerful and positive force for social change, but more by the multi-faceted business returns that corporations can potentially reap from their CSR endeavors”. More specifically, companies by initiating CSR activities will get rewarded by key stakeholders such as consumers, employees and investors.
Despite the fact that the literature is divided regarding the effect of CSR on Corporate Financial Performance (CFP), many scholars (e.g. Du et al. 2009, Luo and Bhattacharya 2016, Story and Neves 2014, Preston and O’Bannon 1997) have evidenced the favorable financial outcomes for companies through CSR activities.
Although, some research has been conducted to investigate the effect of CSR on CFP, the mechanism of this relationship is still unclear. In this research an indirect link for CSR-CFP relationship, which is through brand equity, has been proposed. In other words, it is believed that brand equity has a mediator role in the relationship between CSR and CFP.
Furthermore, by focusing on consumers as one of the key stakeholders in this study, the effect of advertising on aforementioned relationship is investigated. Since it is believed that “a necessary condition for CSR to modify consumer behavior and, hence, affect firm value, is consumer awareness of firm CSR activities” (Servaes and Tamayo, 2013).
In this research, the relation between CSR and financial performance of the company, taking into account the concerns mentioned above is investigated. By using fixed effects models in this research, it is investigated that whether and under what conditions CSR can increase the sale/turnover of the company. Subsequently, I investigate the effect of CSR when it is accompanies with advertising spending on the brand equity and eventually on the sale of the company.
For this study’s analyses, the KLD stats database over the period of 2007 to 2015 has been employed, which covers the CSR activities of the large numbers of the U.S. companies. Moreover, the brand strength data in this study is provided by the BAV database. Finally the before-mentioned two databases have been combined with Compustat database, which provides the financial statement data for different companies.
reputation (combined in brand equity), which eventually increases the sale/turnover of the company. For the second part of the analysis, the effect of advertising spending accompanying with CSR activities on the brand equity and sales is studied. And interestingly, no significant effect of CSR and advertising, neither on brand equity nor on the sale of the company was found.
This study contributes to the debate on the role of CSR on CFP. Since it is shown in this study that CSR activities would result in sale enhancement through increasing the brand equity. It is also possible that CSR would have influence on the financial performance through other paths, which requires further investigation. And also the direct advertising of CSR activities by the company has no effect on sale. This result also requires further investigation, due to the other means of advertising (like WOM, influencers, review websites and etc.), which are not included in company’s advertising expenses.
2. CONCEPTUAL FRAME WORK AND HYPOTHESIS
In this chapter first a description for the main subject of interest will be presented. Then the relationship between variables based on previous literatures will be debated. Subsequently, after each relationship review, a hypothesis will be suggested for further analysis in this study.
2.1 Defining CSR
The World Business Council for Sustainable Development (WBCSD 2004), which is mentioned by Servaes and Tamayo (2013), argue that: “CSR is the commitment of a business to contribute to sustainable economic development, working with employees, their families, the local community and society at large to improve their quality of life.” In this definition, components like environment, human rights, the behavior of employees and the society are mentioned for CSR activities. By relying on the Freeman’s (1984, p. 53) definition of a stakeholder, which is: “any group or individual who can affect or is affected by the achievement of an organization’s purpose”, the society can be interpreted as the stakeholders.
Another definition of CSR, which is provided by Matten and Moon (2008) states: “CSR (and its synonyms) empirically consists of clearly articulated and communicated policies and practices of corporations that reflect business responsibility for some of the wider societal good”. This definition of CSR also highlights the corporate’s responsibility towards the society, or stakeholders in large.
transparency, being treated in a socially responsible manner and also addressing some of the country’s challenging problems (both economically and environmentally) are few examples of the evolved demands of the consumers. These sorts of activities, which are done by the companies to address the demand of stakeholders, are titled Corporate Social Responsibility (CSR).
The popularity of CSR activities among the consumers (Lichtenstein et al. 2004; Luo & Bhattacharya. 2006) in recent years has led the companies and researchers to focus more on this subject.
Nowadays, consumers purchase more from socially responsible companies and those who engage more in CSR activities (Sen & Bhattacharya. 2001; Sen, et al. 2006). Hence, the company’s success and profitability is tied with its obligations to society. This is the reason for the conducted numerous studies about this subject and its effectiveness on the company’s image or even its financial outcomes in the future.
2.2 CSR and Corporate Financial Performance
them to initiate or increase their CSR actions. Initiating the CSR activities by the companies can also have promising results for the stakeholders, like customers. One of the positive outcomes for customers, as Sen and Bhattacharya (2004) mentioned, could be increasing consumer well-being. Since by changing the strategy of the companies towards increasing concerns towards customer needs would result in an enhancement in their well-being. On the firm side, applying socially responsible activities can improve the brand image and consequently the brand equity, which leads to promising financial outcomes and eventually sustainability.
Therefore, due to the importance of CSR-engaged companies for the stakeholders and the influences that CSR activities may have on the financial status of the companies, this subject has become one of the main interests among researchers. However, there has been a debate among researchers regarding the nature of the impact of CSR on the CFP for a very long time. Therefore, researchers have investigated different performance indicators such as: increased market share or market value, purchase intentions, increased sales and shareholders wealth as the possible benefits of the CSR activities. Within the investigated area, there are three opposing opinions on this matter which are as follows:
First group of researchers (e.g. Zaborek 2014, Mishra and Modi 2016 and etc.) have proved a non-or weak relation between CSR and CFP, while the second group (Luo and Bhattacharya 2016, Story and Neves 2014, Preston and O’Bannon 1997 and etc.) proved a significant relation between CSR and the financial performance. On the other hand, the third group of the researchers (e.g. Tang et al. 2012 and etc.) found a negative relation between CSR and financial results.
the strong positive correlation between CSR on CFP could be due to some measurement biases and/or a consequent amount of unauthentic effect, probably because of the respondents who unconsciously believe in positive financial effect of CSR activities. Mishra and Modi (2016), who investigated the effect of CSR on shareholder wealth, found no direct effect between CSR and CFP. Although they believe that the relation is more likely in the presence of marketing capability. Aras et al. (2010) also tested CSR and financial performance with different directions but they found no link between these two variables.
Instead, the second group of researchers believes that there is a relationship between CSR and CFP. In this perspective, it is beneficial to analyze Preston and O’Bannon’s (1997) view. They found a significantly positive relationship between CSR and financial performance indicators, which they believe is broadly consistent with stakeholder’s theory. Furthermore, Luo and Bhattacharya’s (2006) findings suggest that the there is a positive significant relationship between CSR and financial returns, although they believe that the returns are different across firms with different internal situations. Consequently, they indicate that: “the financial returns to CSR are amplified in firms with higher product quality, which means that a proper mix or combination of external CSR initiatives and internal corporate abilities likely generates and sustains financial value for the firm” (Luo and Bhattacharya 2006).
Rothenberg (2008) also indicate that CSR has a marginal direct effect on financial performance. They believe that the impact would be higher if Corporate Social Performance (CSP) is combined with innovation. Another interesting study, which has been done by Servaes and Tamayo (2013), shows that the effect of CSR actions on the corporate performance is significant for companies with high customer awareness, which is accompanies with advertising expenditures.
On the other hand, some researchers from the third group found a negative relationship between CSR and CFP. As such, they have found when a firm engages in CSR in an inconsistent manner, its financial performance suffers (Tang et al. 2012). “As the inconsistent approach disrupts the learning process, and long inactive periods hurt the firm’s ability to absorb CSR knowledge” (Tang et al. 2012). Therefore they suggest, due to the fact that company’s financial performance has suffered from the inconsistent CSR application, its managers would avoid commitment to CSR. Moreover Lopez et al. (2007), also find a negative relationship between CSR and the performance indicator during the first year that is been applied, since the expenses for safety, training and purchasing non-polluting technologies will bring economic disadvantages for the company.
results for CSR-CFP relationship. Since the opposing results might be due to the fact that CSR affects CFP completely (or partially) through brand equity and this relationship has never been investigated before. Moreover in this study, the effect of advertising of CSR activities on the CSR-BE-CFP relationship will also be investigated. Since it is believed by many scholars (e.g. Servaes and Tamayo. 2013, Sen and Bhattacharya. 2004), that the effect of CSR on financial outcomes is tied with consumers’ awareness of the company’s CSR activities.
In this regard, it is believed that managers can obtain competitive advantages and reap more financial benefits by investing in CSR activities (Luo and Bhattacharya. 2006) through increased brand equity and accompanying the CSR activities with advertisement. Therefore, from the stakeholders’ point of view, by applying CSR, many advantageous outcomes such as increasing consumer well-being which positively affects the company’s bottom line (Sen and Bhattacharya. 2004), pollution reduction, quality enhancement of the products would occur which eventually leads to the financial gain for the company (King and Lenox. 2001). Thus, the conceptual framework in this study, as it is shown in Figure 1, proposes that there is a positive relationship between CSR and sales, which is (at least partially) mediated by the brand equity and moderated by advertisement.
Thus, it is expected in this research that, CSR would be a driver of the brand equity and subsequently brand equity would have significant positive effect on the sales of the company. In another word, the CSR-sales linkage exists (completely or partially) because of the process through the brand equity. In addition, as it is shown in Figure 1 the effect of advertising also has been considered in the CSR-sales relationship as a moderator. It is expected that the accompanying CSR with advertising would amplify the CSR-sales linkage.
Figure 1: Conceptual model
2.3 CSR and Brand Equity
Brand equity is a multidimensional concept but based on Aaker’s model (1996), it is a combination of perceptual and behavioral customer-related measures. However, according to Lai et al. (2010) consumer perception about CSR activities leads to positive brand awareness and brand association, while the links between CSR and behavioral variables are weak. To summarize and by relying on Aakar’s model (1996) and Lai et al.’s (2010) definition of brand equity, this research focuses on the perceptual dimension of the brand equity (brand strength).
So now the question is why firm’s CSR activity leads to higher brand equity? At least four literature provide evidence for this link: First, based on Du et al. (2007) when the brand is positioned on CSR and the company is able to differentiate itself from the competitors, the brand awareness will increase and subsequently they can achieve a higher brand equity. Moreover, Wang et al. (2015) also found out that, companies by applying CSR activities can differentiate themselves from others and that is indeed the key to achieve greater brand equity.
Second, conducting a strategically well-managed CSR would build trust among consumers and that leads the company to favorable financial outcomes (Fatma et al. 2014). So the utmost objective of companies should be planning for a well-designed strategy for managing their CSR activities. Moreover, they believe that CSR strategy should be planned as a long-term activity rather than a short-term public relation, because building a good reputation is hard to build and very easy to lose. Brønn and Vrioni (2001) also mention the importance of trust building and long-term commitment to a cause and involvement of non-profit organizations.
a critical linkage between CSR and corporate brand equity by including corporate brand credibility and corporate reputation as key mediators. Therefore they state that: “CSR enhances the consumer perception of corporate marketing performance (e.g., brand credibility, reputation, and brand equity)”. Accordingly, the managers should plan cleverly for the CSR activities and invest resources in CSR activities.
Finally, the fourth literature review that enable us to link CSR to brand equity, is through brand image and the congruency between the brands the supported cause. Benoît-Moreau and Parguel (2012) conducted a research regarding the effect of CSR on brand equity. They proved the positive effect of CSR on the brand equity. Since their experiment validated that “getting involved in an environmental cause and communicating about this engagement to consumers reinforce brand equity, by modifying brand image”.
Therefore, based on the above-mentioned literatures, CSR leads the firm to greater brand equity and financially better outcomes by enhancing brand equity’s components (brand awareness, brand credibility, trust-building and brand image).
brand (Sen and Bhattacharya, 2001). So the brand equity is an undeniable strong indicator of a company’s success in the market place. As it has been argued through years of researches, strong consumer-based brand equity is not only due to the quality of the product, but also can be a result of the company’s activities in non-product dimensions, like their CSR activities.
Finally, by relying on the reviewed literatures that evidenced the significant linkage between CSR and brand equity, this research tries to look at this relationship from a different perspective. As such, the intention in this study is first to investigate the effect of the CSR on brand equity and subsequently investigate the effect of brand equity on the corporate performance. In other words, this research investigates the claim regarding the mediation effect of brand equity on the CSR-sales relationship.
H1. CSR leads to greater brand equity.
2.4 Brand equity and corporate performance
There has been a tremendous interest in investigating the effect of brand equity on corporate performance among researchers. The reason for this interest is considered being due to these fundamental questions: Would brand building be important for the company’s future? Is it profitable for the firm? If the answers to these questions were yes, how would the brand building affect the brand equity? Subsequently, how would the brand equity affect the corporate financial performance?
and etc. However, there is almost no research that studies the effect of brand equity on sales. Now reviews of the literatures that have looked into this relationship are as follows:
One of the performance indicators that can be increased by enhanced brand equity is consumer’s purchase intention. As it is been investigated in many researches, consumers tend to choose the more known and more trusted brands during purchase decision. Chaudhuri and Holbrook (2001) provided evidence that higher brand trust and brand effect working through higher brand loyalty to the brand, lead to higher sales-related outcomes. Moreover, Cobb-Walgren et al. (1995) conducted a research for evaluating the effect of brand equity on purchase intention. They found out that the brands with higher equity generated significantly higher purchase intention among consumers.
Furthermore, Verbeeten and Vijn (2010) studied the effect of brand equity on return on investment (ROI). They also indicate in their research that differentiation, which is brand equity’s measure, has a positive effect on both current and future ROI.
Finally, Yeung and Ramasamy (2007) provided a more complete analysis by studying the effect of brand equity measure (brand value) on multiple profitability ratios. In their research, they show that there is a significant link between brand equity measure and multiple profitability ratios and also the stock market performance measure. So they claim in their study that strongly branded companies are more profitable and the brand’s effect on internal profitability was consistently significant.
Based on the reviewed literatures, there are strong suggestions regarding the positive and significant effect of brand equity on corporate financial performance. Although, the corporate performance has been studied from various angles, the positive effect of brand equity on most of the performance indicators has been evidenced. Pursuing these evidences, this research attempts to investigate the effect of brand equity on firm’s performance, and more specifically on sales. Therefore it is attempted to shed new lights on the existing relationship or the nature of the impact of the brand equity on the sales.
2.5 The mediating role of brand equity
An argue for a mediating role of brand equity in the CSR-sales relation is offered by linking the evidenced influence of brand equity on CFP to the first hypothesis regarding the influence of CSR on brand equity. In other words, brand equity mediates the effect of CSR on sales revenue.
However, the effect of CSR on corporate performance might be through routes other than brand equity, which is believed they can be used as components or measures for brand equity. As such, some researches have considered moral capital as a mediator for the CSR-CFP relationship. Since companies by initiating CSR activities increase the moral capital of the company, it can be used as a brand reputation indicator. Therefore, boosted moral capital of the company will accordingly boost the reputation and eventually the brand equity. Godfrey (2005) studied the effect of CSR-CFP mediated by the morale capital. He explained the reason for considering the mediating effect of morale capital as follows: “Philanthropic moral reputational capital represents the outcome of the process of assessment, evaluation, and imputation by stakeholders and communities of a firm's philanthropic activities; thus, it is, at the core, a perception based construct”. So he considered philanthropic moral as a reputational capital that has value. Since philanthropic morale will form a belief about the firm among the stakeholders and this will affect the activities that stakeholders are engaged in. As a result, he evidenced that CSR-CFP relationship is mediated by the morale capital.
acquired results, they imply that achieving customer satisfaction is one of the underlying pathways through which the CSR activities can capitalize the corporate performance. So they suggest that the effectiveness of CSR on the financial outcomes of the firm could be determined through the amount of customer satisfaction. As such, the CSR activities would increase the customer satisfaction and subsequently high customer satisfaction will increase the market value of the company. It is worth to mention that the growth in customer satisfaction might be due to company’s achievements in acquiring better reputation and their differentiated brand image. Therefore, improved reputation and brand image will increase the brand equity including customer satisfaction as an end goal leading to higher purchase intention (Sen & Bhattacharya. 2001; Sen, et al. 2006).
H2. The effect of CSR on sales is mediated by brand equity
2.6 The moderating role of advertising
The role of advertising the CSR activities by companies is being a subject of debate. Some researchers (e.g. Servaes and Tamayo 2013) believe that CSR activities of companies should be advertised and create awareness among customers, in order to be a profitable activity for the company. When customers are not aware of the CSR actions that a company is committed to, the company should not expect any financial results. So they find advertising and customer awareness, the only solution for this matter. On the other hand, there are other researchers (e.g. Yoon et al. 2006, Jahdi and Acikdilli 2009 and etc.) who believe that advertising for a good cause like CSR activities of a company might give bad impressions on the image of the company and it might actually backfire. So they encourage the companies to do well, just because of the ethical aspects, and not because of CSR activities profits for the company. In this section some of the supporters and opponents of CSR advertising is reviewed:
skepticism of such CSR communications and green-washing”. So they consider source credibility and reliability as the most important requirements of the CSR advertising.
Subsequently, a study by McWilliams et al. (2005) takes a middle ground opinion, by dividing the content of the CSR advertising in to two categories: Persuasive and Informative. As such the content of persuasive advertising should influence the customer with CSR attributes for the products. While informative advertising should only provide information about the firm’s CSR activities. In this way companies would derive more benefits from their CSR activities and will be able to spread their ethical actions without getting bad reputation or receiving criticism from their customers.
On the other hand, Servaes and Tamayo (2013) are among the supporters of the CSR advertising. They claim that it is important for the company to inform the customers about its CSR activities because if the customer is not aware of the non-product related activities of the company, it will not have any favorable financial outcomes. So, a company with high public awareness can have favorable financial income, if its CSR activities are interacted with advertising. Furthermore, Du et al. (2010) also highlighted the importance of the communicating the company’s CSR activities to the stakeholders more effectively. They believe that stakeholders’ low awareness and negative attributes toward company’s CSR activities would have unfavorable financial outcomes for the company.
favorable outcomes from CSR activities, is sharing the information about supporting CSR activities with customers. Therefore, advertising the CSR activities will amplify the reputation, brand image and eventually brand equity leading to higher corporate financial performance.
Therefore, by relying on the supporters of the CSR advertising, we should expect that advertising would have a positive effect on the relationship between CSR-brand equity-CFP in this research. So the following hypothesis will be tested in this research:
3. DATA AND METHODOLOGY
In this chapter, first a description for the data will be discussed. Second, a description for the variables in this study will be presented. Then the descriptive statistics of the variables will be reviewed and finally the methods that are been used in this study to estimate the hypotheses will be discussed.
3.1 Data description
3.2 Data cleaning and variable description
After evaluating the dataset for possible missing values, 223 missing values were found out of 801 observations, which belonged to the CSR (Corporate Social Responsibility) variable. Moreover, 9 missing values were found for the sale variable. In this study it is decided to ignore the missing values for CSR and sale variable and consider them missing at random.
Figure 2: Normality curve for sale Figure 3: Normality curve for Lnsale
Description of the variables that are being used in the analysis of this study can be found in table 1. It is worth to mention that CSR variable, as it has been explained in the Table 1, contains different categories which all can be accounted as CSR activities in general.
Table 1: Explanation of the variables included in the dataset. Variable name Explanation variable
CSR Sum of CSR activities (Environmental, community, human rights and etc.) initiated by companies (mean-centered).
Advertising Indicator of the advertising expenses by the companies (mean-centered).
Ln (Sale) Natural logarithm of net sales/turnover of the companies.
Brand Strength Index for differentiation and meaningfulness of the brand to consumers (mean-centered).
3.3 Descriptive statistics
Due to the nature of the dataset in this study which is an unbalanced panel data, more relevant descriptive statistics would be providing the between and within variation of the different variables among different companies (table 2). Therefore, by looking at the standard deviation for CSR variable in table 2, the between variation shows higher value than the within variation, which means that the CSR activities variation between different companies are higher than the variation in one specific company over time. This trend also applies to all the other variables. The interesting information that can be derived from standard deviation column is related to the firm size variable. As it shows in the table firm size is also a time variant variable. So based on the standard deviation for within variation the size of the panel units (companies) changes over time.
Table 2: Within and between variation for variables.
Another important descriptive statistics to investigate is the correlation coefficients between the variables in order to understand the association between the variables better. Moreover, since in
Variable Variation Mean Std. Dev. Min Max Observations CSR (MC) Overall -6.98e-08 5.216 -6.098 15.901 N = 578 Between 4.712 -6.098 13.615 n = 103 Within 2.132 -7 6 T = 5.611 lnSale Overall 9.5673 1.585 5.391 13.088 N = 792 Between 1.572 5.663 12.977 n = 102 Within .212 8.525 10.563 T = 7.764
Adv (MC) Overall 3.04e-06 1323.153 -1029.973 8697.427 N = 801
Between 1246.082 -1025.348 7709.982 n = 107
Within 238.246 - 1424.119 1756.338 T = 7.485
Brand Str(MC) Overall 1.483 .6124 .370 4.441 N = 801
Between .577 .447 3.598 n = 107
Within .1949 .7044 2.5184 T = 7.485
Firm size Overall 9.7826 2.0759 5.1182 14.8059 N = 801
Between 2.0492 5.4311 14.7378 n = 107
this study a mediator effect will be investigated, the presence of strong linear correlation between mediator and outcome variables would be convenient. The investigated correlation was conducted based on Pearson’s correlation coefficient.
As it is shown in table 3 and by considering a 0.2 threshold for the correlation coefficient, it can be derived from the table that there are strong correlations between firm size and sale (r =.89, p<.001), between advertising and firm size (r=.5, p<.001) and also between CSR and firm size (r=.58, p<.001). These results indicate that the size of the firm have positive correlation with activities like the amount of advertising expenses and also the number of CSR activities that the company initiates.
Moreover, a high correlation between sale and CSR (r=.61, p<.001) can be derived from table 3. Furthermore, the correlations between advertising and CSR (r=.48, p<.001), CSR and brand strength (r=.36, p<.001) and advertising and Brand strength (r=.25, p<.001) are moderately high. On the other hand, moderately weak correlation exists between sale and brand strength (r =.12, p<.001) and also between brand strength and firm size (r=.01, p<.001). In general, all the variables are significantly correlated. Therefore, the regression analysis can be conducted to investigating the relationship between these variables.
Table 3: Correlation between variables Brand Strength
3.4 Method
3.4.1 Model type
For panel data, first step would be deciding which panel data model (pooled model, random effect model and fixed effect model) should be used for the analysis. Differentiation between Fixed effects model and Pooled OLS model are tested by the F test, while random effects are examined by the Lagrange multiplier (LM) test (Breusch and Pagan, 1980). If the null hypothesis is not rejected in either of the mentioned tests, the pooled OLS should be favored. Moreover in order to differentiate between Random and Fixed effect models, the Hausman test was conducted. If the null hypothesis can’t be rejected for the Hausman test the Random effects model should be favored over fixed effects model.
Due to the fact that the dataset that is being used in this research is an unbalanced panel data, the problems such as heteroscedasticity and serial correlation is likely to be existed. After the model diagnostic, test for heteroscedasticity and serial correlation was conducted and the results for both tests were significant. Therefore, the null hypothesis of the homoscedastic and no serial correlation were rejected. This study will address these issues by using fixed effects estimation with autoregressive correlation structure (FE-AR1), which is based on Baltagi and Wu’s (1999) method. This method (FE-AR1) accommodates for unbalanced panel data (Wooldridge, 2015) and it will also controls for unobserved heterogeneity.
3.4.2 Mediation and Moderation
investigated. As the third step, the relationship between mediator (here serves as an independent variable) and the dependent variable, brand equity and sale, is estimated. Finally as the last step, the dependent variable (sale) is regressed on the mediator (brand equity), while controlling for the effect of independent variable (CSR).
For the first part of the analysis, which the mediation effect will be tested, the following model will be used:
Salei,t = β0+ β1.CSRi,t + β2.BrandEquityi,t + β3.FirmSizei,t + ζi +εi,t (Eq.1)
Where i stands for company and t for time (year), the term ζi is the time-invariant unobservable
firm-fixed effects. εi,t is the random error representing all unobserved influences on sale and
LnSalei,t represents the natural logarithm of sale.
For the second part of the analysis, which the moderation effect will be tested, the following model will be used:
Salei,t = β0+ β1.CSRi,t ×Advertisingit+ β2.BrandEquityi,t + β3.FirmSizei,t + ζi + εi,t (Eq.2)
Where i stands for company and t for time (year), the term ζi is the time-invariant unobservable
firm-fixed effects. εi,t is the random error representing all unobserved influences on sale and
4. RESULTS
In this chapter, first the reasoning for model choice will be discussed. Subsequently, the findings mediation and moderation effect will be presented. Furthermore, the robustness of acquired results will be checked. Accordingly, the findings will be compared to the other models for robustness and finally the treatment for the missing values will be estimated.
4.1 Model diagnostics
Panel data models can be estimated with different estimators, and the estimators differ based on whether they use between or within variation. But different estimators also differ on consistency and efficiency dimensions. So a model with higher consistency and efficiency (minimum variance) should be preferred over other models. However, the consistency of the model should be checked first.
Table 4: Panel models comparison
LnSale Pooled OLS Between Fixed effect First difference Random effect
By looking at the results for different estimators, it can be seen that there are differences in the coefficients for different variables. For instance the effect of CSR on sale shows positive significant results, only for fixed effects and random effects models. On the other hand, brand equity once has positive significant effect on sale in the Pooled OLS model and a negative significant effect for the fixed effects model. These results can be interpreted as: brand asset will increase the sale by adding one year in the pooled OLS model for all the companies, while by adding one year in one company the brand asset will decrease the sale of that specific company in the fixed effect model.
Furthermore, the LM test for differing pooled or random effect and also pooled or fixed effect conducted. The results for both were highly significant (P<.001) which means that the null hypothesis for preferring pooled model can be rejected. Then in order to understand whether fixed model or random model is more consistent, the Hausman test was conducted. The result of the Hausman test was also significant (P=.004<.05). So the null hypothesis of preferring random effect model can be rejected and the fixed effect model should be used for the analysis since the Hausman test shows that fixed effect model has higher consistency than the random effect model.
4.2 Results for mediating role of brand equity
logarithm of sales (β=.685). As it can be seen from Table 5, the model accounts for 63% of the variance within the panel units (companies). Also the model accounts for 79% of the variance between panel units and the weighted average of within and betweenR2 also 79%. For path a of the mediation effect, the effect of CSR activities on brand strength indicates a positive significant outcome (p<.000, β=.010), which means that higher CSR activity on average for a company would result in 1.5% increase in sale. Moreover the effect of the firm size on brand strength is also significant (P=.006<.05), and the whole model is highly significant (P<.001). The between R2 for this model is low, it shows that the model accounts for 6% of the variances within each panel unit. Investigating path b of the mediation model, which is regressing sale on brand strength, shows s significant result for brand equity’s effect on log of sale (p=.012<.05). The within 𝑅!for this model is 59%, so model accounts for a moderately acceptable variance within
panel units. For the final path of the mediation, the effect of brand equity on sale by controlling for the independent variable (CSR) and control variable (firm size) showed a significant result (P<.001). In the final path, the effect of brand strength on lnsale is significant (p=.007<.05, β =.094) but the results for CSR is not insignificant. Moreover in overall the model is highly significant (P<.001). The within R2 for this model is 64% and the between R2 is 80%, so the
model accounts for 64% of variances within each panel unit and 80% between different panel units.
which was controlled for, showed significant effect on sale as it was expected, which means that bigger firms can have higher brand strength and sale.
As the outcome shows, the direct effect of CSR on sale and also the effect of CSR on sale accompanying with the mediator is not significant, the Sobel-Goodman test is also applied in order to understand the effect of the mediation better. The outcomes for both direct and indirect effects are significant (P<.001). Moreover, the results shows that 32% of the total effect is mediated which can be interpreted as the partial mediation. The ratio of indirect to direct effect is 46%. Therefore based on the acquired results from the Sobel test, brand equity partially mediates the effect of CSR on the sale.
Furthermore, the bootstrapping mediation is also conducted and the results are consistent with the Sobel test. The outcomes for direct and indirect effect are significant (P<.001) which evidences the existence of partial mediation.
Table 5: Mediation analysis results
Notes: *** significant at p<0.001; ** significant at p<0.01; * significant at p<0.05.
Model specification is first-order autoregressive correlation structure (FE-AR1).
4.3 Results for moderating role of Advertising
For the second analysis, the effect of moderator (advertising) would be included in the mediation. Therefore this analysis would show that whether advertising moderates the effect of CSR on brand equity and also the effect of brand equity on sales or not. For the direct effect of CSR and advertising’s interaction on the sale, the model shows a significant outcome (p<.001). But it should be noted that the main effect, interaction of CSR and advertising on the natural logarithm of sale, is not significant (p=.119>.05). So it means that the significant outcome of the whole model is due to the effect of control variable (firm size) on the natural logarithm of sale (P<.001). The within R2 is 63% and the between R2 is 79%. For path “a” of the mediation, the effect of
and it accounts for 80% between the panel units. In conclusion, it can be derived from the outcomes that advertising CSR activities doesn’t have any effect on the sale or turnover of the company.
Table 6: Moderation analysis results
IV DV β S.E P
Constant (Corr)
Within
𝑹𝟐 Between 𝑹𝟐 Overall 𝑹𝟐 Total p CSR*ADV Ln Sa le 2.00e-06 1.30e-06 .125 2.932 (.04) 63% 79% 79% .000*** Firmsize .683 .026 .000*** CSR*ADV Br an ds tr 3.55e-06 1.81e-06 .051 .644 (-0.23) 2% .3% .4% .006** Firmsize .082 .033 .014* Brandstrength Ln Sa le .061 .023 .008** 3.169 (.003) .000*** Advertising .00009 .00002 .000*** 58% 80% 79% Firmsize .648 .024 .000*** Brand srength ln Sa le .083 .034 .014* 2.875 (0.064) .000***
CSR*ADV 1.55e-06 1.31e-06 .235 64% 80% 80%
Firmsize .676 .026 .000***
Notes: *** significant at p<0.001; ** significant at p<0.01; * significant at p<0.05.
Model specification is first-order autoregressive correlation structure (FE-AR1)
4.4 Validations and Robustness check
4.4.1 Robustness tests
and correlated between the groups (panels) (bc.edu). The outcome of the Driscoll/Kraay method for the mediation analysis (Table 7) shows consistency with the results acquired from the AR (1) regression model (Table 5). As such the effect of CSR on brand strength is significant and since brand strength has a significant effect on Lnsale and also due to the insignificant effect of CSR on Lnsale, the results evidence a complete mediation. On the other hand, the robust standard error model shows a direct significant direct effect of CSR on sale (Table 7). Therefore, it indicates a partial mediation. However, due to the fact that two models out of tested three models indicate complete mediation, this outcome will be accepted for this study.
Table 7: Robustness check by 2 new models for mediation analysis
Model 1 (Robust SE) Model 2 (Drisc/Kraay)
IV DV β
Robust S.E
P Constant (Total P) Within 𝑹𝟐 β S.E P
Constant (Total p) Within 𝑹𝟐 CSR (MC) Ln Sa le .005 .002 .026* 4.066 (.000***) 55% .005 .002 .069 4.066 (.000***) 55% Firmsize .561 .058 .000*** .561 .018 .000*** CSR(MC) Br an ds tr .010 .003 .001** .857 (.001**) 3% .010 .002 .011* .857 (.009**) 3% Firmsize .060 .053 .259 .060 .023 .045* Brandstrength Ln Sa le .105 .036 .005** 3.78 (.000***) 57% .105 .042 .039* 3.78 (.000***) 57% Firmsize .576 .0651 .000*** .576 .013 .000*** Brandstrength Ln Sa le .109 .043 .014** 3.972 (.000***) 56% .109 .032 .016** 3.972 (.000***) 56% CSR (MC) .003 .002 .094 .003 .002 .110 Firmsize .555 .534 .000*** .555 .021 .000***
Notes: *** significant at p<0.001; ** significant at p<0.01; * significant at p<0.05.
Model specification (1) is fixed-effect, regression for panel data with robust standard errors. Model specification (2 is fixed-effect, regression for panel data with Driscoll-Kraay standard errors
would have only direct effect on the sale and not through brand strength (brand equity). While in the Robust S.E model the effect of CSR*advertising on sale is not significant, therefore this outcome is consistent with the AR (1) regression model (Table 6). Again, due to the consistency of 2 models with regarding to the insignificant effect of CSR*advertising on sale, this outcome will be acknowledged as robust.
Table 8: Robustness check by 2 new models for moderation analysis
Model 1 (Robust SE) Model 2 (Drisc/Kraay) IV DV β Robust S.E P Constant (Total P) Within 𝑹𝟐 β S.E P Costant (Total p) Within 𝑹𝟐 CSR*ADV Ln Sa le 1.13e-06 7.17e-07 .119 4.021 (.000***) 55% 1.13e-06 2.59e-07 .005** 4.021 (.000***) 55% Firmsize .566 .058 .000*** .566 .016 .000*** CSR*ADV Br an ds tr 4.49e-08 8.01e-07 .955 .766 (.398) 1% 4.49e-08 2.30e-06 .985 .766 (.398) 1% Firmsize .069 .051 .176 .069 .027 .042* Brandstrength Ln Sa le .109 .036 .004** 3.999 (.000***) 58% .109 .041 .029* 3.999 (.000***) 58% Advertising .00008 .00003 .007** .0008 .00001 .002 ** Firmsize .553 .068 .000*** .553 .015 .000*** Brand srength Ln Sa le .117 .042 .006** 3.930 (.000***) 56% .117 .035 .015* 3.930 (.000***) 56%
CSR*ADV 1.12e-06 7.03e-07 .113 1.12e-06 1.60e-07 .000***
Firmsize .558 .057 .000*** .558 .019 .000***
Notes: *** significant at p<0.001; ** significant at p<0.01; * significant at p<0.05.
Model specification (1) is fixed-effect, regression for panel data with robust standard errors. Model specification (2 is fixed-effect, regression for panel data with Driscoll-Kraay standard errors
4.4.2 Treatment of missing values
complete mediation effect of brand strength (BE) on CSR-CFP relationship persist (Table 9). Moreover, the lack of significant effect of CSR and advertising interaction on sale is also consistent with the previous results (Table 10). Therefore these findings indicate that previous results do not depend on the exact treatment of missing CSR and sale values.
Table 9: Missing values treatment for mediation analysis Set CSR and sale missing values to
mean
Remove missing CSR and sale observations
IV DV β Constant Within𝑹𝟐 β Constant Within𝑹𝟐 CSR (MC) Ln Sa le .0006 (.746) 2.628 (.000***) 67% .0002(.928) 2.922 (.000***) 63% Firmsize .712 (.000***) .685 (.000***) CSR(MC) Br an ds tr .007 (.018*) .017 (.000***) 6% .015 (.000***) 2.869 (.000***) 6% Firmsize .152 (.000***) .090 (.006**) Brandstrength Ln Sa le .055(.021*) 2.596 (.000***) 67% .089 (.008**) 2.869 (.000***) 64% Firmsize .152 (.000***) .677 (.000***) Brandstrength Ln Sa le .055 (.023*) 2.589 (.000***) 67% .094 (.007**) 2.86 (.000***) 64% CSR (MC) .00005 (.976) -.001 (.561) Firmsize .707 (.000***) .676 (.000***)
Notes: *** significant at p<0.001; ** significant at p<0.01; * significant at p<0.05.
Model specification is first-order autoregressive correlation structure (FE-AR1)
Table 10: Missing values treatment for moderation analysis Set CSR and sale missing values to
mean
Remove missing CSR and sale observations
IV D
V β Constant Within𝑹𝟐 β Constant Within𝑹𝟐 CSR*Adv Ln Sa le 1.63e-06 .(099) 2.636 (.000***) 67% 1.97e-06 (.128 ) 2.932 (.000***) 64% Firmsize .710 (.000***) .683 (.000***) CSR*Adv Br an ds tr -2.72e-06 (.084) -.025 (.000***) 6% 3.82e-06 (.034) .642 (.004**) 2% Firmsize .157 (.000***) .082 (.014 **) Brandstrength Ln Sa le .056 (.018*) 2.780 (.000***) 66% .087 (.010*) 2.876 (.000***) 64% Advertising .00008 (.000***) .00003 (.321) Firmsize .687 (.000***) .676 (.000***) Brandstrength Ln Sa le .056 (.019*) 2.597 (.000***) 67% .083 (.015*) 2.875 (.000***) 64%
CSR *Adv 1.68e-06 (.087) 1.50e-06 (.248)
Firmsize .705(.000***) .677 (.000***)
5. DISCUSSION
This chapter will present the findings of this study by linking them to earlier studies and providing implications for acquired results. Accordingly, the findings will be translated into managerial implications. Finally in the last section limitations and directions for future researches will be discussed.
5.1 Findings and theoretical implications
Despite the conducted studies with regarding to the effectiveness of CSR activities on the corporate financial performance and positive approach of some companies towards initiating CSR activities, little is known about the effect of brand equity in CSR-CFP relationship. Moreover, the effect of advertising of CSR activities is still unknown to most of the companies. As some scholars (Jahdi and Acikdilli 2009, Pomering and Johnson 2009, Pomering and Dolnicar 2008, Du et al. 2009 and many other studies) have indicated that the effectiveness of CSR activities in a company depends on communicating those activities actively. Therefore, this study contributes to CSR literature and examines the effects of CSR on brand equity and CFP and also it investigates the effect of CSR awareness (advertising) on brand equity and also on the CFP. First, this study proposes and tests the theoretical model based on direct and indirect relationships between CSR and CFP (through BE). It also extends CSR literature by examining the key role of advertising on the before-mentioned outcome.
activities will increase the strength of a brand (brand equity). As Fatma et al. (2015) also indicated that companies should pay attention to socially responsible activities, since these activities will result in good reputation and eventually increased brand equity.
It is also evidenced in this study, that brand strength significantly affects and increases the sale of the company. Therefore, it can be concluded that brand equity partially mediates the relationship between CSR and sale/turnover of the company.
Subsequently, the role of advertising CSR activities on brand equity and sale is estimated in this study, as some scholars have recognized the advertising of CSR activities as an important factor in effectiveness of CSR on corporate financial performance (see Servaes and Tamayo 2013, Du et al. 2010 and etc.). While others (like Yoon et al. 2006) do not find advertising beneficial for the sole purpose of increasing financial outcomes of the company.
5.2 Managerial implications
Marketing managers have always wondered whether doing well can result in favorable financial outcomes or not? And more importantly how it will result in acquiring higher CFP. These are important issues that have important strong managerial implications prudent practitioners face tough choices in allocating their limited resources and in prioritizing different strategic initiatives (Lue and Bhattacharya 2006).
This study clarifies three managerial points. First, CSR can enhance brand equity for firms in different sectors that are observed in this study. Second, brand equity will positively contributes to the financial performance of companies. And third, when CSR is accompanies with advertising, it does not have any effect on brand equity and sale. Which is inconsistent with the previous studies, which confirmed either negative or positive effect of CSR and adverting’s interaction on corporate financial performance.
Findings in this study indicating that CSR contributes positively to brand equity, suggests that companies can build stronger brands by investing in CSR activities. As such, participating in socially responsible activities would result in good reputation for the company among stakeholders and this phenomenon would have a direct influence on increasing the value and strength of a brand.
Although the direct effect of CSR on sale is not proved in this study, it is important to understand the indirect influence of CSR on sale through brand equity. Because understanding the mechanism of influencing CSR on financial performance of the company through brand equity, would guide the managers to consider investing in CSR activities. Since the effect of initiating CSR would amplify the reputation and strength of the brand, which eventually leads to favorable financial outcomes for the company.
The lack of evidence for the influence of CSR accompanying with advertising is also another important result that can relate to managers. As such, there has been many conducted researches on this topic with different results. The insignificant effect of advertising CSR activities suggest that investing in direct advertising for CSR activities would not have any importance for increasing brand equity and sale/turnover of a company.
5.3 Limitations and future research
A number of limitations should be kept in mind when considering the results of this study, which can be considered as opportunities for future research. First, in the current study, although the positive effect of CSR on sale has been evidenced, the most influential CSR category that companies should focus on has not been specified. Since CSR index from KLD database consists of different categories and the impact of the different categories are important for the companies planning to initiate CSR activities. Therefore, further studies might be required for the impact of different CSR activities on CFP.
stakeholders.
In addition, this study suggests several avenues for future research. The link between CSR activities and performance through the brand equity is only one way in which CSR may affect the corporate financial performance. Therefore, it is believed that focusing on other processes that CSR may impact the CFP, would be very beneficial for future theoretical and empirical research.
The brand equity channel for CSR activities, in particular, seems to deserve further exploration. For instance, to what extent can CSR activities enhance brand royalty or brand perception among stakeholders, thereby enhancing corporate financial performance? In which types of sectors is this relationship particularly more or less relevant?
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