product social responsibility on sales, profit and brand equity
by
Johan van Abbema
University of Groningen
Faculty of Economics and Business
Msc Marketing Intelligence & Management
Theme: CSR: More than a Marketing Tool?
ABSTRACT
The concept of CSR and its effect on several financial performance measurements has been studied for decades. Despite this fact, studies about the influence of specific CSR types are scarce. This paper posits the relationship between environment-, employee-, product- and community-based social responsibility and sales, profit and brand equity. The database contains 801 data points of 107 firms for the years 2007-2015. Employee- and product-based CSR positively influences sales, product-based CSR positively affects brand equity, but environmental-based CSR negatively influences brand equity. Managers can use these insights by focussing on or ignoring these CSR types to enhance their financial performance.
Keywords
Corporate social responsibility, CSR types, sales, profit, brand equity Supervisor: dr. A. Bhattacharya
TABLE OF CONENT
1. Introduction
4
2. Literature Review
7
2.1 Previous research in CSR 7
2.2 CSR and sales and profit 8
2.3 CSR and brand equity 13
3. Data and Measurement
16
3.1 Measuring independent variables – CSR types 18
3.2 Measuring dependent variables – sales, profit and brand equity 18
3.3 Measuring control variables 18
3.4 Formulas of the models 19
3.5 Estimation methods 20
4. Results
23
4.1 Main results 23
4.2 CSR types - sales and profit 23
4.3 CSR types - brand equity 25
4.4 Additional results 26
4.5 Robustness checks 27
5. Discussion
28
5.1 Theoretical implications 28
5.2 Practical implications 30
5.3 Limitations and further suggestions 31
6. References
32
1. INTRODUCTION
Corporate social responsibility (hereinafter CSR) has been extensively researched, and these studies have provided many definitions of the term (Peloza and Shang, 2011). The definition – a firm actions that improve the well-being of stakeholders or society at large – of Korschun et al. (2014) and Kotler and Lee (2005) is adopted, since that definition is taken by the majority of marketing scholars (Mishra and Modi, 2016).
CSR is of growing interest, and more companies are investing much greater efforts in CSR initiatives and is perceived as an integral part of the firm’s strategy. CSR initiatives belong to the top three priorities for half of the Fortune Global 500 companies, with $20 billion spent for CSR activities yearly (Economic Policy Group, 2015; McKinsey & Company, 2014). The intensified efforts of firms is explained by the increasing pressure to pursue social responsible behaviour from stakeholders as shareholders, employees, consumers, managers and investors (Kapstein, 2001; Berman et al., 1999; Donaldson and Preston, 1995). As the threats and opportunities associated with corporate social and environmental responsibilities have become better understood, companies have sought to generate strategic capital from the acceptance of these responsibilities (Brammer et al., 2007). The increasing efforts of firms was accompanied by extensive academic investigation in the relation between CSR and CFP (e.g. Luo and Bhattacharya 2006; Margolis, 2001; Waddock and Graves, 1997; Zhao and Murrell, 2016). However, these findings were conflicting (Margolis and Walsh, 2003). Over the past few decades, negative, neutral and positive relationships have been reported. Orlitzky et al. (2003), Raza et al. (2013) and Waddock and Graves (1997) provide a review and reasoning for these conflicting results. A meta-analysis of Margolis et al. (2009) concluded that the overall relation between CSR and CFP is positive, but small.
practice. The conflicting findings between CSR and financial performance may be attributed by the fact that research has not placed much attention on distinguishing CSR types (Jayachandran et al., 2013). CSR is a multifaceted construct, with certain CSR types, including environment-, employee, product-, community, diversity-, corporate governance–, and human rights-based socially responsible efforts (Mishra and Modi, 2016).
Ailawadi, et al., 2003; Keller and Lehmann, 2006). Hence, all three perspectives perceive brand equity as being a function of the value that the brand delivers to consumers (Aaker, 2004). Based on these considerations, the research question is as follows:
What is the influence of CSR types on sales, profit and brand equity?
The hypotheses are tested by a moderately large set of firms across the years 2007-2015, using the Kinder, Lydenberg and Domini Research and Analytics (KLD) database, Compustat and additional data of brand asset valuation (BAV). This paper extends the literature by providing evidence of the relationship between several CSR types and sales and brand equity. Previous studies focus on the relationship between CSR in general and firm performance. This paper is more distinctive. To the best of my knowledge, this is the first paper to consider the influence of four CSR types on sales, profit and brand equity. The findings reveal that employee- and product-based CSR positively influences sales, product-product-based CSR positively affects brand equity, but environmental-based CSR negatively influences brand equity. Managers can use these insights to focus their resources on the CSR types positively influencing sales and brand equity, and ignoring the nonsignificant or negative CSR types.
FIGURE 1
Conceptual framework
2. LITERATURE REVIEW
2.1 Previous research in CSR
As mentioned, the relation between CSR and CFP has been a subject of extensive investigation, with conflicting findings. This could be attributed to the various ways corporate financial performance and CSR have been operationally defined (Carroll, 1979; Orlitzky et al., 2003), or to the lack of appropriate statistical controls (Margolis and Walsh, 2003; Wood and Jones, 1995), or to the stakeholder misalignment problem (Wood and Jones, 1995; Akpinar et al., 2008). However, another explanation could be due to the lack of attention on distinguishing CSR types (Jayachandran et al., 2013).
degree to which a firm ensures that environmental concerns that arise either out of its business operations or otherwise are addressed. They discussed that PSP has a significant positive effect on firm performance, while ESP neither helps nor hurts firm performance. However, the diminishing effect of ESP could be due to the lack of clarity in reporting. The paper of Mishra and Modi (2016) is the only study which considers six types of CSR. They studied the effect of these CSR types on two components of shareholder wealth, namely stock returns and idiosyncratic risk, with a moderating role for marketing capability. Measuring the influence of CSR types on sales, profit and brand equity is especially declared by how consumers respond to these CSR types. To improve shareholder wealth, a firm needs to improve their overall performance. The key purpose here is that by catering to different stakeholders (Mishra and Modi, 2016). Hence, this paper’s findings are attributable to the influence of consumers, and no other stakeholders.
Mishra and Modi (2016) already concluded that the CSR types differ in their influence on shareholder wealth. Firms have to make trade-offs in engaging and managing different CSR types due to the limited capital resources (Godfrey and Hatch, 2007). For example, an eco-efficiency program has a cost saving effect, while other CSR types attempt to improve employees’ productivity or long-term performance, and other CSR types aim to build reputation (Hoepner and Yu, 2010) or to increase customer satisfaction (Lenz et al, 2017). Hence, it is meaningful for a firm to focus on the right CSR type if the company’s strategy is to increase sales, profit or brand equity.
To prevent that the paper was becoming too complex, there are four CSR types hypothesized and not all CSR types (human rights, diversity and corporate governance).
2.2 CSR and sales and profit
government and community relations are increasingly becoming bases of competition. Mohr and Webb (2005) did confirm the positive relationship between CSR and the purchase intent of customers. They also stated that CSR affected purchase intent more strongly than price did. Such positive perceptions may lead to increased sales, resulting in improved profitability (Kapoor and Sandhu, 2010).
To become more specific, Pickett-Baker and Ozaki (2008) and Sen and Bhattacharya (2001) have stated that consumers express a greater willingness to purchase products from companies that act in a socially responsible manner. Shareholders react positively to the announcement of eco-friendly initiatives, and negatively to the announcement of eco-harmful behaviour, which strengthen or weakening a firms’ competiveness. According to Cronin et al. (2011), consumers increase in numbers who base their decision to buy or not to buy on the environmental performance of the firm. Thereby, regulators have set many defined standards for measuring environmental performance, which are made transparent for stakeholders to verify the legitimacy of firms’ pro-environmental claims (Berrone and Gomez-Mejia, 2009). This may benefit consumer perceptions, since environmental-based CSR is likely to improve firm positioning with consumers, channel partners, and regulators (Mishra, and Modi, 2016). Hence:
H1a: Environmental-based CSR has a positive relationship with sales
would pursue environmental-based CSR, because heterogeneity of resources is a driver of competitive differences within an industry. Those firms could gain competitive advantages and hence achieve higher profits (Flammer, 2013). For example, Hart et al. (1996) stated that costs reduce by increasing operational efficiencies. This is similar with the findings of King and Lenox (2001) and Pil and Rothenberg (2003). They found that environmental and manufacturing improvement efforts were mutual and synergistic, thus environmental improvement leads to more efficient operations. And according to Waddock and Graves (1997), the case could also be that firms attempting to lower its implicit costs by socially irresponsible actions will incur higher explicit costs, resulting in competitive disadvantage. For example, when firms do not implement environmental operations, costs of for example polluted are, are transferred back to the firm to achieve environmental improvement, which increase operating costs and hurting profitability (Bragdon and Marlin, 1972). Also, firms with poor environmental practices can be in risk for large regulatory fines, costly lawsuits and shutdown of operations (Rees, 1994). Finally, manufacturing costs could be reduced when a firm is able to reduce its waste (Schmidheiny, 1992). Since the majority of these studies show a positive relation, the following hypothesis is presented:
H1b: Environmental-based CSR has a positive relationship with profit.
favourably to the firm’s products (McGuire et al., 1988). It also leads to a competitive advantage in comparison to less responsible firms: firms that are reported as ‘the best companies to work for’ may find it easier to hire high performing employees, which can result in increasing productivity at a relatively low cost (Moskowitz, 1972). But to stay critical, Johnson and Greening (1999) argued improving employee work environments and diversity require updates to current facilities or special efforts to find qualified minority employees, which weighs heavily on the firms’ costs. However, there are still positive relations expected:
H1c: Employee-based CSR has a positive relationship with sales H1d: Employee-based CSR has a positive relationship with profit
The product-based CSR can also impact a firm’s profitability. Differentiation through the use of CSR creates new demand or the option to command a premium price for an existing product. Furthermore, differentiating through the use of CSR resources, such as recycled products or organic pest control, may also include investment in research and development. This may result in both CSR-related process and product innovations, which are each valued by some consumers. Consumers are indirectly supporting a cause and rewarding firms that devote resources to CSR (McWilliams and Siegel, 2001). Besides, the diagnosticity of CSR based products is expected to be high. This could increase consumer confidence in the claims of the product, enhancing firm value (Jayachandran et al., 2013).
profitability. Since consumers’ awareness of firms’ CSR activities are quite low (Bhattacharya and Sen, 2004; Devinney et al., 2006), the following, contradictory hypotheses are presented:
H1e: Product-based CSR has a positive relationship with sales H1f: Product-based CSR has a negative relationship with profitability
Empirical evidence between the community and financial performance relationship can be characterized as inconclusive. A meta-analysis by Orlitzky et al. (2003) found a positive relationship between corporate philanthropy financial performance. Also Wokutch and Spencer (1987) found a positive relationship. However, Berman et al. (1999), Griffin and Mahon (1997) and Seifert et al. (2004) did not find a significant relationship. Friedman (1970) argued even a negative relationship between community and financial performance, because managers lack the expertise for efficient investment in social improvement.
compensate it financially (Hoepner and Yu, 2010). Therefore, it is to reason that a corporation invest in charitable donations has a positive effect to a certain point, though this effect diminishes after that and becomes negative. Wang et al. (2008) also reported a non-linear relationship; they interpreted decreasing marginal returns at higher levels of giving. They argued corporate philanthropy helps firms to secure the critical resources controlled by various stakeholders and provides insurance-like protections that reduce the firms’ exposure to the risk of losing critical resources.
However, this is within certain limits. As corporate philanthropic contributions increase beyond a certain level, this positive effect will level off. This has several reasons. First, firms think it is necessary to build departments devoted to charitable programs (Brammer and Millington 2005, McWilliams and Siegel 2001, Saiia et al., 2003). Secondly, corporate philanthropy programs time-consuming and cost effort for employees. This leads to an increase in the firms’ human resource and administrative costs (Wang et al., 2008). Thirdly, managers may act in their own interest, which goes at the expense of the firm’s owners and other stakeholder (Jensen and Meckling, 1976). Therefore, the hypotheses are as follows:
H1g: The community based-CSR has a positive relationship with sales H1h: The community-based CSR has an inverted u-shaped effect on profit
2.3 CSR and brand equity
rare, valuable and inimitable (Barney, 2001) and allows a firm to charge premium prices (Fombrun and Shanley, 1990). Fatma et al. (2015), Hsu (2012) and Lai et al. (2010) found a positive relation between CSR and brand equity. This can be explained by consumers identify more easily with firms with a good record of social responsibility (Bhattacharya and Sen, 2003; Brown and Dacin, 1997). Evidence has also indicated that consumers positively evaluate offerings of firms that are engaged in CSR (Berens et al., 2005; Gürhan-Canli and Batra, 2004) and this leads to that customers are more satisfied (Luo and Bhattacharya, 2006). But even though Fatma et al. (2015) and Lai et al. (2010) found a positive relation between CSR and brand equity, they paper did not make distinctions between the CSR types.
Research about the environmental-based CSR has shown that green attributes elicit positive consumer brand attitudes (Olsen et al., 2014). The majority of consumers show high levels of environmental concern (McEachern et al., 2010; Vermillion & Peart, 2010). As a consequence, when firms are able to effective communicate the environmental aspect to their customers (Grimmer and Bingham, 2012), environmental initiatives can add value through the development of brand loyalty and differentiation which can lead to significant reputational advantages (Chen, 2010; Porter and Kramer, 2006). On the other hand, when firms perform environmentally poorly, they risk consumer disfavour, negative media coverage, and depreciating of their firm’s reputations (Fombrun et al., 2000; King and Lenox, 2000). Thus:
H2a: Environmental-based CSR has a positive relationship with brand equity
environment, such as organizational trust. These perceptions affect not only job satisfaction, but also customer orientation (Lee et al., 2013). This could contribute for customers to differentiate among products. These findings suggest the following hypothesis:
H2b: Employee-based CSR has a positive relationship with brand equity
Firms can cater to consumers by focusing on products with social benefits. Consumers account for societal needs, in addition to their own, when determining their relationship with firms (Handelman and Arnold, 1999). By catering to the economically disadvantaged, social products create a more favourable position with consumers (Du et al., 2007). However, as previous mentioned, consumer awareness about the ethical attributes of products is low (Auger et al., 2003). Even though this can mitigate the impact, the following hypothesis is still presented:
H2c: Product-based CSR has a positive relationship with brand equity
As already mentioned, corporate philanthropy can increase customer demand, are willing to pay a premium price (Bhattacharya and Sen, 2003), and attract and retain customers (Lev et al., 2010). This indicates that customers differentiate among product in order to create brand equity (Aaker, 1996). Similarly, community-based philanthropy, charitable giving, and support to volunteer programs can create a favourable image for stakeholders (File and Price, 1998), improves a firm’s reputation and may strengthen brand images, leading to customer loyalty (Brammer et al., 2006) and reducing price elasticity of demand (Lev et al., 2010).
for corporate philanthropy can help protect a firm’s relationships with its stakeholders, and thus reducing the risk of losing critical resources (Fombrun et al., 2000, Godfrey 2005).
Finally, the firm’s community-based CSR was stronger evaluated by respondents most supportive of corporate philanthropy (Mohr and Webb, 2005). This supports findings of Sen and Bhattacharya (2001), who argued that identification with a firm is enhanced when consumers believe in the firm’s social agenda, and identification strengthens positive responses to that firm.
H2d: Community-based CSR has a positive relationship with brand equity
3. DATA AND MEASUREMENT
The database provided by Kinder, Lydenberg and Domini Research and Analytics (KLD) contains data about the CSR measures from the year 2007 up to and including 2015. The database is extended by Compustat and brand asset valuation (BAV). Computstat contains financial accounting data, such as data about sales, profit, long-term debt to capital, total assets, R&D and advertising. BAV contains data points about brand measurements. The databases combined contains 801 data points of 107 firms and 147 variables. Most firms are established in the United States (91.3%). The remaining countries are Japan (4.4%), Finland (1.1%), Great Britain (1.1%), Liberia (1%) and Panama (1%). Each CSR type contains a number of strengths and concerns. The four CSR types researched for this paper contains a total of sixteen strengths and fourteen concerns (excluding ‘others’). There are twenty different sectors researched (e.g. auto, distribution/retail, food, internet, telecommunications and toys). This paper is intensively obtaining information about sales, profit, brand equity score of firms and their four CSR types.
MCAR’s test is performed, to discover if these missing values are missing (completely) at random or not. Since these outcome of this test is significant (table 1), it is decided to remove these missing values. A total of 708firms remained in the database.
TABLE 1 Little's MCAR test
Variables Mean N Missing
Count Percent Sales 40952 792 9 1,1 Profit 3184 792 9 1,1 Years of CSR 15.61 734 67 8,4 Debt to capital 0.30 719 82 10,2 Chi-Square = 100.9, DF = 9, Sig. = ,000
The following step was to identify outliers. Therefore, a Mahalanobis Distance test is performed to discover any outliers in de dependent variables. 61 outliers were detected. However, since those outliers were not concerning, they are not removed. The outliers are not concerning, because there are twenty different industries, who also differ in size. Thus, it is assumable that large differences exist between data points. The boxplots are plotted for all relevant variables. In the appendix A, the boxplots of the dependent variables are shown as an example.
Since the dataset is panel data, there is tested whether the data is balanced or not. As shown in table 2, the data points per year are not equally distributed. However, fixed and random effects take care of the unbalanced data. So, it is not necessary to take it into account.
TABLE 2
Unbalanced panel data
Year 2007 2008 2009 2010 2011 2012 2013 2014 2015
3.1 Measuring independent variables – CSR types
The CSR types are measured in twofold: by the number of strengths (e.g. for environment: recycling, clean energy, pollution prevention) and by the number of concerns (e.g. for environment: hazardous waste, regulatory problems, ozone depleting chemicals). The final measure is calculated by the number of strength minus the number of concerns. A positive (negative) score of a CSR type means that the number of strengths is higher (lower) than the number of concerns. This means for example that a firm is more positively (negatively) contributing for a better environment than negatively (positively).
3.2 Measuring dependent variables – sales, profit and brand equity
The database Compustat has been used for measuring the sales and profit and the database BAV has been used for measuring brand equity. Sales is measured by ‘sale’. Profit is measured as ‘net income’. Brand equity is measured by three variables: ‘brand strength’, ‘brand asset’ and ‘brand stature’. The final score of brand equity in general is averaged. Thus, the scores of all three variables are summed and divided by three.
3.3 Measuring control variables
impacts financial performance (e.g. Hirschey and Weygandt 1985, Morck and Yeung 1991). R&D expenditures can increase investors’ evaluation and innovation activities (Chauvin and Hirschey, 1993; Gruca and Rego, 2005; McGuire et al., 1988)
Including industry as a factor to control for is necessary, since evidence exist that some factors in an industry explain variation in firm performance across industries, such a economies of scale and competitive intensity (McWilliams and Siegel, 2000). Furthermore, it also declares the hugh differences in sales and profit between industries.
A meta-analysis by Daniel et al. (2004) showed that all slack types positively influence firm performance. Furthermore, according to Bourgeois (1981), slack resource is a cushion that firms can use to counter threats (e.g., counter competitors’ moves; Greenley and Okemgil, 1998) and exploit opportunities (e.g., pursue sales growth; Weinzimmer, 2000). Therefore, slack resources can influence the dependent variables, which can be controlled for by including long-term debts to total capital in the model (Chatterjee, 1990; Reuer and Ragozzino, 2005; Singh, 1986).
Finally, the amount of years a firm has implemented CSR strategies is included as a control variable. A paper of Vanhamme and Grobben (2009) found that perceived integrity is significantly greater for companies with a long CSR history than for those with a short CSR history, which had an impact on the firm and product perceptions.
3.4 Formulas of the models
Since all variables are mentioned, the final models are formulated as follows:
Si,t = αi β1 EnVi,tβ2Empi,t β3 Proi,t β4 Comi,t Coni,t εt
Pi,t = αi β1 EnVi,tβ2Empi,t β3 Proi,t β4 Comi,t β5Com2i,t Coni,t εt
Where:
Si,t = Sales of firm i, in year t
Pi,t = Profit of firm i, in year t
BEi,t = Brand equity score of firm i, in year t
αi = Intercept/constant
EnVi,t = Environment score (strengths – concerns) of firm i, in year t
Empi,t = Employee score (strengths – concerns) of firm i, in year t
Proi,t = Product score (strengths – concerns) of firm i, in year t
Comi,t = Community score (strengths – concerns) of firm i, in year t
Com2i,t = Community score (strengths – concerns) squared of firm i, in year t
Coni,t = Control variables (total assets, advertising, R&D, industry dummies, long-term debts to total capital and years of CSR,
εt = Residuals
3.5 Estimation methods
random effects model or OLS is preferred. This is tested for each dependent variable. The outcome was each time significant (Prob > chi2 = 0.00). This implies that there is evidence of significant differences across firms, hence a random effects model should be run. This is a logical result, since random and fixed effects model are better in handling panel data. Fixed effects models only estimate within effects, they cannot suffer from heterogeneity bias. However, this comes at the cost of being unable to estimate the effects of higher-level processes, so random effects is often preferred where the bias does not exist (Bell and Jones, 2015). In order to test for the existence of this form of bias in the random effects model, a Hausman test - which is appropriate according to Wooldridge (2002) - is performed. The test was only significant for profit, but not for sales and brand equity. Hence, the Hausman test suggests that fixed effects is most appropriate for profit, and random effects for sales and brand equity. The results of the Breusch-Pagan Lagrange and Hausman test and conclusions can be found in appendix E1.
TABLE 3 Descriptive statistics
Variables Mean Std.
Deviation Minimum Maximum
Dependent Sales 41078 67805 220 483521 Profit 3178 5943 -14672 45220 Brand equity 3,28 2,44 0,36 13,17 Independent Environment 0,78 1,14301 -4,00 6,00 Employee 0,45 1,51267 -4,00 8,00 Product -0,49 0,95 -4,00 2,00 Community 0,57 0,77 -2,00 4,00 Control Total assets 135198 400476 167 2692538 Advertising 1032 1331 2 9729 Years of CSR 15,65 5,09 1 21 Long-term debt to total capital 0,30 0,20 0 1 TABLE 4 Definitions of CSR types
CSR type Definition of strengths* Definition of concerns** Environment Organizational efforts toward managing the
firm’s environmental impact through
pollution prevention, recycling, clean energy, etc.
Organizational actions leading toward environmental pollution through hazardous waste, regulatory problems, ozone depleting and agriculture
chemicals, substantial emissions, etc.
Employee Organizational efforts toward improving union relationships, profit sharing, generating employee involvement, providing retirement benefits, improving health and safety records, etc.
Organizational actions toward decreasing union relationships, health and safety, workforce, etc.
Product Organizational efforts toward maintaining quality, R&D innovation, providing products to the economically disadvantaged, etc.
Organizational actions toward decreasing product safety,
marketing-contracting and having an antitrust policy, etc.
Community Organizational efforts toward charitable giving, support for housing and education, volunteer programs, etc.
Organizational actions leading to investment controversies, negative economic impact, tax disputes, etc.
*Definitions according to Mishra and Modi (2016)
4. RESULTS
4.1 Main resultsTable 3 reports the descriptive statistics of all variables. Table 4 provides the definitions of the four CSR types. The correlations between the variables are also described. These can be found in the appendix B. Even though the variables were moderately correlated, they have been tested for multicollinearity. Not only the independent and control variables are taken into account, but also the three remaining CSR types. This is done to make sure each CSR type is different relative to the other CSR types. The highest variance inflation factor (VIF) score 2.79 (appendix C). However, the factor ‘sector’ scored 18. Since this implies more than one degree of freedom, the generalized variance-inflation factor is more suitable (Fox and Monette, 1992). This score for the factor ‘sector’ was 1.08. Since a score of 5 or greater is as a signal of collinearity (De Vaus, 2013), multicollinearity is not an issue in this dataset.
The dataset contains twenty different industries. To analyse whether sales, profit and brand equity differ per industry, an One-way Anova per dependent variable is executed. These outcomes were significant (appendix D). A post hoc test is performed to test whether the differences between the industries is accountable to a certain industry. Even though the industry oil, gas and utilities differs significantly from all the other industries, other industries differs significantly as well. This means that industry affects the dependent variables, and thus should be controlled for.
4.2 CSR types - sales and profit
Hypothesis 1c is supported (p<0.01). However, h1d shows only a significant result in the random effects model (p<0.1), but not the fixed effect model. As hypothesized, the results showed a positive relationship with sales as well with profit. This means that firms who look after the welfare of their employees do generate more revenue, but also decrease their costs. Thus, a reason is that employees become more motivated and productive, leading to relatively lower costs per unit. Due to the lower costs, the asking price can be lowered. This leads to a higher demand, hence an increase in sales.
H1e, in contrast with h1f, shows a significant and positive result (p<001). So, a product-based CSR has a relationship with sales, but not with profit. This inclines that CSR-related process and product innovations are valued by consumers. Consumers are rewarding firms that devote resources to CSR. And even though h1f is insignificant, the relationship was positive, where a negative relationship was hypothesized. The case could still be that product-based CSR leads to increasing costs, but that is rewarded by an increase of sales. And as a consequence, profit in still positive.
4.3 CSR types - brand equity
Of the four hypotheses on brand equity, environmental- and product-based CSR showed a negative (p<0.1) and a positive relationship (p<0.05) with brand equity. Hence, h2a is in contrast with its hypothesis, and h2c is in conformity with its hypothesis. First, a firms’ social contributions based on the environment and product are more easily perceived by consumers compared to a firms’ social contributions based on employees and the community. That is a reason for the significant results for environment and product. Second, the relationship between environment and brand equity is negative. This could be explained by consumers who are sceptical of firms attempting to enhance their social behavioural status. Consumers can be sceptical about firms’ true motivation to engage in environmental-based CSR. This results in negative attitudes towards firms and thus to a negative relationship with brand equity. Apparently, consumers do not show this attitude for product-based CSR. The difference is that product-based CSR has attributable benefits for consumers as well, where environmental-based CSR has not. Thus, it is likely that consumers choose social responsible products, to express that they made a social responsible decision.
TABLE 5
Main results of the fixed or random effects model
Hypotheses Estimates Relationship P-value Significant R2
DV: sales (results from the random effects model) 0.164
H1a (environment) -256.66 + 0.767 No
H1c (employee) 1243.65 + 0.002 Yes
H1e (product) 1604.04 + 0.005 Yes
H1g (community) 942.40 + 0.254 No
DV: profit (results from the fixed effects model) 0.138
H1b (environment) 86.51 + 0.708 No
H1d (employee) 100.46 + 0.177 No
H1f (product) 109.69 - 0.491 No
H1h (community) -194.17 ∩ 0.341 No
DV: brand equity (results from the random effects model) 0.281
2a (environment) -0.08 + 0.09 Yes
2b (employee) -0.04 + 0.113 No
2c (product) 0.10 + 0.024 Yes
2d (community) 0.05 + 0.412 No
4.4 Additional results
As an additional control for the results of the main results, the previous models are estimated again, now with only measuring the CSR strengths as an independent variable. This approach is a pure measure, since it only measures the positive CSR implementations of a firm.
The same steps done for the main models were repeated. Thus, a Breusch-Pagan Lagrange test is executed to test whether a random effects model or OLS is preferred. The outcome was significant (Prob > chi2 = 0.00) for all three dependent variables. Hence, a random effects model is preferred. Next, a Hausman test was executed to test whether a random or fixed effects model was most suitable. The random effects model was most suitable for the variable sales and the fixed effects model for profit and brand equity (appendix E2).
TABLE 6
Results of CSR strengths on the DV’s DV: sales
Estimates R2
Variables OLS GLS Fixed Random 0.201
CSR strengths 2274.07**** 235.88** 711.5643*** 735.9793*** DV: profit CSR strengths 86.27** 36.91**** 37.85 72.37* 0.036 DV: brand equity CSR strengths 0.08**** .047**** 0.003 0.011 0.018 ⁎ p<0.1 ⁎⁎ p<0.05 ⁎⁎⁎ p<0.01 **** p<0.001
Based on choosing the optimal model, the CSR strengths have only a significant effect on sales (p<0.01). Hence, when firms taking effort to become social responsible, it only affects sales significantly. Thus, it can be concluded that it is a drawback when the general impact of CSR is measured. This table shows that it is not worthwhile to implement CSR when firms want to increase their profit or brand equity. But conclusions differ when firms make distinctions between CSR types. Thus, depending on a firms’ strategy, firms can align their strategy with the optimal CSR type.
4.5 Robustness checks
There is a major difference between the results of the OLS and GLS models and the fixed and random effects models . Therefore, the results of the fixed and random effects models are of more importance. Especially the results of the model chosen by the Hausman test.
5. DISCUSSION
The aim of this paper is to answer the research question: To what degree do the CSR types of environment, employee, product and community contribute to sales, profit and brand equity? Prior research has been focussing on the link between CSR in general and firm performance. Studies have been overlooking the distinctive effect of individual CSR types on sales, profit and brand equity. That this leads to different results, became visible due to the additional results of CSR strengths. This paper shows that employee- and product-based CSR has a significantly positive effect on sales. Secondly, environment shows a significantly negative effect on brand equity, and product shows a significantly positive effect on brand equity.
The findings are derived from the KLD database, Compustat and BAV. There is rich information collected from a moderately large set of firms across the years 2007-2015. There has been taking account for missing values, outliers, multicollinearity, autocorrelation, heteroscedasticity and non-normality. Therefore, the results are validated, and enables to opportunity to offer several theoretical and practical implications.
5.1 Theoretical implications
the limited capital resources (Godfrey and Hatch, 2007). Second and as a result of this paper, CSR types differ in their effect on sales and brand equity. Thus, that findings were conflicting (Margolis and Walsh, 2003) can be partially explained by the different effect across CSR types.
There are few studies with a similar consideration. Jayachandran et al. (2013) is one of them. However, they studied only two types – environmental and product social performance - and their impact on firm performance. The study of Mishra and Modi (2016) is the only research considering six CSR types. They studied the relationship between these CSR types and stock returns and idiosyncratic risk, with a moderating role for marketing capability. Although these studies contribute by extending literature, the narrow focus is a limiting factor. This paper contributes to CSR literature, since there is limited research studying the effect of CSR types firm performance measures.
As mentioned, existing studies found a relationship between CSR and firm performance. This paper is more distinctive, since the findings reveal that employee- and product-based CSR positively influences sales, but no CSR types have a significant relationship with profit. These results affirm that CSR types affect revenue positively, but that costs mitigate this affect. Thus, this provides evidence that allocating all CSR types does not result straightforward into an improved firm performance.
It has to be noted that of the twelve hypotheses, only four hypotheses are significant. This may not be surprising, since 28 of the 109 published studies collected by Margolis and Walsh (2003) showed a nonsignificant relationship between CSR and firm performance. The nonsignificant relationships could be due to low awareness of a firm’s CSR activities among customers (McWilliams and Siegel, 2001) or that CSR types individually do not have the ability to enhance firm performance (Berman et al., 1999).
5.2 Practical implications
Firms have to make trade-offs in engaging and managing different CSR types due to the limited capital resources (Godfrey and Hatch, 2007). Since the findings of studies between CSR and firm performance were conflicting (Margolis and Walsh, 2003), it is unclear if resources should be allocated for CSR and for which CSR types.
The findings that CSR types contributes positively to sales and positively as well negatively to brand equity suggests that firms can obtain competitive advantages and reap more financial benefits by investing in the right CSR types.
Secondly, many firms already heavily investing in CSR initiatives to enhance positive, strong and differentiated brand equity (Hur et al., 2014). This paper contributes to this by concluding that firms especially should focus on product-based CSR to enhance their brand equity. Firms can improve the quality of their products, focus on R&D innovation and develop products beneficial to economically disadvantaged. Furthermore, the negative relationship between environmental-based CSR and brand equity implies consumers could be sceptical about the true motivation firms engage in environmental-based CSR. Thus, firms should be careful when they want to apply environmental prevention efforts.
5.3 Limitations and further suggestions
This paper study suffers from limitations that suggest avenues for further research. First, the data points collected from firms are mainly based in the United States. It is possible that respondents in the United States are more sensitive to social responsibility issues. Further research might expand the sample to other countries, especially developing countries where social conditions require immediate and serious attention.
Second, this paper did include only four CSR types. Future research could study the relationship between all CSR types and financial performance measures.
Third, since only several control variables are taken, endogeneity could be caused due to omitted variables. A more comprehensive study is requested, because many variables have influence on sales, profit and brand equity.
Finally, the effect of the CSR types could differ across industries, which is only controlled for in this paper. Distinguishing these industries is necessary to understand in which industries it is beneficial to apply CSR.
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7. APPENDIX
A. Boxplot of the dependent variables
A1: Boxplot of sales A2: Boxplot of profit
B. Correlation matrix
Correlation matrix
Com str
Comcon Empstr Empcon Envstr Envcon Prostr Procon Adv Debtcap R&D TA YearsCSR Comstr 1.00 0.33 0.32 0.27 0.47 0.25 0.22 0.31 0.26 -0.10 0.22 0.12 0.33 Comcon 1.00 0.08 0.31 0.21 0.58 -0.02 0.33 0.16 -0.04 0.08 0.12 0.21 Empstr 1.00 0.13 0.52 0.16 0.37 0.16 0.24 -0.04 0.26 0.13 0.14 Empcon 1.00 0.26 0.32 0.12 0.28 0.16 0.13 0.00 -0.01 0.24 Envstr 1.00 0.43 0.45 0.34 0.40 -0.02 0.32 0.13 0.24 Envcon 1.00 0.14 0.26 0.29 0.01 0.17 0.11 0.12 Prostr 1.00 0.17 0.12 0.03 0.18 0.01 0.21 Procon 1.00 0.34 -0.11 0.29 0.23 0.09 Adv 1.00 -0.06 0.50 0.15 0.16 Debtcap 1.00 -0.06 -0.20 0.01 R&D 1.00 0.10 -0.03 TA 1.00 -0.07 yearCSR 1.00
The variables are abbreviated. For example, Comstr means community strength, and Comcon means community concern. This also yields for the other three IV’s. Adv is advertising, debtcap is debt to capital, TA is total assets and yearsCSR is Years of CSR.
C. Multicollinearity
Variables VIF score
D. One-way Anova
ANOVA Sum of
Squares
Df Mean Square F Sig.
Sales Between Groups 1,13E12 19 5,961E10 18,38 ,000 Within Groups 2,50E12 772 3,244E9
Total 3,64E12 791
Profit Between Groups 1,01E10 19 5,316E8 23,00 ,000 Within Groups 1,78E10 772 2,311E7
Total 2,79E10 791
Brand equity Between Groups 1923,61 19 101,24 27,63 ,000 Within Groups 2861,84 781 3,66
Total 4785,45 800
E1. Tests for the most suitable model
DV Breusch and Pagan (Random or OLS) Hausman (Random or fixed)
P-value Model P-value Model
Sales 0.000 Random 0.927 Random
Profit 0.000 Random 0.001 Fixed
Brand equity 0.000 Random 0.103 Random
E2. Tests for the most suitable model (IV=CSR strength)
DV Breusch and Pagan (Random or OLS) Hausman (Random or fixed)
P-value Model P-value Model
Sales 0.000 Random 0.512 Random
Profit 0.000 Random 0.000 Fixed
F: Main results of all models
DV: sales
Estimates Relationship
Variables OLS GLS Fixed Random
Environment -4282** -315.08 -145.97 -256.66 + Employee -1429 -31.41 1286.35*** 1243.65*** + Product -13751**** 76.72 1796.34*** 1604.04*** + Community 1163 101.86 935.15 942.40 + R&D -.089 1.93**** 3.55**** 3.44**** Advertising 21.30**** 15.12**** 5.95**** 7.25**** Total assets 0.043**** 0.05**** 0.04*** 0.05*** Long-term debt to capital 22135* 2422 3976* 3047 Years of CSR 1325*** 898**** (**) 1370 DV: profit Environment -202 41.81 86.51 14.47 + Employee 113 14.62 100.46 139.98* + Product -526**** -5.15 109.69 52.12 - Community(*) -678* -44.65 -368.58* -357.84 ∩ Community2 157 10.23 78.39 92.71 ∩ R&D 0.688**** 0.33**** -0.55 0.23 Advertising 0.848**** 0.85**** 0.19 0.79**** Total assets 0.008**** 0.008**** 0.01**** 0.009**** Long-term debt to capital -1573* -343*** 676 -698 Years of CSR 192**** 90.01**** (**) 152** DV: brand equity Environment -0.04 0.01 0.15* -0.08* + Employee -0.46 -0.04** -0.04 -0.04 + Product -0.39**** -0.06** -0.10** 0.10** + Community 0.23 0.07* 0.05 0.05 + R&D 0.0003**** 0.0001** 0.00005 0.00008** Advertising 0.0003**** 0.0003**** 0.00008 0.0002** Total assets -5.27e-07
***
-2.36e-07 2.87e-07 -2.35e-07 Long-term
debt to capital
-0.74*** 0.08 -0.40 -0.41
Years of CSR 0.08**** 0.07**** (**) 0.16****
(*) when excluding community square, community estimates are -194.17, with p=0.341 for the fixed effects model and community estimates are -154.09, with p=0.444 for the random effects model (**) Not measured, since years of CSR remains constant within a firm over time in a fixed model
G. Results of CSR strengths of all models
DV: sales
Estimates R2
Variables OLS GLS Fixed Random 0.201
CSR strengths 2274**** 235.88** 711.56*** 735.98*** R&D -2.60 1.01*** 2.69*** 2.55*** Advertising 22.30**** 15.97**** 6.76**** 7.64**** Total assets 0.05*** 0.06**** 0.06*** 0.06*** Long-term debt to capital 31728** 2438 2777 2596 Years of CSR 403 883**** (*) 1509* DV: profit CSR strengths 86.27** 36.91**** 37.85 72.37* 0.036 R&D 0.59**** 0.02*** -1.02 0.002 Advertising 0.80**** 1.02**** 0.12 0.73*** Total assets 0.008*** 0.007**** 0.01**** 0.008**** Long-term debt to capital -1797* -326 -143 -1654 Years of CSR 152*** 69.79**** (*) 136** DV: brand equity CSR strengths 0.08**** 0.047**** 0.003 0.011 0.018 R&D 0.0002*** 0.0000 -0.00002 0.00004 Advertising 0.0004**** 0.0004**** -0.0002 0.00007 Total assets -6.06e-07
*** -5.01e-07 ** -9.22e-07** -9.13e-07**** Long-term debt to capital -0.63* -0.20 -1.10* -1.12** Years of CSR 0.08**** 0.07**** (*) 0.18****
(*) Not measured, since years of CSR remains constant within a firm over time in a fixed model
