Master Thesis A FIRM PERSPECTIVE ON THE RELATION BETWEEN DIFFERENT LEVELS OF CSR - ENVIRONMENTAL, SOCIAL, GOVERNANCE - AND BRAND EQUITY

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Master Thesis

A FIRM PERSPECTIVE ON THE RELATION BETWEEN DIFFERENT LEVELS OF CSR - ENVIRONMENTAL, SOCIAL, GOVERNANCE - AND BRAND EQUITY

Investigating the moderating effects of firm size and home-country institutional characteristics

MSc International Business and Management 2016/ 2017 University of Groningen, Faculty of Business and Economics

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Abstract

In business literature, the effect of Corporate Social Responsibility (CSR) investments on the performance of firms has been studied widely. In this thesis, I take an alternative approach. Differently from previous studies, I analyze CSR as a multidimensional factor that consider three single (ESG) dimensions – Environmental, Social, Governance – and how these correlate to the brand equity of a company. Moreover, I investigate the moderating effect of firm size and two home-country institutional characteristics on the main relationship. These are the corruption and the competition indexes.

The analysis is conducted using an OLS analysis on data retrieved from Datastream, a sample of 3650 firms from several countries is evaluated. The findings confirm a positive effect of Social and Environmental CSR on the brand equity of a company. A positive result is found for both firm size and corruption index on the relationship between Social CSR and brand equity. While no supporting is found for competition index, which in contrary to the expectation, in the robustness test negatively moderates the relationship. These findings have an implication for managerial and theoretical advancement in the study of CSR.

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Nowadays, companies invest in Corporate Social Responsible (CSR) practices as a way of enhancing their corporate performance (Porter and Kramer, 2006). Companies that do so present themselves as socially responsible firms to stakeholders. Generally speaking, CSR allows firms to make actions which go further than their financial plans and increase the welfare of a larger amount of parties.

Several studies have focused on the relationship between CSR practices and companies’ financial performance (Simpson & Kohers, 2002; Lai et al., 2010; Saeidi et al., 2015). Most of them affirm that CSR is positively correlated with the financial performance of a firm. Moreover, those studies latter found that social responsible activities do not only have a positive non-financial outcome for businesses, but also a financial one. However, there is not a universal consensus in the field.

So far, the research has analyzed CSR as a single multidimensional factor without considering its main pillars individually. In this thesis, I provide a different approach by following the reasoning of Liang & Renneboog (2013). I proceed and measure CSR as a construct which consider three main characteristics: Environment, Social, and Corporate Governance.

Differently from previous research, my intent is not to analyze directly the effect that CSR activities have on the performance of company, which has been studied extensively. By taking an alternative approach, I look at the brand equity (BE) value of a firm and inspect for any correlation with a company’s amount of investments in CSR. For the first time in the field, the relationship between different levels of CSR and brand equity is examined. The research reviews past articles which mostly analyze the effect of CSR activities on firms’ performance, and makes use of brand equity as a way to assess the value of an organization. Branco and Rodrigues (2006) have argued that CSR enables firms to improve reputation, which subsequently drives brand valuation (Holt et al., 2004). Indeed, strong brand equity generates trust and loyalty within consumers, which will be less willing to switch to other products.

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brand equity and firms’ investments in CSR. For instance, Torres et al. (2012) found that CSR towards different groups of stakeholders has a positive influence on the global BE. In sum, the literature shows that a positive correlation is present between CSR and BE.

Building on this ground, the aim of this thesis is to analyze the casual relationship by measuring CSR dimensions through Environmental, Social, Corporate Governance scores (ESG). I study whether the involvement in CSR pays off for the brand equity of a company. I utilize ASSET4, a Swiss private firm acquired by Thomson Reuters (2009) which provides data and scores of firms on ESG dimensions. I argue that higher level of different dimensions of Corporate Social Responsible activities create higher brand equity for a firm, which will ultimately increase its economic value. In specific, I will study whether all CSR dimensions are positively related to brand equity or if some social activities have a higher impact than others. For this reason, in my research I argue that companies that wish to increase their brand equity should be more involved in social, governance and environmental issues, given the stakeholders increased interest in those subjects in the last years.

Furthermore, this paper takes into analysis the moderating effect of firm size on the relationship between the independent variable, CSR, and the dependent one, brand equity. Some studies have assumed a monotonic relationship between CSR and firm performance implying that size cannot act as a moderator between the two (Mackey et al., 2007). On the contrary, in this thesis, I will consider the variable to explain how a firm’s size can moderate the main regressions. Given the higher consideration that big companies receive from media compared to smaller ones, the actions of large companies are deemed more visible by consumers. Indeed, public information can shape the mind of individuals and the way they value one brand over another. Larger firms possess a high level of power and resource, and according to Cowen et al. (1987), they might have a bigger impact on the society compared to smaller one given the higher pressure that they experience from the surrounding environment. Alternatively, others researchers affirm that smaller firms invest as much on activities aiming at the increase of brand loyalty and consumers’ satisfaction however they mostly focus on the local environment in which they operate rather than on global context (Perrini, 2006).

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visibility that they gain from their involvement. Therefore, I investigate the effect of CSR on brand equity when I compare companies of different size.

In addition, also the country institutional characteristics are considered. Depending on the firm's national business system, companies’ brand equity is more or less affected by their investments in CSR practices (Matten & Moon, 2008). Studies often focus on firm-level characteristics without considering the importance of the business environment in which a company operates, and how it might have an effect on the main relationship. For this reason, I decide to consider two different institutional dimensions in my work. According to Kostova (1997), the institutional characteristics of a country reflect the norms, social knowledge and rules developed overtime in that environment. Therefore, both the individuals and the organization’s operations present in those specific settings are affected by them. I believe it is very important to investigate aspects of a national institutional environment, by analyzing the extent to which legal and political institutions affect a company’s brand equity through its involvement in CSR. Perhaps in certain environments, the relationship between different level of CSR and brand equity is not present because of these differences. For instance, I argue that in countries in which there is a high level of competition in the market, firms might affect the value of their brand equity by investing more money in CSR activities as a way to differentiate themselves from their competitors. In contrast, in high corrupted countries, the relationship between brand equity and CSR will be weaker because firms will not have additional money or incentives from the government to promote activities towards the community and the environment. In specific, in order to study the country institutional characteristics, I consider the competitiveness and corruption index in a country as moderating factors in the main relationships.

Therefore, my research question is: “Does the level of Social, Environmental, and Governance CSR practices engaged by a company positively correlates to its brand equity? Is this relationship moderated by the firm’s size and country institutional characteristics?”.

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In order to perform my analysis, the database is based on ASSET4 provided by Thomson Reuters. It gives data on a large amount of international firms and its respective ESG scores. The sample includes firms of distinct size and based on different countries, both developing and developed ones, which present diverse institutional characteristics. Given that a precise value of brand equity is not available for all firm in the sample, in the study I only considers those that show a specific score. The sample is composed of 3650 firms coming from different international countries. Other data provided through Datastream, World Forum Economy and Transparency international.

Theoretical, managerial and policy-maker implications can be identified in this paper. First of all, the study makes a theoretical advancement in the field of study by firstly analyzing the concept of brand equity and secondly, relating the latter to single characteristics of CSR. From a managerial perspective, the aim of this paper is to provide recommendations to businesses. Those can show a better conduct to their customers by investing in different type of CSR activities; while increasing their brand value. Firms of different size and coming from a different institutional environment can relate to the results provided in this research and understand which dimension of CSR best suits their strategic plan. Moreover, the analysis of the level of CSR related to country institutional characteristics might provide insights to diverse governments, promoting actions and regulation aimed at its development.

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2. Literature review

In this section, I review the relevant literature for the thesis. First, I analyze the concept of CSR by looking at the numerous definition and theories which were advanced over the years. I inspect past research which look at the different effects that corporate social activities might have on a company’s operation. Next, a brief description of brand equity is provided, and its correlation with the three different levels of CSR is hypothesized. Later on, two moderating effects are introduced. First, the firm-level interaction term firm size; and second, the country-level effect of a country’s institutional environment on the main relationships. Lastly, the conceptual model is provided through the use of a graph.

2.1 Definition of CSR

In literature, it is possible to find several definitions of the concept of CSR, but there is not a general consensus of what it really means to be a socially responsible company. The term is very broad and various management disciplines seek to view CSR and align with it according to their interests and situations. In this thesis, CSR is defined as “the voluntary integration of social and environmental concerns in the firm’s operations” (European Commission, 2011).

According to the shareholder approach, “the social responsibility of a business is to make profits” (Friedman, 1970). Friedman (1970) continues by stating that CSR practices have negative influence on the firm and its stakeholders since resources devoted to those actions can be implemented elsewhere in the firm’s value chain. Consequently, by engaging in CSR, companies are put at a disadvantage position compared to that of their competitors given the extra costs incurred from the investments. He argues that the aim of a company should be to pursuit profit maximization. A firm, which heavily invests in CSR, exhibits a hidden agency problem between shareholders and managers because managers act opportunistically at the expenses of the company’s owners. Friedman promotes the underlying idea of separating business issues from social ones. Despite this, the approach tolerates CSR practices to the extent that will benefit the long term goal and value of the firm.

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answer to their owners but are also accountable to all the other stakeholders. In particular, managers need to look for strategies that can create value for the companies and which should be perceived beneficial to suppliers, employees and all the actors involved in the relationship. Then, directors need to consider the survival of a company which is dependent on the cooperation among the stakeholders and the monetary profit created over time. In addition, managers, especially when doing business abroad in a more distant country, should to be aware of the customers and understanding the societal issues surrounding the foreign stakeholders.

Lastly, the societal approach argues that companies exist to fulfil the need of the society, hence they are responsible for stakeholders’ well being. According to Knudsen (2006), this approach is important in those situations in which the institutional government is weak, where the lack of protected property rights, established capital markets, utilities and infrastructures does not allow an efficient market transactions and growth. In those situations, companies can help the society in solving problems.

Therefore, the first statement focus on the importance of shareholders’ return on the profits of the firm, while the second looks at ways to retain gains and invest in alternative activities in order to benefits the whole stakeholders. The last one highlights a single purpose of a company, which shall act for the societal good. In this thesis, I follow the reasoning of Freeman (1984). I argue that companies invest in CSR activities because they see them as duties that they have towards the society. I argue that doing something positive for the stakeholders will provide to companies even a more positive return.

However, over the years, different definitions of the concept of CSR were advanced. Below, I present the main argumentations.

2.1.1 Overview of CSR research

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implementing CSR, the business could even lose power. Later in (1967), he suggested that CSR should not be seen as a contract but as an act that would benefits both the company and the society. Later, McGuire’s (1963) stated that a company should invest in CSR because it is an obligation that it has towards individuals, therefore it must be involved in increasing: the welfare of the community, the advancement of education, the wellbeing of its employees and of all the other stakeholders.

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dimensions: economic, legal, ethical and philanthropic which are represented in a pyramid. He affirms that CSR firm should: “make profit, obey the law, be ethical, and be a good corporate citizen”.

The 1990s and 2000s became the era of global corporate citizenship (Frederick 2008). During the new century, the view of CSR has become widely accepted (Margolis and Walsh, 2003; Palazzo and Scherer, 2011), although there is still not a universal definition. Indeed, many authors attempt to outline CSR in different manners. For instance, Garriga and Mele (2004) distinguish four dimensions of CSR: instrumental, political, integrative and ethical; while Windsor (2006) classifies CSR as ethical responsibility, economic responsibility and corporate citizenship.

According to Liang & Renneboog (2013) CSR is defined as a firm’s engagement in and compliance to environmental, social, and governance (ESG) issues. Therefore, I will analyze CSR referring to these three issues, evaluating each single effect on the brand equity of a company.

2.1.2 Effects of CSR

Companies invest in CSR activities in order to achieve different outcomes. First of all, as discussed in many papers, CSR influences the financial performance of companies (Simpson & Kohers, 2002; Saeidi et al., 2015), and it allows for improvements in the relationship between the different stakeholders (Lai et al., 2010). For instance, for what concerns employees, it is found that CSR enhance workers’ commitment in an organization. As a result, the company becomes more productive as employees tend to identify with their company and are less likely to have the intention of leaving their jobs (Lin et al. 2012). They are affected by the social identity theory, recognizing their values with those of their own organization. Therefore, in order for companies to increase their reputation and overall satisfaction should invest in actions aiming at the welfare of their internal group. The same view can be applied to consumers. Companies influence individuals’ satisfaction making them more willing to support and identify with their own views (Berrone et al., 2007).

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improvement in reputation by the use of internal resources (Branco and Rodrigues, 2006). Moreover, if a company is able to acquire trust and building loyalty among consumers through actions in CSR, individuals start to look more at the reasons why a company is implemented a certain choice rather than what it is actually doing. Therefore, CSR minimizes negative concerns that customers could have towards an organization. CSR activities might also be instrumentally used when a company introduces a new product in order to gain more visibility among its stakeholders. For instance, according to Luo and Du (2012), companies that present high level of CSR investments show a higher advantage when they commercialize a new good with respect to those who are not involved in social activities.

Furthermore, CSR can be a good choice also in the case in which the company plan to expand abroad in new markets. Firms might invest heavily in CSR activities in their host countries as a way to gain legitimacy, to help them enhance their reputation among stakeholders (Du & Vieira, 2012). However, it is important to keep in mind that individuals coming from different countries might respond differently depending on which dimensions of CSR a company invest in. Indeed, legitimacy might be affected by the culture present in the society; after all culture shapes the individuals (Du et al., 2007). For instance, individuals coming from a collectivism developing country might be more interested in social activities that benefit the community rather than those concerning the environment. Moreover, with regards to the society, in some cases individuals feel a sense of gratitude (Romani et al., 2013) towards the company when they are aware that it engages in CSR, and they might experience a sense of repayment obligation in the form of purchases, which is ultimately positive for the firm.

Overall, managers can invest in CSR activities to influence the perception or the reputation of consumers regarding the company. By following a signaling theory, managers could make use of CSR investments to reduce the uncertainty of buyers (Schmid and Dauth, 2014), provide a positive indication to customers, gain trust and financial efficiency.

Even if in the literature there are contrasting results on the relationship between CSR and performance, above I provided several examples that explain why a firm might try to engage in corporate social responsible practices and gain a good advantage in the market.

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maximization of their own profits. CSR practices allow for a mutual satisfaction between companies and stakeholders. In order to test this reasoning, I look at the brand equity of a company and examine whether there are variations in its value when the firm engages more in CSR.

2.2 Brand Equity

Although there is not a unique definition, the concept of brand equity can be viewed from different perspectives (Aaker, 1991; Keller, 1993; Kotler et al., 2005), since it is a recognized concept in both marketing, finance and accounting. In order to distinguish among the several definitions, Feldwick (1996) provided a classification of the concept of brand equity in three groups. Brand equity as: (1) the value of a brand as a separate asset, (2) the measure of the extent to which a consumer feels attached to a brand, and (3) the belief and associations that a consumer gives to the brand.

In this thesis, I identify brand with the first definition provided by Feldwick (1996) which identifies brand equity as a financial asset. Therefore, I take a firm level approach in which the brand is measured through a calculation that estimate how much the brand is worth as an intangible asset - the value of an actual business transaction (Feldwick, 1996).

Opposed to looking at brand equity as a financial value, according to Yoo and Donthu (2001), brand equity refers to the total utility or value added to a product by virtue of the brand.

Aaker (1991) defined Brand equity as “a set of assets (or liabilities) linked to a brand's name and symbol that adds to (or subtracts from) the value provided by a product or service to a firm and/or a firm’ s customers”. He affirms that brand equity consists of 4 main categories: brand awareness, brand association, perceived quality and brand loyalty from the customer perspective (Aaker, 1991). In particular, the first refers to its capacity to be present in individuals’ mind. Brand association refers to the traits that a customer relates instantly to the company’s product. Perceived quality is what makes consumers buy products from a company overtime. Brand is a sign of quality. Brand loyalty instead considers the trust and faith that individuals have towards a brand - this making them repeatedly repurchase from it.

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Following the financial approach, in this thesis, I consider the method used by ASSET4 to measure brand equity. ASSET4 gives a score from 0 to 100 depending on the value for each company. I believe that in order to measure brand equity, a financial valuation is more reliable and less time consuming rather than a different approach. Moreover, the other two approaches (Aaker, 1991; Kotlet et al, 2005) focus on consumers’ valuation, which would result in a subjective valuation depending on the individuals which are considered in the analysis. Therefore, in this thesis, I consider Brand Equity as the financial value of the brand in U.S. dollars.

2.3 CSR and brand equity

The involvement in CSR activities influence individuals’ judgments of a company. In specific, consumers assume that products coming from socially responsible companies are of higher quality compared to those coming from firms which not invest in CSR. Therefore, companies that fulfil stakeholders’ expectation present higher brand value (Jones, 2005) and individuals are willing to pay a higher premium price for their products. Berrone et al (2007) argue that CSR activities increase stakeholder satisfaction and lead to higher performance by creating intangible assets in term of brand image and reputation. Financial rewards are an outcome of the consequences of CSR, which arise from the increase in reputation of the organization. Companies view CSR as a method to gain commercial success and as a way to honor ethical values, respect people, communities and natural environment, and encompasses all those actions of the organizations which affect the society and its well being. (Chakraborty et al., 2004).

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However, previous studies have viewed CSR at the aggregate level without considering the single dimensions and their effect on companies’ brand valuation. CSR requires to be studied at multidimensional level. In this research, I want to compensate for this limitation in the field by providing an analysis which consider CSR as a construct divided in 3 main subcategories. By considering different levels of CSR, one is able to identify which CSR dimension is most beneficial for a company for the purpose of raising its level of brand equity. Ito achieve this, I examined whether all social activities are correlated positively with the dependent variable, or if it only applies with certain investments. Therefore, it is not clear whether the relationship between CSR and brand equity exists for all dimensions. My work will provide an answer to this debate. Previous researches studied this phenomenon, however they did not contribute in pointing out the specific social actions that maximize consumers’ satisfaction, and subsequently the valuation of a company (Torres et al., 2012). Therefore, in this thesis, by following Liang & Renneboog’ reasoning (2013), the work will progress through the analysis of each single dimension (ESG) and its correlation with the brand equity of the company. Liang & Renneboog (2013) define CSR as a firm’s engagement in and compliance to three pillars. Thus, the three main subcategories of CSR analyzed are: environmental, social, and governance CSR. The first one refers to the extent to which a firm committee to reduce its contaminated emissions within its operation processes and/or invest in alternative green sources. Social CSR, on the contrary, measures the engagement of the company towards actions that benefit the community through donations and social projects. It addresses concerns for the society, such as social diversity, human rights, consumer protection, etc. Lastly, Governance CSR considers all those internal procedures of a firm which do not have a financial purpose but they are implemented to support non-financial strategies (such as anti corruption measures, employees’ relations, etc.)

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announcement in 2016 of a new project to reduce its greenhouse gas emission by 2020. It plans to generate electricity for its facilities through the use of renewable sources (Cisco System report, 2016). This plan might be view as a cost reduction strategy more than an Environmental CSR. However, the company is implementing a strategy that goes beyond its legal requirements; thus the program can be deemed as a social activity. Stakeholders are very involved in the environmental performance of companies and on how it can affect their living conditions. They question managers about the company’s increasing level of pollution, and they respect and value a brand that aims to decrease of waste, air emission and to implement actions that reduce its impact on the surrounding environment (Kumar Panda, 2017). Therefore, I argue that consumers exhibit a positive view towards companies that are green friendly. They are more willing to buy from a company that engages in policies which aim at the reduction of environment emissions in production and operating processes. I posit:

H1a: The level of Environmental CSR practices engaged in by a company is positively correlated to brand equity

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provides an accommodation nearby hospitals to families that have a sick child (McDonald’s CSR report, 2015).

In addition, the social sphere also emphasizes a company’s responsibility towards multiple stakeholder; not only those that allow it to achieve an economic outcome. The brand equity is reflected in the way in which the company acts towards all of its stakeholders. Therefore, I expect that social activities will result in a positive outcome for the company’s BE. I test whether:

H1b: The level of Social CSR practices engaged in by a company is positively correlated to brand equity

Companies that invest in CSR activities not only focus on the external stakeholders but also on how to benefit the internal organization itself. Governance is one of the three factors that measure the sustainability and ethical impact of an investment in a company. It involves procedures which help coordinate and deal strategy in the business among different players. Moreover, it clarifies the decision-making process related to the company performance and involvement in corporate responsibilities. Governance CSR deals with the improvement of a company’s leadership, internal control, and shareholder rights. Moreover, consumers value companies that promote a good working environment for its employees. At the same time, workers who work in such an environment tend to be more attached to the organization, productive and identify the values of the firm as their own (Lin et al. 2012).

By applying efficiently good governance, the company is able to enhance transparency, accountability and responsibility in the management which ultimately results in a positive brand performance. (Tuan, 2011). In addition, it reflects a company’s capacity to show interests and vision towards processes that go further its financial purpose. Therefore, I investigate whether stakeholders assess higher brand equity when they increase their compliance through the improvement of their governance. I state:

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2.4 The moderating role of firm size

In this paper I highlight the relevance of the firm size as a moderator between different level of CSR and brand equity, considering companies that present different size.

Clients are the main drivers of a company’s brand valuation, therefore, companies look at the best method to satisfy customers ‘needs and being the most visible to them. Nowadays, both small and large companies have experienced a higher interest in being involved in CSR practices given the increasing concern clients have towards products produced by socially responsible firms.

The dimension of a company provides different information to a client. According to Udayansankar (2008), large companies are deemed to have higher level of resources availability, visibility and operating scale. According to previous studies, size cannot act as a moderator between CSR and firm performance, assuming a monotonic relationship (Mackey et al., 2007). However, in this thesis, following the traditional view on firm size, I argue that, on the contrary, size can act as a moderator term on the relationship between the engagement of a firm in CSR activities and the value of its brand equity.

Several studies affirm that large companies usually possess more resources and expertise than small and medium sized enterprises. Therefore, they can experience a higher effect investing in CSR activities whenever required from the stakeholders to improve their brand valuation (Brammer and Millington, 2006). Firm size is considered to have a substantial impact on the actions that a company follows (Adams and Hardwick, 1998). I expect bigger firms to positively affect the relationship between CSR investment on brand equity compared to smaller ones. In addition, smaller firms would look first at profit maximization and then at ways to increase customers’ loyalty given their low availability of resources with respect to larger ones (Brammer and Millington, 2006).

Big firms gain visibility through media by first reporting publicly their main social activities programs to their stakeholders, and later by putting them into effect. Hooghiemstra (2000) affirms that companies are increasing their public disclosure as a way of influencing the insight of a customers regarding the image that they have on the organization and to gain legitimacy.

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simultaneously in their business daily, which will negatively affect the value of the company. However, this critic is not as strong and relevant in the real world. Perhaps, in those settings, the work will be distributed among different departments, in which each manager will have the responsibility to oversee specifically one of them.

Therefore, by following the first approach, I will analyze the extent to which size affects the relationship between investment in certain levels of CSR rather than others, and brand equity. I argue that there could be a variation in the results depending on the CSR activity which is considered.

First of all, regarding the first relationship, as previously stated, consumers enhance companies to implement environmental actions and decrease their negative impact on the surrounding area (Kumar Panda, 2017). However, stakeholders first need to be aware of a company environmental activity. Marketing communication is an important instrument for companies to reach the public. Indeed, communication allows to build strong brand equity (Keller, 2003). Therefore, given the higher visibility that large companies experience from the individuals, I expect that those firms will experience a stronger effect on the relationship between environmental CSR and brand value.

H2a: The greater the size of a firm, the stronger the effect of Environmental CSR practices engaged in by a company on its brand equity

The same reasoning on the importance of visibility for environmental CSR can also apply to the social activities that a company implements to increase the welfare in the community and the trust and loyalty of customers. Indeed, smaller firms rarely attract the attention of media compared to bigger ones.

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H2b: The greater the size of a firm, the stronger the effect of Social CSR practices engaged in by a company on its brand equity

In order to operate efficiently, large companies are required to implement strategies that promote a good board structure and define management and employees’ representation in order to operate efficiently. In addition, in large firms, given the high visibility, stakeholders expect the company to not only to have a vision on the financial outcome, but also on those activities that do not give a monetary reward. Therefore, in large firm, the relationship between Governance CSR and brand equity is not surprisingly more enhanced since organizations show a good structure and open communication with costumers. Therefore, I suggest that larger firms would experience higher results in the main relationship given the benefits that non-financial actions have to the company.

H2c: The greater the size of a firm, the stronger the effect of Governance CSR practices engaged in by a company on its brand equity

2.5 The effect of home-country institutional characteristics

Furthermore, it is interesting to analyze whether depending on a company’s country of origin, the perception of CSR practices affects differently its value of brand equity. It is important to consider the institutional environment in which the organization is set up. According to Whitley (1997) national differences in CSR are determined by the type of business system historically present in the country. Furthermore, companies are influenced by the country institutional profile, which reflects the institutional environment that was established over time, and get transmitted into organization through individuals (Kostova, 1997). The analysis of an institution profile can comprise several aspects: legal, market, political, labor, cultural environment. While different papers tried to analyze the cultural, the labor, and the market structure in a country and its implication on the company’s social strategy, few analyzed the other two dimensions.

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respect to the main regression. Indeed, according to Aguilera & Jackson (2003), legal institutions comprise laws and regulations which might affect the relationship between the company and its stakeholders by facilitating or deterring the level of competition in the country.

Competition is central to the operation of markets. High level of competition encourages economic growth and reduce poverty (Godfrey, 2008). According to this reasoning, low competitive countries would present a higher poverty rate with respect to high competitive ones. As a result, I except consumers from low competitive countries to have on average a lower income availability and to be less interested in buying a product considering the product’s value or quality. Individuals would be more concerned about product affordability than on the numerous actions a company does. Indeed, I argue that clients would be less willing to pay a premium price and would not consider the brand equity of a company as the measurement of how much a brand is worth, in specific to them. As a results, I expect the main relationship between different dimensions of CSR and brand equity to be weaker in a low competitive markets compared to high competitive ones.

I suggest that companies coming from high competitive markets might experience a stronger relationship. The main relationship would be more affected, because when a large number of competitors is present, a company would find itself to invest more in CSR to differentiate itself from the other competitors, to signal product quality, and to increase employees’ productivity. This result will subsequently influence the independent variable correlation with brand equity. I argue that the relationship between different level of CSR and brand equity will be stronger in companies which come from a high competitiveness index country for this reason. In my empirical analysis, to test my argument, I analyze the level of competition in different countries by using the Global Competitiveness index provided by the World Economic Forum, which measures the level of competitiveness in a country. Therefore, I want to highlight the competitive advantage that CSR strategy might represents for companies’ brand valuation.

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H3a: The higher the country competitiveness index, the stronger the effect of Environmental CSR practices engaged in by a company on its brand equity

Similarly, given the high level of firms’ concentration in high competitive markets, individuals would have more brands to choose from. These consumers will be interested in buying products coming from companies that are deemed “superior” to them in terms of brand value and quality of products. Therefore, I expect companies in high competitive countries to invest a larger amount of resources in activities that can differentiate them from competitors. Therefore, I posit that the relationship will be even stronger, since firms will make use of Social CSR as a strategic way to gain more customers and gain a higher valuation for their brand.

H3b: The higher the country competitiveness index, the stronger the effect of Social CSR practices engaged in by a company on its brand equity

Lastly, regarding Governance CSR, I forecast firms which operate in a very aggressive markets to be more involved in activities which provide a good and efficient governance and increase their brand value. This might be the case because in order to survive in competitive markets, in which environments constantly changes, managers need to do more than just cost minimizing (Allen & Gale, 1999). Directors need to take initiative that show consumers the importance to promote actions that go further their financial gains. Instead, in low competitive market, given that fewer companies are present, consumers’ valuation of a company brand equity might be less affected by its amount of non-financial investments. Therefore, I posit that:

H3c: The higher the country competitiveness index, the stronger the effect of Governance CSR practices engaged in by a company on its brand equity

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the analysis: the level of corruption to study the relationship between the firm investment in CSR and its effect on brand equity. Some countries present inefficient political institutions. As a result corruption is more spread. A recent study found that high level of corruption is correlated with high score for unequal distribution of power in society, and unequal distribution of wealth (Heinrich, 2017). In specific, the level of corruption in a country is defined as the abuse of public power for private gain creates uncertainty regarding the costs of operation in the country (Cuevo-Cazurra; 2006).

The type of political system that is present in a country might affect the level of a company’s investment in CSR and its effect on brand equity. For instance, in low corrupted countries, the government might have a higher presence in the life of companies by giving incentives, an example are tax reduction or support, to those firms that are involved in actions that could benefit the community. Therefore, companies are less prone to be part of unethical and criminal actions and are encouraged to the opposite.

In addition, from the view of customers, individuals’ loyalty and trust diminish when a known company is found to be part of a corrupted operation. I suggest that corruption affects negatively the main relationship. Indeed, even if companies try to involve themselves in more corporate social responsibility activities which increase their brand equity, it is hard for a firm to regain the trust and loyalty from lost customers.

Therefore, I argue that an increase in one dimension of CSR will lead to an increase in the company’s brand equity, and that this relation will be stronger when the firm is located in a low corrupted environment.

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H4a: The higher the country corruption perception index, the stronger the effect of Environmental CSR practices engaged in by a company on its brand equity

Moreover, in corrupted environment, companies’ brand equity might also be less affected by the level of social activities. In order to survive the corrupted environment, firms would be more prone to engage in unethical practices, for instance child labor and bribery. On the contrary, in less corrupted countries, firms will experience less costs related to the business environment which will result in additional involvement in activities aimed to increase the customers’ loyalty and valuation of their brand. For this reason, I argue that:

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2.6 The Conceptual Model

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3. Research Methodology

In this section I underline the method used to test the hypothesis. First, I provide a description of the data source and sample employed. Following, I present the way the variables are measured. Lastly, I examine the model used to run the regression.

3.1 Data source and Sample

After introducing the hypotheses in the previous chapter, this section will propose the quantitative method used to test them. The data source is provided by Thomson Reuters ASSET4 database. Thomson Reuters provides a structured and standardized ESG research data (Economics, Social, Corporate Government) from which I could retrieve the continuously updated CSR compliance level of investments of several companies. The institutional data are retrieved from different sources including World Forum Economy and Transparency international. I consider the period 2012-2016 which I believe it is a good time span to analyze the effect. According to Fang and Yang (2011), a crisis can damage the brand equity of companies. Firms are less willing to invest money on CSR activities and consumers are less influenced by the quality and visibility of a company. In addition, they experience a lower purchase intention. Therefore, in order to be able to compare different countries, among which there are European and American firms, I choose to focus on this time span because it does not include the period the financial crisis occurred. I evaluate the five-year average score for each variable in the analysis in order to have reliable measures to conduct the analysis. The initial sample consisted of about n=5000 firms, however around n=1450 were excluded because of missing data on both ESG and brand equity scores. The final number of company retrieved is of n=3650. Information on the companies are taken from Datastream, consisting of international firms coming from Europe, the U.S., Asia, Australia and New Zealand. Table 1 below illustrates the composition of the sample.

Country _Frequency _Percent _Cum.

Australia 203 5,6 5,6

Austria 13 ,4 5,9

Belgium 26 ,7 6,6

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Denmark 27 ,7 9,2 Finland 25 ,7 9,9 France 96 2,6 12,5 Germany 82 2,2 14,8 Greece 17 ,5 15,3 Hong Kong 63 1,7 17,0 Hungary 4 ,1 17,1 India 96 2,6 19,7 Indonesia 38 1,0 20,8 Ireland 32 ,9 21,6 Italy 41 1,1 22,8 Japan 409 11,2 34,0 Malaysia 32 ,9 34,8 Netherlands 47 1,3 36,1 New Zealand 20 ,5 36,7 Norway 18 ,5 37,2 Philippines 25 ,7 37,9 Poland 27 ,7 38,6 Portugal 9 ,2 38,8 Singapore 22 ,6 39,5 South Korea 114 3,1 42,6 Spain 48 1,3 43,9 Sweden 61 1,7 45,5 Switzerland 51 1,4 47 Taiwan 126 3,5 50,4 Thailand 32 ,9 51,3 Turkey 21 ,6 51,9 United Kingdom 341 9,3 61,2 United States of America 1416 38,9 100,0 Total 3650 100,0

Table 1: Composition of the Sample

3.2 Measurement of variables

3.2.1 Independent Variable

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Corporate Social Performance Model, Triple Bottom Line, Bottom of the Pyramid, the Strategic Concept of CSR. Nonetheless, it is still questioned which one gives the most reliable result. Several research examine the CSR by the use of the rating provided by the external company KLD. I analyze CSR as a multidimensional framework which relies on three ESG dimensions. (Liang & Renneboog). In order to ensure that a firm is socially responsible, there are several ways in which those principles can be measured through different variables. In this thesis, for my empirical analysis, I make use of the ESG performance score retrieved from Thomson Reuters ASSET4, where data are collected through the work of analysts who gather ESG data every year and transform them in units that enables quantitative analysis. ASSET4 has been identified as one of the primary source of ESG data worldwide (http://www.trcri.com). According to Wood (2010), monetary quantitative value of companies’ investment in CSR is more reliable than the figurative commitment. Therefore, I consider the ESG scores1 related to the environment, social, and corporate governance to measure companies’ involvement in CSR. In the database, more than 700 data points are used to evaluated 250+ key performance indicators which are subsequently divided in different categories within three pillars. In particular, I analyze each dimension separately:

First of all, I measure the level of Environmental CSR through the indicator in ASSET4 under the category score “Environmental”. This describes how a company is able to diminish its environmental risks and use of resources. I believe it is a valuable and reliable score because it provides a measure of the emission reduction for each company over the years through their investments in strategies aiming at the decrease of air emissions, waste, and water discharge.

For what concerns the second dimension, Social CSR, the category score “Social” is used in the analysis. I argued that donations and actions towards the community can results in positive brand equity for the firm. Therefore, I make use of this score as it measures the company reputation within the community; the way a company can generate trust and loyalty through its business practices.

Lastly, for what concerns Governance CSR, the category score “Governance” is analyzed. It refers to the extent to which companies ensure effectiveness in their internal operations and the wellness of all their members by creating a vision that integrate both financial and non-financial

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aspects. The score measures a company’s commitment in improving its internal organization, structure and relation between each actor within the firm.

These three measures provide a score that goes from 0 (no investment in specific CSR) to 100 (high investment).

3.2.2 Dependent Variable

There exist different views in regards to which is the best method to measure Brand Equity. Traditionally, accounting based methods were utilized to estimate the value of the business, but in the lastest years, new brand equity valuation methods were provided in the financial and marketing field. For instance, some companies use financial methods by implementing Cost price or Market Price approaches to measure the value. Simon and Sullivan (1993) estimated brand equity at the firm level conducting cross sectional financial market data founded on the theory Tobin’s Q.

In this thesis, in order to calculate the value of Brand Equity, I use the indicator score “Brand Value/client loyalty” retrieved from ASSET4, which measures the total value of a brand in US dollars. I use brand value as brand equity that according to (Aaker et al., 2001; Keller and Lehmann, 2003) represents the same construct. Moreover, I believe it is a reliable measure because the value is calculated on the basis of information retrieved from both public and private sources and compared through the work of specialists.

3.2.3 Moderating variables

Size can be expressed in terms of value added, number of employees, or number of outputs. In this thesis, I measure the size of the organization by considering the number of employees in the firm. In my sample, I was able to retrieve information on several recognized companies with high number of employees. In my regression, I study whether companies’ number of employees produce an effect on the main relationship. I retrieve the specific number on the Worldscope database through Datastream.

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takes into account the public sector without considering also private corruptions. However, CPI compared to other corruption measurements is calculated through information which are retrieved from several reliable institutions. Therefore, I choose to use it in my analysis.

Global competitiveness index (GCI) is provided by the World Economic Forum. Data are retrieved from opinion survey and public organization. Countries are ranked from 1 (low) to 7 (high). The score assesses the level of prosperity provided by countries to their citizens. Competitiveness measures the ability of a company to be able to sell its products in a given market with respect to the ability of other firms.

3.2.4 Control Variables

By referring to previous studies, I examine a set of variables that affect the relationship between CSR and brand equity. These variables are implemented to diminish the effect of confounding factors on the analysis.

First, I control for firm industry. This predictor has to be taken into analysis because depending on the industry to which I refer, stakeholders’ CSR concerns are diverse (Waddock and Graves, 1997), and the company’s brand equity is influenced differently. Industry is a dummy variable, I create as many dummies as the number of industries, expect Industry_C, taken as reference point. I refer to the NACE industry classification codes to distinguish between the different industries (Appendix).

Then, I consider the firm risk. Different levels of risk can have an impact on the firm’s market value (Amit & Wernerfelt, 1990). Indeed, high level of risk might influence the firm’s opportunities by generating uncertainty in the company. Managers can be influenced by their risk aversion and might not invest on projects which could benefit the brand valuation of a company. Moreover, this actions could lead to an increase or decrease of the company’s reputation and brand value. Referring to a previous study, I measure Risk using long term debt to total assets ratio (Waddock and Graves, 1997).

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In order to control this variable, I retrieved data on the average ROA from 2012-2016 using Net income taken from the Orbis database.

3.3 Empirical Approach and Preliminary Analysis

I will conduct an Ordinary Least Squares (OLS) multi-regression analysis through the use of SPSS. Through an OLS analysis, I find results on my previous predictions and examine if those correlations are significant.

However, before I build the OLS regression model, I present below a correlation table of my variables and I observe the level of correlation between them. Moreover, prior to the analysis, it is essential to control for some errors that might occur. I control the presence of normality, multicollinearity, linearity, and heteroscedasticity.

With regard to normality distribution, according to the central limit theorem, the means of random samples from any distribution will themselves have a normal distribution. Therefore, when the sample has hundreds observations, the distribution of data can be ignored (Altman & Bland, 1995). I tested the linearity by plotting the independent and the dependent variables. The resulting scatter plot diagram is linear.

In statistic, multicollinearity is present when two or more independent variables in the regression are highly correlated among each other. On SPSS, this phenomenon can be checked through the use of the tolerance statistics or the variance inflation factor (VIF). I make use of the VIF. If the value is higher than 10, then there is an evidence of it (Graham, 2003). After calculation, the average VIF found is lower than 10, therefore we can conclude that the predictor variables are not affected by multicollinearity (see Table A2 in the Appendix).

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4. Results

After I controlled for the OLS assumption, the regression results are analyzed in this section. First of all, I look at the descriptive statistics, which show all the variables identified for the analysis. Later, I check for the significance of the results.

4.1 Descriptive statistics

In table 2 and table A4, the descriptive statistics and correlation matrix are exhibited. By looking at the mean of the three level of CSR (E, G, S), it is evident that all the firms evaluated invest at least a small portion of their profits on socially responsible activities. While, for what concerns the size, the high level of standard deviation is explained by the large amount of firms considered in the analysis, which compromises both large companies and small ones.

Variable _N _Minimum _Maximum _Mean _{Std. Deviation}

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Table 2. Descriptive statistic

In table 3, a summary of the analysis is reported. Model 1 analyses the first hypothesis, by correlating the three level of CSR - Environmental, Social, Governance - with the brand equity. In model 2, I consider the moderating effect of Size in the main relationships. In model 3 and 4, the moderating home-country level variables of Competition and Corruption indexes are added in the regression.

4.2 Baseline results

Table 3 shows the results of the OLS estimates.

Model 1 studies the effects of CSR E, CSR S, CSR G on the brand equity of a company. The regression shows a positive correlation for both CSR E and CSR S, significance at 0,01, and a negative one related to CSR G. These outcomes imply that the brand equity increases when companies engage in Environmental and Social activities. While for CSR G, there is a small negative effect on the dependent variable, but not strongly significant. Therefore, H1a and H1b are supported by the results. As expected, Risk, D_IndustryJ and D_industryG are found to be predictors (p<0.05) of the relation, implying that risky investments have a higher positive effect on the company compared to risk adverse ones.

In model 2, I add to the analysis the interaction term Size. As shown, both CSR E and CSR S remain strong predictors in the analysis. The moderating variable Size is only statistically significant for the main relationship between CSR S and brand equity (p<0,01). Therefore, only H2b is supported in the analysis. As shown by the result, when the company size is large, the stronger is the effect of investments towards the community though donations and social projects

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on its brand equity. However, I found no support for Hypothesis 2a and 2c, for what concern the effect of governance and environmental CSR on brand equity.

Table 3. OLS regression results

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D_IndustryS ,477 (1,25) ,377 (1,95) ,516 (1,26) ,601 (1,25) Size 2,609***(,4) SizeXCSR_E -,547 (,603) SizeXCSR_G -,169 (,238) SizeXCSR_S 1,882***(,64) Corr. index -1,113***(,3) CorrXCSR_E -,656 (,469) CorrXCSR_G CorrXCSR_S 1,025**(,478) Comp. Index ,467* (,279) CompXCSR_E -,361 (,495) CompXCSR_S ,338 (,491) CompXCSR_G ,379 (,303) Costant 38,92***(,602) 45,235***(,37) 45,279***(,38) 45,639***(,39) Observations 3650 3650 3650 3650 R-squared ,120 ,197 ,114 ,117

Standard errors in parentheses ***p<0.01, **p<0.05, *p<0.1

In Model 3, I consider the country-level moderating variable competition index and its effect on the main relationship. The results show that competition level is not a statistical significant interaction term in the relationship between different level of CSR and brand equity. Hence, I do no find support for Hypothesis 3.

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subsequently higher level of brand equity. This outcome supports H4b, while the others, H4a and H4c, are not supported.

4.3 Robustness test

In the main model, the dependent variable used in the regression is “brand equity” score, which provides a value from 0 to 100 regarding the financial valuation of a company’s brand. Hence, it considers brand value as a financial asset. However, as I assessed in the theoretical background, there are different ways to measure the concept.

A common method in empirical studies to examine more in depth the regression analysis is to proceed with a robustness check. Indeed, a researcher might examine whether by adding, removing or modifying a repressor in analysis, that creates different results for the undergoing study or if it enhances the validity of previous outcomes.

For this reason, I decided to conduct a robustness test for my analysis in which one of the variables, more precisely the dependent variable, is modified. I take into account brand equity, not by looking at the financial valuation of the firm, but by considering consumers’ satisfaction of the brand, hence through a consumer level approach. On Datastream, I retrieved from Asset4 the “Client Loyalty/Client satisfaction improvements” score, which measures whether the company reported an improvement of the satisfaction and loyalty of its costumers. Companies by committing to social responsible activities can increase the loyalty of consumers towards the brand, and subsequently their financial profits. Similarly to brand equity’s reasoning, I argue that consumer will feel more attached to products/brand image of firms that look beyond their operational activities. Moreover, previous studies affirm that if a customer keeps buying products from a certain company, regardless of price or competition, it implies that there exists brand value for the individual (Rickardsson, Stierna & Stark, 2006). I re-performed the analysis with the new regressor.

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gets stronger. Thereof, it does support H2b, which argued for a strengthened relation for the moderator, and it is consistent with the original model.

However, in Model 3, I found a different result for what regard the competition moderator index. Previously, in the main model, the variable is not significant. On the contrary, the use of client loyalty/satisfaction improvement as dependent variable allows for a significant and negative results for Social CSR on the dependent variable. In specific, as the competition index in a country increases, the relationship between Social CSR and brand equity decreases. The result opposes to my reasoning that the relationship is stronger in competitive markets because the company uses CSR as a way to differentiate themselves from its competitors. On the contrary, perhaps the results could be explained by the fact that the higher the competition level, the more the concerns of the company are about being competitive in the market rather than social responsible towards the community. Hence, H3b is neither supported in the robustness check nor in the main regression.

Lastly, for Model 4 which studies the effect of corruption in the main relationship, the test supports the robustness check since it found a positive and significant relationship (p<0,01) for the interaction effect on Social CSR and brand equity. This suggests that the lower is the corruption level in a country, the higher will be the purchasing power for customers. Consequently, this will affect the importance for a company to acquire a strong brand equity. Consumers will be more concerned in the commitment of a firm to social activities, which will affect additionally their brand valuation. Hence, H4b is supported.

Therefore, the robustness check validates my previous results identifying a positive relationship between Social CSR and brand equity and two significant interaction terms, size and corruption index. However, further research is needed to understand the correlation between Environmental CSR and brand equity, which is not sustained by the robustness check.

5. Discussion

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the political and legal characteristics and how they affect the business environment. I retrieved data on the corruption and competition level calculated in several international countries.

In my analysis, Hypothesis 1a and Hypothesis 1b are significant. They support the statement that companies which engage in Social and Environmental CSR show a higher brand equity. This is an interesting result as it suggests that consumers deem very highly a company that commits in pollution reduction’s activities and it is green friendly. The same applies for those firms that invest in social projects and donation for the community. This implies that investing in Social and Environmental CSR is beneficial for a company both for its financial valuation and for its positive impact on the society. Instead, governance CSR is not significant, it might not drive brand valuation. A possible explaining might be that governance CSR is viewed more as a strategic plan of the company rather than an investment in corporate responsible activities. The internal actors in the organization do not perceive those actions as beneficial for them but more as a way for the company to be more productive and profitable. In the same time, it is evident that social activities drive consumer perception of a brand, and influence the individuals’ purchasing choice. As stated by Kumar Panda (2017), consumers search for companies that can bring benefit to the society living conditions. However, in the robustness check, only social CSR is significant, this weakens the result for what concerns environment projects. The reason could be that consumers are more attracted by companies that engage in social activities, which are more visible, or perhaps they do not value the protection of the environment as highly. Another reason could be that depending on the industry considered, some stakeholders are more prone to value social over environmental CSR projects. My database ASSET4 does not evaluate the consumer perception level but it has a more financial view. Hence, the not significance of the hypothesis 1c could be due to measurement bias.

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of resources that a company possess, it depends rather on whether consumers are aware of a company’s responsible actions. The concept of visibility should be studied more in depth in research. Hence, only H2b is supported, which predicted a positive interaction term for company size in large companies.

In addition, this thesis provides empirical evidence of the influence that institutions might have on a company’s business organization and its investments in terms of environmental, social and governance scores. In the analysis, by considering country-level scores, I study whether there exists a correlation. In order to check for evidence, I make use of two moderating variables which consider distinct categories of institutions, those are the legal and political environment in a country.

For what concern the second interaction term, the level of competition in a country is found to be not significant as a moderator of the main relationship. This is contradictory with the idea that in more competitive countries, companies are more socially involved as a strategic way to beat the competition. However, when the robustness test was performed, it was found that the interaction term is significant for social CSR on brand equity. In specific, when the analysis takes a consumers’ view point, the relation is strengthened in low competitive market. Therefore, the result was opposed to what I suggested in the hypothesis. As stated by Francoise Quairel-Lanoizelee (2011), CSR strategy should not be seen as a competitive advantage for a company. In particular, he continues that the only situation in which a company can invest in CSR and dominate the market is when the advantage is not easily imitable. However, given the contradictory results, a further research should be performed. Hypothesis 3 are not supported in the analysis.

Furthermore, the level of corruption in a country is considered as a moderator in the regression. Not surprisingly, H4b is supported. In low corrupted countries, the relationship between social CSR and brand equity in stronger. In corrupted countries, often the government is in the hand of a group of few individuals, which only seek to advance their own interests. Thereof, these people do not search for ways to improve the wellbeing of the society or to incentive companies to implement actions that go further their profit strategy. This hypothesis is also supported and enhanced through the robustness check.

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the higher level of variance in the sample. For instance, more than half of the companies selected comes from countries which are developed economies, hence the results show low scores for their corruption index. The sample does not analyze companies in which the corruption level is at the extreme higher level. The results may change in those cases. Moreover, the level of corruption in a country is hard to be calculated and cannot be quantified in a single dimension.

5.1 Theoretical implications and recommendations

This study has a number of theoretical implications. First of all, I find support for a relationship between brand equity and Social CSR involvement. Also the relationship between the dependent variable and Environmental CSR is underlined, except in the robustness check. These results provide an advancement to the field where most papers focus on the study of a company’s financial performance and at CSR as a single multidimensional construct. Among the few papers, Torres et al. (2012) found a positive relationship between CSR and brand equity. However, those only focused on a generalization of the concept of CSR. In this thesis, I provide a wider understanding of CSR, which is based on three pillars – environmental, social and governance performance – and how those have a different impact on the brand evaluation of a firm.

Moreover, in this study, I examined Social CSR attentively and I found that this specific dimension of corporate social responsible is the one that mostly interacts with the brand equity of a company, providing a contribution that was prior unknown in research. Therefore, the financial worth of a brand is enhanced in companies that commit to social donations and activities for the community. This result is found both when I consider brand equity as a financial value and when it is measured as the consumers’ loyalty and satisfaction improvement.

Second, most of the earlier literature focused on the analysis of CSR by comparing it with a company’s ROA. In this study, I contribute to the research of CSR, by analyzing the three dimensions and their impact on brand equity and from two different point of views, firm and country-levels.

Master Thesis A FIRM PERSPECTIVE ON THE RELATION BETWEEN DIFFERENT LEVELS OF CSR - ENVIRONMENTAL, SOCIAL, GOVERNANCE - AND BRAND EQUITY

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