The CSR-CFP relationship: moderating role of trust

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The CSR-CFP relationship: moderating role of trust

Cyril Kuipers

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Thesis MSc. Finance

University of Groningen

Faculty of Economics and Business

Supervisor: dr. R.O.S. Zaal

Date: June 7, 2018

Abstract

This study examines the CSR-CFP relationship from the perspective of a moderating effect of country-level trust. Over the period of 2009-2015, firms operating in high trust level countries, received significant positive returns from CSR activities as measured by Tobin’s Q. This relationship is significant for an aggregate measure of CSR incorporating Environmental, Social and Corporate Governance dimensions. The results are inconclusive for the individual dimensions of CSR. The findings in this paper suggest that firms can have significant positive financial returns from investing in CSR, if the country-level of trust in their operating country is high.

Key words: Corporate Social Responsibility, Corporate Financial Performance, Trust, Social Capital

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Corporate Social Responsibility (CSR) has become an integral part of doing business, and firms are increasingly engaging in activities that are value-adding to society and the environment. However there is no clear consensus on the financial value-added for these firms that invest in CSR. This paper explores this relationship more extensively and incorporates a dimension of country-level trust into the CSR and corporate financial performance (CFP) relationship. Discussions on the importance of trust in relation to economics and finance are not new. Virtually every economic transaction brings an element of trust, and this element of trust is used as a vehicle to reduce transaction costs. However, the relationship between trust and corporate social responsibility is relatively unexplored. The main aim of this study is to extend upon the findings of Lins et al. (2017) who investigated the moderating effect of trust on the corporate social responsibility (CSR) and corporate financial performance (CFP) relationship during the financial crisis in the US.

The CSR-CFP phenomenon is one that has been studied extensively, but until now the results have been inconclusive about the true direction of this relationship. The classical view in finance holds firms responsible to maximize the value for its shareholders and to maximize its profits (Friedman, 1970). However, in modern times this view is too limited as the responsibility of firms has extended beyond mere profit maximization for its shareholders, such as improving other stakeholder’s welfare, providing employee benefits and help sustaining the environment (Liang & Renneboog, 2017). Such ‘other’ stakeholder oriented behavior is often defined as corporate social responsibility (CSR) which has become an integral part of business activities for companies (Kitzmueller & Shimshack, 2012). But whether this type of behavior is valued by the market remains ambiguous. Bird et al. (2007) argue that while the market accounts for spending resources on CSR in compliance to regulation to avoid future litigation, it does not value CSR that go beyond this perspective.

In relation to society, the exact meaning of the term CSR remains undefined, whether it is an attitude (caring about the environment), or an action (paying fair wages) (National Survey on Corporate Social Responsibility, 2016). The survey also shows that 66 percent of consumers are reluctant to believe that companies CSR strategies are genuine, and are only pursued in an attempt to improve public relations or to serve as a smokescreen for ‘less responsible’ operations, otherwise known as the ‘window-dressing hypothesis’.

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measuring the direct effect of trust on financial performance. Moreover the construction of a subjective trust variable in relation to an empirical finance concept comes with its own difficulties. Therefore this paper measures the effect of trust on corporate financial performance (CFP) through the interaction with Corporate Social Responsibility (CSR).

The CSR-CFP relationship has received considerable interest from the academic field of Finance in the past. Moreover, in their book Sacconi & Lorenzo (2011) outline that Corporate Social Responsibility is a good proxy for a firm’s social capital. A firm’s social capital in this sense is defined as the ability of a firm to quickly rebuild stakeholder trust after it has endured a shock as for example happened during the financial crisis. Therefore the relationship between social capital and trust should not be overlooked. Moreover they suggest that there is a general consensus among practitioners and corporations that CSR investments generate firm-level social capital and trust. In this paper the relationship between corporate social responsibility and corporate financial performance is argued to be affected by the level of trust within a country. It is hypothesized that CSR activities lead to significant positive financial performance, as long as these activities are perceived to be sincere and not an attempt to improve public relations. The research question that this study aims to answer is: ‘Is there a moderating effect of country-level trust on the relationship between Corporate Social Responsibility and Corporate Financial Performance’.

Data on the firms’ CSR ratings are obtained from the ESG Asset4 Database. This database independently rates firms on a large variety of Environmental, Economic, Social and Corporate Governance metrics. This paper employs a dataset of 375 firms totaling over 2500 firm-year observations from 9 countries over the period 2009-2015. For this sample, this paper first investigates the relationship between the independent CSR variables and dependent variable corporate financial performance. The results show that there exists a significant positive relationship between the aggregate measure for CSR and CFP. However, when taken independently, the results remain inconclusive about the individual aspects (Environmental, Social, Corporate Governance) of CSR on CFP.

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The remainder of this paper is organized as follows. Section 2 outlines the previous literature into the CSR-CFP relationship, and more specifically the role of trust and social capital. The section concludes with the development of various hypotheses used to test the CSR-CFP relationship in correspondence to the moderating effect of trust. In section 3, the data and methodology for this paper are outlined. First the construction of the variables and the various data sources are described and motivated. Then the interaction between the various variables is elaborated upon and summarized in the methodology section. Section 4 outlines the results of this study, starting with the descriptive statistics followed by the results of the regression. This section concludes with various robustness tests to address various issues with the empirical design. The last section of this paper discusses the results and conclusions. Moreover this section outlines the limitations of this study and recommendations for further research.

2. Literature review and hypothesis development

2.1 Corporate Social Responsibility (CSR)

Over the last decades, corporate social responsibility has received considerable attention from researchers in the field of business. Moreover, it has become a prominent and integral part of doing business (Seidi et al., 2015). In their paper, van Beurden & Gössling (2008) state that: “CSR is an answer to the societal uncertainties that business corporations have to cope within the present dynamic, global, and technological social contexts”.

The definition of CSR in the literature is not always as clear-cut and there is no consensus on what actually constitutes the social responsibility of firms. Bernabou & Tirole (2010) outline the various definitions of CSR in the literature and prescribe three overarching views on the concept. The first view is a ‘win-win’ approach, where firms increase profits by being a good corporate citizen. Related to this vision, Liang & Renneboog (2017) define corporate social responsibility as ‘doing well by doing good’. The second view is ‘delegated philanthropy’ which is related to the willingness of stakeholders (investors, customers, employees) to sacrifice financial benefit in favor of social goals. The third view ‘insider-initiated corporate philanthropy’ reflects the desires of internal management to engage in socially beneficial activities.

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obligation to engage in activities that lead to ‘social betterment’ and thus internalizes the issue within the firm. The obligation may be recognized and acted upon proactively by the firm, or enforced by the government. The action-oriented view comes from the external pressures from society that leads to firms investing in CSR. To put the definition of CSR in a general, understandable perspective, the World Business Council for Sustainable Development states that: “Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development, while improving the quality of life of the workforce and their families as of the local community at large” (Holme & Watts, 1999).

The neoclassical view in finance posits that a firm’s exclusive purpose is to maximize its profits (Friedman, 1970). This view relies on the basis that a firm needs to act in the best interest of its stakeholders. However, the difficulty lies in defining stakeholders. This classical view does not look further than the shareholders of a firm, in whose interest it is to maximize share value. Stakeholder theory (Freeman, 1984) advocates that managers should act in the interest of all stakeholders and not merely shareholders. Stakeholders in this sense includes all individuals, groups and communities who are affected by, or have an impact on the welfare of a firm. Stakeholder management is the process of aligning the interests and expectations of various stakeholder groups with the objectives of managers (Cai et al., 2012).

An important distinction between the classical view and the modern view is not the existence, but the position of social responsibility within the core processes of a firm. Corporate social responsibility is often defined as moving beyond what is expected from a firm in a voluntary manner. Emphasis lies on these social actions being voluntary and hence separating these practices from the core processes and responsibilities of a firm (Manne & Wallich, 1972). The discussion became less ambiguous when changes to social legislation incorporated the social and environmental responsibility into a firm’s strategy by force of law. Examples are the creation of the Environmental Protection Agency (EPA) and the Equal Employment Opportunity Commission (EEOC) (Carroll, 1991). However, one could also argue that this just raises the bar of what is expected from firms, and could still define CSR as moving beyond that point.

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because of CSR. Lastly, Carroll (1991) divides CSR into four components: economic responsibilities, legal responsibilities, ethical responsibilities, and philanthropic responsibilities.

There is difficulty in measuring CSR as it operates on different levels within and outside organizations (van Beurden & Gössling, 2008). In an attempt to put this into perspective, Wood (1991) divides CSR into three principles. The first principle is that of legitimacy which operates on an institutional level. The second principle is that of public responsibility, which operates on an organizational level. The third and last principle is that of managerial discretion, which operates on an individual level. CSR assesses a company’s general approach to a wide range of concerns relevant to the social field (Waddock & Graves, 1997).

2.2 CSR & Corporate Financial Performance (CFP)

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Another argument by Bernabou & Tirole (2010) is that financial markets are still learning about CSR, and therefore CSR is undervalued.

In earlier days Cornell & Shapiro (1987) found evidence of a relationship between corporate stakeholders and consequent financial performance. Cochran & Wood (1984) found a positive relationship between a firm’s asset age and its corresponding commitment to CSR activities. Controlling for this relationship, they also found a positive relationship between CSR and CFP. Moreover, Dowell et al. (2000) also found a significant positive relationship between a firms commitment to environmental standards and its market performance. Deng et al. (2013) analyzed the relationship between CSR and stakeholder value maximization by looking at post-merger firm performance. Their results show that high CSR acquirers realize larger increases in operating performance in both the short and long-term compared to low CSR acquirers.

In contrast, a large collection of studies find a negative relationship between CSR and CFP. In their paper, Brammer et al. (2006) found significant negative results using stock returns in the UK. Moreover, they found that holding a portfolio of the least socially desirable stocks leads to considerable abnormal returns. Boyle et al. (1997) used a sample of defense contractors, who were asked to sign the ‘Defense Industries Initiative’ as a public commitment to ethics. Their results showed a negative relationship between signing the agreement and future cash flows. In response to these results they put forward two explanations: 1) the market interpreted the initiation of this agreement as predictor for future sanctions or 2) as a penalty for social irresponsibility in this market.

The ambiguous results of the relationship between CSR and CFP is even more pronounced by various studies who found no significant relationship at all. In their paper, Seifert et al. (2004) analyzed the relationship between corporate generosity in the form of charitable donations and consequent financial performance. Their results showed no significant relationship between this form of corporate social behavior and profits. In addition, Moore & Robson (2002) also found no significant results when analyzing the relationship in the UK supermarket industry. In their study, McWilliams & Siegel (2000) argue that the ambiguous results are explained by misspecification of the models used in the empirical literature. By including R&D as an important determinant of firm performance, they find no significant relationship between CSR and CFP.

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related CSR dimensions, a consistent strategy and those dimensions which are more internal to the firm. In addition, Lin et al. (2009) found that for firms in Taiwan, CSR does not have much impact in the short-run but leads to remarkable long-run fiscal advantages. Nollet et al. (2016) also found evidence that CSR only pays off in the long-run. Their study implies that in order for CSR to serve the interests of the shareholders, companies need to engage in long-run planning and invest sufficient resources to this dimension.

Considering the vast amount of studies who found a positive relationship between CSR and CFP, this paper aims to answer the following hypotheses:

Hypothesis 1a: there is a significant and positive relationship between corporate social responsibility (CSR) and corporate financial performance (CFP)

Hypothesis 1b: there is a significant and positive relationship between environmental aspect of CSR (ENV) and corporate financial performance (CFP)

Hypothesis 1c: there is a significant and positive relationship between social aspect of CSR (SOC) and corporate financial performance (CFP)

Hypothesis 1d: there is a significant and positive relationship between Corporate Governance aspect of CSR (CGV) and corporate financial performance (CFP)

2.3 Trust and social capital

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Related to the concept of trust is social capital, from which trust is often ultimately derived Lins et al. (2017). However, social capital is a broader concept and multidimensional in nature, and therefore also harder to measure. In this sense it is important to outline the difference between trust and social capital. Social capital is the ability of a firm to rebuild trust after it has endured a shock. For example, during the financial crisis markets experienced a large shock to trust from society. Lins et al. (2017) hypothesize that firms who had large social capital, were able to regain this trust easier and thus recoup the losses quicker in response to the financial crisis than firms with lower social capital. In their paper, Scrivens & Smith (2013) outline four interpretations of social capital: 1) personal relationships 2) social network support 3) civic engagement and 4) trust and cooperative norms. As outlined by Lins et al. (2017) the last two interpretations are the most relevant to economics and finance and therefore to this study in particular. The civic engagement comprises all activities through which agents contribute positively to society (for example corporate giving and volunteering). The cooperative norms and trust factor encompasses how agents behave toward each other and as member of a society. These contribute positively towards the economy through a reduction in transaction costs (higher trust reduces the need for formal contracts) and better cooperation between members of a society which leads to a more efficient allocation of resources.

The concepts of trust and social capital have been studied extensively, however relatively little in relation to firm performance. For example, Putnam et al. (1993) show economic development is higher in areas of higher social capital. Furthermore, Sapienza & Zingales (2012) analyzed the effect of trust on an individual’s likelihood to increase his/her investment in the stock market, accounting for expectations for the S&P500 market to rise or fall. They found a significant positive effect of trust on this relationship. Moreover, in another paper, Guiso et al. (2004) analyzed the relationship between social capital and financial development in Italian households. They found that in high-social-capital areas, households invest more in stock, less in cash and more frequently use checks and have easier access to institutional credit. Knack & Keefer (1997) investigated the relationship between social capital and economic growth and found a significant positive relationship.

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a society level variable for trust, the average is taken from all individual levels of trust of the people who participated in the survey.

2.4 Trust, CSR & CFP

This paper builds upon the conception that the relationship between CSR and CFP is moderated by country-level trust. However, there are also studies on the relationship between CSR and trust. From a CEO survey conducted by PriceWaterhouseCoopers in 2013, CEOs mentioned to plan on recovering stakeholder trust after the financial crisis by investing in CSR (PricewaterhouseCoopers, 2013). However, academic research studying this relationship between CSR and trust is limited. Sacconi & Antoni (2011) wrote a book on this subject and outlines analytical studies that show that firms can build trust through CSR. Furthermore, Eccles et al. (2014) investigated the relationship between corporate sustainability and organizational processes and performance. One of their key findings suggested that high CSR firms show higher stakeholder engagement over the long term. Furthermore, the notion of reciprocity refers to the likelihood of stakeholders to ‘do whatever it takes’ to help firms in case of a crisis. This reciprocity effect is expected to increase as an individual’s trust in these firms increases.

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Therefore the last relationship this study aims to test is the interaction between country-level trust, corporate social responsibility and corporate financial performance. The primary argumentation in favor of this hypothesis is in line with Lins et al. (2017) who follow Putnam (2000) who argues that ‘an agent’s social capital is more valuable in a society where overall social capital is higher. Framing this argument in the context of the CSR-CFP relationship: ‘’in regions where people have a lower propensity to trust, CSR activities are less likely to be viewed by investors and other stakeholders as trust-enhancing activities; instead they may be perceived as window dressing and less genuine activities. As such, they are less likely to pay off.’’. In this context it is important to distinguish between a firm’s social capital in the form of CSR, and society’s social capital in the form of trust. It is the moderating effect of society-level trust, on the relationship between firm-level CSR and firm-level CFP that is of particular interest in this study. In light of this view, the following hypotheses can be formulated as follows:

Hypothesis 2a: The positive significant effect of CSR on CFP is moderated by country-level trust.

Hypothesis 2b: The positive significant effect of Environmental CSR on CFP is moderated by country-level trust.

Hypothesis 2c: The positive significant effect of Social CSR on CFP is moderated by country-level trust.

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3. Data and methodology

3.1 Data

3.1.1. Tobin’s Q

The dependent variable of interest for this study is firm financial performance. This paper analyses the impact of the cost perspective of CSR on financial performance. Ideally, an accounting measure such as ROA (return on assets) is preferred to assess this relationship. However, many researchers studying the relationship between CSR and CFP have implemented the use of Tobin’s Q. Tobin’s Q is a widely employed measure for firm value in accounting, finance, and economics (Cai et al. (2012). One of the advantages of using Tobin’s Q over accounting measures such as ROA is to avoid accounting manipulations (Lioui & Sharma, 2012). Moreover (Luo & Bhattacharya, 2006) advocate the use of tobin’s q as it is forward-looking and based on market value, whereas accounting-based returns are related to backward-looking firm profitability. As costs related to CSR persist for more than one period, a forward-looking measure also incorporating growth opportunities is preferred. In line with Lioui & Sharma (2012) Tobin’s Q is defined as the ratio of the market value of equity plus total debt divided by total assets. Therefore the dependent variable Tobin’s Q is defined as follows in equation 1.

1. 𝑇𝑜𝑏𝑖𝑛′𝑠𝑄_𝑖,𝑡 =𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦_{Total Assets}𝑖,𝑡+ 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡𝑖,𝑡 𝑖,𝑡

3.1.2 CSR

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paper focuses on three of the four pillars; Social and Environmental and Corporate Governance to assess a firm’s commitment to CSR activities. The environmental performance measures are related to resource reduction, emission reduction and product innovation in favor of the environment. The social performance dimension refers to product responsibility, community, human rights, diversity, training and development, health and safety, and employment quality (Luo et al., 2015). The Corporate Governance Pillar focuses on factors such as board structure, compensation policy, board functions, financial and operational transparency, shareholder rights and vision and strategy. There is discussion in the literature involving the inclusion or exclusion of the Corporate Governance dimension into an aggregate CSR measure. This potential issue is addressed in section 4.5 where the CGV aspect is excluded as a robustness test.

An aggregate measure for CSR is computed to incorporate the Environmental, Social and Corporate Governance pillar into one variable to represent a firm’s commitment to CSR. The aggregate measure is the average of a firm’s score all three of the CSR pillars as presented in equation 2:

2. 𝐶𝑆𝑅_𝑖,𝑡 =𝐸𝑛𝑣𝑖𝑟𝑜𝑛𝑚𝑒𝑛𝑡𝑎𝑙 𝑆𝑐𝑜𝑟𝑒𝑖,𝑡+ 𝑆𝑜𝑐𝑖𝑎𝑙 𝑆𝑐𝑜𝑟𝑒₃ 𝑖,𝑡+ 𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝐺𝑜𝑣𝑒𝑟𝑛𝑎𝑛𝑐𝑒 𝑆𝑐𝑜𝑟𝑒𝑖,𝑡

3.1.3 Trust

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3.1.4 Control variables

Aside from the dependent and independent variables. A number of control variables are included into the model that affect firm financial performance. Firstly, a proxy for firm size is included to account for a positive ‘size effect’ by incorporating the natural logarithm of total assets (Cai et al., 2012). Second, leverage is included and defined as (Total Debt/Total Assets). Capital structure is expected to have a negative effect on growth opportunities for firms and consequentially on long term financial performance as measured by Tobin’s Q (Lang et al., 1996). Moreover, Leverage is often modelled as a proxy for firm risk in CSR related studies (Lioui & Sharma, 2012). Third, the controlling effect of return on assets is included. ROA is often used as a measure for firm financial performance similar to Tobin’s Q. However in this study it was preferred to use Tobin’s Q, ROA is still used as a control variable. Fourth, one year sales growth (Sales Growth) is added to the model. Sales growth is expected to have a positive impact on financial performance (Odalo et al., 2016). Lastly, capital expenditures as a ratio to assets is (Capex/Total Assets) incorporated into the model. Following Titman et al (2004), even though an increase in CAPEX is related to high past returns, firms that do will face return reversal in the long-term, resulting in expected negative benchmark-adjusted returns. An overview of all the variables in this study, the data sources through which they have been accessed and further specification can be found in table 11 in Appendix B.4.

3.2 Sample selection

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3.3 Methodology

3.3.1 The CSR-CFP relationship

To test the hypotheses formulated in section 2, several panel regression are performed. However, there are a few characteristics of the data that have to be taken with care. Studies of the CSR-CFP relationship are subject to endogeneity problems arising from the relationship between CSR and CFP (Cai et al., 2012) (Lioui & Sharma, 2012) (El Ghoul et al., 2017). The endogeneity problem constitutes as higher CFP leads to more available resources to be allocated to CSR activities. In this case, OLS estimation leads to biased results. There is a wide range of approaches to deal with this endogeneity problem. This study takes the first lag of all independent variables to control for this endogeneity effect in line with previous studies (Lioui & Sharma, 2012) (Cai et al., 2012).

A second problem in panel regression estimations is a heterogeneity issue over the cross-sections. This problem arises when variation in the coefficients can be attributed to differences in firm characteristics across the sample. For example, differences in manager’s personalities, views on CSR, or corporate governance in general may lead to possible bias. This unobserved heterogeneity may therefore lead to biased results. To account for this heterogeneity issue, a random effects or fixed effects model can be employed. In a fixed effects model, the regressors are demeaned with their group means (Lioui & Sharma, 2012). Moreover, it allows the intercept to vary across cross-sections but not over time. Therefore it allows for heterogeneity in the intercepts for various cross-sections. The random effects model assumes the cross-sectional effect to be random, and assumes a global constant with a random disturbance around it. In order to decide between a fixed effects or random effects model, a Hausman test is conducted. The Hausman Test is used to assess whether there is correlation between the individual unobserved random effects. The null hypothesis states that there is no correlation. Therefore, rejection of the null hypothesis means that there is significant correlation between the random effects, and therefore a fixed effects model is preferred. The results of the Hausman Test are reported in Table 6 in Appendix A.1. The results of this test show that the null hypothesis is rejected (p < 0.000) and therefore the model incorporates both industry and time fixed effects. Lastly, the model uses white standard errors clustered at firm level to account for possible heteroskedasticity.

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17 1. 𝑇𝑜𝑏𝑖𝑛′𝑠𝑄_𝑖,𝑡 = 𝑏₀+ 𝑏₁𝑥𝐶𝑆𝑅_{𝑖,𝑡−1}+ 𝑏₄𝑥𝐿𝑁𝐴𝑆𝑆𝐸𝑇𝑆_{𝑖,𝑡−1}+ 𝑏₅𝑥𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒_{𝑖,𝑡−1}+ 𝑏₆𝑥𝑅𝑂𝐴_{𝑖,𝑡−1}+ 𝑏₇𝑥𝑆𝑎𝑙𝑒𝑠 𝐺𝑟𝑜𝑤𝑡ℎ_{𝑖,𝑡−1}+ 𝑏₈𝑥𝐶𝐴𝑃𝐸𝑋_{𝑖,𝑡−1}+ 𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑦_𝑖,𝑡+ 𝑦𝑒𝑎𝑟_𝑖,𝑡+ 𝑒_𝑖,𝑡 2. 𝑇𝑜𝑏𝑖𝑛′𝑠𝑄_𝑖,𝑡 = 𝑏₀+ 𝑏₁𝑥𝐸𝑁𝑉_{𝑖,𝑡−1}+ 𝑏₄𝑥𝐿𝑁𝐴𝑆𝑆𝐸𝑇𝑆_{𝑖,𝑡−1}+ 𝑏₅𝑥𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒_{𝑖,𝑡−1}+ 𝑏₆𝑥𝑅𝑂𝐴_{𝑖,𝑡−1}+ 𝑏₇𝑥𝑆𝑎𝑙𝑒𝑠 𝐺𝑟𝑜𝑤𝑡ℎ_{𝑖,𝑡−1}+ 𝑏₈𝑥𝐶𝐴𝑃𝐸𝑋_{𝑖,𝑡−1}+ 𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑦_𝑖,𝑡+ 𝑦𝑒𝑎𝑟_𝑖,𝑡+ 𝑒𝑖,𝑡 3. 𝑇𝑜𝑏𝑖𝑛′𝑠𝑄_𝑖,𝑡 = 𝑏₀+ 𝑏₁𝑥𝑆𝑂𝐶_{𝑖,𝑡−1}+ 𝑏₄𝑥𝐿𝑁𝐴𝑆𝑆𝐸𝑇𝑆_{𝑖,𝑡−1}+ 𝑏₅𝑥𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒_{𝑖,𝑡−1}+ 𝑏6𝑥𝑅𝑂𝐴𝑖,𝑡−1+ 𝑏7𝑥𝑆𝑎𝑙𝑒𝑠 𝐺𝑟𝑜𝑤𝑡ℎ𝑖,𝑡−1+ 𝑏8𝑥𝐶𝐴𝑃𝐸𝑋𝑖,𝑡−1+ 𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑦𝑖,𝑡+ 𝑦𝑒𝑎𝑟𝑖,𝑡+ 𝑒𝑖,𝑡 4. 𝑇𝑜𝑏𝑖𝑛′𝑠𝑄𝑖,𝑡 = 𝑏0+ 𝑏1𝑥𝐶𝐺𝑉𝑖,𝑡−1+ 𝑏4𝑥𝐿𝑁𝐴𝑆𝑆𝐸𝑇𝑆𝑖,𝑡−1+ 𝑏5𝑥𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖,𝑡−1+ 𝑏₆𝑥𝑅𝑂𝐴_{𝑖,𝑡−1}+ 𝑏₇𝑥𝑆𝑎𝑙𝑒𝑠 𝐺𝑟𝑜𝑤𝑡ℎ_{𝑖,𝑡−1}+ 𝑏₈𝑥𝐶𝐴𝑃𝐸𝑋_{𝑖,𝑡−1}+ 𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑦_𝑖,𝑡+ 𝑦𝑒𝑎𝑟_𝑖,𝑡+ 𝑒𝑖,𝑡

Where Tobin’s Q is defined as the ratio of the market value of equity plus total debt divided by total assets. The variable CSR is an aggregate measure for the environmental and social score. ENV and SOC are the individual scores for environmental CSR and social CSR respectively. LNAssets is the natural logarithm of assets to account for a possible size effect. Leverage is the ratio of total debt to total assets. Return on assets is an alternative measure of corporate financial performance. Sales Growth is the one year growth in sales. Capex is the total capital expenditures scaled by total assets. Lastly, dummies for industry and year are included into the model to account for firm fixed effects and time fixed effects respectively and 𝑒_𝑖,𝑡 is the error term. The subscript i and t denote the time and firm index.

3.3.2 The moderating effect of trust on the CSR-CFP relationship

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time-invariant, and many studies studying trust investigate a shock to trust on a specific dependent variable. Shocks to trust levels occur in relation to a phenomenon which is detrimental to society as a whole, such as the financial crisis or military conflicts. However, because of the time horizon of this study, the countries in the sample, and the availability of data on trust levels in this period, it is assumed that country-level trust is relatively time-invariant between 2009-2015. Moreover, In fixed regression models, any variable that does not change over time is automatically omitted. To circumvent this issue, the regressions account for specific industry and time fixed effects by introducing these variables as dummy variables. Therefore to test hypothesis 2a, 2b, 2c and 2d the following regression equations are tested:

5. 𝑇𝑜𝑏𝑖𝑛′𝑠𝑄𝑖,𝑡 = 𝑏0+ 𝑏1𝑥𝐶𝑆𝑅𝑖,𝑡−1+ 𝑏2𝑥𝑇𝑟𝑢𝑠𝑡𝑖,𝑡−1+ 𝑏3𝑥𝐶𝑆𝑅𝑖,𝑡−1𝑥𝑇𝑅𝑈𝑆𝑇𝑖,𝑡−1+ 𝑏4𝑥𝐿𝑁𝐴𝑆𝑆𝐸𝑇𝑆𝑖,𝑡−1+ 𝑏5𝑥𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖,𝑡−1+ 𝑏6𝑥𝑅𝑂𝐴𝑖,𝑡−1+ 𝑏7𝑥𝑆𝑎𝑙𝑒𝑠 𝐺𝑟𝑜𝑤𝑡ℎ𝑖,𝑡−1+ 𝑏8𝑥𝐶𝐴𝑃𝐸𝑋𝑖,𝑡−1+ 𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑦𝑖,𝑡+ 𝑦𝑒𝑎𝑟𝑖,𝑡+ 𝑒𝑖,𝑡 6. 𝑇𝑜𝑏𝑖𝑛′𝑠𝑄_𝑖,𝑡 = 𝑏₀+ 𝑏₁𝑥𝐸𝑁𝑉_{𝑖,𝑡−1}+ 𝑏₂𝑥𝑇𝑟𝑢𝑠𝑡_{𝑖,𝑡−1}+ 𝑏₃𝑥𝐸𝑁𝑉_{𝑖,𝑡−1}𝑥𝑇𝑅𝑈𝑆𝑇_{𝑖,𝑡−1}+ 𝑏₄𝑥𝐿𝑁𝐴𝑆𝑆𝐸𝑇𝑆_{𝑖,𝑡−1}+ 𝑏₅𝑥𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒_{𝑖,𝑡−1}+ 𝑏₆𝑥𝑅𝑂𝐴_{𝑖,𝑡−1}+ 𝑏₇𝑥𝑆𝑎𝑙𝑒𝑠 𝐺𝑟𝑜𝑤𝑡ℎ_{𝑖,𝑡−1}+ 𝑏₈𝑥𝐶𝐴𝑃𝐸𝑋_{𝑖,𝑡−1}+ 𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑦_𝑖,𝑡+ 𝑦𝑒𝑎𝑟_𝑖,𝑡+ 𝑒_𝑖,𝑡 7. 𝑇𝑜𝑏𝑖𝑛′𝑠𝑄_𝑖,𝑡 = 𝑏₀+ 𝑏₁𝑥𝑆𝑂𝐶_{𝑖,𝑡−1}+ 𝑏₂𝑥𝑇𝑟𝑢𝑠𝑡_{𝑖,𝑡−1}+ 𝑏₃𝑥𝑆𝑂𝐶_{𝑖,𝑡−1}𝑥𝑇𝑅𝑈𝑆𝑇_{𝑖,𝑡−1}+ 𝑏₄𝑥𝐿𝑁𝐴𝑆𝑆𝐸𝑇𝑆_{𝑖,𝑡−1}+ 𝑏₅𝑥𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒_{𝑖,𝑡−1}+ 𝑏₆𝑥𝑅𝑂𝐴_{𝑖,𝑡−1}+ 𝑏₇𝑥𝑆𝑎𝑙𝑒𝑠 𝐺𝑟𝑜𝑤𝑡ℎ_{𝑖,𝑡−1}+ 𝑏₈𝑥𝐶𝐴𝑃𝐸𝑋_{𝑖,𝑡−1}+ 𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑦_𝑖,𝑡+ 𝑦𝑒𝑎𝑟_𝑖,𝑡+ 𝑒_𝑖,𝑡 8. 𝑇𝑜𝑏𝑖𝑛′𝑠𝑄_𝑖,𝑡 = 𝑏₀+ 𝑏₁𝑥𝐶𝐺𝑉_{𝑖,𝑡−1}+ 𝑏₂𝑥𝑇𝑟𝑢𝑠𝑡_{𝑖,𝑡−1}+ 𝑏₃𝑥𝐶𝐺𝑉_{𝑖,𝑡−1}𝑥𝑇𝑅𝑈𝑆𝑇_{𝑖,𝑡−1}+ 𝑏4𝑥𝐿𝑁𝐴𝑆𝑆𝐸𝑇𝑆𝑖,𝑡−1+ 𝑏5𝑥𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖,𝑡−1+ 𝑏6𝑥𝑅𝑂𝐴𝑖,𝑡−1+ 𝑏₇𝑥𝑆𝑎𝑙𝑒𝑠 𝐺𝑟𝑜𝑤𝑡ℎ_{𝑖,𝑡−1}+ 𝑏₈𝑥𝐶𝐴𝑃𝐸𝑋_{𝑖,𝑡−1}+ 𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑦_𝑖,𝑡+ 𝑦𝑒𝑎𝑟_𝑖,𝑡+ 𝑒_𝑖,𝑡

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dummies for industry and year are included into the model to account for firm fixed effects and time fixed effects respectively and 𝑒_𝑖,𝑡 is the error term. The subscript i and t denote the time and firm index.

4. Results

4.1 Descriptive Statistics

Table 1 represents the descriptive statistics of this study. Tobins’Q, which measures the firm’s financial performance, has a mean of 0.91, and a median of 0.73. The mean CSR score, averaging Environmental, Social and Corporate Governance scores is 0.63 and has a median of 0.70. The individual CSR scores for the Environmental and Social aspect lie closely together, while that of CGV is more dispersed. It is evident from the correlation matrix (Table 3) that the all three aspects of CSR are highly correlated, which is in line with expectations from theory. The mean score for country-level trust is 5.88 on a scale of 10. One may assume from this average, that people are fairly conservative when it comes to trusting each other. The mean for the natural logarithm of assets is 16.20. While mean leverage, defined as total debt divided by total assets, is 0.26 or 26% which is in line with existing literature (Lioui & Sharma, 2012). The mean Return on Assets is 5.19% while Sales Growth is 5%. Capex as a ratio to total assets has a mean of 4%.

Table 1. Descriptive Statistics

This table presents the descriptive statistics of all firm specific and CSR variables. Tobin’s Q is defined as the ratio of market value of equity plus total debt to total assets. CSR represents an aggregate ratio for firm commitment to CSR activities, composed of both Environmental, Social and Corporate Governance scores. Trust is a proxy for country-level trust in which the firm is headquartered, derived from a social survey. LNAssets represents a proxy for firm size by taking the natural logarithm of total assets. Leverage is a proxy for firm risk and is defined as total debt divided by total assets. Return on Assets is an accounting measure for financial performance. Sales growth is defined as the one year growth in sales. Capex is a ratio of total capital expenditures to total assets.

N Mean Median Maximum Minimum Std Dev

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Table 2 presents the sample distribution for the firms included in this study. Panel A outlines the number of firms per industry as identified by the Fame-French 12 Industry Classification SIC codes. Interestingly, the three largest groups are composed of manufacturing, finance and ‘other’ firms. In empirical finance studies, financial firms or institutions are often excluded from the regressions as these firms behave differently than similar firms in other industries. For example, financial institutions have different capital structures and different risk characteristics. Section 4.5.1. covers this issue by employing regressions excluding financial firms as a robustness test.

Panel B outlines the number of firms per country. Correspondingly, on the next page Panel C outlines the mean trust levels per country as well as the number of respondents in the survey for each country. It is important to note that average trust in Panel C is different from the average trust in the descriptive statistics in Table 1. This discrepancy exists due to the sample mean being composed of the number of firms, and their corresponding home country trust levels.

Table 2. Sample Distribution

Panel A number of firms by industry. Based on Fama&French 12 Industry SIC Codes

Industry N Percentage

1. Consumer Non-Durables 26 7%

2. Consumer Durables 14 4%

3. Manufacturing 60 16%

4. Oil, Gas, And Coal Extraction and Products 12 3%

5. Chemicals and Allied Products 22 6%

6. Business Equipment 28 7%

7. Telephone and Television Transmission 2 1%

8. Utilities 13 3%

9. Wholesale, Retail, and Some Services 31 8% 10. Healthcare, Medical Equipment, and Drugs 23 6%

11. Finance 68 18%

12. Other 78 21%

377 100%

Panel B. number of firms by country

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4.2 Correlation Matrix

Table 3 on the next page presents the correlation matrix for the dependent, independent and control variables employed in this study. The correlation between the Environmental and Social CSR scores is high, which is expected as firms who tend to invest in one aspect of CSR is likely to invest in another aspect as well. The correlations between individual CSR scores and the aggregate measure of CSR is also high, as the aggregate score is comprised of the three individual scores. To avoid any misleading inferences as a result of the high correlations between the CSR variables, they are only employed exclusively of each other in the regression analyses. Another important note is the high correlation between Return on Assets and Tobin’s Q. As these variables both measure financial performance, these measures are expected to correlate. Lastly, the data reflects a size effect for firm commitment to CSR as these measures have moderately high correlation with the logarithm of total assets, which is included as a proxy for size. High correlation has important implications for multi collinearity problems and are approached carefully in this study by employing a variance inflation factor test in the next section. Moreover, the correlation between the control variables is relatively moderate, which is also important to avoid any multi collinearity problems.

Panel C. trust by country

Country Respondents Mean trust score

1. Austria 4196 5,98 2. Belgium 5516 5,56 3. Denmark 3028 6,28 4. France 5672 5,35 5. Germany 4626 5,45 6. Italy 4420 5,16 7. Netherlands 4098 6,57 8. Sweden 4479 6,94 9. Switzerland 4065 7,64 4456 6,10

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Table 3 Correlation Matrix

This table present the correlations between financial performance, corporate social responsibility and the control variables. Furthermore, all standard errors are reported in between brackets. ***, **, * stand for p<0.01, p<0.05 and p<0.10, respectively.

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4.3 Estimation results 4.3.1 Direct effects of CSR

The first step in the empirical research of this study is to assess the direct effect of CSR on CFP for the European sample. Financial performance is measured by Tobin’s Q which is frequently used in the literature related to CSR as it incorporates long-term growth opportunities. In Table 5 on page 25 the results for the relationship between the various CSR variables and CFP are presented, as well as between the aggregate measure for CSR and CFP.

In general the results for the control variables are consistent with theory and earlier research in this field. The results show that there is a significant negative size effect, measured by the natural logarithm of assets (p<0.05). Moreover, leverage has a negative but insignificant sign. This result is in line with the theory and earlier research on the CSR-CFP relationship (Nelling & Webb, 2009) (Cai et al., 2012) (Lioui & Sharma, 2012). It is important to note that as Leverage in this study is measured by the ratio of total debt to total assets, it is evident that by construction, Tobin’s Q increases as this ratio increases (as the ratio of total debt to total assets also shows up in the construction of Tobin’s Q), however this problem is mitigated by taking the first lag. Return on assets is positively and significantly related to Tobin’s Q (p<0.01) which is expected as these two variables are alternative measures for financial performance. The effects of sales growth and Capex scaled by assets on financial performance show a positive but insignificant sign. The overall predictive power of model 1a through 1e is fairly moderate (R² ~ 0.24).

To assess the multi-collinearity problem emphasized in the section above amongst the control variables, table 4 on the next page presents the variance inflation factors for these variables. The VIF value is calculated as 𝑉𝐼𝐹 = _1−R²1 which measures to what extent the variance of the estimated regression coefficient increases because of collinearity. There is no general consensus on what the bottom line value for this factor is to represent multicollinearity, but from the table it follows that the VIF of the variables are way below any possible threshold mentioned in the literature. Therefore it is concluded that the regressions do not suffer from any multicollinearity in the control variables.

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consistent with stakeholder theory. When looking at the coefficients, it follows from the results that the aggregate measure for CSR has the largest impact on CFP, and that investing into the Social pillar of CSR has the least financial benefits. Moreover, the adjusted R² of the model improves only slightly when including the independent variables. Interestingly the relationship between the control variables and the dependent variable is hardly affected by including or excluding the independent variables.

Looking back at the hypotheses outlined in section 2 of this paper, a few conclusions can be drawn. Model 1b investigated the relationship between overall CSR and CFP. The results provide evidence in favor of hypothesis 1a in that there is a positive significant relationship between CSR and CFP. However, model 1c through 1e fail to provide evidence in favor of an existing relationship between the individual aspects of CSR and CFP. Therefore we cannot argue in favor of hypotheses 1b through 1d and have to be careful about drawing conclusions about the different CSR dimensions.

Table 4.

CSR and CFP. This table represents the VIF for the control variables employed in all regressions of this study. The key estimation equation is formulated as follows:

𝑇𝑜𝑏𝑖𝑛′_𝑠𝑄

𝑖,𝑡 = 𝑏0+ 𝑏1𝑥𝐶𝑆𝑅𝑖,𝑡−1+ 𝑏2𝑥𝑇𝑟𝑢𝑠𝑡𝑖,𝑡−1+ 𝑏3𝑥𝐶𝑆𝑅𝑖,𝑡−1𝑥𝑇𝑅𝑈𝑆𝑇𝑖,𝑡−1+

𝑏₄𝑥𝐿𝑁𝐴𝑆𝑆𝐸𝑇𝑆_{𝑖,𝑡−1}+ 𝑏₅𝑥𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒_{𝑖,𝑡−1}+ 𝑏₆𝑥𝑅𝑂𝐴_{𝑖,𝑡−1}+ 𝑏₇𝑥𝑆𝑎𝑙𝑒𝑠 𝐺𝑟𝑜𝑤𝑡ℎ_{𝑖,𝑡−1}+ 𝑏₈𝑥𝐶𝐴𝑃𝐸𝑋_{𝑖,𝑡−1}+ 𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑦_𝑖,𝑡+ 𝑦𝑒𝑎𝑟_𝑖,𝑡+ 𝑒_𝑖,𝑡

Variable VIF 1/VIF

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Table 5.

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4.3.2 Moderating effect of trust

The second step in the empirical research of this study is to assess the main research question of this study whether the relationship between CSR and CFP is moderated by country-level trust. Tobin’s Q measures firm financial performance and CSR is measured by the aggregate score as well as the three individual scores (Environmental, Social, Corporate Governance) of which total CSR is comprised. Table 6 presents the results for model 2 through 5 which expand upon the models in table 5 by including country-level trust, as well as an interaction variable between trust and CSR to account for the possible moderating effect of interest in this study.

In general, the results for model 2 through 5 acknowledge the effects proposed in model 1 as firms who perform better financially are smaller, suggesting a negative size effect. Moreover, these firms have higher return on assets, which is expected from theory as ROA is another measure of financial performance. The coefficients for sales growth and capex still show a positive but insignificant relationship. Furthermore the overall explanatory power of the model is still relatively moderate as the adjusted R² is approximately 0.30 for all models.

Looking at model 2c (Panel A), it follows that the positive impact of CSR on corporate financial performance is absorbed by the moderator variable which includes the interaction between CSR and country-level trust. When this interaction variable is included, the individual variable of CSR has a significant negative impact on financial performance (p<0.05). However, the interaction variable has a significant positive impact on financial performance (p<0.01). The coefficient (0.129) for this interaction variable is relatively close to the coefficient (0.101) measured in model 1. Furthermore, in model 3 through 5 (Panel B,C,D) the results for the moderating effect of the individual aspects of CSR are presented. From this table it follows that the interaction term is still significant for Environmental and Social CSR, however not for the Corporate Governance aspect of CSR.

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Table 6.

CSR and CFP. This table presents the results of the regressions for the sample of 2592 firm-year observations over the period of 2009-2015. The regressions test hypothesis 2a through 2d on the relationship between the CSR variables and CFP measured by Tobin’s Q, and the moderating effect of country-level trust. CSR is an aggregate measure with incorporates all CSR variables (Environmental, Social, Corporate Governance) with equal weight. Trust is a proxy for country-level trust derived from the SHARE survey and takes a value from 0 to 10. The control variables are described in detail in Table 1. All dependent, independent and control variables are winsorized at the 97.5th_and 2.5th_{percentile Furthermore, all standard errors are adjusted for} heteroskedasticity, clustered at firm-level and are reported in between brackets.. ***, **, * stand for p<0.01, p<0.05 and p<0.10, respectively.

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4.5 Robustness tests

4.5.1 Excluding financial firms

In contemporary financial research, financial firms and institutions are often excluded. Fama & French (1992) argued that ’the high leverage that is normal for financial firms, does not have the same meaning as for nonfinancial firms, where high leverage more likely indicates distress’. In line with this argumentation, all financial firms are excluded from the sample (SIC codes between 6000-6999) and the regression for model 5 is repeated. Model 5 regresses the impact of the aggregate CSR measure as well as the interaction effect between CSR and country-level trust on corporate financial performance. The results of this regression are presented in Table 8 in Appendix B.1.

From the results it follows that there is still a significant negative effect (p<0.05) of CSR on CFP, if the CSR variable is looked at individually. The coefficient for the interaction variable between CSR and country-level trust is still positive and statistically significant. Furthermore, there is a negative size effect as the coefficient for the natural logarithm of assets is still negative. Additionally more profitable firms exhibit better financial performance as measured by return on assets. The coefficient for leverage is negative but statistically insignificant which requires careful interpretation. Moreover, as leverage was also insignificant for the sample including financial firms, it is expected that excluding financials has limited impact on the overall results of the model as is confirmed by the results in this section.

4.5.2 Alternative measure of financial performance

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of CSR on CFP measured by ROA it shows that there is a significant negative impact (p<0.1) of CSR on ROA. Furthermore, after the interaction variable is included, this effect also becomes insignificant. When comparing the results from this regression with the results for the regression with uses Tobin’s Q as the dependent variable, one might argue that the possible financial benefits from CSR are indeed long-term. Therefore it could be argued that Tobin’s Q is preferred over ROA as the financial performance instrument in studies on CSR. From the coefficients on the control variables it is evident that firms experience higher ROA when they are relatively high levered, exhibit growth opportunities in the form of Tobin’s Q and have high sales growth. All in all, by using an alternative measure for financial performance in the form of Return On Assets, it is shown that the positive moderating effect of country-level trust is only persistent when using a financial measure that includes future growth opportunities such as Tobin’s Q.

4.5.3. Excluding Corporate Governance from the aggregate CSR measure

Academic interest in CSR and corresponding financial performance has grown substantially over the last decade, and with it came the discussion about which aspects of CSR are the most impactful. In this study in particular, the relationship has been modelled for each aspect of CSR specifically and has already provided some insights into the different relationships with CFP. Of specific interest in academic research has been the role of Corporate Governance in the CSR-CFP relationship. However the results have been inconclusive and have led Dalton & Dalton (2011) to conclude that: ‘there is virtually no evidence related to the financial performance of the firm with regard to either of these fundamental elements of firms’ governance structures’. Moreover, El Ghoul et al. (2017) exclude the corporate governance aspect of CSR from their composite CSR measure altogether. In their study, they also gather information on firm’s CSR ratings from the Asset4 database, but focus merely on the Environmental and Social pillar. Therefore as a robustness test, the regression for model 2 has been repeated for an aggregate CSR measure excluding the Corporate Governance pillar. The results for this test are presented in Table 10 in Appendix B.3.

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significantly higher financial performance when they are smaller and exhibit higher profitability. The results from this model remain inconclusive about the true purpose of corporate governance within the CSR-CFP relationship. However it is evident from the results from all regressions in this study that it is required to be careful about the exclusion of certain aspects of CSR.

5. Discussion & Conclusion

Building upon stakeholder theory and stakeholder management, this main aim of this study is to provide a theoretical framework surrounding the concept that Corporate Social Responsibility is value enhancing in the long-term. Furthermore, the theory in this paper hypothesizes that this positive effect is moderated by the level of trust within a country. This paper argues that firms can significantly improve their financial performance by investing into CSR in countries where the level of trust in a society is higher.

Using a sample of 375 firms from nine countries in Europe over the period of 2009-2015, this study finds supportive evidence in favor of the CSR-CFP relationship. By employing various fixed effects regressions, controlling for both industry fixed effects and time fixed effects, the results show a positive significant relationship of the aggregate CSR measure on financial performance as measured by Tobin’s Q. The results are in line with various other studies analyzing this relationship (Cornell & Shapiro, 1987) (Cochran & Wood, 1984) (Dowell et al. (2000) (Deng et al. (2013). However, when looking at the individual aspects of CSR (Environmental, Social and Corporate Governance) and regressing them individually on CFP this study remains inconclusive about their relationship. The results emphasizes the ambiguity in the CSR-CFP relationship as emphasized in earlier research (Seifert et al., 2004) (Moore & Robson, 2002) (McWilliams & Siegel, 2000).

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insignificant moderating effect. Therefore the results are still inconclusive about the true position of Corporate Governance within CSR, suggesting an area for future research.

In addition, these results support stakeholder theory that investments in CSR lead to higher CFP through the alignment of stakeholder interests and operational activities. In the context of this paper, firms can improve their financial performance by aligning their operations with the interests of society through CSR. In addition, the results in this paper are an extension of the results of Lins et al. (2017) by providing argumentation in favor of the theory that the moderating effect of trust in the CSR-CFP relationship also perseveres outside of the crisis period their study focused on. Moreover, Lins et al. (2017) argued that the moderating effect of trust solely exists in times where markets endured a shock in trust, as for example happened during the financial crisis. However, the results in this paper show that this does not necessarily have to be the case.

Furthermore, the robustness tests in section 4.5 show that there still remains a positive effect of CSR on CFP when employing a different measure for financial performance in the form of return on assets. However, after including the interaction variable, the results become insignificant and therefore inconclusive which suggests an angle for future research that looks more specifically into the various measures of financial performance. Moreover, the role of trust and social capital into the CSR-CFP relationship can benefit from future research by analyzing the various aspects of social capital individually.

One of the limitations this paper in particular, similar to Lins et al. (2017), is that it takes a broad and general approach towards the trust-CSR relationship by employing a proxy for country-level trust which is derived from a social survey. Moreover, an aggregate measure for country-level trust is constructed from the average of individual levels of trust. However this approach is very arbitrary in nature, and requires a lot of caution about drawing conclusions with respect to the true relationship. The theory of trust within the CSR-CFP debate could benefit from research into the distinct drivers of this relationship, and more specifically into the aspects of country-level trust and firm-level social capital. For example, instead of looking at country-level trust, one could look to what extent people have faith in certain markets or certain industries. Research further examining the interrelationship between CSR and the various aspects of which trust and social capital are comprised, could improve the general understanding of the role of trust within the CSR-CFP relationship.

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study. In extension to the alternative approach to trust outlined above, which moves towards a more multi-dimensional construct of trust allowed to vary across industries and markets, this concept could benefit greatly by also allowing it to vary over time.

Another interesting angle for future research is to combine the results of this study with the results of Lins et al. (2017) by comparing time periods in which country-level trust has endured a shock (for example the financial crisis) to a period in which country-level trust is expected to be relatively time-invariant. This could have important implications for theory of social capital, through which firms can improve the trust they receive from society. By investing into CSR, firms improve their overall social capital. In times of a shock in country-level trust, these firms are expected to more quickly recoup the losses, than firms with lower social capital. An alternative approach to this relationship would be to analyze whether firms indeed respond to these shocks by increasing their investments into CSR.

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7. Appendix

A.1 Hausman Test

Table 7.

This table presents the results for the Hausman Test which was conducted to decide between a fixed effects and a random effects model. The variables include all estimations for Tobin’s Q on the independent CSR variables as well as various control variables.

Fixed Random Var(Diff.) P value

The CSR-CFP relationship: moderating role of trust