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Journal of Business Ethics
Published in: Journal of Business Ethics 4/2013

01-06-2013

Do Investors Value a Firm’s Commitment to Social Activities?

Authors: Waymond Rodgers, Hiu Lam Choy, Andrés Guiral

Published in: Journal of Business Ethics | Issue 4/2013

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Abstract

previous article The Business Case for Asserting the Business Case for Business Ethics
next article Corporate Social Performance, Firm Valuation, and Industrial Difference: Evidence from Hong Kong

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Footnotes
1
See the special issue on “Corporate Social Responsibility: Strategic Implications” in Journal of Management Studies (volume 43, issue 1, January 2006) and the special topic forum on “Corporations as Social Change Agents” in Academy of Management Review (volume 32, issue 3, July 2007). Also, see previous special research forum on “Stakeholders, Social Responsibility, and Performance” in Academy of Management Journal (volume 42, issue 5, October 1999).
 
2
Moreover, McWilliams et al. (2006), McWilliams and Siegel (2000), and Barnett (2007) argue that the lack of consistency in previous findings may be a consequence of poor definition of the financial performance and CSR constructs, imprecision in research design, model specification biases and deficient analysis of the results.
 
3
Tobin’s Q depicts the market’s valuation of a company compared to its assets-in-place (Smith and Watts 1992).
 
4
The only exception is the community dimension of CSR. The interaction between the community dimension and the investment in innovation has a positive effect on Tobin’s Q.
 
5
For example, the firm has an implicit contract with its customers on the quality of products and services. Customers have an implicit claim on the firm when the product does not meet quality standard (e.g., product recalls for safety concern).
 
6
Peloza (2006) also suggests that corporate social activities, in terms of firm reputation, may play an important role in mitigating the potential consequences of future damaging events.
 
7
For example, Ford Motor was selected Latina Style magazine’s 2004 Fifty Best Companies based on, among other criteria, its mentoring program and its relationship with the Hispanic community. This publicity can help Ford to attract better prospective employees (Greening and Turban 2000; Turban and Greening 1997), increase customer-company identification (Sen and Bhattacharya 2001) and affect customers’ product attitude (Berens et al. 2005).
 
8
Both McWilliams and Siegel (2000) and Hull and Rothenberg (2008) based their conclusion on a single accounting-based measure: profitability (proxied by return on assets ratio).
 
9
Indicators for our latent variables are shown in Fig. 1.
 
10
Numerous accounting studies have used Zmijewski score for the recognition of financial distressed firms (e.g., Pava and Krausz, 1996; Ruiz-Barbadillo et al., 2004; Johnstone and Bedard, 2004; Carcello and Nagy, 2004). Since we are interested in the effect of CSR on a firm’s performance, we use the negative of Zmijewski score as a proxy for the firm’s financial health. We have also repeated our analyses using the inverse of Zmijewski score as a proxy and the tenor of the results does not change.
 
11
Once again in model 3, firms with a better financial health had higher profitability (β 1 = .351, p < .01), higher liquidity (β 2 = .118, p < .01), and less leverage (β 3 = -.799, p < .01). Also, the KLD measures latent variable explained most of the variance of the CSR construct (β 5 = .920, p < .01; R 2 = .847).
 
12
While McWilliams and Siegel (2000) reported a correlation between CSR and innovation of 0.499 (p < 0.01) over the period of 1991–1996, Hull and Rothenberg (2008) found a correlation of −0.166 (p < 0.05) over the period of 1998–2001.
 
13
In their study, Barnett and Salomon (2006) employed risk-adjusted financial performance as the dependent variable, measured as the monthly percentage change in a fund’s market value adjusted by the fund’s specific beta.
 
14
This argument is consistent with Paul and Siegel (2006) and Vitaliano and Stella (2006) suggesting that CSR seems to be a management choice based on balancing marginal cost and marginal revenue.
 
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Metadata
Title
Do Investors Value a Firm’s Commitment to Social Activities?
Authors
Waymond Rodgers
Hiu Lam Choy
Andrés Guiral
Publication date
01-06-2013
Publisher
Springer Netherlands
Published in
Journal of Business Ethics / Issue 4/2013
Print ISSN: 0167-4544
Electronic ISSN: 1573-0697
DOI
https://doi.org/10.1007/s10551-013-1707-1

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