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Corporate social responsibility: How much is enough? A higher dimension perspective of the relationship between financial and social performance

  • S.I.: Regression Methods based on OR techniques
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Abstract

We investigate the nature of the relationship between corporate social responsibility (CSR) and corporate financial performance (CFP) by examining how it changes across a third dimension that accounts for firm-specific factors. We propose a semi-latent specification of an endogenous control variable, which can, for the first time, explicitly identify, for each individual firm, the threshold level where the marginal impact of CSR on CFP turns positive. We provide empirical evidence that this threshold depends on the additional dimension and consequently, the previously reported U-shape seems to be an aggregation of relationships of differential magnitude and direction. This disaggregation fits the data better and therefore, we maintain that the addition of a higher dimension, along with the identification of the threshold level, can explain the conflicting results in the literature.

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Notes

  1. CSR is the discretionary societal expectations of a firm (Carroll 1979). This explicitly differentiates social from financial objectives, implicitly recognizing that not all CSR actions are profitable. However, because this is a forward-looking (latent) concept, we use an empirical proxy, Corporate Social Performance (CSP) (Carroll et al. 2016), which measures how socially responsible the firm has been in the past. This backward-looking proxy does not introduce estimation bias because we employ a backward-looking measure of CFP.

  2. KLD methodology changed due to the transition to the MSCI ESG indices family that occurred on the 1st of September 2010; therefore, we collect KLD data until 2010 and the ESG (Bloomberg) data beyond 2010 to maintain consistency. Further information about the exact methodologies and social performance valuation can be found in RiskMetrics Group (2010) for KLD and in Bloomberg (2020) for ESG.

  3. The data collection focuses on the period before the formalization of the Vigeo Euronext Indices and the Merge with EIRIS. Further information can be found in Vigeo Eiris (2020).

  4. Carroll et al. (2016) argue that CSP scores might not reflect the true CSP of the firms, due to biases, such as regional factors (Shahzad and Sharfman 2017), the weighting used (e.g., García-Melón et al. 2016; Capelle-Blancard and Petit 2017) or simply because they do not adequately cover the breadth of CSR (e.g., Lamata et al. 2018; Oll et al. 2018). Even worse, Chatterji et al. (2016) report that the existing CSP scores do not converge and therefore, they might not be a good proxy for CSR. We address these concerns by testing the robustness of our findings to CSP-scores with different criteria, weighting and regional/cross-sectional coverage (Vigeo, KLD and ESG), which should be able to capture the diversity of these concerns.

  5. The coverage of the KLD index was not extensive in the early stages and therefore, this sample mainly consists of the constituents of the S&P500 index. The estimation results are consistent when focusing only on S&P500.

  6. The model can be estimated with various estimation methods appropriate for a system of equations. We use an iterative GMM procedure with Newey–West heteroskedasticity–consistent errors, as our main estimation method, but we also test the robustness of our findings with simpler estimation methods and we find them to be consistent. The use of instrumental variables can account for various econometric issues, identify more precisely the CSR–CFP link, while it is also consistent with the literature. For more information, please refer to the Online Appendix.

  7. The selection of firm size as a third dimension is by no means an identification statement. We recognize that a single variable might not be enough to capture the complexity of the CSR–CFP. Therefore, we suggest a semi-latent modeling to account for other factors too, as well as various model extensions in order to incorporate other factors of interest or other functional forms. Consequently, by selecting firm size, we do not claim that it is the only or the best factor affecting the CSR–CFP link. Instead, we select a variable that is recognized in the literature to affect both, aiming at highlighting how an additional dimension can help explaining their relationship.

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  1. Audencia Business School, ReMA Special Interest Group in Regulation, Market Structure and Asset Pricing, 8 Route de la Joneliere, 44312, Cedex 3, Nantes, France

    Iordanis Kalaitzoglou

  2. Coventry University, Faculty of Business and Law, Priory Street, Coventry, CV1 5FB, UK

    Hui Pan & Jacek Niklewski

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Kalaitzoglou, I., Pan, H. & Niklewski, J. Corporate social responsibility: How much is enough? A higher dimension perspective of the relationship between financial and social performance. Ann Oper Res 306, 209–245 (2021). https://doi.org/10.1007/s10479-020-03834-y

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