Abstract
In this article, we examine the empirical association between firm value and CSR engagement for firms in sinful industries, such as tobacco, gambling, and alcohol, as well as industries involved with emerging environmental, social, or ethical issues, i.e., weapon, oil, cement, and biotech. We develop and test three hypotheses, the window-dressing hypothesis, the value-enhancement hypothesis, and the value-irrelevance hypothesis. Using an extensive US sample from 1995 to 2009, we find that CSR engagement of firms in controversial industries positively affects firm value after controlling for various firm characteristics. To address the potential endogeneity problem, we further estimate a system of equations and change regression and continue to find a positive relation between CSR engagement and firm value. Our findings support the value-enhancement hypothesis and are consistent with the premise that the top management of US firms in controversial industries, in general, considers social responsibility important even though their products are harmful to human being, society, or environment.
Similar content being viewed by others
Notes
According to the management literature summarized by Margolis and Walsh (2003), over 120 studies between 1971 and 2001 examine the empirical relation between CSR and corporate financial performance (CFP), and the results are largely inconclusive. They suggest that assessments of previous studies are complicated due to various imperfections in these studies, such as measurement problems related to both CSR and CFP, omitted variable problems, a lack of necessary analyses of causality and/or endogeneity, a lack of methodological rigor, and a lack of theory. Nonetheless, these studies stress that bad social performance is detrimental to a firm’s financial performance.
More recently, Porter and Kramer (2006, 2011) argue that because traditional CSR activities mainly focus on corporate reputation and are so disconnected from the core business, it is often difficult to sustain CSR programs and to benefit society over the long run. Porter and Kramer (2011) further claim that the principle of corporate shared value (CSV) is essential to a company’s profitability, competitive position, and the best interest of wider stakeholder groups including government and non-profit organizations. Porter and Kramer (2011) conclude that because CSV leverages the unique resources and expertise of the firm to create economic value by creating social value, CSV should supersede CSR in guiding firms to plan their CSR programs.
Similarly, El Ghoul et al. (2010) find that the participation of CSR in two sinful industries including tobacco and nuclear power increases cost of equity capital, while CSR engagement decreases the cost of equity capital for all the other industries.
Toyota Prius is a good example—the increasingly popular hybrid car—is an intersection between Toyota’s core business and environmental benefits (less emissions, happy customers, cleaner roads, cleaner air, etc.).
Hong and Kacperczyk (2009) exclude adult entertainment industry and weapon industry from their list of sin industries. While they focus on the so-called triumvirate of sin (alcohol, tobacco, and gaming), two other classes of stocks are sometimes thought of as sinful. The first is the adult entertainment industry. However, there are very few publicly traded companies with heavy operations in adult entertainment. Indeed, when we check adult entertainment industry firms in KLD, there was no single adult entertainment firm covered in the KLD data. Therefore, omitting these companies will not affect our results in any significant way. The second is the weapon industry. Following Hong and Kacperczyk (2009), we decide against including weapon or defense as a sin industry in our main analysis because it is not perfectly clear whether weapon or defense is considered a sin by many American people. Instead, we include weapon industry in other category (see Table 2). In addition, when we check the KLD data, nuclear industry firms are not covered either.
While it is true that the CSR actions of the firm’s competitors drive, at least, part of firm’s CSR strategy, our empirical method and our sample do not permit us to explore such a possibility.
When we run the regression on sin industry only, the sample size is only 186 in 3SLS, and 165 in change regression, and none of the CSR coefficients on firm value is significant, similar to the results reported in Table 5. These results are available upon request.
To assess the quality of the KLD data, Chatterji et al. (2009) use the KLD environment ratings to predict toxic releases reported in the government’s Toxic Releases Inventory (TRI) and compliance with environmental regulations including the number and amount of penalties imposed. They conclude that the KLD ratings do not reflect all the information available on environmental performance but are a good predictor of firms with the worst environmental performance. TRI emissions are a much narrower measure of environmental performance than that in the KLD Environment category and hence are not a good proxy for the KLD strengths or concerns.
References
Allouche, J., & Laroche, P. (2006). The relationship between corporate social responsibility and corporate financial performance: A survey. In J. Allouche (Ed.), Corporate social responsibility: Performance and stakeholders (pp. 3–40). Basingstoke: Palgrave MacMillan.
Banerjee, B., & Bonnefous, A. (2011). Stakeholder management and sustainability strategies in the French nuclear industry. Business Strategy and Environment, 20, 124–140.
Barnea, A., & Rubin, A. (2010). Corporate social responsibility as a conflict between shareholders. Journal of Business Ethics, 97, 71–86.
Baron, D., Harjoto, M. & Jo, H. (2011). The economics and politics of corporate social performance. Business and Politics 13(2), Article 1, 1–46.
Beurden, P., & Gössling, T. (2008). The worth of values—a literature review on the relation between corporate social and financial performance. Journal of Business Ethics, 82, 407–424.
Byrne, E. (2010). The US military-industrial complex is circumstantially. Journal of Business Ethics, 95(2), 153–165.
Cai, Y., Jo, H., & Pan, C. (2011). Vice or virtue? The impact of corporate social responsibility on executive compensation. Journal of Business Ethics, 104(2), 159–173.
Campbell, H. (1996). Understanding risk and return. Journal of Political Economy, 104, 298–345.
Carroll, A. (1979). A three-dimensional conceptual model of corporate social performance. Academy of Management Review, 4, 497–505.
Carroll, A. (1991). The pyramid of corporate social responsibility: Toward the moral management of organizational stakeholders. Business Horizons, 34, 39–48.
Carroll, A. (2001). Models of management morality for the new millennium. Business Ethics Quarterly, 11(2), 365–371.
Chatterji, A., Levine, D., & Toffel, M. (2009). How well do social ratings actually measure corporate social responsibility? Journal of Economics and Management Strategy, 18, 125–169.
Chung, K., & Jo, H. (1996). The impact of security analysts’ monitoring and marketing functions on the market value of firms. Journal of Financial and Quantitative Analysis, 31, 493–512.
Dillenburg, S., Greene, T., & Erekson, H. (2003). Approaching socially responsible investment with a comprehensive ratings scheme: Total social impact. Journal of Business Ethics, 43, 167–177.
Donaldson, T., & Preston, L. (1995). The stakeholder theory of the corporation: Concepts, evidence, and implications. Academy of Management Review, 20(1), 65–91.
El Ghoul, S., Guedhami, O., Kwok, C., & Mishra, D. (2010). Does corporate social responsibility affect the cost of capital? Working Paper, University of Alberta.
Fama, E., & French, K. (1997). Industry costs of equity. Journal of Financial Economics, 43, 153–197.
Fisman, R., Heal, G., & Nair, V. (2005). A model of corporate philanthropy. Working Paper, Columbia University.
Freeman, R. (1984). Strategic management: A stakeholder approach. Marshfield, MA: Pitman Publishing Inc.
Frynas, J. (2005). The false developmental promise of corporate social responsibility: Evidence from multinational oil companies. International Affairs, 81(3), 581–598.
Goel, A., & Thakor, A. (2008). Overconfidence, CEO selection, and corporate governance. Journal of Finance, 63(6), 2737–2784.
Greene, W. (1993). Econometric analysis (5th ed.). Upper Saddle River, NJ: Prentice-Hall.
Griffin, J., & Mahon, J. (1997). The corporate social performance and corporate financial performance debate. Business and Society, 36(1), 5–31.
Harjoto, M., & Jo, H. (2011). Corporate governance and CSR nexus. Journal of Business Ethics, 100(1), 45–67.
Hillman, A., & Keim, G. (2001). Shareholder value, stakeholder management and social issues: What’s the bottom line? Strategic Management Journal, 22, 125–139.
Hong, H., & Kacperczyk, M. (2009). The price of sin: The effects of social norms on markets. Journal of Financial Economics, 93, 15–36.
Jensen, M. (2002). Value maximization, stakeholder theory, and the corporate objective function. Business Ethics Quarterly, 12, 235–256.
Jensen, M., & Meckling, W. (1976). Theory of firm: Managerial behavior, agency costs, and capital structure. Journal of Financial Economics, 3, 305–360.
Jo, H., & Harjoto, M. (2011a). The causal effect of corporate governance on corporate social responsibility. Journal of Business Ethics (in press).
Jo, H., & Harjoto, M. (2011b). Corporate governance and firm value: The impact of corporate social responsibility. Journal of Business Ethics, 103(3), 351–383.
Lindgreen, A., Swaen, V., & Johnston, W. (2009a). Corporate social responsibility: An empirical investigations of US organizations. Journal of Business Ethics, 85, 303–323.
Lindgreen, A., Swaen, V., & Maon, F. (2009b). Introduction: Corporate social responsibility implementation. Journal of Business Ethics, 85, 251–256.
Malmendier, U., & Tate, G. (2005). CEO overconfidence and corporate investment. Journal of Finance, 60, 2661–2700.
Margolis, J., & Walsh, J. (2003). Misery loves companies: Rethinking social initiatives by business. Administrative Science Quarterly, 48, 268–305.
McElhaney, K. (2007). Strategic CSR. Sustainable Enterprise Quarterly, 4(1), 1–7.
McWilliams, A., & Siegel, D. (2001). Corporate social responsibility: A theory of the firm perspective. Academy of Management Review, 28, 117–127.
Modigliani, F., & Miller, M. (1958). The cost of capital, corporate finance, and the theory of investment. American Economic Review, 48, 261–297.
Nelling, E., & Webb, E. (2009). Corporate social responsibility and financial performance: The ‘virtuous circle’ revisited. Review of Quantitative Finance and Accounting, 32, 197–209.
Orlitzky, M., Schmidt, F., & Rynes, S. (2003). Corporate social and financial performance: A meta analysis. Organizational Studies, 24, 403–441.
Palazzo, G., & Richter, U. (2005). CSR business as usual? The case of the tobacco industry. Journal of Business Ethics, 61(4), 387–401.
Porter, M., & Kramer, M. (2006). Strategy & society. Harvard Business Review, December, 78–92.
Porter, M., & Kramer, M. (2011). Creating shared value. Harvard Business Review, January–February, 62–77.
Scalet, S., & Kelly, T. (2010). CSR rating agencies: What is their global impact? Journal of Business Ethics, 94, 69–88.
Tencati, A., Perrini, F., & Pogutz, S. (2004). New tools to foster corporate socially responsible behavior. Journal of Business Ethics, 53(1–2), 173–190.
Tobin, J. (1958). Estimation of relationships for limited dependent variables. Econometrica, 26, 24–36.
Waddock, S., & Graves, S. (1997). The corporate social performance-financial performance link. Strategic Management Journal, 18, 303–319.
White, H. (1980). Heteroscedasticity-consistent covariance matrix estimator and direct test for heteroscedasticity. Econometrica, 48, 817–838.
Wilson, A., & West, C. (1981). The marketing of “unmentionables”’. Harvard Business Review, 51(1), 91–102.
Wood, D. (1991). Corporate social performance revisited. Academy of Management Review, 16, 691–718.
Yoon, Y., Gurhan-Canli, Z., & Schwarz, N. (2006). The effect of corporate social responsibility (CSR) activities on companies with bad reputations. Journal of Consumer Psychology, 16(4), 377–390.
Acknowledgments
We appreciate many valuable comments provided by two anonymous referees. This research is partially conducted while Jo was visiting at Korea University Business School (KUBS) during his sabbatical period. Jo appreciates partial financial assistance provided by Asian Institute of Corporate Governance of KUBS.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Cai, Y., Jo, H. & Pan, C. Doing Well While Doing Bad? CSR in Controversial Industry Sectors. J Bus Ethics 108, 467–480 (2012). https://doi.org/10.1007/s10551-011-1103-7
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10551-011-1103-7