Journal of Business Ethics

, Volume 109, Issue 3, pp 367–388 | Cite as

Corporate Social and Financial Performance Re-Examined: Industry Effects in a Linear Mixed Model Analysis

  • Philip L. Baird
  • Pinar Celikkol Geylani
  • Jeffrey A. Roberts
Article

Abstract

In this research, we shed new light on the empirical link between corporate social performance (CSP) and corporate financial performance (CFP) via the application of empirical models and methods new to the CSP–CFP literature. Applying advanced financial models to a uniquely constructed panel dataset, we demonstrate that a significant overall CSP–CFP relationship exists and that this relationship is, in part, conditioned on firms’ industry-specific context. To accommodate the estimation of time-invariant industry and industry-interaction effects, we estimate linear mixed models in our test of the CSP–CFP relationship. Our results show both a significant overall CSP effect as well as significant industry effects between CSP and CFP. In conflict with expectations, the unweighted average effect of CSP on CFP is negative. Our industry analysis, however, shows that in over 17% of the industries in our sample, the effect of CSP on CFP for socially responsible firms is positive. We also examine the multidimensional nature of the CSP construct in an industry context by exploring the CSP dimension–industry nexus and identify dimensions of social performance that are associated with either better or worse financial performance. Our results confirm the existence of disparate CSP dimension–industry effects on CFP, thus our results provide important and actionable information to decision makers considering whether and how to commit corporate resources to social performance.

Keywords

Corporate social performance Corporate financial performance Panel data analysis Linear mixed model Residual income model 

References

  1. Abarbanell, J., & Bernard, V. (2000). Is the U.S. stock market myopic? Journal of Accounting Research, 38(2), 221.CrossRefGoogle Scholar
  2. Al-Khazali, O., & Zoubi, T. (2005). Empirical testing of different alternative proxy measures for firm size. Journal of Applied Business Research (JABR), 21(3), 79.Google Scholar
  3. Allouche, J., & Laroche, P. (2005). A meta-analytical investigation of the relationship between corporate social and financial performance. Revue de Gestion des Ressources Humaines, 57(1), 8.Google Scholar
  4. Barnea, A., & Rubin, A. (2006). Corporate social responsibility as a conflict between owners. European Finance Association, June 11 2010.Google Scholar
  5. Barnett, M. L., & Salomon, R. M. (2006). Beyond dichotomy: The curvilinear relationship between social responsibility and financial performance. Strategic Management Journal, 27, 1101.CrossRefGoogle Scholar
  6. Bauer, R., Koedijk, K., & Otten, R. (2005). International evidence on ethical mutual fund performance and investment style. Journal of Banking Finance, 29(7), 1751.CrossRefGoogle Scholar
  7. Belsley, D. A. (1973). A test for systematic variation in regression coefficients. In Anonymous, Annals of Economic and Social Measurement, Vol. 2, Number 4 (p. 492). Cambridge: National Bureau of Economic Research Inc.Google Scholar
  8. Berman, S. L., Wick, A. C., Kotha, S., & Jones, T. M. (1999). Does stakeholder orientation matter? The relationship between stakeholder management models and firm performance. Academy of Management Journal, 42(5), 488.CrossRefGoogle Scholar
  9. Brammer, S., Brooks, C., & Pavelin, S. (2006). Corporate social performance and stock returns: UK evidence from disaggregate measures. Financial Management, 35(3), 97.CrossRefGoogle Scholar
  10. Brav, A., Lehavy, R., & Michaely, R. (2005). Using expectations to test asset pricing models. Financial Management, 34(3), 31.CrossRefGoogle Scholar
  11. Courteau, L., Kao, J. L., & Richardson, G. D. (2001). Equity valuation employing the ideal versus ad hoc terminal value expressions. Contemporary Accounting Research, 18(4), 625.CrossRefGoogle Scholar
  12. Derwall, J., Guenster, N., Bauer, R., & Koedijk, K. (2005). The eco-efficiency premium puzzle. Financial Analysts Journal, 61(2), 51.CrossRefGoogle Scholar
  13. Dowell, G., Hart, S., & Young, B. (2000). Do corporate global environmental standards create or destroy market value? Management Science, 46, 1059.CrossRefGoogle Scholar
  14. Fama, E. F., & French, K. R. (1992). The cross-section of expected stock returns. The Journal of Finance, 47(2), 427.CrossRefGoogle Scholar
  15. Fama, E. F., & French, K. R. (1997). Industry costs of equity. Journal of Financial Economics, 43(2), 153.Google Scholar
  16. Fama, E. F., & MacBeth, J. D. (1973). Risk, return and equilibrium: Empirical tests. Journal of Political Economy, 81(3), 607.Google Scholar
  17. Feldman, S. J., Soyka, P. A., & Ameer, P. G. (1997). Does improving a firm’s environmental management systems and environmental performance result in a higher stock price? The Journal of Investing, 6(4), 87.CrossRefGoogle Scholar
  18. Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston, MA: Pitman.Google Scholar
  19. Freeman, R. E. (1994). The politics of stakeholder theory: Some future directions. Business Ethics Quarterly, 4(4), 409.CrossRefGoogle Scholar
  20. Goldreyer, E. F., & Diltz, J. D. (1999). The performance of socially responsible mutual funds: Incorporating sociopolitical information in portfolio selection. Managerial Finance, 25(1), 23.CrossRefGoogle Scholar
  21. Griffin, J. J., & Mahon, J. F. (1997). The corporate social performance and corporate financial performance debate: Twenty-five years of incomparable research. Business and Society, 36(1), 5.CrossRefGoogle Scholar
  22. Hamilton, S., Jo, H., & Statman, M. (1993). Doing well while doing good? The investment performance of socially responsible mutual funds. Financial Analysts Journal, 49(6), 62.CrossRefGoogle Scholar
  23. Hardy, M. A. (1993). Regression with dummy variables (p. 90). Sage Publications: Newbury Park.Google Scholar
  24. Hillman, A. J., & Keim, G. D. (2001). Shareholder value, stakeholder management, and social issues: What’s the bottom line? Strategic Management Journal, 22(2), 125.CrossRefGoogle Scholar
  25. Jensen, M. C. (2002). Value maximization, stakeholder theory, and the corporate objective function. Business Ethics Quarterly, 12(2), 235.CrossRefGoogle Scholar
  26. Kempf, A., & Osthoff, P. (2007). The effect of socially responsible investing on portfolio performance. European Financial Management, 13(5), 908.CrossRefGoogle Scholar
  27. Klein, A. (1990). A direct test of the cognitive bias theory of share price reversals. Journal of Accounting & Economics, 13(2), 155.CrossRefGoogle Scholar
  28. Konar, S., & Cohen, M. A. (2001). Does the market value environment performance? The Review of Economics and Statistics, 83(2), 281.CrossRefGoogle Scholar
  29. Kreft, I., & de Leweuw, J. (1998). Introducing multilevel modeling, 1998 edition (June 18, 1998) edition (p. 160). London: Sage Publications Ltd.Google Scholar
  30. Littell, R. C., Milliken, G. A., Stroup, W. W., Wolfinger, R. D., & Schabenberger, O. (2006). SAS for mixed models (2nd ed., p. 814). Cary: SAS Institute.Google Scholar
  31. Lubatkin, M., & Shrieves, R. E. (1986). Towards reconciliation of market performance measures to strategic management research. The Academy of Management Review, 11(3), 497.Google Scholar
  32. Margolis, J. D., Elfenbein, H. A., & Walsh, J. P. (2007). Does it pay to be good? A meta-analysis and redirection of research on the relationship between corporate social and financial performance. Working Paper, Harvard Business School, Boston.Google Scholar
  33. Margolis, J. D., & Walsh, J. P. (2003). Misery loves companies: Rethinking social initiatives by business. Administrative Science Quarterly, 48(2), 268.CrossRefGoogle Scholar
  34. Marom, I. Y. (2006). Toward a unified theory of the CSP–CFP link. Journal of Business Ethics, 67(2), 191.CrossRefGoogle Scholar
  35. McGuire, J. B., Sundgrena, A., & Schneeweis, T. (1988). Corporate social responsibility and firm financial performance. Academy of Management Journal, 31(4), 854.CrossRefGoogle Scholar
  36. McWilliams, A., & Siegel, D. (2001). Corporate social responsibility: A theory of the firm perspective. Academy of Management Review, 26(1), 117.Google Scholar
  37. Merton, R. C. (1987). A simple model of capital market equilibrium with incomplete information. Journal of Finance, 42(3), 483.CrossRefGoogle Scholar
  38. Orlitzky, M., Schmidt, F. L., & Rynes, S. L. (2003). Corporate social and financial performance: A meta-analysis. Organization Studies, 24(3), 403.CrossRefGoogle Scholar
  39. Penman, S. H., & Sougiannis, T. (1998). A comparison of dividend, cash flow, and earnings approaches to equity valuation. Contemporary Accounting Research, 15(3), 343.CrossRefGoogle Scholar
  40. Preston, L. E., & O’Bannon, D. P. (1997). The corporate social–financial performance relationship. Business and Society, 36(4), 419.CrossRefGoogle Scholar
  41. Ramnath, S., Rock, S., & Shane, P. (2005). Value line and I/B/E/S earnings forecasts. International Journal of Forecasting, 21(1), 185.CrossRefGoogle Scholar
  42. Roman, R. M., Hayibor, S., & Agle, B. R. (1999). The relationship between social and financial performance: Repainting a portrait. Business and Society, 38(1), 109.CrossRefGoogle Scholar
  43. Rowley, T., & Berman, S. (2000). A brand new brand of corporate social performance. Business & Society, 39(4), 397.CrossRefGoogle Scholar
  44. Ruf, B. M., Muralidhar, K., Brown, R. M., Janney, J. J., & Paul, K. (2001). An empirical investigation of the relationship between change in corporate social performance and financial performance: A stakeholder theory perspective. Journal of Business Ethics, 32(2), 143.CrossRefGoogle Scholar
  45. Russo, M., & Fouts, P. (1997). A resource-based perspective on corporate environmental performance and profitability. Academy of Management Journal, 40, 534.CrossRefGoogle Scholar
  46. Simpson, W. G., & Kohers, T. (2002). The link between corporate social and financial performance: Evidence from the banking industry. Journal of Business Ethics, 35(2), 97.CrossRefGoogle Scholar
  47. Singer, J. D. (2002). Fitting individual growth models using SAS PROC MIXED. In D. S. Moskowitz & S. L. Hershberger (Eds.), Modeling intraindividual variability with repeated measures data: Methods and applications (p. 135). Mahwah: L. Erlbaum Associates.Google Scholar
  48. Singer, J. D., & Willett, J. B. (2002). Applied longitudinal data analysis: Modeling change and event occurrence (p. 644). Oxford: Oxford University Press.Google Scholar
  49. Statman, M. (2000). Socially responsible mutual funds. Financial Analysts Journal, 56(3), 100.CrossRefGoogle Scholar
  50. Statman, M. (2006). Socially responsible indexes. Journal of Portfolio Management, 32(3), 100.CrossRefGoogle Scholar
  51. Statman, M., & Glushkov, D. (2009). The wages of social responsibility. Financial Analysts Journal, 65(4), 33.CrossRefGoogle Scholar
  52. Sweeney, R. E., & Ulveling, E. F. (1972). A transformation for simplifying the interpretation of coefficients of binary variables in regression analysis. The American Statistician, 26(5), 30–32.Google Scholar
  53. Turban, D. B., & Greening, S. B. (1996). Corporate social performance and organizational attractiveness to prospective employees. Academy of Management Journal, 40(3), 658–672.CrossRefGoogle Scholar
  54. Ullmann, A. (1985). Data in search of a theory: A critical examination of the relationship among social performance, social disclosure, and economic performance. Academy of Management Review, 10, 540.Google Scholar
  55. van 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(2), 407.CrossRefGoogle Scholar
  56. Waddock, S. A., & Graves, S. B. (1997). The corporate social performance–financial performance link. Strategic Management Journal, 18(4), 303.CrossRefGoogle Scholar
  57. Wallace, D., & Green, S. B. (2002). Analysis of repeated measures designs with linear mixed models. In Anonymous, modeling intraindividual variability with repeated measures data: Methods and application (p. 276). Mahwah: L. Erlbaum Associates.Google Scholar
  58. Wooldridge, J. M. (2002). Econometric analysis of cross-section and panel data. Cambridge, MA: MIT Press.Google Scholar
  59. Wu, M. L. (2006). Corporate social performance, corporate financial performance, and firm size: A meta-analysis. Journal of American Academy of Business, 8(1), 163.Google Scholar

Copyright information

© Springer Science+Business Media B.V. 2011

Authors and Affiliations

  • Philip L. Baird
    • 1
  • Pinar Celikkol Geylani
    • 2
  • Jeffrey A. Roberts
    • 3
  1. 1.Duquesne University, Palumbo–Donahue Schools of BusinessPittsburghUSA
  2. 2.Duquesne University, Palumbo–Donahue Schools of BusinessPittsburghUSA
  3. 3.Duquesne University, Palumbo–Donahue Schools of BusinessPittsburghUSA

Personalised recommendations