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When doing good for society is good for shareholders: importance of alignment between strategy and CSR performance


We investigate the association between firms’ strategy and their corporate social responsibility (CSR) performance and whether the alignment between strategy and CSR activities affects firms’ financial performance. We describe firms’ strategies as innovation differentiation, marketing differentiation, and cost leadership Miller, (1986). We expect a higher benefit from CSR for firms that rely more on innovation differentiation and a lower benefit for firms that rely more on marketing differentiation and cost leadership. We measure firms’ strategy through a textual analysis of 10-K filings and collect CSR data from KLD Ratings. We find that innovation differentiation strategy is positively associated with CSR performance, while cost leadership (marketing differentiation) is negatively (insignificantly) associated with CSR performance. Moreover, we find that innovating differentiators with higher CSR performance achieve higher financial performance. Finally, we provide additional evidence that information asymmetry and financial constraints moderate the alignment between firms’ strategy and CSR performance.

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  1. We use these independently assessed CSR performance variables and assume that firms receive higher performance ratings if they invest more in CSR. Assuming a firm’s CSR performance is positively associated with its investment in CSR, we use “CSR activities” and “CSR performance” interchangeably throughout the paper.

  2. Some stakeholders may have the ability to vote on granting social licenses to operate, but others may only have a significant influence when using the media (Wilburn & Wilburn, 2011).

  3. Clan control arises in problematic agency settings, where the information between agent and principal is asymmetric (i.e., the task programmability and output measurability are low) (Govindarajan & Fisher, 1990). To implement clan control, the agent and principal need to develop “shared values, beliefs, and goals among members so that appropriate behaviors will be reinforced and rewarded” (Das & Teng, 2001). Handley and Angst (2015) link clan control to relational governance. They state that “relational governance is often referred to as social or clan control.” They further state that “cultural norms emphasize long-term relationships, harmony, and cooperation.”

  4. We acknowledge that CSR is one means to achieve clan control but serves the purpose of getting a social license to operate from society. In this setting, clan control may include many different mechanisms, including CSR. For example, if the top management team or employees are hired from the local community, and such a community has a social norm of trust, clan control might be achieved without sending any additional signals through CSR.

  5. One key input for innovation differentiation strategy to succeed is high-quality employees. These employees might have strong views on sustainability and society and hence pressure innovating differentiators to have higher levels of CSR performance.

  6. Some marketing differentiators might still pursue CSR because their customers demand it. Indeed, as their competitive advantage lies in meeting customers’ demands, marketing differentiators might view spending on CSR as a necessary cost to increase customer loyalty and generate revenue.

  7. Mandatory electronic filings became effective for filers in 1995. Therefore our sample is based on 10-K filings from 1995 onwards.

  8. We extract Item 1 from plain-text 10-K filings by identifying the section heading that denotes the beginning of Item 1 and the section heading that denotes the beginning of the next section using Python. Specifically, we use the content between “Item 1 Business” and “Item 1A Risk factors” for 10-K forms filed from 2005 and onward and the content between “Item 1 Business” and “Item 2 Properties” for 10-K forms filed before 2005.

  9. We look up the fiscal year-end that occurs prior to and closest to the 10-K filing date to identify the fiscal year. We exclude 10-Ks for the fiscal year 2016 because of limited observations.

  10. U.S. public firms are required to discuss their products, markets, and business operations in Item 1. Therefore we examine this section rather than the entire 10-K to provide a relatively uniform context for our textual analysis.

  11. We use wildcards (i.e., indicated by asterisks in Appendix B) to capture variations in individual words. In addition, we count the two-word phrases in the form with and without a hyphen. Finally, we count the instances where phrases that contain a verb and its object exist in the same sentence without requiring them to be adjacent to each other.

  12. These three factors are orthogonal to each other by construction and capture about 88% of the variance of the scaled word frequency matrix.

  13. These descriptive statistics could vary in our regression sample because of data availability issues.

  14. We do not control for further firm characteristics, assuming that strategy is the most critical choice a firm makes and many firm decisions flow from this choice (Van den Steen, 2017; Vanden Steen, 2018).

  15. As a robustness check, we replace the three continuous strategy variables with dummies that equal 1 if the strategy variable value is greater than the median for a given industry in a given year. The untabulated results show qualitatively similar patterns as the main results.

  16. One of the advantages of our three-dimensional measure is that we do not assume that the three strategies sit on the same continuum. In this additional analysis, we test the robustness of the results after reconfiguring the strategy measure as unidimensional. Specifically, firms are sorted into the lower half and upper half based on the value of each main strategy measure by year and industry. We then create a categorical variable where (i) firms in the upper half of innovating differentiation are coded as 3, (ii) firms in the upper half of marketing differentiation are coded as 2, (iii) firms in the upper half of cost leadership are coded as 1. We find that this unidimensional categorical strategy variable is positively associated with concurrent and subsequent CSR performance, consistent with our main findings.

  17. As per the factor analysis output, the textual strategy variables in the sample have a mean of zero and a standard deviation of one by construction.

  18. Since strategy is recognized as a long-term commitment, we do not expect firms’ strategies to vary substantially from year to year. As expected, we find that our textual strategy variables are consistent in their outputs, years after years. For example, the AR (1) coefficients for innovation differentiation, marketing differentiation, and cost leadership are 0.97, 0.97, 0.91, respectively.

  19. To assess the overall impact of firms’ orientations toward the portfolio of strategies, we examine the three strategy variables and interpret their coefficients collectively.

  20. We do not expect firms with different strategies to show any differential levels in terms of CSR_Concerns. As expected, our un-tabulated tests find that those strategy variables are indeed not associated with CSR_Concerns.


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We would like to thank Stephen H. Penman, Jim Cannon, Tim Gray, Temi Oshadiya, Matthew McNaughton, anonymous reviewers, conferences participants at the 2019 CFMAR Annual Conference, the 2019 AAA Annual Conference, the 2020 CAAA Annual Conference, the 2020 AFAANZ Conference, and workshop participants at the Hong Kong Baptist University, for useful comments on earlier versions of the manuscript. We would like to thank Professor Yuan Liao for help at an early stage of the project.


The authors declare they have no financial or non-financial interests. Partial financial support was received from the President Research Creative Activities Fund and Marjorie Young Bell Faculty Fund.

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Appendix A–Variable and Definitions

Variables Definition
Textual Variables
Innovation differentiation Strategy score for innovation differentiation strategy
Marketing differentiation Strategy score for marketing differentiation strategy
Cost leadership Strategy score for cost leadership strategy
CSR Variables
CSR_Net Sum of all strengths minus all concerns of five areas: community, diversity, employee relations, environment, and human rights
CSR_Strength Sum of all strengths on five areas: community, diversity, employee relations, environment, and human rights
Other Variables
ROA Earnings before extraordinary items scaled by average total assets
Firm size Natural logarithm of market valuation at the beginning of the year
Firm age Natural logarithm of numbers of years firms have been included in Compustat
Firm leverage Total liabilities divided by common equity
R&D R&D expenses scaled by average total assets
ADV Advertising expenses scaled by average total assets
CapiExp Capital expenditure scaled by average total assets
MTB Market-to-book value of assets, calculated as market capitalization plus book value of debts scaled by book value of assets
  1. Textual variables are generated from a factor analysis based on individual raw counts of the keywords scaled by the length of the document as defined in variable definitions section. Textual variables and other variables are winsorized at the 1st and 99th percentiles

Appendix B-Keyword lists

• Strategic positioning: differenti*, unique*, superior*, premium*, excellen*, leading edge, upscale, high* price*, high* margin*, high* end*, inelasticity*, cost leader*, low* pric*, low* cost*, cost advantage*, competitive pric*, aggressive pric*.

• Operations: efficien*, high* yield*, process* improvement*, asset* utilization*, capacity* utilization*, scope*, scale*, breadth*, broad, mass, high* volume*, large* volume*, economy* of scale, new* product*, quality*, reliab*, durable*.

• Marketing: marketing*, advertis*, brand*, reputation*, trademark*.

• Service: customer* service*, consumer* service*, customer* need*, sales support*, post-purchase service*, customer* preference*, consumer* preference*, consumer* relation*, consumer* experience*, consumer* support*, loyalty*, customiz*, tailor*, personaliz*, responsive*, on time*, timely*.

• Technology: innovate*, creativ*, research and development, R&D, techni*, technolog*, patent*, proprietar*.

• Infrastructure: control* cost*, control* expense*, control* overhead*, minimiz* cost*, minimiz* expense*, minimiz* overhead*, reduce* cost*, reduce* expense*, reduce* overhead*, cut* cost*, cut* expense*, cut* overhead*, decreas* cost*, decreas* expense*, decreas* overhead*, monitor* cost*, monitor* expense*, monitor* overhead*, sav* cost*, sav* expense*, sav* overhead*, cost* control*, cost* minimization*, cost* reduction*, cost* saving*, cost* improvement*, expense* control*, expense* minimization*, expense* reduction*, expense* saving*, expense* improvement*, overhead* control*, overhead* minimization*, overhead* reduction*, overhead* saving*, overhead* improvement*.

• Human resources management: talent*, train*, skill*, intellectual propert*, human capital*.

Following Banker and Ma (2018), we use wildcards (i.e., indicated by asterisk in this appendix) to capture variations in individual words. In addition, we count the two-word phrases in the form with and without a hyphen. Finally, we count the instances where phrases that contain a verb and its object existed in the same sentence without requiring them to be adjacent to each other.

Appendix C

Table 11 Factor loading

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Banker, R.D., Ma, X., Pomare, C. et al. When doing good for society is good for shareholders: importance of alignment between strategy and CSR performance. Rev Account Stud (2022).

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  • Strategy
  • Corporate social responsibility (CSR)
  • Social license to operate
  • Textual analysis
  • 10-K filings


  • L10
  • M14
  • M4