Skip to main content
SpringerLink
Log in

The impact of corporate social responsibility on corporate financial performance and credit ratings in Japan

  • Original Article
  • Published:
Journal of Asset Management Aims and scope Submit manuscript

Abstract

We investigate the impact of companies’ sustainability efforts on their corporate financial performance (CFP) and credit ratings in Japan, based on a new proxy for corporate social responsibility (CSR)—Sustainalytics’ quantitative Environment, Social and Governance (ESG) ratings. We find weak evidence of a negative impact of ESG scores (on an aggregated basis and disaggregated basis) on several accounting measures of CFP. Our quantile regression results reveal a nonlinear pattern across the quantiles, with CSR effects intensifying at the extremal quantiles. However, we find a weak positive relationship between ESG and stock market-based measures, as well as between ESG and credit ratings. Our findings suggest that investors, credit rating agencies (CRAs) and regulators should differentiate between the three types of ESG screening as they interact and contribute in their specific way to the aggregate ESG effect.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Similar content being viewed by others

Notes

  1. Lys et al. (2015) refer to this as the “investment hypothesis” as current CSR expenditures lead to improvements in future firm performance.

  2. The MSCI ESG STATS database was previously known as the KLD STATS database; the latter covered only US publicly traded companies. MSCI ESG STATS expanded its coverage of non-US companies in 2013.

  3. Both Sales and Cash (as proxies for size) use the logarithm of total sales, and cash and marketable securities, respectively, and have not been scaled to total assets. This is to isolate the effect of the specific control variable as total assets can be viewed as a measure of size too.

  4. The literature concerning credit ratings has documented many firm characteristics that influence credit ratings. Default risk is found to be inversely related to credit ratings (Lamy and Thompson 1998. Other studies (Blume et al. 1998; Bhojraj and Sengupta 2003; Mansi et al. 2004; Ashbaugh-Skaife et al. 2006) control for a set of variables routinely used in studies of credit ratings to isolate the effects of the CSR variable.

  5. See Attig et al. (2013), Blume et al. (1998), Bhojraj and Sengupta (2003), Mansi et al. (2004), and Ashbaugh-Skaife et al. (2006).

References

  • Alexander, G.J., and R.A. Buchholz. 1978. Corporate social responsibility and stock market performance. Academy of Management Journal 21 (3): 479–486.

    Article  Google Scholar 

  • Ashbaugh-Skaife, H., D.W. Collins, and R. LaFord. 2006. The effects of corporate governance on firms’ credit ratings. Journal of Accounting and Economics 42: 203–243.

    Article  Google Scholar 

  • Asian Bankers Association (2000). Developments of regional standards for Asian credit rating agencies—issues, challenges and strategic options. http://www.ctasc.org.tw/conference/Other%20Papers_files%5CCredit%20Ratings_files%5CCRAstudy.PDF

  • Attig, N., S. El Ghoul, O. Guedhami, and J. Suh. 2013. Corporate social responsibility and credit ratings. Journal of Business Ethics 117: 679–694.

    Article  Google Scholar 

  • Auer, B.R., and F. Schuhmacher. 2016. Do socially (ir)responsible investments pay? New evidence from international ESG data? The Quarterly Review of Economics and Finance 59: 51–62.

    Article  Google Scholar 

  • Aupperle, K.E., A.B. Carroll, and J.D. Hatfield. 1985. An empirical examination of the relationship between corporate social responsibility and profitability. Academy of Management Journal 28 (2): 446–463.

    Article  Google Scholar 

  • Barnett, M.L., and R.M. Solomon. 2012. Does it pay to be really good? Addressing the shape of the relationship between social and financial performance. Strategic Management Journal 33: 1304–1320.

    Article  Google Scholar 

  • Bénabou, R., and J. Tirole. 2010. Individual and corporate social responsibility. Economica 77 (305): 1–19.

    Article  Google Scholar 

  • Bhojraj, S., and P. Sengupta. 2003. Effect of corporate governance on bond ratings and yields: The role of institutional investors and outside directors. Journal of Business 76: 455–475.

    Article  Google Scholar 

  • Blume, M.E., F. Lim, and A.C. Mackinlay. 1998. The declining credit quality of U.S. corporate debt: Myth or reality. Journal of Finance 53: 1389–1413.

    Article  Google Scholar 

  • Boaventura, J.M.G., R.S.D. Silva, and R. Bandeira-de-Mello. 2012. Corporate financial performance and corporate social performance: Methodological development and the theoretical contribution of empirical studies. Revista Contabilidade and Finanças 23 (60): 232–245.

    Article  Google Scholar 

  • Bouslah, K., B. Zali, M. Turcotte, and K. Kooli. 2010. The impact of forest certification on firm financial performance in Canada and the US. Journal of Business Ethics 96 (4): 551–572.

    Article  Google Scholar 

  • Burke, L., J.M. Logsdon, W. Mitchell, M. Reiner, and D. Vogel. 1986. Corporate community involvement in the San Francisco Bay Area. California Management Review 28: 122–141.

    Article  Google Scholar 

  • Campbell, J.L. 2007. Why would corporations behave in socially responsible ways? An institutional theory of corporate social responsibility. Academy of Management Review 32 (3): 946–967.

    Article  Google Scholar 

  • Chatterji, A.K., D.I. Levine, and M.W. Toeffel. 2009. How well do social ratings actually measure corporate social responsibility? Journal of Economics and Management Strategy 18 (1): 125–169.

    Google Scholar 

  • Chava, S. 2014. Environmental externalities and cost of capital. Management Science 60 (9): 2111–2380.

    Article  Google Scholar 

  • Cheng, I. H., Hong, H., and K. Shue, 2016, Do managers do good with other people's money? American Finance Association 2013 San Diego Meetings Paper; UCD and CalPERS Sustainability and Finance Symposium 2013, Fama-Miller Working Paper, Chicago Booth Research Paper No. 12-47.

  • Cochran, P.L., and R.A. Wood. 1984. Corporate social responsibility and financial performance. Academy of Management Journal 27 (1): 42–56.

    Article  Google Scholar 

  • Ding, G.K., C. Ferreira, and U. Wongchoti. 2016. Does it pay to be different? Relative CSR and its impact on firm value. International Review of Financial Review 47: 86–98.

    Google Scholar 

  • El Ghoul, S., O. Guedhami, C.C. Kwok, and D.R. Mishra. 2011. Does corporate social responsibility affect the cost of capital? Journal of Banking and Finance 35 (9): 2388–2406.

    Article  Google Scholar 

  • Epstein, M. J. and A. Rejc-Buhovac. 2014. Making sustainability work, best practices in managing and measuring corporate social, environmental, and economic impacts. Sheffield: Greenleaf Publishing Limited

  • Erhemjamts, O., Q. Li, and A. Venkateswaran. 2013. Corporate social responsibility and its impact on firms’ investment policy, organizational structure, and performance. Journal of Business Ethics 118: 395–412.

    Article  Google Scholar 

  • Farag, H., Q. Meng, and C. Mallin. 2015. The social, environmental and ethical performance of Chinese companies: Evidence from the Shanghai Stock Exchange. International Review of Financial Review 42: 53–63.

    Google Scholar 

  • Fatemi, A., I. Fooladi, and H. Tehranian. 2015. Valuation effects of corporate social responsibility. Journal of Banking and Finance 59: 182–192.

    Article  Google Scholar 

  • Ferrell, A., H. Liang, and L. Renneboog. 2016. Socially responsible firms. Journal of Financial Economics 122 (3): 585–606.

    Article  Google Scholar 

  • Fitch Ratings. 2004. Evaluating corporate governance: The bondholders’ perspective. Credit Policy Special Report.

  • Freeman, E. 1984. Strategic management: A stakeholder perspective. Englewood Cliffs: Prentice Hall

  • Friedman, M. 1970. The social responsibility of business is to increase its profits. New York Times Magazine, September 13, 32-33.

  • Garcia, A.S., W. Mendes-Da-Silva, and R.J. Orsato. 2017. Sensitive industries produce better ESG performance: Evidence from emerging markets. Journal of Cleaner Production 150: 135–147.

    Article  Google Scholar 

  • Ge, W.X., and M.Z. Liu. 2015. Corporate social responsibility and the cost of corporate bonds. Journal of Accounting Public Policy 34: 597–624.

    Article  Google Scholar 

  • Godfrey, P.C. 2005. The relationship between corporate philanthropy and shareholder wealth: A risk management perspective. Academy of Management Review 31: 329–346.

    Google Scholar 

  • Goss, A., and G.S. Roberts. 2011. The impact of corporate social responsibility on the cost of bank loans. Journal of Banking and Finance 35: 1794–1810.

    Article  Google Scholar 

  • Griffin, J.J., and J.F. Mahon. 1997. The corporate social performance and corporate financial performance debate: Twenty-five years of incomparable research. Business and Society 36 (1): 5–31.

    Article  Google Scholar 

  • Jensen, M. 2001. Value maximization, stakeholder theory and the corporate objective function. Journal of Applied Corporate Finance (Fall), 8–21.

  • Jensen, M.C., and W.H. Mecking. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics 3 (4): 305–360.

    Article  Google Scholar 

  • Jiraporn, P., N. Jiraporn, A. Boeprasert, and K. Chang. 2014. Does corporate social responsibility improve credit ratings? Evidence from geographic identification. Financial Management 43: 505–531.

    Article  Google Scholar 

  • Karpoff, J.M., J.R. Lott Jr., and E.W. Wehrly. 2005. The reputational penalties for environmental violations: Empirical evidence. The Journal of Law and Economics 48 (2): 653–675.

    Article  Google Scholar 

  • Khan, M., G. Serafeim, and A. Yoon. 2016. Corporate sustainability: First evidence on materiality. The Accounting Review 91: 1697–1724.

    Article  Google Scholar 

  • Klapper, L., and I. Love. 2004. Corporate governance, investor protection, and performance in emerging markets. Journal of Corporate Finance 10 (5): 703–728.

    Article  Google Scholar 

  • Koenker, R., and G. Bassett. 1978. Regression quantiles. Econometrica 46: 33–50.

    Article  Google Scholar 

  • Koenker, R., and K.F. Hallock. 2001. Quantile regression. Journal of Economic Perspectives 15 (4): 143–156.

    Article  Google Scholar 

  • KPMG. 2011. KPMG international survey of corporate responsibility reporting 2011.

  • Krüger, P. 2015. Corporate goodness and shareholder wealth. Journal of Financial Economics 115: 304–329.

    Article  Google Scholar 

  • Lamy, R., and R. Thompson. 1988. Risk premier and the pricing of primary issue bonds. Journal of Banking and Finance 12: 585–601.

    Article  Google Scholar 

  • Lins, K.V., H. Servaes, and A. Tamayo. 2017. Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis. Journal of Finance 72 (4): 1785–1824.

    Article  Google Scholar 

  • Lioui, A., and M. Sisto, 2017. Corporate social responsibility and the cross section of stock returns, Available at SSRN: https://ssrn.com/abstract=2730722.

  • Lydenberg, S., Marlin, A.T., and S. Strub, 1986. Rating America's corporate conscience: A provocative guide to the companies behind the products you buy every day, Addison Wesley Publishing Company.

  • Lys, T., J.P. Naughton, and C. Wang. 2015. Signaling through corporate accountability reporting. Journal of Accounting and Economic 60 (1): 56–72.

    Article  Google Scholar 

  • Mansi, S., M. Maxwell, and D. Miller. 2004. Does auditor quality and tenure matter to investors? Evidence from the bond market. Journal of Accounting Research 42: 755–793.

    Article  Google Scholar 

  • Margolis, J. D., Elfenbein, H.A., and J.P. Walsh, 2009. Does it pay to be good? A meta-analysis and redirection of research on the relationship between corporate social and financial performance, Available at SSRN: http://ssrn.com/abstract=1866731

  • Mattingly, J.E., and S.L. Berman. 2006. Measurement of corporate social action: discovering taxonomy in Kinder Lydenberg Domini Ratings Data. Business and Society 45: 20–46.

    Article  Google Scholar 

  • McWilliams, A., and D. Siegel. 2000. Corporate social responsibility and financial performance. Strategic Management Journal 21 (5): 603–609.

    Article  Google Scholar 

  • Menz, K.M. 2010. Corporate social responsibility: Is it rewarded by the corporate bond market? A critical note. Journal of Business Ethics 96: 117–134.

    Article  Google Scholar 

  • Nguyen, P.A., Kecskes, A., and S. Mansi. 2017. Does corporate social responsibility create shareholder value? The importance of long-term investors. Journal of Banking and Finance pp. 1–21.

  • Oikonomou, I., K. Brooks, and S. Pavelin. 2014. The effects of corporate social performance on the cost of corporate debt and credit ratings. The Financial Review 49: 49–75.

    Article  Google Scholar 

  • Orlitzky, M., and J.D. Benjamin. 2001. Corporate social performance and firm risk: A meta-analytic review. Business and Society 40: 369–396.

    Article  Google Scholar 

  • Ottawa, B. 2018. Not considering ESG could mean failing fiduciary duty: Compenswiss. IPE, Available at https://www.ipe.com/news/esg/not-considering-esg-could-mean-failing-fiduciary-duty-compenswiss/www.ipe.com/news/esg/not-considering-esg-could-mean-failing-fiduciary-duty-compenswiss/10025298.fullarticle.

  • Preston, L.E., and D.P. O’bannon. 1997. The corporate social-financial performance relationship: a typology and analysis. Business and Society 36 (4): 419–429.

    Article  Google Scholar 

  • Principles for Responsible Investment. 2016. Global guide to responsible investment regulation. PRI Association.

  • Rodgers, W., H.L. Choy, and A. Guiral. 2013. Do investors value a firm’s commitment to social activities? Journal of Business Ethics 114: 607–623.

    Article  Google Scholar 

  • Rust, R., K. Lemon, and V. Zeithaml. 2004. Return on marketing: Using customer equity to focus marketing strategy. Journal of Marketing 68: 109–127.

    Article  Google Scholar 

  • Sahut, J.M., and H. Pasquini-Descomps. 2015. ESG impact on market performance of firms: International evidence. International Management 19 (2): 40–63.

    Google Scholar 

  • Sharfman, M.P., and C.S. Fernando. 2008. Environmental risk management and the cost of capital. Strategic Management Journal 29: 569–592.

    Article  Google Scholar 

  • Spencer, B.A., and G.S. Taylor. 1987. A within and between analysis of the relationship between corporate social-responsibility and financial performance. Akron Business and Economic Review 18 (3): 7–18.

    Google Scholar 

  • Teoh, S.H., I. Welch, and C.P. Wazzan. 1999. The effect of socially activist investment policies on the financial markets: Evidence from the South African boycott. The Journal of Business 72 (1): 35–89.

    Article  Google Scholar 

  • Tsoutsoura, M. 2004. Corporate social responsibility and financial performance, Center for Responsible Business.

  • Ullmann, A. 1985. Data in search of a theory: A critical examination of the relationships among social performance, social disclosure, and economic performance of U.S. firms. Academy of Management Review 10: 540–557.

    Article  Google Scholar 

  • Vance, S.C. 1975. Are socially responsible corporations good investment risks? Management Review 64 (8): 19–24.

    Google Scholar 

  • Waddock, S.A., and S.B. Graves. 1997. The corporate social performance—financial performance link. Strategic Management Journal 18 (4): 303–319.

    Article  Google Scholar 

  • Wolfe, R., and K. Aupperle. 1991. Introduction to corporate social performance: methods for evaluating an elusive construct. In J. E. Post (Ed.), Research in Corporate Social Performance and Policy 12, 265-68.

  • Wu, M.L. 2006. Corporate social performance, corporate financial performance, and firm size: A meta-analysis. Journal of American Academy of Business 8 (1): 163–171.

    Google Scholar 

  • Xie, X.M., Y.Y. Jia, X.H. Meng, and C. Li. 2017. Corporate social responsibility, customer satisfaction, and financial performance: The moderating effect of the institutional environment in two transition economies. Journal of Cleaner Production 150: 26–39.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. EDHEC Business School, Roubaix Cedex 1, France

    Frank J. Fabozzi & Peck Wah Ng

  2. University of Kent, Kent Business School, Canterbury, Kent, CT2 7NZ, UK

    Diana E. Tunaru

Authors
  1. Frank J. Fabozzi
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Peck Wah Ng
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Diana E. Tunaru
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Frank J. Fabozzi.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Fabozzi, F.J., Ng, P.W. & Tunaru, D.E. The impact of corporate social responsibility on corporate financial performance and credit ratings in Japan. J Asset Manag 22, 79–95 (2021). https://doi.org/10.1057/s41260-021-00204-6

Download citation

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/s41260-021-00204-6

Keywords

JEL Classification

Search

Navigation