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European Business Review

Corporate social responsibility and economic performance in the top British companies: are they linked?
George Balabanis Hugh C. Phillips Jonathan Lyall

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In the modern commercial era, companies and
their managers are subjected to well publicised pressure to play an increasingly active
role in society – so called “Corporate social
responsibility”. It has been argued that an
element in this development is simply enlightened self-interest in that social responsibility
enhances corporate image and financial performance. To date the evidence to support
this thesis derives from North America. Outside this continent evidence for any relationship is sparse. This study investigates the
claims that social responsibility and economic
performance are linked and attempts to test
the relationship within a UK context.
This study will initially attempt to define
the concept of corporate social responsibility
and to examine its guiding principles. Subsequently, the available empirical research into
the link between corporate social responsibility and economic performance will be evaluated and research hypotheses will be formulated. Finally, the research method, measures
used, findings and conclusions will be presented.

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Corporate social
responsibility and
economic performance
in the top British
companies: are they
George Balabanis
Hugh C. Phillips and
Jonathan Lyall
The authors
George Balabanis is a Lecturer at the European Business
Management School, University of Wales Swansea,
Swansea, UK.
Hugh C. Phillips and Jonathan Lyall are at the Leicester
Business School, DeMontfort University, Leicester, UK.
This paper investigates the relationship between corporate
social responsibility (CSR) and the economic performance
of corporations. It first examines the theories that suggest
a relationship between the two. To test these theories,
measures of CSR performance and disclosure developed by
the New Consumer Group were analysed against the
(past, concurrent and subsequent to CSR performance
period) economic performance of 56 large UK companies.
Economic performance included: financial (return on
capital employed, return on equity and gross profit to sales
ratios); and capital market performance (systematic risk
and excess market valuation). The results supported the
conclusion that (past, concurrent and subsequent) economic performance is related to both CSR performance
and disclosure. However, the relationships were weak and
lacked an overall consistency. For example, past economic
performance was found to partly explain variations in
firms’ involvement in philanthropic activities. CSR disclosure was affected (positively) by both a firm’s CSR performance and its concurrent financial performance. Involvement in environmental protection activities was found to
be negatively correlated with subsequent financial
performance. Whereas, a firm’s policies regarding
women’s positions seem to be more rewarding in terms of
positive capital market responses (performance) in the
subsequent period. Donations to the Conservative Party
were found not to be related to companies’ (past, concurrent or subsequent) financial and/or capital performance.

Corporate social responsibility (CSR) has
recently been the subject of increased academic attention. While social responsibility has
figured in commercial life over the centuries,
in the modern era increasing pressure has
been placed on corporations to play a more
explicit role in the welfare of society. Although
the topic rose to prominence in the 1970s
(Carroll, 1979; Wartick and Cochran, 1985),
the first publication specifically on the field
dates back to 1953, with Bowen’s “Social
responsibilities of the businessman”. In this
work Bowen argues that industry has an
obligation “to pursue those policies, to make
those decisions, or to follow those lines of
actions which are desirable in terms of the
objectives and values of society” (Bowen,
1953, p. 6). Epstein (1987), however, argues
that the concept of specific business ethics can
be traced further back to certain academics
and businessmen in the nineteenth century
who promulgated the belief that “private
business is a public trust”.
Bowen (1953) sets the scene in this field by
suggesting that the concept of specifically
corporate social responsibility emphasises
• businesses exist at the pleasure of society
and that their behaviour and methods of

European Business Review
Volume 98 · Number 1 · 1998 · pp. 25–44
© MCB University Press · ISSN 0955-534X


ethical and discretionary demands that society places on business. 1977). it can be claimed that they are broad 26 . As a result.. A growing number of scholars take the view that firms can no longer be seen purely as private institutions but as social institutions instead (Frederick et al. etc. However. creditors. society has an implicit social contract with the firm. encapsulating them into three driving principles of social responsibility. Social responsibility is also seen as a consequence of and an obligation following from the unprecedented increase of firms’ social power (as tax payers. 1975).. 1983). recruiters. Phillips and Jonathan Lyall Volume 98 · Number 1 · 1998 · 25–44 enough to allow departures from this narrow path.) whose contribution is necessary for a firm’s success. With respect to Friedman’s argument that the legal conception of corporations’ articles and memorandums of associations limits a firm’s involvement solely to economic roles. legal. government’s involvement in the economy and conversely industry’s involvement in the political process through lobbying. Friedman (1970) argued that the successful functioning of our society depends on the role specialisation of its institutions (or systems). Carroll (1979) suggests that CSR is defined as the economic. in return for the right to exploit resources in the production process. 1983). communities and the environment in which those people or communities live (Frederick et al. the separation of ownership and management. Miss shellvida husniyah At 16:57 07 October 2014 (PT) operation must fall within the guidelines set by society. society has a claim on the firm and the right to control it. Another school of thought sees social responsibility as a contractual obligation firms have towards society (Donaldson. 1975). 1992). Similarly. The benefits flowing from firms need to be shared collectively. The specifics of this contract may change as social conditions change but this contract in general always remains the basis of the legitimacy of the demand for or assertion of the need for CSR (Epstein. government with its potential for inefficiency and insensitive bureaucratic methods may be forced to step in. employees. challenge the very foundations of Friedman’s thesis – the economic model. 1992) of this view. Organisations are seen purely as legal entities incapable of value decisions.) (Davis. Zanies conceptualised CSR as the degree of “fit” between society’s expectations of business and the ethics of business. which are that: (1) business is a social institution and thus obliged to use its power responsibly. 1992. Thus. In general. This thesis is similar to the stakeholders model (Freeman. Opponents (Frederick et al. and (3) individual managers are moral agents who are obliged to exercise discretion in their decision making. According to him the corporation is an economic institution and thus should specialise in the economic sphere. They claim that the economic model and role specialisation of institutions (or systems) are not working as suggested. Thus. the social responsibilities of a firm seem to arise from the intersection (and compatibility) of the political and cultural systems with the economic system (Jones. 1983). A manager who uses a firm’s resources for non-profit social purposes is thought to be diverting economic efficiency and levying an “illegal tax” on the organisation.Corporate social responsibility and economic performance European Business Review George Balabanis. 1984) and claims that a firm is responsible not only to its shareholders (owners) but to all stakeholders (consumers. In addition. socially responsible behaviour will be rectified by the market through profits.. etc. In Friedman’s (1970) view business has only one social responsibility and that is to maximise the profits of its owners (to protect their property rights). 1987). Freeman. Wood (1991) expanded these ideas. He argues that CSR is really nothing more than another layer of managerial responsibility resulting from the evolution of capitalism. This comes as a result of the rise of oligopolies in certain sectors. (2) businesses are responsible for the outcomes relating to their areas of involvement with society. An interesting twist to the argument is provided by Tuzzolino and Armandi (1981) who provide a motivational theory of Downloaded by UNIVERSITAS TRISAKTI. if corporations do not adopt “social responsibility”. and • businesses act as moral agents within society. Failure to balance social power with social responsibility may ultimately result in the loss of this power and a subsequent decline of the firm (Davis. It is society in the first place that has permitted firms to use both natural and human resources and has given them the right to perform their productive functions and to attain their power status (Donaldson. 1984. Hugh C. Lodge. CSR means that a corporation should be held accountable for any of its actions that affect people.

Angelidis and Ibrahim (1993) defined CSR as “corporate social actions whose purpose is to satisfy social needs”.). 101). – depending on the stance taken. while the empirical evidence for and against will be presented later. Relationship with concurrent and subsequent (to CSR) economic performance Those who have theorised that a negative relation exists between social responsibility and economic performance have argued that a high investment in social responsibility results in additional costs. job-sharing. CSR focuses more on the consequences of organisational actions. They developed an equilibrium theory based on social demand and supply.). at the operational level insights are more sparse. • equality of treatment for minorities. the discussion will be divided into the relationships suggested with: • concurrent and subsequent (to CSR) economic performance. According to this view. Hugh C. The relationship between corporate social responsibility and economic performance Commentators have argued both for and against the view that corporate social responsibility is enlightened economic self-interest. reduction of emissions and waste and the recycling of materials). 855) the added costs may result from actions such as “making extensive charitable contributions. etc. etc. what can be conceived as “social responsibility” can range from simply maximisation of profits. etc. According to him “business ethics” refer to issues and dilemmas related to the morality of organisational actions or decisions. and • employee schemes (higher standards of occupational health and safety. He defined CSR as the “discernment of issues. or fulfilment of social contractual obligations. However. • involvement in social causes (involving anything from human rights to AIDS education). flexitime.). As a consequence different aspects of a firm’s operations can be seen to come under its sway – depending on the stance one adopts. Phillips and Jonathan Lyall Volume 98 · Number 1 · 1998 · 25–44 organisational social response based on Maslow’s hierarchy of needs. Epstein (1987) attempted to differentiate “business ethics” and CSR and to incorporate them into a strategic process. Thus. The controversy at the theoretical level will be considered here. and • past economic performance. expectations and claims on business organisations regarding the consequences of policies and behaviour on internal and external stakeholders” (Epstein 1987.). maintaining plants in economically depressed locations and 27 . many of these have now been regulated by statute. • profit sharing. • disclosure of the board of directors. While academic debate abounds at the theoretical level. Schwarts and Dahl observed that socially acceptable behaviour of North American firms at the time of writing – the 1970s included: • disclosure of information to shareholders. As has been shown. firms adopt CSR after they have satisfied three earlier layers of needs (which include: “physiological” or survival needs fulfilled by corporate profits. and “affiliative needs” such as participation in trade association. promoting community development plans. “safety needs” such as dividend policy. • philanthropy (donating to charities. which are in substance the same for both North American and the UK firms. He found that current CSR concerns. • ethics in advertising. conglomeration and competitive position. etc. good standard of staff treatment. • urban investment (working with local government to regenerate small businesses and the inner city environment generally). p. p. Similarly. and • social impact of technology. Miss shellvida husniyah At 16:57 07 October 2014 (PT) Corporate social responsibility and economic performance European Business Review George Balabanis. encompass such areas as: • environmental protection (e. opinions differ in terms of the basis or scope of CSR and even the very definition of the term. according to Vyarkarnam (1992).g. CSR is the fulfilment of a firm’s “internal and external self-actualisation needs” which are located on the top of their organisational needs pyramid. achievement of a social equilibrium. in order to clarify what is a complex and at times convoluted debate.Downloaded by UNIVERSITAS TRISAKTI. identifying a set of factors that affects them (social supply and demand). etc. • monopolistic behaviour (predatory pricing. lobby groups. Present day concerns have changed focus. to satisfaction of stakeholders’ social needs. • environmental protection. fulfilment of a firm’s needs. (1988. According to McGuire et al.

at least in this area. unregulated issues on labour relationships). 28 . According to Spicer (1978a. a firm’s CSR behaviour seems to be a factor that influences banks and other institutional investors’ investment decisions. (1988). Relationship with past economic performance According to Parert and Eibert (1975). government.b). According to Freeman (1984) and McGuire et al. (1988) cite the argument that a firm perceived as high in social responsibility may face relatively fewer labour problems or perhaps customers may be more favourably disposed to its products. For example. consumers. This is supported by the assertion that corporations with strong prior economic performance appear to be more likely to have high current levels of social disclosure. (1991). if corporate social responsibility is viewed as a significant cost. gas emissions) may spill-over and affect the corporate image in other areas as well (e. (1988) the implications of the conversion of “ implicit” to “explicit” contracts may have broader effects than the direct costs resulting from the forced change in its behaviour (e. Ullmann (1985) argued that corporations must reach an acceptable level of economic performance before devoting company resources to meet social demands. Thus. 1995. According to McGuire et al. firms with an image of high CSR may find that they face both fewer and lower-cost explicit claims than those with a less enlightened stance. According to stakeholder theory the value of a firm is related to the cost of both “explicit claims” and “implicit claims” on a firm’s resources. CSR activities might improve a firm’s reputation and relationship with bankers. Belkaoui (1976) investigated the information content of pollution control disclosures. Graves and Waddock (1994) and Pava and Krausz (1996). Hugh C. Claimants include not only the legal owners of the firm but other constituencies such as lenders. others have argued the case for a positive association. Freeman.g. then it is argued that the parties to these contracts may attempt to transform them from implicit to explicit agreements. Miss shellvida husniyah At 16:57 07 October 2014 (PT) Corporate social responsibility and economic performance European Business Review George Balabanis. there are others with whom the firm has made implicit contracts. banks.Downloaded by UNIVERSITAS TRISAKTI. etc. For example. firms.g. Shane and Spicer. It is also expected that poor performers would seek more immediate results and consequently they may prefer short-term and high-yield investments to the uncertain and in general longer-term CSR investments. cost of installment of gas emission control equipment). employees. These costs might put a firm at an economic disadvantage compared to other. Jones. McGuire et al. less socially responsible. Alternatively. from a theoretical perspective. Phillips and Jonathan Lyall Volume 98 · Number 1 · 1998 · 25–44 establishing environmental protection procedures”. McGuire et al. Other studies produced results consistent with the notion that corporate social responsibility activities impact on the financial markets (Anderson and Frankle. firms with relatively high past financial performance may be more willing to absorb these costs in the future. Spicer.g. etc. Modern corporate stakeholder theory (Cornell and Shapiro. Stakeholders who have explicit claims on the corporation include – besides its owners – lenders. socially irresponsible actions in one area (e. 1983. His results suggested a positive relationship between economic performance and social responsibility. 1978a.b). employees. investors and government officials.. Some studies have suggested a positive relation. The latter may be more costly for the firms involved. a high CSR profile may improve a firm’s access to sources of capital. Ullmann (1985) and Roberts (1992). arguments can and have been made both for and against a positive relationship between social responsibility and concurrent or subsequent (to CSR) economic performance. Improved relationships with them may well be translated to economic benefits. 1980. Rosen et al.. Thus. 1987. Ullmann (1985) also suggested that companies with less stable stock market patterns would be relatively less likely to commit resources to social activities. 1988) can also explain part of the CSR/economic performance relationship. In contrast. whereas others have concluded that the effects are negative or inconsequential. Prior empirical research Empirical research into the effects of corporate responsibility has produced mixed results. In addition. which could include the quality of service and CSR. 1984. if the firm does not honour these implicit contracts. trade unions) striving to make their claims explicit. 1988). government. A similar view is that policies and expenditures in discretionary areas such as social programmes may be especially sensitive to the existence of “slack” resources in the firm (McGuire et al. Thus. This could in turn result in other implicit stakeholders (e.g.

Cochran and Wood (1984) used corporate social responsibility rankings developed by Moskowitz (1972) to test the relationship between corporate social responsibility activities and firm’s performance. this study will use a more comprehensive measurement of CSR performance (admittedly within the context of the UK social and business environment). prior research has focused on the North American experience. In most of the previous studies. Trotman and Bradley (1981) and Mahapatra (1984) concluded that corporate social responsibility activities may lead to increased systematic risk. Chugh (1978). Frankle and Anderson (1978) rejected Belkaoui’s (1976) interpretation and argued that non-disclosing firms had consistently performed better in the market. arguing that his results were driven by spurious correlations. as measured by both stock market returns and accounting based measures. that companies are more likely to disclose social responsibility expenditures when their financial statements indicate favourable economic performance. economic performance periods were concurrent to the CSR performance period. According to Ullmann (1985) this may be attributed to the use of varying and questionable measures of CSR.. and thus to make possible reliable inferences about direction of causation. However. McGuire et al. a combination of economic performance measures and including the necessary intervening variables in the research design. concurrent and subsequent to CSR economic performance. Miss shellvida husniyah At 16:57 07 October 2014 (PT) Corporate social responsibility and economic performance European Business Review George Balabanis. To overcome these limitations. were found to be more closely related to corporate social responsibility than was subsequent economic performance. One drawback of the above empirical studies is that they failed to distinguish between past. Phillips and Jonathan Lyall Volume 98 · Number 1 · 1998 · 25–44 However. economic performance covered a (commonly five year) period “surrounding” the CSR performance and/or social disclosure periods. 1991). In a similar manner. concurrent and subsequent to CSR performance. emphasising that associations not causal relationships were being investigated. the empirical research into the relationship between corporate social responsibility and economic performance is confusing and far from conclusive. whereas this study focuses on corporations that operate in the UK environment. Hugh C. Mills and Gardner (1984) concluded in their analysis of the relationship between social disclosure and economic performance. McGuire et al. and • past economic performance. Ingram (1978) concluded that the information content of social responsibility disclosures was conditional on the market segment with which a firm is identified. Practically. Thus. a weak positive association between corporate social responsibility activities and economic performance was found. certain studies have replicated earlier research and found conflicting results. 29 . Alexander and Bulcholz (1978) and Abbott and Monsen (1979) found no significant relationship between a corporation’s level of social responsibility activities and stock market performance. differences in the research methodologies and the financial performance measures used. in Mahapatra (1984) and Mills and Gardiner (1984) studies. After controlling for industry classification and corporate age. They used Fortune magazine’s ratings of corporate reputations to analyse the relationship between perceived corporate social responsibility and economic performance. In response Spicer (1980) stated that Chen and Metcalf (1980) misinterpreted the purpose of his study.Downloaded by UNIVERSITAS TRISAKTI. finding a positive association. Routinely. (1988) were the first to break this tradition and to separate economic performance into past. the CSR performance and/or social disclosure periods were the midpoints of that period. Research methodology The objective of the current study is to test the hypothesis that there is a relationship between CSR and economic performance of firms in terms of their: • contemporaneous or subsequent economic performance. Only Shane and Spicer (1983) looked at economic performance subsequent to CSR disclosure period.b) conclusions. The main criteria for their selection were quotation on the London Stock Exchange and the availability of CSR ratings by the New Consumer Group (NCG) – a UK public-interest research organisation (Adams et al. Prior economic performance of the firms. In total 56 firms were included in the study. As mentioned earlier. In addition. (1988) suggested that economic performance may be a variable influencing social responsibility activities. Chen and Metcalf (1980) disagreed with Spicer’s (1978a.

p. Sectors such as financial services and media related products were not included due to the difficulties associated in the assessment of CSR performance (Adams et al. The laborious triangulation of both information sources and data collection methods. Therefore. 0 = average.. and the use of multi-dimensional measurements of CSR. p.).. the information provided by the company over and above its annual report. annual reports) or a single data collection method (panel of experts. (A five point scale was produced: –2 = well below average. additional information for each company came from several (internal) informants (for each firm) who were contacted by NCG. (1991.e. The 13 ratings produced by NCG were: (1) CSR disclosure. 2 = well above average. 1975). etc. The main focus of the NCG organisation is the consumer sector. the extent to which the company went beyond minimum statutory disclosure requirements and the comments provided on the first version of NCG CSR profiles. trade unions. only the first eight were used). seem to have significantly decreased the possibility of both the validity and reliability problems in their ratings. 1991. Measurement of corporate social responsibility Previous studies in this area have primarily used three criteria to measure corporate social responsibility (McGuire et al. It seems that Adams et al. The ratings were complemented by primary data collected via a 30 . 1991. The latter ones are based on the author’s (Moskowitz) own evaluations and a panel of businessmen and MBA students evaluations. p. 1 = above average. trade associations. The validity of independent experts ratings rests on the expertise of the assessors and the accuracy of the information available to them. 1991. 1972. Downloaded by UNIVERSITAS TRISAKTI. pp. Apart from the questionnaire.. –1 = below average. Phillips and Jonathan Lyall Volume 98 · Number 1 · 1998 · 25–44 multi-wave mail survey directed to companies (for details of the questionnaire see Adams et al. Evidence for the validity of the ratings comes from the number and diversity of sources used to produce a relatively comprehensive index of CSR performance.Corporate social responsibility and economic performance European Business Review George Balabanis. apply only to a small number of industries or sectors. In addition. as has already been mentioned. The sources include: commercial cutting services. Commonly used expert-based rankings in the US studies are the Council of Concerned Businessmen Index and Business and “Society’s” rankings (Moskowitz. in some cases they had to get information (for a single company) from 20 different informants. Hugh C.) (2) The extent to which a company encourages the advancement of women. Miss shellvida husniyah At 16:57 07 October 2014 (PT) The study covered more than 20 industry sectors. • content analysis of annual reports and other corporate documents. 1991). 55). research and public relations firms and national and international public interest groups. produced by the New Consumer Group (NCG).. 1988): • expert evaluations. 58). and • performance in controlling pollution – as a proxy measure. As the authors emphasise. In this study. The pollution control proxy measure is limited in value to those industries where pollution is a significant issue. Similar to other studies in this area. reliance on a single information source (e. Disclosure was assessed on whether the company completed the questionnaires sent by NCG and the Council of Economic Priorities. Each of these measures is subject to limitations. they were not incorporated into the current study (i. 531-58). being the product of the company’s public relations programme. (confined by a general absence of relevant UK sources) the ratings of corporate social responsibility were obtained from the publication Changing Corporate Values (Adams et al.) have been addressed and avoided. measurement limitations of prior studies such as: use of only one dimension (pollution proxies. The assessment of companies in the NCG book covers the years 1988 and 1989. content analysis.. This rating was based on extent to which a company provides maternity leave. though there was a deliberate limitation in terms of industry coverage. This effort resulted in the development of company CSR profiles which were sent to the firms for comment and refinement. The last five categories. Each company was rated on 13 different aspects related to CSR (listed below). business directories and databases. The informational value of annual reports and other public corporate documents as a source of hard data can be queried.g. in the list. content analysis that included the quantity (the number of pages) and quality of information related to CSR in their annual reports was also used (Adams et al. etc. 531) took all reasonable precautions to minimise bias and systematic error in their measurement.

Phillips and Jonathan Lyall Volume 98 · Number 1 · 1998 · 25–44 career breaks. 2 = well above average. only donations to the Conservative Party were examined. it was excluded from the study. (Four point scale: –1 = below average. this rating included factors such as secondment of staff. As ratings were available for only half of the sampled firms.Downloaded by UNIVERSITAS TRISAKTI. Hugh C. this measure could not be used across the whole range of firms. 1 = some environmental action. (7) Subscription to the Economic League. (A yes/no scale was used.) (8) The extent to which the company’s activities have a significant effect on the environment. To qualify for membership a firm should contribute more than 0. Miss shellvida husniyah At 16:57 07 October 2014 (PT) Corporate social responsibility and economic performance European Business Review George Balabanis. Its main aim is to promote community action by the private sector. This was more of an industry-based classification of a firm’s impact on the environment. a “blacklisting organisation” that sells information to employers on individuals regarded as potential subversives. oil and mining industries). (9) Respect for life (animal cruelty) refers to animal testing. conditions under which animals are reared for food. in career advancement. 1 = above average. As this indicator is confined to specific businesses (e. The degree (depth) of a firm’s business involvement with South Africa was used as a proxy.) (3) The extent to which a company encourages the placement and advancement of ethnic minorities. whether or not a firm has a written environmental policy and/or an environmental office/officer was taken into account. As this rating refers to the industry’s rather than actual firm’s activities. 2 = industries with significant environmental impact (clothing. fishing techniques used and genetic engineering. 1 = above average. “Business in the community” is a partnership of 250 companies and 30 (governmental. In addition. 0 = average. soft drinks and brewing companies). fast food. In addition. 0 = average. pharmaceuticals. (Three point scale –1 = below average. agricultural goods and car manufacturing firms).5 per cent of its pre-tax profits to the community.) (6) Whether the company has made a donation to the British political parties in the 1986-1990 period. A four point scale was used.) (5) Environmental action refers to initiatives the company is undertaking to reduce its environmental impact or improve its environmental protection performance. (Three point scale –1 = below average 0 = average. specific initiatives and the number of ethnic minorities found at senior managerial positions. However. Similarly “Per cent club” is another UK organisation that promotes charitable donations. membership of “Business in the community” and “Per cent club” were also taken into account. especially young blacks. 2 = concerted environmental action. electrical goods. London-based organisation founded in the 1970s which aims to help ethnic minorities. and 0 = industries with average impact (all the other industries and sectors). 1 = above average. This rating was based on the existence of well-designed ethnic monitoring and equal opportunities policies. pesticides. where: 3 = industries with major environmental impact (chemical. (Three point scale: 0 = none. crèche facilities and job share schemes. Some of them had already 31 . this index was excluded from the study. trade unions and/or voluntary) organisations.) Information on the size of donations provided was not complete for all firms and thus not usable. gifts in kind and facilities provided to staff to engage in charitable activities. Other factors taken into account were: the recruitment. (A yes/no scale was used. it was used in the research as intervening or classificatory variable rather than a measure of CSR. brewery and tobacco industries). 1 = industries with above average impact (tobacco. training and promotion of women and the proportion of women at different levels of management especially at senior management level. “Fullemploy” is a UK.g. (11) Doing business with “oppressive regimes”. membership of the “Fullemploy” organisation. disregarding the firm-specific efforts to alleviate it. (10) Respect for people refers to a company’s involvement in the manufacturing and sales of alcohol and tobacco products as well as gambling. As well as charitable donations as a proportion of pre-tax profits. As none of the examined firms has donated to the Labour or other parties.) (4) Philanthropy or charitable giving and involvement to community projects.

as mentioned earlier. Therefore. Hugh C. performance is captured mainly by the following four indicators: women’s position. according to Ullmann (1985).Downloaded by UNIVERSITAS TRISAKTI. The data were obtained from the Datastream on-line database. and 1990-1994 (post-assessment period). However. and 1991-1994 (post-assessment period). information on donations to the Conservative Party and subscription to the Economic League are related to the 1986-1990 period (this was to cover party donations during the 1987 election period). ethnic minorities’ position. GPS). economic performance data were divided into three periods: 1984-1987 (pre-assessment period). (13) Business relationships with the least developed countries. Inversely. Return on Equity. 19861990 (concurrent period). Thus. 1988-1989 (concurrent period). CSR disclosure is measured by the first dimension in the list. As this rating was only relevant to defence related industries. an interference between CSR disclosure and CSR performance seems to exist and needs to be checked. In particular. ROCE. As NCG did not rely exclusively on information (disclosed or) emanating from firms themselves to assess CSR performance. A further advantage of the CSR measurement used is that it provides different ratings for CSR performance and disclosure. The content of these indicators covers all the CSR dimensions of the modern firms as identified by Vyarkarnam (1992). Firms have a variety of reasons to misrepresent or even conceal their actual CSR performance. In this study. Donations to the Conservative Party and participation in the Economic League due to their dichotomous nature will be used as complementary measures. pp. For more information on what factors were included to produce the ratings of each category see Adams et al. There is an obvious and important difference between what companies do and what they say they do (or did). if this indicator was used as a CSR measure. For the purpose of this study. Ullmann (1985) emphasised that a mistake common to studies of this kind is that researchers do not differentiate between the two. Periods of analysis The set of corporate social responsibility measures available related to the period 19881989. a differentiation between CSR disclosure and CSR performance is operationally possible. is used as an intervening variable. firms with “poor” CSR record (or with high CSR expenses) tend to under-report this information. Economic performance measures were averaged for each period. Anderson and Frankle (1980) and Abbott and Monsen (1979) . these are related to economic performance data for the periods: 1984-1985 (pre-assessment period). (12) Production and/or sales of military equipment. This is because some of the CSR activities might be at the expense of other investments which were more profitable and closer to shareholders’ interests. NCG rated firms on the basis of their depth of business involvement with third world countries. 32 . ROE. In addition. Trotman and Bradley (1981). EMV and Beta – a measure of a firm’s systematic risk). Based on the above period of time. Miss shellvida husniyah At 16:57 07 October 2014 (PT) Corporate social responsibility and economic performance European Business Review George Balabanis. (1991. CSR Measures of economic performance and hypotheses This study followed the precedent of most of the previous studies on the topic and used accounting data to measure financial performance and capital market data to measure systematic risk and excess market valuation (capital market performance). The variables used were: (1) three accounting based measures (Return on Capital Employed. In this instance. the effect on the environment rating. disregarding their nature and thereby whether their actions could be regarded as socially responsible or not. and (2) two capital market based (Excess market valuation. and the ratio of gross profit to sales. philanthropy and environmental actions. it could not be applied to any representative sample of firms. the term economic performance will be used to describe both financial and capital market performance. Finally. there is a tendency to overstate their CSR performance in order to create a positive impression as a part of their PR efforts. 5-54). Phillips and Jonathan Lyall Volume 98 · Number 1 · 1998 · 25–44 significant investments in South Africa before its international condemnation and thus divestment could have been more difficult for them. those firms who by chance or choice do not trade internationally would be appear misleadingly to be gratuitously credited with social responsibility.

the book value of these assets. All three measures will be used in a complementary fashion so as to compensate for their disadvantages. the higher its concurrent and subsequent financial performance. both ROCE and ROE can be distorted by the effect of inflation on the book value of the assets. before its democratisation) and reduce a firm’s range of strategic alternatives. As sustained growth in financial performance is a primary goal for most managers. the higher the level of CSR disclosure. gaining consumers’ goodwill and support for its products. installation of environmental protection equipment. Both theoretical argument and prior 33 . 1988). H1a: The higher the level of past financial performance. investing in South Africa. literature on the effects of CSR on (concurrent and subsequent) financial performance (FP) is inconclusive. The third accounting-based measure to be used is the gross profit to sales ratio. The argument against this view is that CSR consumes resources and can be costly. satisfactory financial performance may have a definite influence on the level of support top corporate decision makers can commit to future social responsibility activities (Ullmann. 1987. Spicer. etc. in all likelihood. For example. The main arguments for a positive relationship are that CSR is an indicator of management’s ability to deal effectively and proactively with stakeholders’ demands (and/or possible threats which if they materialised would have an adverse impact on firm’s future FP). hypothesis H3 is formulated: H3: The higher the level of a firm’s involvement in costly CSR activities. Phillips and Jonathan Lyall Volume 98 · Number 1 · 1998 · 25–44 The ratios of return on capital employed and the return on equity measure the relative efficiency of asset utilisation. CSR’s impact on FP is realised by either: increasing employee productivity and morale or reduction of potential labour problems. Satisfying stakeholders’ explicit and implicit demands. Thus: H1b: The higher the level of past financial performance. empirical work can be used to support the argument that CSR can have either a negative or a positive impact on financial performance. 1988. reflecting the effect of inflation on nominal asset prices. As has been mentioned earlier. Its main advantage is that it is free from leverage differences but it is handicapped in the sense that it is subject to inflation distortions and. CSR activities such as charitable donations. Also. two firms may have identical physical assets that they purchased at different times. Based on this argument. Hugh C. 1985). putting the firm at an economic disadvantage compared to its competitors. as it might seem to be difficult to justify this “redirection” of profits towards CSR activities to shareholders (Ullmann. 1978a. it can be suggested that a positive association should exist between past financial performance and the level of CSR performance (Cornell and Shapiro. can be seen as carrying a significant cost element. McGuire et al. Communication or disclosure of CSR performance information to stakeholders is necessary for these effects to take place and for stakeholders to fully appreciate a firm’s social contribution. the higher the level of CSR performance.b). stopping possible actions by lobby groups against the firm and the resulting bad publicity. support to community projects. A major strength of the ROCE ratio is that it is free from the effects of bias that can result from differences in capital structure between firms. Given that in periods of low profitability economic demands may have priority over discretionary social responsibility expenditures.. unlike the other measures. trends in accounting-based measures are frequently used in evaluating the performance of management. However. Based on the above. Miss shellvida husniyah At 16:57 07 October 2014 (PT) Corporate social responsibility and economic performance European Business Review George Balabanis. gaining their support and/or averting potential threats is thought to improve firm’s FP. fails to capture the relative effectiveness of the use of assets. withholding of CSR information and secrecy may cultivate suspicion and/or distrust to stakeholders which can be translated to lower financial performance. preventing government officials imposing costly regulation. emphasis on CSR may distract resources from more economically profitable uses (e. firms may be less inclined to disclose information on expenditures for CSR activities.g. Put formally as a hypothesis this is: H2b: The higher the level of a firm’s CSR disclosure. the higher its concurrent and subsequent financial performance. the lower Conversely. H2a: The higher the level of a firm’s CSR performance. in cases of low financial performance.Downloaded by UNIVERSITAS TRISAKTI. will be different. If so.. 1985). Conversely. and/or facilitating the flow of capital to the firm by improving its standing with bankers and investors (McGuire et al.

is a reflection of their contradictory theoretical underpinnings (Ullmann. the lower the concurrent and/or subsequent systematic risk or beta.. philanthropy and environmental action seem to be comparatively more costly than the other CSR activities examined in this study. Given that such economic considerations are central to corporate decision makers. Based on this argument firms with high CSR performance are postulated to exhibit more stable market performance patterns (lower betas). p. However.g. Information on the exact costs of each CSR performance variable and disclosure is not available.. H4a: The lower a firm’s past systematic risk or beta. a corporation’s common stock) and market portfolio. Compared to other firms. 1988. They tap only historical aspects of a company’s financial performance. it can be argued that the impact of CSR on a firm’s systematic risk may be minimal. as they capture investors’ evaluation of a firm. In addition. the lower the concurrent and/or subsequent systematic risk or beta. Spicer. 1986). H5b: The higher a firm’s level of CSR disclosure. two stock-marketbased measures of performance were also used. CSR performance in hypothesis H2a includes both costly and other CSR performance indicators. stable market performance should enhance their discretion to commit resources in CSR activities in the subsequent periods (Roberts. 1985). However. divided by the variance of the market portfolio (Copeland and Weston. A high degree of CSR may also permit a firm to have lower variance in its economic performance as a function of more stable relations with the government and the financial community in general (McGuire at al. Corporations that have low measures of systematic risk are expected to have higher levels of CSR activities. Research also suggests that CSR activities may improve a firm’s access to capital and increase employee morale and productivity (McGuire et al.Corporate social responsibility and economic performance European Business Review George Balabanis. based on the information available from NCG. Excess market valuation (EMV) is defined as the difference between total firm market value and the book value of assets divided by sales. 1983). Thus: H4b: The lower a firm’s past systematic risk or beta. 50). Ullmann (1985) argues that these are more appropriate to studies of this type. The same arguments as above hold for the relationship between disclosure and beta. firms with stable market performance would feel less tempted to conceal information about investments in CSR activities from their shareholders and investors. If corporate social responsibility creates positive or negative market expectations about 34 . Given this debate about the proper measure of a company’s financial performance. Moskowitz. Hugh C.b). Based on this information. the use of capital-market performance measures along with financial performance measures compensates for any possible measurement weaknesses. The capital-market measures used were beta (a measure of a firm’s systematic risk) and excess market valuation. Systematic risk (beta) is defined as the covariance between returns on a risky asset (e. They can also be subject to managerial manipulation and differences in accounting procedures make comparability across firms and studies problematic (McGuire et al. The conflict between hypotheses H2a and H3 with reference to the direction of relationship of the cost-adding CSR activities. 1984. the higher its CSR disclosure. Accounting-based measures are not free of limitations. 1972). 1985). 1988. Disclosure of social responsibility activities is expected to have similar results as in many cases it is used to improve market evaluations (Ullmann. Phillips and Jonathan Lyall Volume 98 · Number 1 · 1998 · 25–44 Similarly. H5a: The higher a firm’s level of CSR performance. firms with high CSR may have lower total market risk as they should be less sensitive to certain external events. To overcome these difficulties. 1987). market participants may view socially responsible firms as being better managed and less risky. the higher its CSR performance.. Downloaded by UNIVERSITAS TRISAKTI. and thereby have a lower liability. one has to recognise the difficulty of estimating and attributing costs to each of the CSR activities. Miss shellvida husniyah At 16:57 07 October 2014 (PT) its concurrent and subsequent financial performance. “This measure captures the value premiums or discounts accorded by the market to various companies”(Cochran and Wood. 1992). Corporations with low systematic risk have a more stable pattern of stock market returns. 1978a. like governmental action in the field. Most events affecting one firm’s commitment to social responsibility do not systematically affect all other firms in the marketplace (Cornell and Shapiro. Thus. even if these activities were not evidently profit-generating or economically justified.

Hugh C. their effects on each other will be isolated and controlled. the lower the concurrent and/or subsequent EMV. and links 3 and 4 (hypotheses H2a. The nexus of the postulated relationships between the main and intervening variables is given in Figure 1. The same factors affecting the beta – CSR performance/disclosure relationship (i. the NCG classification of industries in terms of their impact on the environment was used instead. Another link of interest is link 1. H2b. this measure is a reflection of market evaluation for a firm and its activities. Thus. The main focus of the study is on link 2 (hypotheses H1a. decision makers under such circumstances (of favourable EMV) will be less inhibited to disclose information about potentially non-economically justifiable and costly CSR activities to their investors and shareholders. The relationship of environmental impact with CSR and economic performance is depicted with links 9. As a result such firms are postulated to exhibit higher EMVs in the concurrent and subsequent periods. The arguments put forward for the relation between systematic risk and CSR apply to EMV as well. H1b. as manifested in high EMV. H5a. However. It was important to isolate these effects to control for the possibility of spurious relationships resulting from this link. Industries with a significant and probably more visible impact on the physical environment are less likely to avoid the attention and scrutiny of the public. 10. An additional control was on the carry-over effects of economic performance from one period to the next. as the underlying logic is the same. However. H7a and H7b). higher employee morale and productivity and more stable relationships with government and financial institutions) influence positively the capital market’s reactions to firms investing in CSR activities. improved access to capital. H7b: The higher a firm’s level of CSR disclosure. Favourable past market responses. then it will be related to a high or low excess value. Similar to beta. H5b. it is necessary to control for intervening variables which might produce spurious relationships and/or obscure any key effects. Thus. Thus. To overcome this problem given this constraint. it is reasonable to assume that firms in these sectors will feel more pressure to improve their CSR standing. H6a: The higher a firm’s past EMV the higher its CSR performance. it was difficult to statistically control for such effects. as firms in the sample are dispersed over more than 20 (2-digit SIC coded) industries and given the small size of the sample. Links 13 and 14 depict these relationships. H4b. Phillips and Jonathan Lyall Volume 98 · Number 1 · 1998 · 25–44 the firm’s prospects.e. Figure 1 The nexus of relationships between economic performance. H6b: The higher a firm’s past EMV the higher its CSR disclosure. Thus. H4a. CSR disclosure and CSR performance CSR Disclosure (1) Past financial performance (2) Controlling for spurious relationships Before testing the hypothesis. that depicts the relationship between CSR performance and disclosure. affect each other. H3. As these variables CSR Performance women’s position ethnic minority (13) philanthropy environmental action (3) (14) Concurrent financial performance (6) (9) (5) (11) (7) Firm’s Size 35 (10) Environmental impact of industry Subsequent financial (4) performance (8) (12) .Downloaded by UNIVERSITAS TRISAKTI. visibility of their “damage” to the environment may affect negatively stakeholders’ behaviour towards the firm and as a consequence their financial and capitalmarket performance. H6a and H6b). the lower the concurrent and/or subsequent EMV. Past empirical research has shown that a firm’s size affects economic performance and Similarly. a limitation of this measure is that it is subject to inflation distortion of asset values. will relieve some of the pressure on corporate decision makers to invest solely in activities that evidently generate profits in shorter periods of time than CSR investments. 11 and 12 in Figure 1. A firm’s size and industry classification are commonly used as control variables in studies of this type. H7a: The higher a firm’s level of CSR performance. Miss shellvida husniyah At 16:57 07 October 2014 (PT) Corporate social responsibility and economic performance European Business Review George Balabanis. In addition.

ethnic minorities position and philanthropy) identified one factor (explaining 42. Spicer.5 per cent) sampled firms had donated to the Conservative Party.e. An additional or alternative argument is that larger companies.035) in their organisation. While the sample was small. at p = 0.583. the “environmental action” measure). environmental impact of industry. Examining the relationship between disclosure and CSR performance (link 1 in Figure 1). Twenty-one out of the 56 (37.001) correlated to disclosure and two CSR performance measures. philanthropy and environmental action (see Table I). CSR performance variables can explain 36 per cent (R2 = 0. A chi square test showed that contributions to the Conservative Party were not statistically related to EL membership. ANOVA was also used to check for joint effects (of Conservative Party donation and EL membership) on CSR performance and disclosure. 7 and 8 in Figure 1) and CSR (link 5 in Figure 1) it needs to be controlled. 1978b). Turnover was used to measure a firm’s size. Factor scores will be used as a proxy of the overall CSR performance which will be examined together with the four CSR performance variables. being significant taxpayers and employers. 1980.354. correlation analysis shows that environmental impact of a firm’s industry is not statistically related to the firm’s activities to alleviate it (i. managerial and technical know-how to undertake costly CSR activities than their smaller counterparts. A firm’s size then might influence both voluntary and mandatory requirements for CSR behaviour.3 per cent) were members of the Economic League (EL). of which only four were contributors to the Conservative Party as well. are inter-correlated. firm’s size and environmental impact. the two control variables. One would have expected that firms in industries with higher levels of environmental damage would be more oriented towards activities designed to alleviate this. regression analysis showed a quite strong relationship. T-test analysis also showed that membership of the Economic League and donations to the Conservative Party are not statistically related either to the firm’s size or the environmental impact of the industry. corporate social responsibility performance and disclosure As can be seen in Table I. p. the same was not true for membership of the Economic League. that is CSR performance – as defined here.Downloaded by UNIVERSITAS TRISAKTI.05) differences between Conservative Party donors and nondonors. a t-test showed that members of the EL rated significantly (at p ≤ 0. women’s position.05) to any of the economic performance measures employed in all three periods of analysis. As expected. whereas only eight (14. 548) larger companies are subject to more public scrutiny and are more likely to have the necessary financial. Hugh C. Firm’s size also was found to be significantly (at p ≤ 0.) all require a high level of investment and generally are large in size.025) and ethnic minorities position (mean difference δ = 0. Phillips and Jonathan Lyall Volume 98 · Number 1 · 1998 · 25–44 CSR performance and disclosure (Chen and Metcalf. mineral extraction. Surprisingly. Miss shellvida husniyah At 16:57 07 October 2014 (PT) Corporate social responsibility and economic performance European Business Review George Balabanis. This can be explained by the fact that the industries with significant environmental impact (chemicals.3 per cent of the total variance). have a higher bargaining power that allows them to obtain concessions from legislators and/or enforcement agencies regarding the imposition of and compliance to CSR standards. apparently. As a firm’s size is also postulated to affect both economic performance (links 6. in terms of CSR disclosure or any of the CSR performance variables.05. In particular. Findings Interrelationships among corporate social responsibility measures Principal component analysis (roots criterion) of the four CSR performance variables (environmental action. However.363) of CSR disclosure.05) lower than EL non-members in both women’s position (mean difference δ = 0. That confirms the unidimensionality of all four variables which seem to be manifestations of the same underlying factor. Similarly. 36 . T-test analyses failed to uncover any statistically significant (p ≤ 0. No such effects were identified at p ≤ 0. etc. either environmental impact or firm’s size was found to be statistically correlated (at p ≤ 0. According to Ullmann (1985. at p ≤ 0. this was not so. than companies in other sectors. firms with good performance in terms of CSR are more inclined to disclose more. The relationship between firm’s size.

Forward stepwise 37 . CSR performance and disclosure Table II displays the (two-tail) semi-partial correlation matrix of CSR disclosure.134 4 5 6 7 0. pairwise t-test analysis was used to check for any significant (at p ≤ 0. CSR performance.240 –0.228 0.018. in Figure 1) and vice versa were partialled out. findings (in Table II) do not support hypotheses H4a and H4b (relationship between beta and CSR performance and disclosure. concurrent and subsequent periods of study. concurrent and subsequent economic performance and the impact of recession Before we embark on to examining the impact of CSR on financial and capital-market performance.000. Of interest was the relation of past financial performance and donations to the Conservative Party and Economic League.034.Corporate social responsibility and economic performance European Business Review George Balabanis.049. so as to assess the impact of the business cycle (recession). 7p = 0.464**1 0. In both instances.084 0. As financial and capital-market performance were found to be strongly inter-correlated. environmental impact and firm’s size 1 1 2 3 4 5 6 Disclosure Women’s position Ethnic minorities position Philanthropy Environmental action CSR performance (factor scores) 7 Impact on the environment 8 Firm’s size 2 3 0.520**1 0. However. it might be useful to examine how financial performance measures are interrelated at different periods under study. 3p = 0.089 0.354**7 Downloaded by UNIVERSITAS TRISAKTI.01.343*3 –0. 2p = 0. Figure 2 illustrates the changes in the annual average (arithmetic mean) of all economic ( financial and capitalmarket) performance variables during this period. Miss shellvida husniyah At 16:57 07 October 2014 (PT) Note: N = 56. Hugh C. Philanthropy was found to be positively related to both excess market valuation and gross profit to sales ratio.08) higher than that of the pre-recession period. the average ROE in the The relationship between past economic performance. 5p = 0.82 (standard deviation: 13.178 0.732**1 0. Similarly disclosure’s effects on CSR performance (link 1. CSR performance and past economic performance measures. The fluctuation of the financial and capitalmarket performance of the sampled firms during the 1984-1994 period was also examined. [1p = 0. Logistic regression analysis was used to identify a potential relationship.237 0.230 0.012. As can be seen. *p ≤ 0.105 0.773**1 0. respectively).264*4 0.512**1 0.476**1 0. Factor scores were used as overall measures of a firm’s financial and capital market performance respectively. Relationships between past. Possible effects resulting from a firm’s size and its industry environmental impact (links 5 and 11 in Figure 1) were controlled for (partialled out).127 0.155 0.008] 1984-1986 (pre-recession) period was 16.404**5 0.05) differences between the 19841986 (pre-recession period) and 1987-1994 (recession period). PCA (roots criterion) extracted a single factor for each set of variables for the past. the unstandardised regression residuals of the main variable against the control ones were used.579**1 0.111 0. Phillips and Jonathan Lyall Volume 98 · Number 1 · 1998 · 25–44 Table I (Two-tail) correlation between CSR disclosures.318*6 0.02) was detected in regard to the return on equity (ROE) measures. In order to statistically assess the impact of recession in the British economy during the period 1987-1994.05. 4p = 0.002. It seems that firms with higher pre-tax (gross) profits and gains in market value feel more comfortable in investing in community projects and charitable donations.188 0.283*2 0. Surprisingly.139 0. As expected. No other statistically significant differences were identified. principal component analysis (PCA) was used to identify the underlying factors. It seems that recession had no statistically identifiable effects on the economic performance indicators of the sampled firms. 6p = 0.11 (standard deviation: 8. This partly supports hypotheses H1a and H6a. correlation analysis showed that economic performance is positively related to the next period of time performance.18) whereas during the 1987-1994 (recession) period it was 20. **p ≤ 0. Only one statistically significant difference (p ≤ 0.534**1 0. there is no clear pattern of a cyclical movement for any of the measures.

174 0.092 –0. Similarly. In addition.384*2 0.017 0.151 –0. 10 and 13 in Figure 1).088 0. None of the past economic performance or control variables entered any of the regression equations. Hugh C.209 0. Thus it would seem. At each step changes between the Downloaded by UNIVERSITAS TRISAKTI.111 –0.007 0.164 0.181 .130 –0.206 0.215 0. Miss shellvida husniyah At 16:57 07 October 2014 (PT) 15 10 5 0 84 85 86 87 88 89 90 91 92 93 94 Key Return on Equity Beta-systematic risk ROCE Excess Market valuation Gross Profit to sales variable selection and the likelihood-ratio test were used to select the predictor variables for the regression equations (at p ≤ 0. Phillips and Jonathan Lyall Volume 98 · Number 1 · 1998 · 25–44 performance fail to predict the probability of a company donating to the Conservative Party or being a member of the Economic League.128 0.137 Note: N = 56. hierarchical regression analysis (see Table IV) was used to confirm and assess the CSR performance and disclosure (after controlling for firm’s size and environmental impact) effects on concurrent economic performance (free of the effects of past economic performance).190 0.003 –0.004).145 0. *p ≤ 0. t-test analysis confirmed that there were no significant differences in any of the past economic performance indicators between contributors and non-contributors to the Conservative Party and members or nonmembers of the EL. 2p = 0.155 0.184 0.187 –0. Variables entered the regression equation at three consecutive steps. that past financial and capital-market Table II (Two-tail) semi-partial correlation analysis between past economic performance and social corporate responsibility controlling for firm’s size and industry’s environmental impact Beta – systematic risk Excess market value Capital market performance (factor) Gross profit to sales ratio Return on capital employed Return to equity Financial performance (factor) Women positiona Ethnic minoritya Philanthropya 0.057 0. Firm’s size and industry’s environmental impact were also included in the equation as control variables. Figure 2 Average (mean) performance of sampled firms in the period 1984-1994 25 20 The relationship between CSR performance and concurrent and subsequent economic performance Semi-partial correlation analysis similar to the one used earlier (see Table III) revealed only one statistically significant relationship between contemporaneous economic performance and CSR disclosure.250 –0.166 0.009 0.031.05). No other statistically significant relationships (at p ≤ 0.05) were identified.067 –0. b: controlled for CSR performance [1p = 0. At the first step the control variables.Corporate social responsibility and economic performance European Business Review George Balabanis.159 –0.022 0. at the second step CSR disclosure and at the third step the four CSR performance indicators were entered.332*1 0. environmental impact and past economic performance (links 7.074 –0.079 –0. The interaction effects between CSR performance and CSR disclosure were also partialled out of each other.176 0.022 0.149 0.260 Environmental CSR actiona performancea Disclosureb 0. The controls applied in this case included: firm’s size.012] 38 –0. firm’s size and environmental impact.05. respectively.231 0.086 –0. Gross profit to sales ratio was found to be positively related to CSR disclosure (at p ≤ 0. a: variables controlled for disclosure.109 0.278 0.037 0.246 0.

4042 –0.070 0.128 0.104 0.134 0.091 0.087 0.045 0.130 0.016 0. ∆R2s together with standardised regression coefficients (betas) were used to check the size of the independent variables’ effects on the concurrent economic performance.099 0.040 0. The formed regression equation is as follows: Concurrent economic performance = a + b1 × disclosure + b2 × CSR performance + b3 × (disclosure × CSR performance).1814 0.Downloaded by UNIVERSITAS TRISAKTI.045 0.184 0.263 –0.061.055 0.153 0. As can be seen in Table IV.052 0.135 0.4134 0. hypotheses H2a and H3 were not supported by the findings. **p ≤ 0. industry’s environmental impact and past economic performance Beta – systematic risk Excess market value Capital market performance (factor) Gross profit to sales ratio Return on capital employed Return to equity Financial performance (factor) Women positiona Ethnic minoritya Philanthropya 0.012 0.170 Dependent variables (concurrent period) Market GPS responsibilitya ratioa ROCEa –0.035 0.026 0.082 0.061 0.140 –0.065 0. Hugh C. **p ≤ 0.05] 39 –0.278 0.05.020 0.055 –0.05).298 –0.123 –0. where: a is the intercept (constant) and b1.318 –0.245 0.005 –0.045 0.370 0.120 –0.003 0.338 0.039 –0.212 0.068 –0.023 –0.124 0. b2 and b3 the regression coefficients.007 –0.066 –0. 3p = 0.001 –0. In this analysis an additional multiplicative term (disclosure × CSR performance) is created to encompass the interaction effect.025 0.229 –0.004] Table IV Hierarchical regression analysis of concurrent economic performance against disclosure and CSR performance Independent variables Size of the firm Environmental impact ∆R12 Disclosure ∆R22 Women position Ethnic minority Philanthropy Environmental action ∆R32 Final R2 Systematic risk.242 0.045 –0.039 0.133 0.073 –0.169 0.242 0.234 0.062.01 [1p = 0.154 –0.025 0.063 –0.3681 0.104 0.041 0.040 0.050 –0. In order to check the interactive (joint) effect of disclosure and CSR performance on concurrent economic performance.040 0.150 –0.192 0.048 –0.049. Standardised scores of disclosure were formed before the formation of the multiplicative term so as to be measured in the same units as Table III (Two-tail) semi-partial correlation analysis between concurrent economic performance and social corporate responsibility controlling for firm’s size.275 0. a: variables controlled for disclosure.076.029 0.340**1 0. betaa EMVa –0. b: controlled for CSR performance [1p = 0.124 –0.017 0.121 0.099 0.275*5 Note: a: past economic performance effects have been partialled out N = 56.073 –0.051 0. This provides partial support for hypothesis H2b. CSR disclosure was found to explain around 5 per cent of the variance in the concurrent GPS ratio (∆R22 = 0.230 –0. firm’s size and environmental impact effects were all partialled out from each of the concurrent economic performance measures used.058 –0.037 0.022 0.120 0.188 0.125 0.156 0.022 –0.109 –0. However.045 Note: N = 56.318 –0. the analysis confirms the semipartial correlation analysis results. moderated (or multiplicative) multiple regression analysis is used. Variance inflation factors and condition indices detected no collinearity effects among the independent variables.064 –0. *p ≤ 0.213 –0.009 –0. 4p = 0.034 –0.210 –0. 5p = 0.004 0.061 0.107 0.08.076 –0. The condition index for the lowest eigenvalue was 5. Past economic performance.044 Environmental CSR actiona performancea Disclosureb 0. Phillips and Jonathan Lyall Volume 98 · Number 1 · 1998 · 25–44 consecutive R2s (∆R2s) were estimated.173 0.157 –0.01. well below the conventional standard (10).054 0.072 .100 0. Miss shellvida husniyah At 16:57 07 October 2014 (PT) Corporate social responsibility and economic performance European Business Review George Balabanis.173 ROEa Financial performancea –0.026 0.039 0.002 0.070 0.079 0.002 0.042 –0. 2p = 0.012 0.448*3 0.

Accordingly. ∆R2 = 0. Results also showed (Table V) that improvements in women’s position get noticed by the capital markets in a favourable way in the subsequent period. links 8 and 12 in Figure 1).006). Unlike capital-market performance.186 and 0. In particular.22 × disclosure –0. disclosure seems to have a significant effect on subsequent financial performance.35. firm’s size and environmental impact of industry effects). a semi-partial correlation analysis was used (controlling for firm’s size and environmental impact of the industry.32 + 0. both equations showed that firms that combine high disclosure and high CSR performance (and firms that combine low disclosure and low CSR performance) perform better in terms of ROE (and financial performance in the concurrent period) than others. Miss shellvida husniyah At 16:57 07 October 2014 (PT) Corporate social responsibility and economic performance European Business Review George Balabanis. capital markets seem to be more positively disposed to improvements in women’s position (∆R23 = 0. It seems that costly CSR activities such as environmental action have a negative carry-over effect on subsequent financial performance. firms that combine low CSR performance with high disclosure and the ones with high CSR performance and low disclosure. Second. disclosure was found to have a negative effect on subsequent EMV. Hugh C. namely. 1983).4 for both equations). The regression equation was as follows: Concurrent ROE = –0. equations revealed that. It The second equation was: Concurrent financial performance = –0. as ∆R22 shows the size of this effect is very small.153). some statistically significant relationships were identified (at p ≤ 0.05).18. In line with the previous section. Results (in Table V) indicate that environmental initiatives are negatively related to a firm’s subsequent ROCE. The size of the interaction effect is determined by the size of the ∆R2. As can be seen in Table VI. an interaction effect was identified in two instances. disclosure was found to be positively related to both GPS and financial performance (factor scores). Following this procedure. whereas CSR disclosure was found to be positively related to subsequent GPS. Condition indices showed very low collinearity effects (the condition index for the lowest eigenvalue was 3. Hierarchical multiple regression analysis (the same procedure as before) was employed again to assess relationships of CSR performance and disclosure with subsequent economic performance (Table VI). capital-market performance factor scores in the subsequent period were positively related to improvements in women’s position. a similar effect was revealed for concurrent financial performance (factor scores) proxy (free of the intervening variable impact). The size of the interaction effect (∆R2) in the first equation is larger than that in the second one. the overall CSR performance factor scores for each firm were used instead of the raw scores for each CSR performance indicator. For parsimony reasons. CSR performance and disclosure enter the equation at the first step and the multiplicative term at the second.1 per cent of the subsequent EMV’s variance.’s (1991) instructions for interpretation of equations of this type were followed. Jaccard et al.Downloaded by UNIVERSITAS TRISAKTI. the recorded condition index for the lowest eigenvalue was 5. Additionally. This seems to provide some support for hypothesis H3. The collinearity effects in the equation were very low. However.05) (Cohen and Cohen. it explains only 2. a two step hierarchical regression analysis was undertaken. If an interaction effect is present then the difference between the two R2s values would be statistically significant (p ≤ 0.47 × interaction (final R2 = 0.136 respectively.17 significant at p = 0. As can be seen in Table V. ∆R2 = 0. Interpretation of the 40 . significant at p = 0. First. disclosure seems to have exactly the opposite results on subsequent financial performance. On the contrary.42 + 0. firms that combine high CSR performance and high disclosure outperform the ones that combine low CSR performance and low disclosure (in terms of contemporaneous ROE and financial performance factor scores). However. Phillips and Jonathan Lyall Volume 98 · Number 1 · 1998 · 25–44 the CSR performance.34.62 × interaction (final R2 = 0. The changes in R2 values (∆R22s) were 0.03 × CSR performance + 0.40 × disclosure –0.001).023 × CSR performance + 0. the “CSR performance × disclosure” term had a significant effect on concurrent ROE (controlled for past economic performance. In the case of subsequent performance.07. According to Cohen and Cohen (1983) the existence of an interaction effect can be identified by checking for (statistically significant) changes of the R2 (∆R2) when the multiplicative term enters the equation. in general. possible concurrent economic performance effects on subsequent economic performance were partialled out (link 14 in Figure 1). Thus.

348*15 0.134 0.078 –0.183 0.194 0.101 0. 3p = 0.151 0. disclosure and CSR performance controlling for firm’s size and industry’s environmental impact Downloaded by UNIVERSITAS TRISAKTI.003 0.100 0. 13p = 0.069 –0. 2p = 0.415*13 0. 5p = 0.044 0.026 0.185 –0. 8p = 0.277*4 Dependent variables (concurrent period) Market GPS responsibilitya ratioa ROCEa –0. 4p = 0.012.160 0.045 0. *p ≤ 0.033 0. b: controlled for CSR performance.348**11 ROEa Financial performancea –0.019 0.179 –0. Phillips and Jonathan Lyall Volume 98 · Number 1 · 1998 · 25–44 Table V (Two-tail) semi-partial correlation analysis between subsequent economic performance.151 Environmental CSR actiona performancea Disclosureb 0.513*8 0.153 –0. Overall. 14p = 0.063 –0.004 –0.009.305*3 0.176 –0.011 0.3725 0.012 0.114 0.037. The impact of the two dichotomous variables (donations to the Conservative Party and participation in the Economic League) and their interaction (joint impact) on both concurrent and post-assessment period (subsequent) performance were also examined.001 –0.01 [1p = 0.043 0.482*6 0.220 0.342*2 0.061 0.016 –0. etc.031.120 0.025] 41 .159 0. c: controlled for concurrent economic performance [1p = 0.233 –0. Hugh C.044. employees.094 0.122 0.172 0.049.241 –0.282 0.083 0.390*10 0. 3p = 0.049.170 –0.2 per cent (∆R23 = 0.206 0.059.369*1 0.172) of subsequent ROCE variance. In a similar manner concurrent performance effects were partialled out of subsequent economic performance variables so as to avoid the possibility of any spurious relationships. 12p = 0.090 0. 7p = 0.068 –0.067 –0. **p ≤ 0.05.g. Hierarchical regression analysis (Table VI) also confirms the environmental action’s negative relationship with subsequent ROCE.123 –0.019. 10p = 0.186 –0.205 0. customers. CSR performance variables seem to explain 17.315*1 –0.098.192 0.032 0. Analysis of covariance (ANCOVA) was used to uncover any statistically significant (p ≤ –0.055 0.234 0.229 –0.052.104 –0. 11p = 0.220 –0.045.158 0.153 0.111 –0.110 –0. 9p = 0.160 0.0966 0.117 0.103 –0.054 0. 2p = 0.021 0.212 0. Miss shellvida husniyah At 16:57 07 October 2014 (PT) Beta – systematic riskc Excess market valuec Capital market performance (factor)c Gross profit to sales ratioc Return on capital employedc Return to equityc Financial performance (factor)c Women positiona Ethnic minoritya Philanthropya –0.) but to have adverse effects on the capital market participants.014.172 0.426*2 0.156 –0.023. This provides additional support for hypothesis H3.124 –0.131 0.132 –0.087 0.014.110 –0.013 0. 17p = 0.047 0.006 0.Corporate social responsibility and economic performance European Business Review George Balabanis.262 0.059] seems that disclosure has a favourable effect on the other stakeholders whose contributions are necessary for improved financial performance (e.34812 0.255 0.059. 6p = 0.05) relationships of the two dichotomous Table VI Hierarchical regression analysis of subsequent economic performance against disclosure and CSR performance Independent variables Size of the firm Environmental impact ∆R12 Disclosure ∆R22 Women position Ethnic minority Philanthropy Environmental action ∆R32 Final R2 Systematic risk.2697 –0.229 –0.037. a: variables controlled for disclosure.033 0.136 0. 4p = 0.3763 0.132 0. Moderated or multiplicative multiple regression analysis (using the same procedure as in the case of concurrent economic performance) failed to identify the existence of any significant (disclosure × CSR performance) interaction effects on any of the subsequent economic performance variables.036 –0.363*16 0. betaa EMVa 0.3139 0.1855 0.080 0.004 0. 15p = 0.063 –0. *p ≤ 0.320*17 Note: a: concurrent economic performance effects have been partialled out N = 56.154 0.103 –0.144 –0. 16p = 0.134 –0.061 0.05.124 0.2874 Note: N = 56. Past economic performance carry-over effects on concurrent economic performance were partialled out.015 –0.30914 0.239 –0.137 0.195 0.069 0.

low CSR disclosure combined with good CSR performance or high CSR disclosure combined with poor CSR performance were found not to be economically-rewarding strategies. a multi-dimensional measure of social corporate responsibility performance was used. Again. Second. However. In particular environment care related activities – assumed to have a higher cost – were found to be negatively related to subsequent financial performance (ROCE). In contrast. In particular.6 per cent). Specifically.02) lower EMV (concurrent economic performance effects have been partialled out) for the subsequent period 1991-1994 (mean = –0. In contrast. membership of the Economic League has a negative effect on subsequent ROCE and EMV.135).028) lower subsequent ROCE (controlled for concurrent economic performance effects) (mean = –0. Even poor CSR performance accompanied by low level of disclosure was found to be a better strategy (than the other combinations) in the short term (concurrent period). CSR disclosure was found to be more positively received by other stakeholders responsible for a firm’s financial performance (GPS). The results of the empirical research supported only a few of the postulated relationships between CSR disclosure and 42 .11).e. CSR disclosure was found to be associated with concurrent financial performance. However. the size of the EL membership effect on EMV (partial eta-squared = 0. No significant differences in the (concurrent and subsequent) economic performance of donors and non-donors to the Conservative Party were identified. like the enhancement of women’s corporate position were found to have a positive but not instantly realisable (as it was detected only in the subsequent period) effect on capital markets. Firm’s size and environmental impact were used as covariates.Downloaded by UNIVERSITAS TRISAKTI. Paradoxically.49) than non-members (mean = 0.006) impact on subsequent excess market valuation. it appears that donations to the ruling (Conservative) party have no effect on any of the concurrent and subsequent economic performance variables. ANCOVA results showed that members of the EL have significantly (at p = 0. Another important point is the impact of CSR activities with a significant cost element. It was (t-test analysis) also confirmed that members of the Economic League have a significantly (at p ≤ 0. gross profit to sales ratio was found to affect disclosure positively. (1988). A combination of high CSR performance and high disclosure was also found have positive effects on firms’ overall profitability. which allowed for a more comprehensive measurement to be undertaken. this was not true for Conclusions The results of the empirical tests are of interest for a number of reasons.165) was comparatively higher than that on ROCE. CSR performance with past. It seems that past financial performance can explain variation in certain elements of corporate social responsibility.14). Overall. However. Miss shellvida husniyah At 16:57 07 October 2014 (PT) Corporate social responsibility and economic performance European Business Review George Balabanis. Phillips and Jonathan Lyall Volume 98 · Number 1 · 1998 · 25–44 variables on economic performance. philanthropic activity seems to be affected by gross profit to sales ratio and excess market valuation in the past. On the other hand less costly CSR activities. However. Similarly. membership of the EL had a significant (at p ≤ 0. disclosure effects seem not to materialise immediately as they could only be detected in the subsequent period. However. Donations to the Conservative Party were found to have no effect on any of the concurrent and subsequent economic performance variables. Hugh C.72) than nonmembers (mean = 0. subsequent periods). Interestingly enough donations to the Conservative Party or membership of the Economic League were found not to be particularly related to company’s past economic performance. concurrent or subsequent economic performance.716) compared to non-members (mean = 0. First. This seems to agree to a certain extent with the findings of McGuire et al. the size of the effect attributed to (or the variability explained by) EL membership (partial eta-squared = 0.126) was relatively small (12. However. this effect seems to fade away in the longer run (i. the reaction of the capital markets in the subsequent period to companies with high CSR disclosure was found to be negative. the major theories concerning social responsibility which had been developed in the North American context were tested within the distinct cultural and economic environment of the UK. Members of EL displayed a lower average EMV (mean = –0. A t-test analysis was also performed to check independently the differences in the means between donors and non-donors to the Conservative Party and between subscribers and non-subscribers to the Economic League.

Vol.Downloaded by UNIVERSITAS TRISAKTI. Academy of Management Journal. Harper & Row.R. Donaldson. Accounting Review. “On the measurement of corporate social responsibility: self-reported disclosure as a measure of corporate social involvement”. J. Belkaoui. the results of this study (weakness of the identified relationships) imply that additional factors need to be taken into account to explain higher proportions of the economic performance – CSR performance/disclosure relationship. Fall. the lack of systematic CSR measurement for other groups of companies imposes certain limitations on the generalisability of the findings (beyond the largest British firms). Angelidis. American Business Law Journal. 1. R. pp. Reading. and Ibrahim. 1984. T. 4. 4 No. “Constructing a social contract for business” in Donaldson. Miss shellvida husniyah At 16:57 07 October 2014 (PT) Corporate social responsibility and economic performance European Business Review George Balabanis. 19-24. The inclusion of medium-sized firms in the future might improve the research design. Overall. “The corporate social policy process and the process of corporate governance”. “The relationship between pollution control record and financial indicators revisited”. 42-56. Carruthers. R. NJ. A. Further research should then concentrate on the stakeholder model of management (Clarkson. Vol. pp. 1. Alexander. R. Overall. Future research should examine the impact of CSR concerns in conjunction with other factors which might affect decision making and expectations formation of different segments of investors. (1979). 67. NY. and Monsen. Journal of Economic Studies. and Werhane. A. 16 No. Vol. 18 No. Even more surprisingly the degree to which a firm discloses CSR information had a negative effect on capital market participants (postulated to be one of the main motives and targets of disclosure). “Corporate stakeholders and corporate finance”. “A three-dimensional model of corporate performance”. “Impact of pollution control regulations on the market risk of securities in the US”. Carroll. 6-31. 20 No. 168-77. pp. 21. Vol. Chugh. (1978). J. Adams R. 55. Vol. (1983). Chen. pp. 55. 16. New York. and Hamil. R. Vol. p. 361-83. 2. 4. Abbott.B. (1976). and Cohen. Changing Corporate Values. (1987). Business Horizons. (Eds). H. Quite the opposite. 25. Kogan Page. pp. pp. Applied Multiple Regression for the Behavioral Sciences. G. Accounting Review.E. 43 . Financial Management. 22. 92-117. Vol. “Five propositions for social responsibility”. T. 5 No. and Weston. 1995. In addition. Hugh C. and Metcalf. The social context within which CSR behaviour is moulded and subsequently rewarded or punished by the interested parties (stakeholders) is very important. Obviously the relationship is more complex than has been hitherto suggested. Development of proper operationalisations of the social pressures and universe surrounding different firms would improve future research designs and unravel new. Members of the Economic League were found to have lower financial (ROCE) and lower capital market performance (EMV) in the subsequent assessment period than non-members. (1979). Cochran. Vol. pp. Academy of Management Journal. Copeland. “A stakeholder framework for analysing and evaluating social corporate performance”. S. richer contingencies affecting the main relationship. A. The hypothesis of the “ethical investor” (that capital markets tend to reward socially responsible firms) is not necessarily empirically supported by this research. 153-65. Vol. Clarkson. Englewood Cliffs. 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