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Corporate Social Responsibility and Financial Performance

Author(s): Philip L. Cochran and Robert A. Wood
Source: The Academy of Management Journal, Vol. 27, No. 1 (Mar., 1984), pp. 42-56
Published by: Academy of Management
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In fact.Only once this questionis answeredcan the questionof causation be addressed.Averageage of corporateassetsisfound to be highlycorrelatedwithsocial responsibilityranking.improvedtechnique.If certainactions (classifiedas socially responsible) tend to be negativelycorrelatedwith financialperformanceof firms.The focus of this paper is on the questionof whetherthesetwo factors(CSRand financialperformance) are related. Social Responsibility Financial Performance1 Corporate and PHILIP L. Robert Pitts. Keith Ord. Finally. Steven Wartick. 27.If. morerecently.Vol. No. 14 Sep 2015 16:56:46 UTC All use subject to JSTOR Terms and Conditions .1982.153.and industry-specific controlgroups. a recentworkreviewedsevenearlierempiricalstudiesandconcluded that "economic performanceis not socialresponsiveness" (Arlow& Gannon. and three anonymous referees for their helpful comments and suggestions. 42 This content downloaded from 121. on the otherhand. a positive relationshipcan be shown to exist. then managementmight be encouragedto pursuesuch activitieswith increasedvigor or to investigate the underlyingcauses of this relationship. The relationshipbetweena firm'scorporatesocialresponsibility(CSR)or.Researchers havereachedno realconsensuson the relationshipbetweenthesevariables. 1. After controllingfor thisfactor. then managersmightbe advisedto be cautiousin this area.its corporatesocialresponsiveness-andits financialperformancehas beenthe subjectof a livelydebatesincethe 1960s. Certainfactors omittedin previousstudiesare explicitlycontrolledfor by use of improvedfinancialperformancemeasuresandadditionalvariables. 240).p. WOOD Pennsylvania State University Therelationshipbetweencorporatesocialresponsibility and financial performance is reexaminedusing a new methodology. in eithera positive or negativefashion.182 on Mon.?Academy of Management Journal 1984. 42-56. the 'The authors would like to express their appreciation to Anthony Curley. This paperextendspriorempiricalresearchin threeareas. COCHRAN ROBERT A. more suited to the data is employed. therestill is some correlationbetweencorporatesocialresponsibilityandfinancial performance.52. Whetheror not a relationshipexistsclearlyis an importantissue for corporate management. logit analysis.A statistical tool.

""honorable mention.namely.Consequently. to a certainextent.who over a periodof severalyearsrateda numberof firmsas "outstanding. In this study the CEP rankedthe pollution control performanceof 24 firms in the pulp and paperindustry(Councilof EconomicPriorities.1984 Cochranand Wood 43 sampleis enhancedby utilizinga largeindustry-specificcontrolgroupand using two test intervals. 1975).assetturnoverand assetage are addedas explanatoryvariables. Previous Research Althoughthe examinationof previousresearchdoes. Most reputationindexes generatedto date cover only a relativelysmall numberof firms. Folger and Nutt (1975). it may summarizethe perceptionsof a key constituencyof variousfirms. however. Second. including Bragdonand Marlin(1972).Nonetheless. and Spicer(1978). The firstreputationindexwasa fairlynarrowone. A secondreputationindexwasgeneratedby MiltonMoskowitz. generatedby the Council of EconomicPriorities(CEP) in the late 1960sand early 1970s. Themostimportant(andmost is that such are obvious) rankings highlysubjectiveand thus may varysignificantlyfrom one observerto another.The 1972versionof This content downloaded from 121. the numberof studiesexamined hereinis considerablylarger. Thereare. In this method knowledgeableobservers rate firms on the basis of one or more dimensionsof social performance.Third." or "worst" (Moskowitz.a newandconsiderably more extensiveempiricaltest of this researchquestion.In addition.1972. A second problemis one of samplesize.This raisesthe spectreof unreliability. This measureof CSR has been used by a numberof other studies.This expandedanalysisrevealsthat the key correlate with CSR is asset age and that the omission of this variablein previous studiesmay have led to spuriouspositive correlationsbetween CSR and financialperformance.disadvantages as well. 1971). Resultsof these improvementsindicatethe crucialrole of firm assetsin test outcomes.therestill is weak evidence of a positive correlationbetween CSR and financial performance. it tends to be internallyconsistent becauseone evaluatoris applyingthe same (albeitusuallysubjective) criteriato each firm. parallelthe work of Arlow and Gannon. this surveyof earlierwork providesthe rationalefor the bulkof thispaper. Measurementof CorporateSocial Responsibility Thereare two generallyacceptedmethodsof measuringCSR. This method has some advantages. it makesno pretenceof applyinga rigorous objectivemeasureto a dimensionthat may be innatelysubjective.52.First. 14 Sep 2015 16:56:46 UTC All use subject to JSTOR Terms and Conditions . The first method is the reputationindex.with this variableincluded. Thus one must be cautious about generalizingfrom the results of these studies. This alone may be an importantfactor in determiningthe relationshipbetween CSR and financialperformance.153.182 on Mon.

1978.This can consist of simply noting whetheror not a particularitem (such as pollution control)is discussedeitherqualitativelyor numerically. 1975. at the moment there obviously are not better measures available. 1979. The second method of measuringCSR is content analysis.Preston. The problemof measuringsocial responsibility or responsivenessof firmsneedsconsiderablymoreattentionin this literature. Yet. At best.1980.Second. Indexesgeneratedby this study were used subsequentlyby Vance (1975). Subsequently. in contentanalysisthe extentof the reportingof CSR activitiesin various firmpublicationsand especiallyin the annualreportis measured.Further. Heinze (1976).First.or it can mean actuallycountinga numberof items. one certainlycould postulatethat firmsthat are awareof these issuesare those that will discussthem as well as act on them.44 Academyof ManagementJournal March this index was used by Moskowitzand a composite of his 1972-1975indexeswas used by Sturdivantand Ginter(1977)in theirstudiesof the relationship between CSR and financial performance. On the other hand. Normally.largersample sizes are possible. and this may be verydifferentfrom what they actuallyare doing.153. 1976). there is no real consensus on the proper measure of financial This content downloaded from 121. A commonlyused sourcefor content analysisis a series of studies conductedby Beresford(1973.content analysisis only an indication of what firmssay they are doing. In this study the authorsexaminedonly the food processingindustryand developedtheirown indexbasedon the numberof linesof the annualreport devoted to CSR. one could imaginethat firms that are doingpoorlyon this frontwouldfeel an extraincentiveto makethemselves look good by touting their achievementsin their annual reports. 1978)used content analysisindexes based on Beresford'swork. Anotherpopularreputationindexalso can be tracedbackto Moskowitz.Anderson& Frankle.182 on Mon.contentanalysisalso has some drawbacks. Neithercontentanalysisnor reputationindexescan be consideredwholly adequatemeasuresof CSR." 1972) in which300 graduatestudentsof businessadministrationwerequestioned about their views on the social responsibilityof some of the Fortune 500 firms.Ingram.The choiceof variables to measureis subjective.52.Thereforethe resultsare independentof the particular research. 14 Sep 2015 16:56:46 UTC All use subject to JSTOR Terms and Conditions . becausethis techniqueis more mechanical. Measurement of Financial Performance Although one might have expected a certain diversity of measures of CSR. However.severalother studies (Abbott & Monsen.the procedureis reasonablyobjective. and Alexanderand Buchholz (1978). The first study to use content analysiswas Bowmanand Haire (1975). Contentanalysishas two significantadvantages. once the particular variableshave been chosen (a subjectiveprocess). A surveywas conductedby the National Associationof ConcernedBusiness Students("How businessschool studentsrate corporations.

The implicationof this is that evenif CSRdoes lead to improvedfinancialperformance. Abbott and Monsen(1979)used the changein sharepriceplus dividends as their measureof investor returns.182 on Mon.However. Therefore.. An examinationof Moskowitz'shigh CSR firms over the 1970-1979periodindicatesthat the portfolio of these firms had a beta of 1. A stock with a beta above 1 is consideredan aggressivestock because it will tend to move faster. and both have evolved considerablyover the course of the past decade. 14 Sep 2015 16:56:46 UTC All use subject to JSTOR Terms and Conditions .Both haveenjoyedperiodsof popularity.the first half of 1972. 1972through 1974.which is commonlyreferredto as "beta. this. risk.the apparentcontradictionbetweentheir results can be explainedby the riskinessof the returnsof the firmsthat they had classifiedas sociallyresponsibleand not by the variabletheybelievedthey were examining. As most subsequentstudieshave noted. concludedjust the opposite. An averagebeta is 1. In acceptedfinancetheory. However.1984 Cochran and Wood 45 performanceeither. Simplystated. is insufficient. 1979).However..e. two years later. In fact. there is a problemwith the use of even a "clean" measureof investorreturnsfor this type of study. a stockwitha betabelow 1 is considered a defensive stock (Curley& Bear.e. InvestorReturns. and the periodthat Vancelooked at. was a bull market(i.this tenetpositsthat as informationthat mightaffect future cash flows of a firm soon as the marketbecomesaware This content downloaded from 121.These were Alexanderand Buchholz(1978) and Andersonand Frankle(1980). Vance. It was preciselythis failureto adjustfor riskthat led to the (apparently) resultsof Moskowitz(1972)andof Vance(1975). thereis a wide rangeof such measures. this measureis clearlyflawed. falling). In both of thesestudies changesin priceper sharewas used as the investorreturnsindex.Correspondingly. Two studies did use risk adjustedmeasuresof investorreturns. the efficient marketshypothesis. and it must be includedin any measureof investorreturns." typicallyis obtained for a stock by regressingits realizedreturnson those of a broad basedmarketindex.56. rising).52.mostmeasuresof financialperformancefall into two broadcategories: investorreturnsand accountingreturns. thanthe market. The change in priceper shareis only one elementof investorreturns. the risk of holdingassetsis measuredby the covarianceof the expectedreturnon the assetwiththatof the overallmarket. The regressionslope coefficientprovidesthe beta estimate. either up or down.Thebasicideaunderlyinginvestorreturnsis thatreturns should be measuredfrom the perspectiveof the immediatelywill be reflectedin its currentshareprice.The first studiesto employ investorreturnsas a measureof financialperformance werethose of Moskowitz(1972)and Vance(1975). The period that Moskowitz examined. This measure.Moskowitz's contradictory studyindicatedthat firmswithhighCSRratingsoutperformedthe market. too.Dividendincome is the other. This problemis summarizedby one of the tenets of modernfinancetheory. Simple returns(changein price per share plus dividends)fail to capture another dimensionof vital importanceto investors-namely. was a bear market(i.153.

Ingramtests for a correlationbetweensocial responsibilitydisclosures(used by others as a proxyfor CSR)and financialperformancewhile controllingfor both riskand industryeffects.As Alexanderand Buchholz(1978)noted.firms in the higherexcessmarketreturncategoryhave betterCSR ratingsthan do those in the lower excess marketreturncategory.Thus. In seven of these subgroupings. This content downloaded from 121. The proceduremay be viewedas a reversecluster analysis.Bowmanand Haire(1975).Heinze(1976). AccountingReturns.46 Academyof ManagementJournal March of any change in a firm's CSR rating it will immediatelyalter price per shareto reflectthatinformation.The most commonmeasuresof accountingreturnsusedin studiesof this questionare simplyearnings per share(EPS) or price/earnings(P/E) ratios.In order to employ investorreturnsmeasuresof financial performanceproperly.This clearly is not a strong rejectionof the null hypothesis.were true.then he or she probably wouldconcludethat CSRand financialperformanceareunrelated. Ingram'sproceduredivideshis sampleof 116 firms into 10 subgroups whereineach subgrouphas two sets of firms-one having higher excess marketreturnsthan the other. thatthereis no relationshipbetweensocial responsibilitydisclosuresand financialperformance. Ingram'snullhypothesis.The basicidea behindusingaccounting returnsas a measureof financialperformanceis to focus on how firm earningsrespondto differentmanagerialpolicies. if the perceptionof a firm'ssocial responsibilitychangedin 1975and a naive researcherexaminedonly the period 1977-1979.182 on Mon. One particularlyinnovativemethodologythat avoidsmanyof the earlier problemswithinvestorreturnsis employedby Ingram(1978). excessaccountingearnings.he uses fiscal year. the researchermust conductan "eventstudy. then 7 or more of the 10 groupswould have disclosureratingsin the higherfinancial performancecategorieswith a frequencyof 11. Bragdonand Marlin (1972). The reverseis true for the remainingthree subgroups." Failureto do so could lead the researcherincorrectlyto the conclusionthat thereis no relationshipbetween CSR and financial mustbe cautiousin interpretingIngram'sresultsas support for a correlationbetweenCSR and financialperformance. Although this techniqueavoids many of the problemsencounteredby earlierstudies. in fact.or somealgebraic variationof them as at least one of the measuresof financialperformance in their studies. Preston(1978). and industryas explanatoryvariables.If.even if one actually exists.32 percent. in which the sample is iteratively split into subgroups. with the groupingcriterionbeingmaximizationof the differenceof a functionalrelationship betweeneach of the two subgroupsat each iteration. P/E ratios.andSpicer(1978)all usedEPS. 14 Sep 2015 16:56:46 UTC All use subject to JSTOR Terms and Conditions . The functional relationshipthat Ingramuses is excess marketreturnfor each firm as the dependentvariable. after this reactiononly new informationregardinga firm's social responsibilitywill have any affect on the firm's financialperformance.Folgerand Nutt (1975).52.153.Accountingreturnsare the other primarymethod of measuringfinancialperformance.thatis.

fully 9 (Anderson & Frankle. Unfortunately. 1978). the control groups in a number of these studies were too small. as noted earlier. quite the oppositeaccounting returns may be the best proxy for financial performance. This does not mean that one cannot use accounting returns. Moskowitz.52. 1979. 1975. the time period(s) employed in a number of the previous studies was too short. and other variables that may influence test results will be more homogeneous within industries. Heinze. for example. Accounting practices. Ingram. 1972. Preston. 14 Sep 2015 16:56:46 UTC All use subject to JSTOR Terms and Conditions . 1978. examined only nine firms. The Folger and Nutt (1975) study. Alexander & Buchholz. associated with using EPS or P/E ratios as such a measure. In addition. several researchers(Abbott & Monsen. necessarily. 1972. This step represents an improvement.Cochran and Wood 1984 47 There are several problems. the particular measures used in previous studies have serious defects. Samples in Previous Studies Most of the previous work in this area employed samples that were too small to result in any safely generalizableresults. Moskowitz. Bragdon & Marlin. All but four of the studies employed control groups smaller than 100 firms. these financial performance measures cannot be accuratelycompared across firms without considering financial leverage influences and risk differences. However. Seven of these studies employed time periods equal to or less than two years. operating leverage. Both are strongly influenced by the rate of growth and accounting practicesof firms (Beaver& Morse. However. 1977) found some positive relationship between CSR and financial performance. Results of Previous Studies As noted earlier. 1980. 1978. Of the 14 studies examined. 1976. Second.182 on Mon. the previous empirical work in this area reached no real consensus on the nature of the relationship between CSR and financial performance. 1975) compared their samples to broad market averages such as the Standard and Poors 500. Spicer. create subgroups with sufficient homogeneity. In order to overcome this problem.153. Only five of the studies used time periods greater than or equal to five years. In others the sample was matched with an external control group of similar size. 1978. 6 of the 14 studies examined here had samples of less than 30 firms. Preston. but comparison to industry control groups is superior. Finally. Sturdivant & Ginter. 1978. because of incorrect specification of the This content downloaded from 121. 1972. In fact. Sturdivant and Ginter (1977) recognized this problem and grouped their sample into four somewhat homogeneous subgroups. by doing so they reduced their overall sample size and did not. however. In several of the studies the small sample of CSR firms was segmented and subgroups were compared. Bowman & Haire. 1978. Vance.

In orderto avoid some of the problemsof inadequatesamplesencounteredin previousstudies.whichwerecomparedto 386 firmsin theirindustry control groups. Onestudy(Vance.182 on Mon.a specific reputationindex. However. Folger& Nutt. is employedby this study (see Table 1). as discussedearlier. In the second period (1975-1979)there were 36 firms in 28 industriesand a total of 366 firms in the control groups.48 Academyof ManagementJournal March financialperformanceproxy.Alexanderand Buchholzdid properlyaccount for risk. the combinedMoskowitzlist (as used by Sturdivantand Ginter).neitherof the two major categoriesof CSR measures (reputationindexes and content analyses)is wholly adequate.The use of accountingdata raisesthe possibilityof distortionsfrom inflation This content downloaded from 121. 1979.1975-1979)or becausetherewas less than a total of 10 firmsin the industry(thus makingindustryaverages suspect). small sample size.Abbott and Monsen. Of these groups. 1978. Three studies (Abbott & Monsen.52. these resultsmust be viewed with suspicion. but they did not employan eventstudyand thus could have failed to discovera relationshipeven if one did exist. Measuresof FinancialPerformance This studyfollowedthe precedentof most of the previousstudiesof this questionand used accountingdata to measurefinancialperformance.his proxy for investorreturns(only change in share price) clearlywas insufficient. Therefore.153.failed to accountproperlyfor risk. 1975)found no reallinkbetweenthesevariables. Method Measuresof Social Responsibility As noted earlier. Averaging accountingdata across five years will control for unusualaccountingentries in any one year that might distort test results. 14 Sep 2015 16:56:46 UTC All use subject to JSTOR Terms and Conditions .1975)founda negativerelationshipbetweenthesevariables.Alexander and Buchholz.Alexander& wellas AbbottandMonsen.each firm on this list is independentlycompared to its industrygroup as defined by the four-digitStandardand Poor Industry the first time period(1970-1974)the samplecontained39 firmsin 29 industries. 13 wereeliminatedeitherbecausetherewereinsufficientdata on the Compustat tapes for calculatingthe three financial performancemeasuresover each of two five yearperiods(1970-1974.usedformsof investorreturns as proxiesfor financialperformance.however. However. and questionablemethodology. The 61 firms (6 firmswereeliminatedbecausethey no longerexistedin their originalform) are containedin 42 such groups. Two time periods were studied to increasethe sample size. becauseit has beenusedextensivelyin the literatureon thissubject.

honorable mention. less depreciationand amortization.52. 2000 Food & kindred products Quaker Oats Co.182 on Mon. 3570 Office computing & accounting machines aCSR #s: 1. 2800 Chemicals & allied products Dow Chemical 2800 Chemicals & allied products DuPont (E. Steel Corp. 3310 Blast furnaces & steel works 2030 Canned-preserved fruits-vegetables Campbell Soup Co.b 3410 Metal cans & shipping containers American Can Co. 5311 Retail-department stores Dayton-Hudson Corp. 2731 Books: publishing & printing McGraw-Hill. and (3) excessmarketvaluation. 14 Sep 2015 16:56:46 UTC All use subject to JSTOR Terms and Conditions . differencesacrossfirmsas well as differentapplicationsof accountingprinciples. 3. A major strengthof this ratio is that it is free from the effects of bias that can resultfrom differencesin capital structurebetween firms. Inc. 3221 Glass containers Owens-Illinois. Threeaccountingreturnsmeasureswereemployedinitially:(1) the ratio of operatingearningsto assets.Compustatdata item 13. 3430 Heating equipment & plumbing fixtures Masco Corp. Inc. worst. American Home Products Corp. Inc. 2300 Apparel & other finished products Phillips-Van Heusen 3861 Photographic equipment & supplies Polaroid Corp. 3651 Radio-TV receiving sets RCA Corp. (California) 2911 Petroleum refining Standard Oil Co. 2. U. 5411 Retail-grocery stores Jewel Cos.153. However. Inc. 2300 Apparel & other finished products Farah Mfg. Giant Food.) de Nemours 1211 Bituminous coal & lignite mining Eastern Gas & Fuel Assoc. 2911 Petroleum refining 2000 Food & kindred products Nabisco. (2) the ratio of operatingearningsto sales. Inc. 3841 Surgical & medical instruments & appliances Johnson & Johnson 5331 Retail-variety stores K Mart Corp. best. 3630 Household appliances Whirlpool Corp. Compustatdata item 14) to assets measuresthe relativeefficiency of asset utilization. 2830 Drugs 4811 Telephone communication American Telephone & Telegraph 2911 Petroleum refining Atlantic Richfield Co. Mobil Corp. Inc.b 2911 Petroleum refining Standard Oil Co. all others were used in both periods. 2111 Cigarettes American Brands. 2800 Chemicals & allied products Koppers Co. (Indiana) 2830 Drugs Syntex Corp. 5411 Retail-grocery stores 3000 Rubber & miscellaneous plastics products Goodyear Tire & Rubber Co..49 Cochran and Wood 1984 Table 1 Firms in Sample CSR #a 2 3 3 3 2 2 3 2 3 2 1 3 2 3 2 3 2 I I 3 2 3 2 1 2 3 I 2 2 1 2 3 I I 3 3 1 I 1 Firm SIC # Industry 1000 Metal mining Amax. 3570 Office computing & accounting machines International Business Machines Corp.b 2841 Soap & other detergents Colgate-Palmolive Co. The ratio of operatingearnings(as measuredby operatingearningsbefore depreciation. I. Co. Inc. Inc.two firmsmayhaveidenticalphysical This content downloaded from 121. bThese three firms were used in the first period only. These distortionswere controlled for insofar as possible.Eachhas certainstrengthsand weaknesses. 2020 Dairy products Kraft. 3310 Blast furnaces & steel works 2400 Lumber & wood products Weyerhaeuser Co. Xerox can be distortedby the effect of inflation on the book valueof the assets. Bethlehem Steel Corp. 2911 Petroleum refining Texaco.For example.S. Inc.

i= 1.Thus if CSR is correlatedwith superioror inferiorfutureprospects. This is a relativelynew measurein the financeliterature. to the extent that the inflation distortion of asset values and income (and therebyretainedearnings)varyacrossfirms.Total Assets Sales This measurecapturesthe value premiumsor discountsaccordedby the marketto variouscompanies.which is stated as a historicalratherthan a currentcost. If so. in all likelihood.52.a potentialfor bias exists. Excessvalue is definedas the differencebetweentotal firm marketvalue (marketvalue of equity and book value of debt) and the book value of assets. Recall that 29 industrieswere includedin the first test intervaland 28 in This content downloaded from 121.the three regression models tested for each intervalwere: FPi =bjCSRj +bkINDk + . will be different. normalized by sales or. used by Thomadakis(1977) and Errunzaand Senbet (1981). and the impactof inflation on book inventoryvalues.Academyof ManagementJournal 50 March assetsthat they purchasedat differenttimes.182 on Mon. Comparingsample firms against others in their industry will partiallycontrol for these distortions. Furthersourcesof distortionare depreciation. The ratio of operatingearningsto sales. though free from leveragedifferences. 2. An advantageof this measureis that it reflectsthe market'sevaluationof each firm. the book valueof these assets. INDk are 0.then it will be correlatedwith EV. 14 Sep 2015 16:56:46 UTC All use subject to JSTOR Terms and Conditions .also is subjectto inflation distortionof depreciation. 1 dummy variables reflecting industry. reflectingthe effect of inflation on nominal asset prices. 3 where FPi are the averaged financial performancemeasures described above for each firm. CSRjare 0. The initial analysisphase of this study basicallyreplicates earlierwork in this area by evaluatingthe relationshipbetweenCSR and financialperformancethroughanalysisof covariance.However.The threefinancial performancemeasuresfor each firm are (separately)regressedupon industrydummyvariablesand dummyvariablesfor the MoskowitzCSR categorieswith the constant term omitted. The third measureof financialperformanceemployed in this study is excessvalue(EV). EmpiricalResults Initial Analysis. However. it too has a seriousweakness-it fails to capturethe relativeeffectiveness of the use of assets by competitors. 1 dummyvariablesreflectingthe Moskowitz categories. Specifically.153. in the absenceof wealthtransfersof the agencytradition: MarketValue of Equity and Book Value of Debt .

This regressioncan be consideredan analysisof covariancethat tests for CSR effects while controllingfor industryeffects.24** .19** Operating earnings/assets 1970-1974 . or their use.02 .19** Supplemental measures Asset age 1970-1974 1975-1979 Asset turnover 1970-1974 1975-1979 Coeficient of Multiple Determination (Adjusted for turn.09 -1.03*** 1975-1979 3.92* 1.with a slightreversalbetween"worst"and "honorablemention" categoriesin the 1975-1979interval.182 on Mon.which. by these firms.15 1.04 1.13 . **p< .34* .78* -. This patternis repeatedfor the excess value measure. The purposeof this analysisis to examineif CSR is significantlycorrelatedwith eithersuperioror inferiorfinancialperformancewithinindustry groups.raisesinterestingquestionsconcerningthe natureof the assets. Further Test Procedures.29 .34 -1.firms with "best"ratingsoutperform"honorablemention"firms.58 -.59 -2.68 -1. This ratio is equal to the operatingearningsto assets ratio dividedby the operatingearningsto sales ratio. two additionalvariablesareintroduced.35 .44* 1970-1974 1975-1979 2. The results of these regressionsare shown in Table 2.50 . 14 Sep 2015 16:56:46 UTC All use subject to JSTOR Terms and Conditions .52.42 1975-1979 Excess value 1970-1974 4.04 .47 .29 . Why might this puzzlingresult occur? Possible explanationsare differencesin the effectivenessof the use of assets or differencesin asset age between the CSR groups.the patterndiffers for the operatingearnings/assetsmeasure.21 -.59 . is used to measurethe effectivenessof the use of assetsby firms. All statisticalsignificanceis lost.91 1.05 -. This result. the ratio of net fixed assets This content downloaded from 121.) .24 . Table 2 Regression Results Dependent Variable/ Interval Best t Statistics for CSR Dummy Variables__ Honorable Worst Mention Financial performance measures Operating earnings/sales 1. outperform"worst" firms.153.07 1.24 -1.57 . However. and "honorablemention" firms appear slightlysuperiorto "best" firms.05 ***p<.89 .1984 Cochran and Wood 51 the second.34 .69 1 "*p<.f.01 Withoperatingearnings/salesas the financialperformancemeasure.38 1.In order to explore furtherthese influences.76 .or the ratioof sales to assets.07** -2. In addition.08 -.22 . also found by Bowmanand Haire(1975).Assetturnover.

469 (-.178 1. At this stage. asset turnoveris weakly correlated to Moskowitz's ratings.036 (-.136) 1.logit analysis.000) ings/assets Operating earnings/sales Asset age Asset turnover Excess value Operating Earnings/ Sales . it is obviousthat the above suspicionsare confirmed(Table2). Note that EV has the highestt statisticand asset turnoverhas the highestcoefficient of multipledetermination.567 . In addition. The positive correlationof asset age and CSR rankingssupport this explanation.The remainingcorrelationsindicatea possible Table 3 FinancialVariableCorrelation 1970-1974.000 (1. thereis evidenceof interactionsbetween the variables.clearlyis not consistentwith the evidence regardingreturnon sales.249) . The relativestrengthof each is not yet clear.providesan appropriatetestprocedureby whichthe underlyingassumptionsof themodel are met by the data.207 -.005) (1.Therefore. 14 Sep 2015 16:56:46 UTC All use subject to JSTOR Terms and Conditions .241 1.000) al975-1979 data in parentheses.assetage is stronglyand significantlynegativelycorrelatedwith the "worst" CSR firms. Correlationsbetweenpossibleexplanatoryvariablesare shown in Table 3 for both testintervals. the closer this ratio will be to unity.however.102) (1.000) .182 on Mon. First. Newer firms have higher CSR ratingsand higherreportedassetvaluesrelativeto theiroldercompetitors. As a firm's assets age.52. Anotherstatisticaltechnique. this ratio will approachzero. This explanation.561) -. The apparentproblemof multicollinearityis a factor in consideringwhichexplanatoryvariablesto includein the logit proxyingmay be occurringwithineach regression.fourof the five variablesemployedappearto be significantly relatedto CSR.153.A secondexplanationis thatinflationhas seriously distortedreportedasset values.233) 1. The newera firm'sassets. 1975-1979a Operating Earnings/ Assets Operating earn1.000 (1.000 (.52 Academy of Management Journal March to grossfixedassetsis usedto measureassetage. This content downloaded from 121.062) (.000 (1.823) .000) . In particular.587 Asset Age (. firms that aremoresociallyresponsiblemay utilizetheirassetsin a less efficientmanner. Asset age and asset turnoverare related with Moskowitz's CSR categories. the next step is to test simultaneouslythe associationbetweenCSR and the various measuresof financial performance. When these new variablesare regressedon the industryand CSR dummies.000) Asset Turnover .226) -.570 (.115 Excess Value (.656) (.Also. Becausethe lattervariable has a higher correlationwith CSR.Operatingearnings/assetandoperatingearnings/sales have the highestcorrelationsin both time periods.055 (. operatingearnings/assetsis excludedin the logit analysis. There are two possible explanationsfor these results.000 (. Logit Analysis.

71 .02* .868 2.637 .271 -.346 4.46* .182 on Mon.08 .05 This content downloaded from 121.219 -2.957 -.33 5.36 .38 .242 -3.80 .08* .40 .035 41.10 1.22 .645 -6.606 -.08 5.604 3.578 38.01 .63* 5. wherethe accountingvariablesare averagedin each test interval.70 .408 .153.For this model.29 2.237 .162 .994 .745 48.616 15.301 45.15 .425 1.61 . The chi-squarestatisticis reportedfor eachpairwisecombinationof CSR categories.431 -2.046 -9.416 .611 .533 -.93 4.098 19.Therefore the test was repeatedwith the inclusion of each and both of these variables.02 2.05* 4.53 .32 *p< .92 1975-1979 Effect Intercept Operating earnings/sales Asset age Asset turnover Excess value Pairwise CSR Comparisons Coefficient Estimate Chi-Square Statistic Best/worst Honorable mention/worst Best/honorable mention Best/worst Honorable mention/worst Best/honorable mention Best/worst Honorable mention/worst Best/honorable mention Best/worst Honorable mention/worst Best/honorable mention Best/worst Honorable mention/worst Best/honorable mention .52. 14 Sep 2015 16:56:46 UTC All use subject to JSTOR Terms and Conditions .768 -1. Logit analysisprovidesa chi-squaretest for the significanceof each explanatoryvariablein predictingthe CSR categoryin whichan observation (firm) will fall.50 .16 1.1984 Cochran and Wood 53 multicollinearity problembetweenEV and operatingearnings/sales. The logit model estimatedis: CSR = a0+ a1OES + a2AGE + a3TURN + a4EV+ E.94 2.374 -1. industryinfluencesare controlledby subtractingindustryaverages from the firm variables.The resultsshownin Table4 indicatethatassetage is statistically Table 4 Logit Results 1970-1974 Effect Intercept Operating earnings/sales Asset age Asset turnover Excess value Pairwise CSR Comparisons Coefficient Estimate Chi-Square Statistic Best/worst Honorable mention/worst Best/honorable mention Best/worst Honorable mention/worst Best/honorable mention Best/worst Honorable mention/worst Best/honorable mention Best/worst Honorable mention/worst Best/honorable mention Best/worst Honorable mention/worst Best/honorable mention -.25 1.00 1.121 -4.974 .

The associationof CSR and financial performance.In everycase.The CSR measurementerrorwould be minimizedfor this comparison.firmswitholder assets have lower CSR ratings.industry-specific and statisticaltools new to this area of research. In orderto examinethe possibilityof bias in coefficientsignificancetests from multicollinearity. This content downloaded from 121. Operatingearnings/salesis significantat the .at the .Whenasset age is dropped. The source of the correlationbetweenasset age and CSR is of interest.025levelfor the honorablemention/worst distinction.54 Academyof ManagementJournal March significantin the 1975-1979time intervalat the . No variablessignificantlyclassify firms between the best and honorablemention categories. responsibility by usingan enhancedsample.if a firm built a plant priorto the mid-sixtiesthereis an excellentchancethat its facilitypollutesmorethanone builtin the recentpast. 14 Sep 2015 16:56:46 UTC All use subject to JSTOR Terms and Conditions .however.suggestingthat thesevariablesmayhaveproxiedfor assetage in previoustests.asset age is significant.Consequently. multicollinearitydoes not appear to alter the test outcome significantly. firms with older assets have lower CSR ratings.035 level in distinguishing betweenhonorablemention/worstand significantat the .018 confidencelevel for the best/worstdistinction. The EV best/worst pairbecamemarginallysignificantin the first interval.636 level for the best/honorablemention distinction. With all variablesincluded.This is understandable.087 level in distinguishingbetweenbest and worst in the second five-yearperiod.the analysiswas modified for both intervalsby alternativelydroppingthe EV and operatingearningsvariables. For example.153.182 on Mon. Conclusionsand Implications Thispaperextendsthe studyof financialperformanceandcorporatesocial controlgroups. It is insignificantin both respectsfor the 1970-1974interval.and operatingearnings/sales and EV are alternativelymarginallysignificant.and in most cases the significanceof the remainingfinancial performancevariablesincreased. the significanceof the asset age variableincreased. still is marginallysignificant. One possibleexplanationis that firmswith older assetsconstructedplants in a periodwhenregulatoryconstraintswereless severethanthey aretoday. The evidencestronglysuggeststhat the financialvariablemost significantly associatedwith CSR is asset age-specifically.eitherEV or operatingearnings/salesbecomesignificant.Specifically.and at the .The associationis strongestwith the best/worst comparison. Operatingearnings best/worst became significant and honorable mention/worst droppedto marginalsignificancein the second interval.The major conclusionis that withinindustrygroupsthe financialvariablemost stronglycorrelated with CSRis assetage and that omissionof this variableresultsin a spurious correlationof CSRand financialperformance. Asset age is the only variablethat is significantin predictingwhether or not an observation(firm) will be best versusworst or honorablemention versusworst in both time periods.52.

182 on Mon. Finally. using a largesample.153.even after controllingfor asset orderto conduct a valideventstudybetterand moreextensiveCSRrankingswillbe required.causalityshouldbe investigated. In addition.. 14 Sep 2015 16:56:46 UTC All use subject to JSTOR Terms and Conditions . 514). may be responsiblefor poorer CSR ratings.Thereforeresearchin this areacouldfocus onperceptionsof CSR. First.and industry-specificcontrol groups.Regularsurveysof businesspeople.No workto datehas statistically demonstratedthe directionof causationbetweenthese two variables.e. It would be very useful to have CSR rankingson at least the Fortune 500 firms over severalyears.partof AbbottandMonsen's conclusioncan be reiterated:"[B]eingsociallyinvolved[does not appear to be] dysfunctionalto the investor. Third. at the same time.52. However. This content downloaded from 121. businessschool faculty. Future ResearchDirections Futureresearchin this area could proceed in a numberof directions."Managementof "older" firms may simplybe less responsivein both business and socialdimensionsthanmanagementof "younger"firms.The resultsof this study(i. Second.Theremightbe separaterankingsfor eachof severaldifferent constituencies. Such content analysisstudies in some sensesmay reflectthe firm'sperceptionsof its socialresponsibility.However.bettermeasuresof CSR are desperatelyneeded. the possibilityand implicationsof additionalexplanatoryvariablesmustbe explored.This could give researcherssome indicationsof the effects of certainpolicy changes on perceptionsof CSR and subsequenteffects on financial performance.businesswriters. Perhapsit is this latter finding thathas greatersignificancefor decisionmakingpurposes. there still is weak supportfor a link betweenCSRand financialperformance. Another explanationis that older firms may possess less flexibilityin adaptingto social change-corporate "hardeningof the arteries. that assetage is highly correlatedwith CSR)throwdoubt on the resultsof most previousstudies. and the publicat largecould give researchersreliable reputationindexesfor time seriesstudies. more extensivemeasuresof CSR also are needed.Therefore.particularly given currentpolitical and social pressures"(1979. p.1984 Cochranand Wood 55 Managementof such a firm may be attemptingto respondto the social demandsfor a cleanerenvironmentand may actuallyhave spent more to upgradeits facilitiesthan did firmsthat built laterin anticipationof these new constraints. The implicationsof this new factor should be exploredand additionalexplanatoryfactors sought.Alternatively. the Beresford studiescould be replicatedfor recentyears.Thisresultis consistentwiththe resultsdiscovered by Sturdivantand Ginter (1977).Thusthe simpleaccidentof whena firmbuilt or acquired its plant and equipmentmay have contributedto highercosts in meeting new social demandsand.It may neverbe possibleto measureCSRobjectively. the type of managersthat "old" firms attractmay differ from those attractedby "young"firms.One promisingtechniquewouldbe an eventstudy.

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