KATHMANDU UNIVERSITY SCHOOL OF MANAGEMENT

Final Paper
Seminar in Finance

Submitted to:

Sabin Bikram Pant

Submitted by:

Aloke Jung Joshi (15315)

Nova Khosin (15320)
Karuna Tuladhar (15336)

January, 2017
I. Background
"Look how far we've come; Some were never meant to come around. Some were never meant
to leave the ground"

Certainly, we have come so far and so have our businesses and the way we conduct them.
Corporate Social Responsibility, CSR, though first used during 1960s wasn't quite a
buzzword till 1990s. However as we entered a new century, the term CSR started to become
the new "thing" in the corporate world. CSR now has evolved itself from being a company's
greater consciousness towards society to much of a necessity in this competitive world. 67%
out of total surveyed people said that they prefer to work for socially responsible companies;
moreover, 55% of the respondents are willing to pay extra for products and services from the
companies who are involved in CSR (The Nielsen Company, 2014).

The financial theorists have defined and redefined what an ultimate goal of the firm should
be. From Profit Maximization to Value Maximization, the goal has always been towards
maximization of wealth/returns/value/profit. But where does Corporate Social Responsibility
and Performance fall in this mix? Modern finance theories however has stretched out the
domain of business including non market environment into consideration. Thus, a business
organization's performance is perennially affected by its strategies and operations in both,
market as well as non-market environments (Baron, 2000). Thus, it is imperative that factors
such as reputation and good will through socially responsible behaviour needs to be
considered while carrying out any valuation of the organization as it, though not in same
magnitude, but affects the overall performance of the organization. This paper aims to
analyze the relationship between value of the firm and the CSR activities conducted by the
firm. If the Corporate Social Responsibility or Corporate Social Performance(CSP) is
believed as the antecedent of the Corporate Financial Performance(CFP) (Orlitzky, Schmidt,
& Rynes, 2003), then Corporate Social Responsibility or Corporate Social Performance will
certainly affect Firm Value.
II. Literature Review
In the research meta-analysis study, Marc Orlitzky, Frank L. Schmidt and Sara L. Ryan
advocates a relation between Corporate Social Performance and Financial Performance. The
research finds that there is a positive correlation between CSP and CFP across a wide variety
of industry and study contexts. Similarly the study also tests and certifies through meta
analysis that there is a bidirectional casualty between CSR and CFP. Finally, the research
concludes that there is a positive relationship between CSP and CFP because a) CSP
increases managerial competencies, contributes to organizational knowledge about the firms'
market, social, political, technological and other environments and thus enhances
organizational efficiency and b) CSP helps the firm build positive reputation and goodwill
with its external stakeholders. The research highlights 'reputation' to be the most important
moderating factor in the CSP and CFP relationship. (Orlitzky, Schmidt, & Rynes, 2003)

In another research by Lingling Ding, the research postulates the different effects of CSR
activities targeted for different stakeholders. In testing five hypotheses, the research shows
that the most important undertaking for CSR activities is for the government as it actively
increases the financial performance. Secondly, the CSR activities for employees and creditors
have a positive impact on the financial performance. Finally, the study reveals that the CSR
activities directed towards customers yield a positive increase in the firms' value. The final
takeaway of the research is that, the influence of CSR on financial performance is time
bound. Such that although in the short term, the CSR activities for the stakeholders undertook
by the corporation have no influence or even negative influence, in the long run, the
undertaking of CSR activities for creditors, employees, government, consumers and social
welfare and other stakeholders can bring the enterprises profits. (Orlitzky, Corporate Social
Responsibility, Noise, And Stock Market Volatility, 2013)

"Impact of Corporate Social Responsibility on Stock Prices: An Event Study of Vigeo Rating
announcement" looks into the effect of CSR ratings done by rating companies on the stock
price of the company. The financial performance here is measured in the way the stock
performs in the market after an announcement of CSR rating. The research finds through
Events Study that announcement of social ratings have a significant impact on the stock
prices, that is there is a rise in the stock price after a positive rating. Further the portfolio
analysis shows that the aggregate CSR score explains more than expected the market reaction
to CSR announcements. Finally, the study tests and announces that the market reaction
differs based on the difference in the themas and the market standing/norm. The takeaway of
the study is that although there can be said a relation between the CSR announcements and
the stock prices, the market norms cannot be ignored and that the reason for the change in
prices must be specified. (Cellier & Chollet, 2010)

Hasan Fauzi, in his "Corporate Social and Financial Performance: Empirical Evidence from
American Countries" tries to test the relationship between CSR and CFP using the guidance
of Slack Resource and Good Management Theory. The research also looks into the loopholes
of the other literature wherein Hasan Fauzi analyses the impact of moderating factors it
explaining the relationship between CSR and CFP. The results of the study shows that the
financial leverage is the only factor that significantly moderates the relationship between
CSR and CFP, whereas firm size and the number of disclosures do not have any moderating
effect on the relationship. This study fills in the gap that exist with available literature on how
various independent variables have moderating or influencing effect on the controversial
relationship between CSR and CFP. (Fauzi)

In "The Economics and Politics of Corporate Social Performance", the authors try to find the
impact of CSR on the CFP and measure the effect of SP on CSR. The study shows a no
significant relation between CSR and CFP however, the study states that organizations do
significantly spend on CSP if it contributes to product differentiation of their products.
similarly it is observed that increased social pressures increases CSP and that although SP
increase CSP, it reduces CFP eventually. The highlight of the study is that, in a product
industry, CSP do build into the customer perception even though conclusive results are not
determined. (Baron, Harjoto, & Jo, 2009)

In the research of Liliana Nicoletra and Stefan Cristian, Quantitative correlational study is
done to analyse the impact of CSR on FP. The research is cross- sectional and a simple model
of statistical regression is used to analyse the direction of impact of CSR on Financial
Performance. There were no conclusive results on the explanation of CSR activities on
financial performance, however it may be said that CSR may aid in the improvement of FP.

(Simionescu & Gherghina, 2014)

III. Findings
Corporate social responsibility is viewed as a tactics to deliver reputational and financial
benefit to organization as most executives believes CSR indeed create firm value and brand
value. Meanwhile, some view it as just a corporate responsibility to be fulfilled having no
positive effect on firm wealth. Going through all the research study, it was found that there is
tendency to have positive result of CSR on financial value of the firm however, it lacks
significant statistical evidence. It was observed that CSR and CFP have bidirectional relation
where reputation plays a major role as a mediator. Research in develop country showed that,
in short run CSR have no significant influence on corporate value, however in long run,
undertaking CSR activities for the creditors, employees, government, consumers, social
welfare and other stakeholders can bring the enterprises profits. Furthermore, it was social
pressure that is either from public or private, it increases cost to organization whereas, its
benefit does not cover all the cost employed. This is why, CSR increases cost and had
negative effect on corporate value. Having said that, in service industry CSR has improved
corporate value.

In the context of stock price of organization, it was observed that announcement of social
ratings induce a positive relation of the stock price. Additionally, study says, there exist a
strong positive link than expected between CSR and financial performance. And it was
observed that if CEO has concentrated power, they would more on CSR than any other
executives. Looking over such analysis, it seems like reputation and brand is what need to be
created through right mechanism of CSR activity otherwise, it will not have positive effect at
the end.
IV. Critical analysis
Mixed result in study call for detail study including factors of CSR and industry specific
study, to find out effect of CSR on financial performance. Results reflects positive relation
between SCR and FP, however there are evidenced showing no significant relation between
these variables. Whether it is political action, environmental action, social action that has
strong impact on FP. This scope of study is yet to be explored. Furthermore, it was found that
complying with environmental awareness activity in CSR, in long term a company can have
benefit from it. But how long is that long term means. This time frame needs to be estimated
in order to find out profit realization period of CSR.

Between CSR and FP, lots of variable seems to have their role, and in order to make a model
robust and simple, more of simpler form of equation is required. Instead of taking all variable
in different model, certain variable need to be identified having significant effect on FP. A
sector wise study can be perform, as industries differ and hold different featured that effect
FP. Some research showed that, CSR does create a brand value however it fails to convince
with profit figure in term of cost employed to perform CSR. Hence a question is raised,
where does that brand value count if it does not show any financial effect? Does it only
calculated while buying stocks of the company?

In study in was found that CSR has positive effect on stock price to some extent as volume
increase when a company performs CSR. This makes company to desire for high social rating
in international market.
V. Conclusion
CSR reflects social concern of the organization whether a company initiate environmental
protection action or social initiatives. Research claim to have some extent of relation between
CSR and FP however, it is not assured that CSR will lead to high profit figure. Especially in
short term it cost higher than benefit. However, in long term it will have positive effect has it
had help to build brand and trust among customer. Market will value its brand high and
people will consider brand based on reputation of the firm.
Before committing CSR activity, a company need to analyses its strategic vision and try to
make CSR activities accordingly. Doing so, will maximize the potential benefit of CSR. Like
any other investment decision, it would be better if we keep following question in our mind
to ensure benefit from CSR.

 Does CSR initiatives integrate into your business strategy?

 Do CSR initiatives create shared value in terms of benefit to both organization and
society?
 Are your executives visible and vocal advocates for your CSR initiatives?
 How do you evaluate the effectiveness of your CSR initiatives?

Once the answer of above question is answered, company can initiate CSR which will
increase wealth of the firm. Most importantly, CSR can be regard as implicit marketing
techniques or public relation mechanism. If you target right place at right time, then cost
employed in CSR will bring out higher benefit to the organization. AT first glance market
sees what organization show to them, hence investing in CSR can bring best return in future
time.

In the race of innovation and creativity in market, today’s organization requires innovation in
CSR activity too. After all, CSR bring brand to organization which an organization wants to
pursue in long term. Following such CSR activities will create positive effect in long term
though it might cost high in short run.
VI. Reference

Baron, D. (2000). Business and its environment. NJ: Prentice Hall.

Baron, D. P., Harjoto, M. A., & Jo, H. (2009). The Economics and Politics of Corporate Social
Performance.

Cellier, A., & Chollet, P. (2010). The impact of Corporate Social Responsibility on Stock Prices: An
Event Study of Vigeo Rating Announcement.

Fauzi, H. (n.d.). Corporate Social and Financial Performance: Empirical Evidence from American
Companies. Sebelas Maret University- Indonesia.

Orlitzky, M. (2013). Corporate Social Responsibility, Noise, And Stock Market Volatility. The Academy
of Management Perspectives, 238-254.

Orlitzky, M., Schmidt, F. L., & Rynes, S. L. (2003). Corporate Social and Financial Performance: A
Meta-analysis. Organization Studies, 403-441.

Simionescu, L. N., & Gherghina, S. C. (2014). Corporate social responsibility and corporate
performance: Empirical evidence form a panel of Bucharest Stock Exchange listed companies.
M&M.

The Nielsen Company. (2014). Doing Well by Doing Good.