Differentiating the Impact of CSR Strengths and Concerns on Firm Performance: An

investigation on MNEs and U.S. Domestic Firms

Albi Alikaj

Cau Ngoc Nguyen

Efrain Medina

Texas A&M International University

ABSTRACT

We argue that inconsistencies on whether or not firms should allocate additional

resources into CSR investments are due to the different measurements of CSR. As such, we

distinguish between CSR concerns and strengths to explore their relationship with firm financial

performance. Additionally, we test whether the relationship between CSR and firm performance

is moderated by the type of the firm in terms of being multinational or domestic. We find that

increases in CSR strengths as well reductions in CSR concerns are positively linked to firm

financial performance. Our results also suggest that addressing concerns would be more

beneficial to MNEs as opposed to U.S. domestic firms.

KEYWORDS: corporate social responsibility, CSR concerns, CSR strengths, structured equation

model, path analysis, multinational enterprises

INTRODUCTION

For years, managers and scholars alike have debated on whether or not investments in

increasing corporate social responsibility (CSR) of firms are beneficial to performance. CSR

“concerns with actions that appear to further some social good, beyond the interests of the firm

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and the requirements of law” (McWilliams & Siegel, 2000). Proponents for CSR perceive such

investments as a strategy for firms to increase their competitiveness (Posnikoff, 1997; Waddock

& Graves, 1997; Weber, 2008), whereas opponents of CSR argue that such investments conflict

with the firms’ objective to maximize profits (Wright & Ferris, 1997). This conflict has led to

increased motivation for studying this relationship in an attempt for the reconciliation of

differing sides on the subject.

Unfortunately for decision makers, the extant research on the CSR-firm performance

relationship has yielded inconclusive results. Empirical studies have shown a positive

relationship (Nguyen & Oyotode, 2015; Posnikoff, 1997; Waddock & Graves, 1997), a negative

relationship (Wright & Ferris, 1997), and even no significant relationship (McWilliams & Siegel,

2000; Teoh, Welch, & Wazzan, 1999). Instead of addressing the controversy, these mixed results

only add to the confusion regarding whether or not these investments are injudicious.

We argue that the contradictory results are due to the inconsistent measurements of CSR

in previous studies. CSR has been operationalized in a number of ways including primary

questionnaires (Mohr & Webb, 2005; Quazi, 2003), Fortune Corporate Reputation Index

(McGuire, Sundgren, & Schneeweis, 1988; Stanwick & Stanwick, 1998), Reputation Institute’s

CSR Reptrak Index (Nguyen & Oyotode, 2015; Zamohano, 2013), and Kinder, Lydenberg,

Domini & Co (KLD) Index (Carroll & Shabana, 2010; McWilliams & Siegel, 2000). Of these

measurements, KLD is the most comprehensive because it takes seven qualitative dimensions

(i.e. corporate governance, diversity, community, environment, employee relations, human rights

and products) into account to measure CSR strengths as well as CSR concerns. However, most

studies aggregate both CSR strengths and concerns into one latent variable to measure CSR.

Therefore, we take a different approach by distinguishing between CSR strengths and concerns

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to study their individual effects on firm financial performance. The second contribution we seek

to make is to distinguish between U.S. domestic firms and multinational enterprises to gain

additional insights and explore if any differences exist.

The structure of this study is as follows. The second section will highlight a selected

literature review. The following section will be focused on discussing our sample and

methodology. Then the results will be discussed in the fourth section. The final section will

highlight our implications, limitations and recommendations for future research.

LITERATURE REVIEW

Corporate Social Responsibility (CSR) and Firm Performance

Over the years, a plethora of research has been devoted to examining its influence on a

number of organizational outcomes including financial performance (Nelling & Webb, 2009;

Peloza, 2006; Teoh et al., 1999), brand equity (Lai, Chiu, Yang, & Pai, 2010; Nguyen &

Oyotode, 2015), and market performance (Becchetti & Ciciretti, 2009; Konar & Cohen, 2001).

For the purpose of this study, we are focused primarily on firm financial performance. We argue

that financial performance is the most appropriate measure of performance for this relationship

because unlike the other measures, it is not subject to perceptions and biases.

The results on the CSR-financial performance relationship have been indeterminate. For

example, Bragdon Jr and Marlin (1972) found evidence that social responsibility can have a

negative relationship with financial performance. In a study of the paper industry, they found that

firms that implemented pollution controls tend to perform worse in terms of return on equity

(ROE) and return on capital (ROC). Other studies that have shown a negative relationship

(Aupperle, Carroll, & Hatfield, 1985; Griffin & Mahon, 1997) show support for the notion that

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the extra expenses that are incurred for being socially responsible can put a firm at a financial

disadvantage relative to the less socially responsible firms.

On the other hand, Waddock and Graves (1997) studied 469 of the Fortune 500

companies and found that the companies that performed better in KLD social responsibility

measures were associated with higher ROE, return on assets (ROA), and return on sales (ROS).

Studies that have shown this relationship (Orlitzky, Schmidt, & Rynes, 2003; Stanwick &

Stanwick, 1998) assert that CSR helps to build a good reputation for the firm. This intangible

asset, in turn, may serve as a sustainable competitive advantage because of the development of

lasting relationships between the firms and its stakeholders(McWilliams & Siegel, 2000).

Operationalization of CSR

In a meta-analysis of 52 papers, Orlitzky et al. (2003) showed that CSR is positively

related to financial performance and that this relationship is moderated by the operationalization

of CSR. There have been a number of measurements of CSR, with some studies developing their

own questionnaires (Mohr & Webb, 2005; Quazi, 2003), and others studies using existing

indexes such as Fortune Corporate Reputation Index (McGuire et al., 1988; Stanwick &

Stanwick, 1998) and Reputation Institute’s CSR Reptrak Index (Nguyen & Oyotode, 2015;

Zamohano, 2013). Perhaps the most widely used measurement of CSR comes from KLD

(Carroll & Shabana, 2010; McWilliams & Siegel, 2000). KLD uses approximately 80 indicators

in seven major qualitative issue areas which include corporate governance, diversity, community,

environment, employee relations, human rights, and products to provide strength and concern

ratings for each company. However, most existing studies have aggregated the two variables

(strengths and concerns) into a single measurement of CSR (Aupperle et al., 1985; Becchetti &

Ciciretti, 2009; Carroll & Shabana, 2010; McWilliams & Siegel, 2000). This can potentially be a

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problem because these two variables are not meant to measure the same issues. Based on the

descriptions of each factor comprising the KLD dimensions, CSR strengths are related to issues

that are more in a firm’s control, while issues dealing with CSR concerns involve external parties

such as the government in the case of legal issues. We argue that a lack of CSR strength in some

areas does not necessarily mean that a firm has concerns over the same issues. Therefore, our

first contribution to the literature is to separate the two and study each of their effects on

financial performance.

H1: CSR strengths are significantly and positively related to financial performance.

H2: CSR concerns are significantly and negatively related to financial performance.

MNE vs. US Domestic firms

Our second contribution is to explore whether or not there exist any differences between

multinational enterprises (MNEs) and U.S. domestic firms. MNEs are more complex

organizations and therefore, are constantly facing legitimacy issues (Kostova & Zaheer, 1999).

We argue that because MNEs are held to stricter standards and oversight, firms’ engagement in

CSR investment and activities will have a larger impact on financial performance. Thus,

H3a: The positive relationship between CSR strengths and financial performance is

strengthened if the firm is a MNE.

H3b: The inverse relationship between CSR concerns and financial performance is

strengthened if the firm is a MNE.

Figure 1 shows a visual representation of our conceptual model.

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Figure 1: Conceptual Model

CSR
Strengths

MNE vs. Financial

Domestic Performance Firm Size

CSR
Concerns

METHODOLOGY

Sample

Firms were selected from the Kinder, Lydenberg, Domini & Co. (KLD) database. The

database originally contained 2,912 firms. However, several indicators did not have available

data, and, therefore, we excluded firms who did not have values for at least five indicators. After

this exclusion, the sample size was reduced to 610 firms. We then cross-checked the KLD

database with the Compustat database to make sure that data was available on both databases.

The cross-checking reduced the sample size to a final list of 562 firms. To determine whether the

firms were U.S. domestic or multinational, we used information provided by the firms’ website.

359 firms are multinational corporations, and 203 firms operated solely in the U.S. The firms

were picked for the year 2009. We chose this year because 2009 was the most recent year with

the most complete data. The missing values account for less than 1 percent of the data set. We

used the arithmetic mean imputation to treat the missing data.

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Measures

Dependent Variable

To measure the firm financial performance as our dependent variable we use accounting

measures as opposed to market measures for two reasons. First, market measures assume that

markets are efficient and the stock price represents the fundamental value of the firm. However,

the assumption of market efficiency has been debated in the literature (e.g. Tobin, 1984). Also,

even if the assumption of market efficiency holds, the fundamental value of the firm will be

influenced by the amount of information that firms choose to make publicly available (Bettis,

1983). For a more comprehensive measure of firm financial performance, we consider three

indicators, and more specifically firm sales, return on assets, and return on equity. We collected

the data from the Compustat database for the year 2009.

Independent Variables

The independent variables for this study consist of CSR strengths and fewer CSR

concerns. These variables were taken from the KLD database. This database consists of 13

dimensions. We only use the dimensions that have a wide range of indicators representing the

CSR strengths and weaknesses of a firm. The dimensions we use are corporate governance,

employee relations, community, environment, diversity, and product. A list of the strengths and

concerns measured for each of the six KLD dimensions used in this study is provided in the

Appendix. For the moderating variable, MNEs vs. U.S. Domestic firms, we created a dummy

variable and assigned a value of 1 if the company is a MNE and 0 if it operates solely in the U.S.

We also use firm size as a control variable. The proxy used for firm size is the number of

employees in the natural log form. We take the natural log of the number of employees for two

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reasons. First, we want to reduce the variance of this variable. Second, we want to reduce an

artificial increase in R-squared of firm performance due to a potential high collinearity of the

number of employees with firm sales. The data for the number of employees was collected from

the Compustat database.

Validity and Reliability

Validity, reliability, and multicollinearity tests were conducted to determine the strength

of our variables. Convergent validity was examined by the factor loadings (Table 1). In order to

pass the convergent validity test, the indicators should have values greater than or equal to 0.50

(Hair, Anderson, & Tatham, 1987). Based on this cut-off point, we dropped two indicators of

CSR strengths (employee relations and product), three indicators of CSR concerns (corporate

governance, diversity and employee relations), and one indicator of firm financial performance

(return on equity). The factor loadings of each indicator are presented in Table 1.

Table 1: Factor Loadings

CSR CSR Performance Size MNE
Strength Concerns
Corporate Governance - Strengths (0.704) 0.143 0.049 -0.177 -0.021
Community - Strengths (0.701) -0.061 0.088 0.213 -0.175
Diversity - Strengths (0.658) -0.293 0.179 0.406 -0.226
Environment - Strengths (0.670) 0.192 -0.262 -0.110 0.199
Employee Relations - Strengths (0.491) 0.129 0.004 -0.483 0.155
Product - Strengths (0.409) -0.139 -0.098 0.046 0.187
Community - Concerns 0.209 (0.723) 0.061 -0.271 -0.080
Product - Concerns 0.187 (0.611) 0.059 0.269 -0.162
Corporate Governance - Concerns -0.129 (0.484) 0.017 0.318 0.222
Diversity - Concerns -0.606 (0.184) 0.000 0.243 0.135
Employee Relations - Concerns -0.541 (0.323) -0.185 0.385 0.038
ROA -0.111 -0.209 (0.725) -0.086 0.074
Revenue 0.112 0.393 (0.602) 0.296 0.006
ROE 0.027 -0.176 (0.484) -0.239 -0.118
Nr. Of Employees (ln form) 0.000 0.000 0.000 (1.000) 0.000
MNE or Domestic 0.000 0.000 0.000 0.000 (1.000)

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 After dropping the indicators that did not pass convergent validity, we tested the latent

variables for discriminant validity. Discriminant validity determines that the latent variables that

are supposed to be unrelated are in fact unrelated. The variables pass discriminant validity if they

are correlated more with themselves than with other latent variables (Table 2). As can be

observed in Table 2, all variables pass discriminant validity.

Table 2: Correlations among latent variables.

CSR CSR Performance Size MNE MNE*CS MNE*CSR
Strengths Concerns R Concerns
Strengths
CSR Strengths (0.715) 0.235 0.372 0.402 0.184 0.431 0.097
CSR Concerns 0.0235 (0.698) 0.348 0.319 0.002 0.112 0.041
Performance 0.372 0.348 (0.739) 0.460 0.136 0.207 0.206
Size 0.402 0.319 0.460 (1.000) 0.263 0.076 0.117
MNE 0.184 0.002 0.136 0.263 (1.000) -0.123 -0.001
MNE*CSR Strengths 0.431 0.112 0.207 0.076 -0.123 (0.680) 0.212
MNE*CSR Concerns 0.097 0.041 0.206 0.117 -0.001 0.212 (0.695)

Table 3 shows that the data has passed reliability and multicollinearity tests. To test if the

variables are reliable, we refer to the composite reliability values. As noted, all the latent

variables have composite reliability values greater than 0.60 (Kock, 2012), and, therefore, they

pass the reliability test. As for the multicollinearity test, we refer to the full collinearity variance-

inflation factor (VIF). All the variables are below the cut-off value of 3.3 used for this study

(Kock, 2012).

Table 3: Reliability and collinearity values.

CSR CSR Performance Size MNE MNE*CSR MNE*CSR
Strengths Concerns Strengths Concerns
R-Squared 0.055 0.313
Adj. R-Squared 0.053 0.306
Composite Reliability 0.806 0.736 0.706 1.000 1.000 0.773 0.731
Avg. variance 0.511 0.487 0.546 1.000 1.000 0.463 0.483
Extraction
Full Collinearity VIF 1.575 1.202 1.457 1.502 1.145 1.364 1.086

RESULTS

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 In order to test our proposed model, we use the statistical software WarpPLS 5.0. The

results of the path analysis are shown in Figure 2. The relationship between CSR strengths and

firm financial performance has a path coefficient of 0.16, and this coefficient is statistically

significant (p<0.01), showing support for Hypothesis 1. The relationship between CSR concerns

and firm financial performance has a path coefficient of -0.20, and this coefficient is statistically

significant (p<0.01), showing support for Hypothesis 2.

Figure 2: Results of the path analysis.

CSR
Strengths
β=0.16
β=0.06 (ρ<0.01)
(ρ=0.04)
β=0.31
MNE vs. Financial (ρ<0.01)
Domestic Performance Firm Size
β=0.13
(ρ<0.01) R2=0.31
β=-0.20
CSR (ρ<0.01)
Concerns

The R-squared on firm financial performance is 0.31. The MNE variable, which

determines whether the firm is U.S. domestic or multinational, moderates both links, thus

showing support for hypotheses 3a and 3b. The moderating effect of the MNE dummy variable

on the relationship between CSR strengths and firm performance is 0.06, and this coefficient is

statistically significant (p=0.04), while the effect of this moderating variable on the relationship

between CSR concerns and firm performance is 0.13, and this coefficient is also statistically

significant (p<0.01). The model passes goodness-of-fit indices. Average block VIF is 1.259,

which is well below the ideal value of 3.3. Also, average full collinearity VIF is 1.333, which too

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is below the ideal value of 3.3. The Tenenhaus Goodness-of-Fit value is 0.343, which is in the

medium range (between 0.25 and 0.35), but very close to being considered large (large >=0.36).

The effect sizes for all of the paths were examined. Cohen (1988) suggested that the

strength of the relationship of two variables can be measured as small, medium or large. The

values proposed by him were 0.02, 0.15, 0.35 for small, medium, and large, respectively. All but

one the relationships had small effect sizes. The moderating variable on the relationship between

CSR strengths and firm performance, even though barely statistically significant, had an effect

size below 0.02, demonstrating that the effect of such a moderator is not strong enough to be

considered relevant for practical purposes. The values of all effect sizes are summarized on

Table 4.

Table 4: Effect sizes for path coefficients.

CSR CSR Performance Size MNE MNE*CSR MNE*CSR
Strengths Concerns Strengths Concerns
Performance 0.060 0.069 0.143 0.013 0.027

DISCUSSION AND CONCLUSIONS

We hypothesized that CSR strengths as well as fewer CSR concerns would be positively

related to financial firm performance. The support of these two hypotheses by our study is

consistent with the assertion that CSR investments can be strategically used to inflate financial

performance. We also provided additional insights by testing the moderating effect of MNEs on

the relationship between CSR and financial performance. Our results show that addressing CSR

issues provides a higher effect on firm performance for MNEs than for U.S. domestic firms.

Such results suggest that it would be more beneficial for MNEs to invest in CSR because they

are serving a wider range of stakeholders that might have a higher degree of sensitivity toward

issues related to CSR. Furthermore, we found that fewer CSR concerns are associated with

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higher firm financial performance than CSR strengths. This can be explained by suggestions of

the prospect theory, inferring that individuals value losses more than gains. In our study, perhaps

stakeholders punish firms more as the number of CSR concerns such as legal issues and fines

increases, while they do not praise them as much when these firms invest in CSR activities such

as helping the community or using environment-friendly products. The inverse relationship

between CSR concerns and firm performance is strengthened when firms are operating on a

multinational level.

This study is restricted by various limitations. First, it should be noted that our study is

cross-sectional, thus limiting confirmation of causality. Future studies can confirm causality by

conducting longitudinal analysis. Also, some country-specific regulations require firms to make

certain CSR related information publicly available. Future studies can focus on countries that

have such regulations and make comparisons with countries that allow firms to decide for

themselves whether or not to make CSR related activities publicly available. The effect of

investments in CSR activities on firm financial performance remains a debatable topic even to

this day, and this topic in the literature is still of great interest for scholars throughout a wide

range of disciplines.

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 APPENDIX

Strengths and Concerns measured for each of the KLD Qualitative Issue Areas
Qualitative Strengths Concerns
Issue Areas
1 Corporate Limited compensation High Compensation
Governance Ownership Strength Accounting Concern
Transparency Strength Ownership Concern
Political Accountability Strength Transparency Concern
Political Accountability Concern
2 Employee No-layoff Policy Workforce Reductions
Relations Employee Involvement Health and Safety Concern
Cash Profit-Sharing Plans Union Relations
Union Relations Retirement Benefits Concern
Retirement Benefits Strength
Health and Safety Strength
3 Community Charitable Giving Investment Controversies
Support for Housing Negative Economic Impact
Support for Education Indigenous Peoples Relations
Innovative Giving Tax Disputes
Non-US Charitable Giving
Indigenous Peoples Relations
Volunteer Programs
4 Environment Beneficial Products and Services Hazardous Waste
Pollution Prevention Programs Regulatory Problems
Recycling Substantial Emissions
Clean Energy Ozone Depleting Chemicals
Communications Agricultural Chemicals
Property, Plant, and Equipment Climate Change
Management Systems
5 Diversity Female CEO Controversies
Promotion for Minorities and Females Non-representation
Board of Directors
Work/life Benefits
Employment of the Disabled

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 Women & Minority Contracting
Gay & Lesbian Policies
6 Product Product Quality Product Safety
R&D/Innovation Marketing/Contracting Concern
Benefits to Economically Disadvantaged Antitrust Violations

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