Title: Equal gains and pains?

Analyzing corporate
financial performance for
industrial corporate social
performance leaders and
laggards

Presented by: D11222012 夏邦隆 Benjamin Hsia

Date: November 1, 2023
Course: International Business Strategy & Environment
10/30/2023 簡報標題 2
 Title: Sustainable development—Direct and indirect effects
between economic, social, and environmental dimensions in
business practices (Presented by Muti on 10/18)

Hypothesis 1.
The economic dimension relates
positively to the social dimension
(i.e., direct effect).
* social dimension =>
corporate social performance
(CSP)

10/30/2023 簡報標題 3
 Title: Are firms with foreign CEOs better citizens?
A study of the impact of CEO foreignness on corporate social
performance (Presented by Ben on 10/11)

Thomson Reuters ESG Score

2023/10/30 簡報標題 4
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Figure 1 An organizing framework for examining CSP in the MNE
Strategic Choice Theory:
Strategic choice refers to the decision making of
company leadership after deliberately examining
the influence of both the external environment and
internal conditions (Child, 1972).
MNEs may choose from a portfolio of CSP strategies
depending on how far the firm can preserve its
autonomy when balancing the external environment
and internal resources to gain expected returns.
(Napier, et. Al., 2023)
the Virtue Matrix
Martin, Roger L.
The Virtue Matrix:
Calculating the
Return on Corporate
Responsibility
HBR, March 2002

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 ABSTRACT
The literature has discussed how corporate social performance (CSP)
may influence corporate financial performance (CFP). However, it is
unclear whether stakeholder expectancy and subsequent stakeholder
(dis)satisfaction may influence the CSP-CFP link. Using industrial
average CSP as the proxy of stakeholder expectancy, we distinguish
firms into industry CSP leaders (i.e., firms with CSP superior to
industrial average CSP) and laggards (i.e., firms with CSP inferior to
industrial average CSP). We ask whether industry CSP leaders and
laggards experience asymmetric gains (i.e., increases in CFP) or
pains (i.e., decreases in CFP) when having symmetric deviations from
the industrial average CSP. We then theoretically draw on stakeholder
theory and expectancy disconfirmation theory (EDT), and empirically
conduct a series of analyses based on a longitudinal dataset. The
findings show asymmetric CSP-CFP relationships for industry CSP
leaders and laggards. The contributions and implications of this study
are discussed.
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 Literature review

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 Literature review -> Finding

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 RESEARCH GAP
• The literature on the CSP-CFP link in the past few decades has
been dominated by studies seeking to identify a positive
relationship between CSP and CFP (Wood, 2010); despite the early
argument of a negative CSP-CFP relationship by Friedman (1970).
• The research status of being inconclusive in the CSP-CFP
relationship leaves managers with an ineffective guideline about
their CSR-related decisions (McWillians & Siegel, 2000).
• The literature has significantly assumed a unitary linear or
symmetric relationship (i.e., U-shaped or inverted U-shaped)
between CSP and CFP. These assumptions neglect the possible
firm heterogeneity, e.g., firms with low CSP and high CSP may
experience different or asymmetric gains (i.e., increases in CFP) or
pains (i.e., decreases in CFP) when having the same changes in
CSP.
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 RESEARCH GAP (Abstract)
The literature has discussed how corporate social performance (CSP)
may influence corporate financial performance (CFP). However, it is
unclear whether stakeholder expectancy and subsequent stakeholder
(dis)satisfaction may influence the CSP-CFP link.

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 RESEARCH QUESTION
• Integrating CSP studies with stakeholder theory, Wood and Jones
(1995, p. 229) suggest that “Multiple stakeholders (a) set
expectations for corporate performance, (b) experience the effects
of corporate behavior, and (c) evaluate the outcomes of corporate
behavior.”
• Whether firms with satisfied CSP (i.e., firms’ CSP exceeds
stakeholder expectation) and firms with unsatisfied CSP (i.e., firms’
CSP falls short of stakeholder expectation) experience asymmetric
gains or pains when having symmetric CSP deviations from
stakeholder expectation.
• Answering this question is critical for enhancing scholarly
understanding of firm heterogeneity in CSP-CFP relationships and
offering managerial implications regarding sophisticated and
differential CSR decisions for different types of firms.
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 FRAMEWORK
• To answer this question, we first build an integrated theoretical
framework based on stakeholder theory (Freeman, 1984) and
expectancy disconfirmation theory (EDT) (Oliver, 1980, 1997).
• Drawing on this framework, we argue that industry CSP (laggards)
leaders experience stakeholder (dis)satisfaction which further
leads to the focal firms’ (decreased) increased CFP. Furthermore,
the negative CSP-CFP relationship for industry CSP laggards is
influenced by stakeholders’ negativity bias; the positive CSP-CFP
relationship for industry CSP leaders is affected by the diminishing
effects, resulting in asymmetric CSP-CFP relationships for industry
CSP leaders and laggards.

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 FRAMEWORK

H1 (++) H2 (++) H3 (+)

CSP Leader Gains
Corporate Corporate
Social average CSP EDT Salient Weaken Financial
Performance Performance
CSP Laggards Pains
H1 (--) H2 (---) H3 (--)

Stakeholder Theory – e.g. Investors

Expectancy Disconfirmation Theory (EDT)

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 RESEARCH QUESTION elaborated
• By viewing the industry average CSP level as stakeholders’
expectations of CSP toward a focal firm. The paper further
conceptualized and distinguished firms as industrial CSP leaders
(i.e., firms with superior CSP to industrial average CSP) and
laggards (i.e., firms with inferior CSP to industrial average CSP).
• Therefore, the research question can be specified – whether
industrial CSP leaders and laggards experience asymmetric gains or
pains when having symmetric CSP deviations from industrial
average CSP.
• The negative CSP-CFP relationship for industry CSP laggards is
influenced by stakeholders’ negativity bias; the positive CSP-CFP
relationship for industry CSP leaders is affected by the diminishing
effects, resulting in asymmetric CSP-CFP relationships for industry
CSP leaders and laggards.
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 RESEARCH QUESTION (Abstract)
• Using industrial average CSP as the proxy of stakeholder
expectancy, we distinguish firms into industry CSP leaders (i.e.,
firms with CSP superior to industrial average CSP) and laggards
(i.e., firms with CSP inferior to industrial average CSP). We ask
whether industry CSP leaders and laggards experience
asymmetric gains (i.e., increases in CFP) or pains (i.e., decreases
in CFP) when having symmetric deviations from the industrial
average CSP.

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 About the Stakeholder Theory
• Stakeholder Theory is a view of capitalism that stresses the
interconnected relationships between a business and its customers,
suppliers, employees, investors, communities and others who have
a stake in the organization. The theory argues that a firm should
create value for all stakeholders, not just shareholders.
• In 1984, R. Edward Freeman originally detailed the Stakeholder
Theory of organizational management and business ethics that
addresses morals and values in managing an organization. His
award-winning book Strategic Management: A Stakeholder
Approach identifies and models the groups which are stakeholders
of a corporation, and both describes and recommends methods by
which management can give due regard to the interests of those
groups. “The 21st Century is one of “Managing for Stakeholders.” The task of executives is to
create as much value as possible for stakeholders without resorting to tradeoffs. Great
companies endure because they manage to get stakeholder interests aligned in the
10/30/2023 same direction.” — R. Edward Freeman 18
About the Expectancy Disconfirmation Theory
• Expectancy Disconfirmation Theory is a theory that explains how
customers evaluate their satisfaction with a product or service
based on the comparison between their expectations and the
actual performance of the product or service. According to this
theory, there are three forms of disconfirmation: (1) Positive
disconfirmation: Occurs when perceived performance exceeds
expectations. (2) Confirmation: Occurs when perceived
performance meets expectations. (3) Negative disconfirmation:
Occurs when perceived performance falls short of expectations.
• Expectancy Disconfirmation Theory is a cognitive theory which
seeks to explain post-purchase or post-adoption satisfaction as a
function of expectations, perceived performance, and
disconfirmation of beliefs.
Oliver, R.L. (1980) A Cognitive Model of the Antecedents and Consequences of Satisfaction
10/30/2023 Decisions. Journal of Marketing Research, 17, 460-469. http://dx.doi.org/10.2307/3150499 19
 hypotheses
H1. Ceteris paribus, industry CSP leaders’ positive (industry
CSP laggards’ negative) expectancy disconfirmation of CSP
has a positive (negative) influence on CFP.
H2. The influence of negative expectancy disconfirmation of
CSP on CFP for industry CSP laggards is more salient than
the influence of positive expectancy disconfirmation of CSP
on CFP for industry CSP leaders.
H3. The influence of positive (negative) expectancy
disconfirmation of CSP on CFP for industrial CSP leaders
(laggards) will be weakened with the increase of positive
(negative) expectancy disconfirmation of CSP.

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 Methodology
Sample and data
• Data from two archival data sources:
1. MSCI ESG STATS (formerly known as KLD) provides CSR ratings
for publicly listed companies in the U.S.
2. Standard & Poor’s Compustat compute provides financial
information to compute Tobin’s Q, total assets, cash-holding,
leverage, and R&D ratio.
• The sample period is from 2003 to 2013.
1. To include 1,000 largest and 2,000 smaller U.S. firms in 2003.
2. The significant changes in the rating system after 2013.
• Eliminating those observations with missing financial and CSP data,
final sample includes 11,742 firm-year observations with 2,165
distinct sample firms.
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 ESG Ratings

https://www.msci.com/our-solutions/esg-investing/esg-ratings

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 ESG Ratings

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 Compustat® Financials

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 Methodology
Variables
• Dependent variable: Tobin’s Q
• Independent variable: Disconfirmation
1. Firms’ actual CSP: To measure firms’ actual CSP by counting the
number of strengths of all six dimensions except for the governance
dimension.
2. Industry average CSP: To calculate and use the industry average
CSP by categorizing firms into different industries based on the first
two digits of their Standard Industrial Classification (SIC) codes.
• Control variables

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 Methodology

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 About the Tobin’s Q
• Tobin’s Q, the ratio of a firm’s market value and book value against its
total assets (e.g., Chung & Pruitt, 1995), has been perceived as a
forward-looking indicator reflecting the investors’ expectations toward
a firm’s future financial performance (Rao et al., 2004). Thus, Tobin’s
Q indicates a firm’s growth potential and future profitability (Luo &
Bhattacharya, 2006). Since the benefits of a firm’s CSR activities can
be arguably realized in the long term while not in the short run, Tobin’s
Q has been widely used as an indicator of CFP when examining the
CSP-CFP relationship (e.g., Luo & Bhattacharya, 2006; Wang & Qian,
2011).
• Tobin’s Q was first introduced by Nicholas Kaldor in 1966 in his paper:
Marginal Productivity and the Macro-Economic Theories of
Distribution: Comment on Samuelson and Modigliani. It was
popularised a decade later by James Tobin’s A General Equilibrium
Approach To Monetary Theory in 1969.
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 Formula of the Q Ratio
Original formula for the Q Ratio:

A modification of the original formula

Q Ratio for the overall market:

Q Ratio = Value of Stock Market / Corporate Net Worth.

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 Methodology
Research design

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 Methodology
Descriptive statistics

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 Methodology
correlation matrix Positive Disconfirmation and Negative Disconfirmation, and Strength
and Concern Ratings, have a negative relationship with Tobin’s q, that
provides some insights that deviating from the industry average CSP
ratings negatively impacts firm performance.

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 Empirical results
Model (1) does not control for year-specific and
industry-specific impacts on Tobin’s q. Model (2)
include year-specific and industry-specific dummy
variables as additional control variables.
The estimated coefficient of Disconfirmation is
significantly positive (βDisconfirmation = 0.06, p-value
< 0.01 and βDisconfirmation = 0.06, p-value < 0.01 in
Models (1) and (2), respectively). Thus, H1 is supported.

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 Empirical results
In Model (1), the estimated coefficients are significantly
positive (βPositive disconfirmation = 0.07, p-value <
0.01, βNegative disconfirmation = 0.04, p-value < 0.05),
but they are contrary to the expectation of H2 because
the estimated coefficient of negative disconfirmation
does not seem to be greater than that of positive
disconfirmation.
In Model (2), the estimated coefficients of positive
and negative disconfirmation are positive (βPositive
disconfirmation = 0.05, p-value < 0.01 and βNegative
disconfirmation = 0.11, p-value < 0.01). The estimated
coefficient of negative disconfirmation is greater than
that of positive disconfirmation. Such results confirm
that negative bias from stakeholders for industry CSP
laggards does exist. Thus, H2 is supported.

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 Empirical results
To include the squared terms in the regression Models
(1) and (2).
In Model (1), the estimated coefficient of positive
disconfirmation is significantly positive (βPositive
Disconfirmation = 0.14, p-value < 0.01), and the
squared term of positive disconfirmation is significantly
negative (βPositive Disconfirmation 2 = − 0.01, p-value
< 0.01), indicating a diminishing effect. The estimated
coefficient of negative disconfirmation is significantly
positive (βNegative Disconfirmation = 0.10, p-value <
0.01), and the squared term is significantly positive
(βNegative Disconfirmation 2 = 0.04, p-value < 0.05),
showing a diminishing effect as well. These results
support H3.

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 Empirical results
However, in Model (2), the estimated coefficient of
positive disconfirmation is significantly positive
(βPositive Disconfirmation = 0.10, p-value < 0.01), and
that of the squared term is negative (βPositive
Disconfirmation 2 = − 0.01, p-value < 0.01). The
estimated coefficient of negative disconfirmation is
significantly positive (βNegative Disconfirmation = 0.14,
p-value < 0.05), while that of the squared term is
positive but insignificant (βNegative Disconfirmation 2 =
0.03, p-value > 0.10). The diminishing effect is only
confirmed for industry CSP leaders ; thus, H3 is
partially supported.

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 Empirical results
The left-hand column is based on Model (1) results showing a gentle S curve, indicating there is a diminishing
effect for both leaders and laggards. The right-hand column presents the results of Model (2) and shows a
subtle curve for industry CSP leaders but not laggards, meaning that a diminishing effect appears for leaders.

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 Empirical results Robustness checks – Validity and Reliability
Robustness checks - New-West, nonparametric, and median-based estimations.

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 Empirical results
Robustness checks - Extend our sample of the KLD database, from 1991 to 2013.

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 Empirical results
Robustness checks - Controlling for industry variables.
We control for these industry variables in our main empirical model. We measure industry
growth as the average of three-period year-over-year sales growth in the two-digit SIC code
(Bahadir et al., 2008), industry competitiveness as the Herfindahl-Hirschman index (HHI), and
industry turbulence as the coefficient of variation in sales over three prior years within the two-
digit SIC code (the ratio of the standard deviation to the mean over the three years)
(Srinivasan et al., 2011). We rerun the Model (2) of Table 6 (the comprehensive model) that
includes the positive and negative disconfirmation variables with year- and industry-fixed
dummies. We control for the three industry variables separately or all three variables together
in the model. The results are presented in the last four columns of Table 8. The main results
remain the same as those in Table 6.

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 Discussion
This study aims to contribute to this research stream of the CSP-CFP
relationship.
First, we build a theoretical framework based on stakeholder theory
and EDT. This integrated theoretical framework explains how and why
stakeholders may influence the CSP-CFP relationship via two
intermediary factors, namely stakeholder expectancy and stakeholder
satisfaction, and provides a theoretical base for empirical tests to
identify the possible non-unitary CSP-CFP relationship for different
firm groups.

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 Discussion
Second, based on the proposed integral theoretical framework, we set
industrial average CSP as the proxy of stakeholder expectancy and
distinguish firms into two subgroups, that is, industry CSP leaders and
industry CSP laggards.
There is asymmetric effects regarding the influence of CSP on CFP,
that is, the same deviation of CSP from industry average CSP does
not lead to the same magnitude of gains (increases in CFP) and pains
(decreases in CFP) for industry CSP leaders and laggards,
respectively. Specifically, with the same deviation from the industry
average CSP, industry CSP laggards experience more pains than the
gains benefited by industry CSP leaders.
Additionally, there are diminishing effects for CSP leaders but no
diminishing effects for CSP laggards.
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 Contributions
This study has multiple contributions.
First, it introduces an integrated theoretical framework based on
stakeholder theory and EDT to the CSP-CFP literature, providing a
nuanced perspective for scholars to understand the CSP-CFP link,
which may vary for different firm groups.
Second, this integration extends the application of EDT to CSP
studies, making it relevant among all stakeholders rather than the
narrowed consumer group.

• Stakeholders = ? INVESTERS

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 Contributions
Furthermore, the findings of this study provide several critical
managerial insights and implications.
First, it reminds managers to view stakeholders as members of the
mutual relationships driven and nurtured by both parties.
Second, this study reveals a thumb-rule, pointing at the firm’s peers’
CSP because stakeholders tend to form their expectations based on
the overall industrial CSP.
Third, this study provides practical insights into how firms could
manage their communications and maintain relationships with
stakeholders to influence stakeholders’ expectations regarding firms’
CSP.
Fourth, our findings show that diminishing effects exist for industry
CSP leaders when their CSP reaches a certain level.
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THANK YOU!
D11222012@yuntech.edu.tw