[MS]The Impact of Corporate Social Responsibility

MANAGEMENTSCIENCEArticlesinAdvance,pp.1–17ISSN0025-1909(print)—ISSN1526-5501(online)©2013INFORMSTheImpactofCorporateSocialResponsibilityonFirmValue:TheRoleofCustomerAwarenessHenriServaesLondonBusinessSchool,LondonNW14SA,UnitedKingdom,[e-mail]ofEconomicsandPoliticalScience,LondonWC2A2AE,UnitedKingdom,[e-mail]oratesocialresponsibility(CSR)andfirmvaluearepositivelyrelatedforfirmswithhighcustomerawareness,asproxiedbyadvertisingexpenditures.Forfirmswithlowcustomerawareness,therelationiseithernegativeorinsignificant.Inaddition,wefindthattheeffectofawarenessontheCSR–valuerelationisreversedforfirmswithapoorpriorreputationascorporatecitizens.ThisevidenceisconsistentwiththeviewthatCSRactivitiescanaddvaluetothefirmbutonlyundercertainconditions.Keywords:corporatesocialresponsibiliy;firmvalue;customerawareness;reputationHistory:ReceivedSeptember21,2009;acceptedJune13,2012,byBrunoCassiman,businessstrategy.PublishedonlineinArticlesinAdvance.1.IntroductionCorporatesocialresponsibility(CSR)hasbecomeanintegralpartofbusinesspracticeoverthelastdecadeorso.Infact,manycorporationsdedicateasectionoftheirannualreportsandcorporatewebsitestoCSRactivities,illustratingtheimportancetheyattachtosuchactivities.Butdosuchactivitiescreatevalueforthefirm’sshareholdersordotheyfocustoomuchonotherstakeholders,therebyloweringfirmvalue?Despitemuchresearchonthetopic(forreviewsoftheliterature,seeGriffinandMahon1997,Orlitzky2001,Orlitzkyetal.2003,MargolisandWalsh2003,Margolisetal.2009),fewfirmconclusionscanbedrawn,exceptthattheliteratureisdivided.AlthoughthereappearstobemoresupportfortheviewthatCSRactivitiesarepositivelyrelatedtoprofitabilityandfirmvalue,alargenumberofstudiesfindtheoppositerelation.Asaresult,thenormativeimplica-tionsofresearchoncorporatesocialresponsibilityarestilluncertain.TherelationbetweenCSRactivitiesandfirmvalueisunclearpartlybecauseofmethodologicalconcerns(MargolisandWalsh2001)and,inparticular,modelmisspecification.Evenmoreimportantis,perhaps,thelackofunderstandingaboutthechannelsthroughwhichCSRaffectsfirmvalue.Mosttheoreticalmod-elsassumeadirectlinkbetweenCSRandfirmvalue.Inthispaper,weproposeanindirectlink.Inparticu-lar,werelyonBarnett’s(2007)insightthattheimpactofCSRonfirmvaluedependsontheabilityofCSRtoinfluencestakeholdersinthefirm.Wefocusononeofthekeystakeholders,consumers,andsuggestthatanecessaryconditionforCSRtomodifyconsumerbehaviorand,hence,affectfirmvalue,isconsumerawarenessoffirmCSRactivities.Moreover,wearguethatconsumersarelesslikelytorespondtoCSRactiv-ities,eveniftheyareawareofthem,iftheCSRactiv-itiesarenotalignedwiththefirm’sreputationasaresponsiblecitizen(seealsoDuetal.2010,SchulerandCording2006).Inthispaper,werevisittherelationbetweenCSRandfirmvalue,takingintoaccounttheconcernsmen-tionedabove.Usingmodelswithfirmfixedeffectstoaddressmodelmisspecificationproblems,weexam-inewhetherandunderwhatconditionsCSRcanaddvaluetothefirm.Morespecifically,westudywhetherCSRactivitiesaremorevalueenhancingiftheyareconductedbyfirmswithmoreconsumerawareness.AlthoughtherelationbetweenCSRandfirmvalueoughtnottobeconfinedtotheconsumerchannel,consumersconstituteanaturalstartingpointtouncoversucharelation,giventhattheirpurchasingbehaviorclearlyaffectsacompany’sfinancialperfor-manceand,ultimately,firmvalue.Wealsoinvesti-gatewhethertheimpactofawarenessisattenuatedforfirmswithapoorpriorreputationforresponsi-blebehavior,andcontrasttheconsumerawarenessstorywithanalternativeinwhichCSRisemployedbysociallyconsciousentrepreneurswhowishtosig-nalproductquality.Inouranalyses,weemploytheKLDStatsdatabaseovertheperiod1991–2005,whichcoversCSRactiv-itiesofalargesubsetofU.S.companies,andcombineitwithfinancialstatementdataobtained1Copyright:INFORMSholdscopyrighttothisArticlesinAdvanceversion,whichismadeavailabletosubscribers.Thefilemaynotbepostedonanyotherwebsite,includingtheauthor’[e-mail]intJanuary8,2013ServaesandTamayo:TheImpactofCorporateSocialResponsibilityonFirmValue2ManagementScience,ArticlesinAdvance,pp.1–17,©2013INFORMSfromCompustat.OurmainperformancemetricisTobin’sq,whichisthemarketvalueofthefirm,dividedbythereplacementvalueoftheassets.Westartbyassessingwhetherfirmswithhighcon-sumerawareness,asproxiedbyadvertisingspending,canenhancefirmvaluebyincreasingCSR,andfindthistobethecase.CSRactivitieshaveanegligibleornegativeimpactonfirmvalueforfirmswithlowadvertisingintensity,whichsuggeststhatforthesefirmsthecostssometimesoutweighthebenefits.Con-versely,wefindapositiveimpactforfirmswithhighadvertisingintensity.However,weshowthatthepos-itiveimpactofadvertisingintensityreversesforfirmswithapoorpriorreputationforbeingresponsiblecitizens,asmeasuredbyFortune’sratingonthelistof“America’sMostAdmiredCompanies.”Interest-ingly,wefindnoevidenceofadirectlinkbetweenCSRandfirmvalueaftercontrollingforunobservabletime-invariantfirmcharacteristics(i.e.,inmodelsthatemployfirmfixedeffects).ThispapercontributestothedebateontheroleofCSRinc