Abstract
The empirical relationship between a firm’s social performance and its financial performance is still not well established in the literature. Despite more than 30 years of research and more than 100 empirical studies on the issue, the results are still mixed. We argue that the heterogeneous results found in previous studies are not due exclusively to problems related with the measurement instruments or the samples used. Instead, we posit that a more fundamental problem related with the endogeneity of social strategic decisions could be driving most of the empirical findings. We show that, using a panel data of 658 firms from 1991 to 2005, how some of the results found in previous research change, and some are even reversed when endogeneity is properly taken into account.
Similar content being viewed by others
References
Agle, B. R., R. K. Mitchell and J. A. Sonnenfeld: 1999, ‹Who matters to CEOS? An investigation of stakeholder attributes and salience, corporate performance and CEO values’, Academy of Management Journal 42(5), 507-525.
Alexander, G. J. and R. A. Buchholz: 1978, ‹Corporate social responsibility and stock market performance’, Academy of Management Journal 21(3), 479-486.
Aupperle, K. E., A. B. Carroll and J. D. Hatfield: 1985, ‹An empirical examination of the relationship between corporate social responsibility and profitability’, Academy of Management Journal 28(2), 446-463.
Baum, C. F.: 2006, An introduction to modern econometrics using Stata (Stata Press, Texas).
Baum, C. F., M. E. Schaffer and S. Stillman: 2007, Enhanced Routines for Instrumental Variables/GMM Estimation and Testing. Boston College Economics Working Paper No. 667.
Berman, S. L., A. C. Wicks, S. Kotha and T. M. Jones: 1999, ‹Does stakeholder orientation matter? The relationship between stakeholder management models and the firm financial performance’, Academy of Management Journal 42(5), 488-506.
Brammer, S. and A. Millington: 2006, ‹Firm size, organizational visibility and corporate philanthropy: an empirical analysis’, Business Ethics: A European Review 15(1), 6-18.
Burgstahler, D. and M. Eames: 2006, ‹Management of Earnings and Analysts’ Forecasts to Achieve Zero and Small Positive Earnings Surprises’, Journal of Business Finance and Accounting 33(5&6), 633-652.
Campa, J. M. and S. Kedia: 2002, ‹Explaining the diversification discount’, Journal of Finance 57(4), 1731-1762.
Cochran, P. L. and R. A. Wood: 1984, ‹Corporate social responsibility and financial performance’, Academy of Management Journal 27, 42-56.
Coffey, B. S. and G. E. Fryxell: 1991, ‹Institutional Ownership of Stock and Dimensions of Corporate Social Performance: An Empirical Examination’, Journal of Business Ethics 10(6), 437-444.
Collins, J. C. and J. I. Porras: 1994, Built to last: successful habits of visionary companies, (HarperBusiness, New York).
Coombs, J. E. and K. M. Gilley: 2005, ‹Stakeholder management as a predictor of CEO compensation: Main effects and interactions with financial performance’, Strategic Management Journal 26, 827-840.
Dechow, P. M.: 1994 ‹Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals’, Journal of Accounting and Economics 18, 3-42.
Eesley, C. and M. J. Lenox: 2006 ‹Firm responses to secondary stakeholder action’, Strategic Management Journal 27, 765-781.
Fernández, P.: 2002, Valuation methods and shareholder value creation , (Academic Press, San Diego CA).
Garcia-Castro, R., M. A. Canela and M. A. Ariño: 2008, ‹Over the Long Run? Short-Run Impact and Long-Run Consequences of Stakeholder Management’, Business and Society, doi:10.1177/0007650308315493.
Ghoshal, S. and C. A. Bartlett: 1994, ‹Linking organizational context and managerial action: the dimensions of quality of management’, Strategic Management Journal 15(5), 91-112.
Graves, S. B. and S. A. Waddock: 2000, ‹Beyond built to last…stakeholder relations in built to last companies’, Business and Society Review 105, 393-418.
Greene, W. H.: 1993, Econometric analysis, 2nd edition, (Macmillan, New York).
Griffin J. J. and J. F. Mahon: 1997, The corporate social performance and corporate financial performance debate’, Business & Society 36(1), 5–31.
Hansen, L.: 1982, ‹Large sample properties of generalized method of moments estimators’, Econometrica 50(3), 1029-1054.
Hamilton, B. H. and J. A. Nickerson: 2003, ‹Correcting for endogeneity in strategic management research’, Strategic Organization 1(1), 51-78.
Hausman, J.: 1978, ‹Specification tests in econometrics’, Econometrica 46, 1251-1271.
Hayes, R. and W. J. Abernathy: 1980, ‹Managing our way to economic decline’, Harvard Business Review 58(4), 67-78.
Heckman, J.: 1974, ‹Shadow prices, market wages, and labor supply’, Econometrica 42, 679-94.
Hillman, A. J. and G. D. Keim: 2001, ‹Shareholder value, stakeholder management, and social issues: What’s the bottom line? Strategic Management Journal 22(2), 125-139.
Huselid, M. A.: 1995, ‹The impact of human resource management practices on turnover, productivity, and corporate financial performance’, Academy of Management Journal 38(3), 635-672.
Margolis, J. and J. Walsh: 2001, People and profits?, (Lawrence Erlbaum Associates, New Jersey).
Margolis, J. and J. Walsh: 2003, ‹Misery loves companies: Rethinking social initiatives by business’, Administrative Science Quarterly 48, 268-305.
Masten, S. E.: 1996, ‹Empirical research and transaction cost economic: challenges, progress, directions’, in J. Grownewegen (ed.), Transaction cost economics and beyond, (Kluwer, Boston MA,), pp. 43-64.
Mattingly, J. E. and S. L. Berman: 2006, ‹Measurement of corporate social actions: Discovering taxonomy in the Kinder Lydenburg Domini rating data’, Business and society 45,(1), 20-46.
McGuire, J. B., A. Sundgren and T. Schneeweis: 1988, ‹Corporate social responsibility and firm financial performance’, Academy of Management Journal 31, 854-872.
McWilliams, A. and D. Siegel: 2000, ‹Corporate social responsibility and financial performance: correlation or misspecification? Strategic Management Journal 21, 603-609.
Mitchell, R. K, B. R. Agle and D. J. Wood: 1997, ‹Toward a theory of stakeholder identification and salience: defining the principle of who and what really counts’, Academy of Management Review 22(4), 853-886.
Moskowitz, M.: 1972, ‹Choosing socially responsible stocks’, Business and Society Review 1, 71-75.
Mundlak, Y.: 1978, ‹On the pooling of time series and cross section data’, Econometrica 46, 69-85.
Ogden, S. and R. Watson: 1999, ‹Corporate performance and stakeholder management: balancing shareholder and customer interests in the U.K. privatized water industry’, Academy of Management Journal 42(5), 526-538.
Orlitzky, M., F. Schmidt and S. Rynes: 2003, ‹Corporate social and financial performance: a meta-analysis’, Organization Studies 24, 403-441.
Pava, M. and J. Krausz: 1996, ‹The association between corporate social responsibility and financial performance: the paradox of social cost’, Journal of Business Ethics 15, 321-357.
Perez-Lopez, J. A.: 1993, ‹Fundamentos de la dirección de empresas’, (Ediciones Rialp, Madrid).
Post, J. E., L. E. Preston and Sachs, S.: 2002, ‹Managing the extended enterprise: The new stakeholder view’, California Management Review 45(1), 6-28.
Preston, L. E. and J. E. Post: 1975, ‹Measuring Corporate Responsibility’, Journal of General Management 2(3), 45-52.
Rajagopalan, N. and G. M. Spreitzer: 1997, ‹Toward a Theory of Strategic Change: A Multi-lens Perspective and Integrative Framework’, Academy of Management Review 22(1), 48-79.
Rehbein, K., S. Waddock and S. B. Graves: 2004, ‹Understanding shareholder activism: which corporations are targeted?’, Business & Society 43(3), 239-267.
Roman, R., S. Hayibor and B. R. Agle: 1999, ‹The Relationship Between Social and Financial Performance’, Business & Society 38(1), 5–31.
Shaver, J. M.: 1998, ‹Accounting for endogeneity when assessing strategy performance: does entry mode choice affect FDI survival?’, Management Science 44(4), 571-85.
Shea, J.: 1997, ‹Instrument Relevance in Multivariate Linear Models: A Simple Measure’, The Review of Economics and Statistics 79(2), 348-352.
Stern Stewart: 1996, The Stern Stewart Performance 1000, (Stern Stewart Management Services, New York).
Stock, J. H. and M. Yogo: 2004, Testing For Weak Instruments in Linear IV Regression’, Working Paper, Harvard University, Boston, MA.
Stock, J. H., J. H. Wright and M. Yogo: 2002, ‹A survey of weak instruments and weak identification in generalized method of moments’, Journal of Business and Economic Statistics 20, 518-529.
Ullmann, A. A.: 1985, ‹Data in Search of a Theory: A Critical Examination of the Relationships Among Social Performance, Social Disclosure, and Economic Performance of U.S. Firms’, Academy of Management Review 10(3), 540-557.
Villalonga, B.: 2004, ‹Does Diversification Cause the “Diversification Discount”?’, Financial Management 33(2), 5-27.
Waddock, S. A. and S. B. Graves: 1997a, ‹Quality of management and quality of stakeholder relations: Are they synonymous?’, Business & Society 36(3), 250-279.
Waddock S. A. And S. B. Graves: 1997b, ‹The corporate social performance – financial performance link’, Strategic Management Journal 18 (4), 303-319.
Wiggins, R. R. and T. W. Rueffli: 2002, ‹Sustained competitive advantage: temporal dynamics and the incidence and persistence of superior economic performance’, Organization Science 13, 82-105.
Wooldridge, J. M.: 2002, Econometric analysis of cross section and panel data, (MIT Press, Cambridge, MA).
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Garcia-Castro, R., Ariño, M.A. & Canela, M.A. Does Social Performance Really Lead to Financial Performance? Accounting for Endogeneity. J Bus Ethics 92, 107–126 (2010). https://doi.org/10.1007/s10551-009-0143-8
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10551-009-0143-8