Skip to main content
SpringerLink
Log in

Permanency of CSR Activities and Firm Value

  • Published:
Journal of Business Ethics Aims and scope Submit manuscript

Abstract

This paper investigates whether the pattern of firms’ corporate social responsibility (CSR) activities affects firm value. If firms do permanently CSR activities for strategic purposes, firms’ value is more likely to increase. Using firms known to do CSR in Korea, we examine the valuation effect by adopting an earnings response coefficient (ERC) model and document firms with permanent CSR activities, which show higher ERCs than other firms regardless of the level of CSR activities. This result partly explains the inconsistency among the results of previous studies by showing the differential implication for firm value depending on the CSR activity pattern. Also, the results of our paper imply that investors need to consider the pattern of firms’ CSR activities in their economic decision making.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Among components of KEJI index scores: the soundness of corporate activities was estimated as 20 points, the fairness of corporate activities 10, contribution to social service 10, environmental protection 10, customer satisfaction 7, employee satisfaction 15, and contribution to economic development 28, respectively. Each component is calculated several subcomponents which consist of 64 items as of 2011. However, specific subcomponents have been changed over years, while seven major components are not changed in 2000s. The soundness of corporate activities is based on the composition of shareholders, financing methods, and soundness of spending activities, such as the relative magnitude of entertainment expenses to total salaries expenses, etc. The fairness of firm’s operation is based on the relative magnitude of internal transaction, use of market leading power for unfair transaction with clients, transparent disclosure of information, and the degree of cooperation with other firms. The subcomponents of contribution to social services consist of the protection of social minority groups and contribution to social welfare. Customer protection consists of the protection of consumer rights, product quality, and advertisement behavior. Environmental protection is based on the effort for environment improvement, the results of environmental improvement, compliance to environmental rules and regulations, environmental contamination, etc. Employee satisfaction is based on training, compensation, and welfare. Contribution to economic development is based on the efforts and results of research and developments, growth, profitability and exports, etc.

  2. Teoh and Wong (1993) suggest that interaction variables with unexpected earnings and control variables be included in the ERC model. However, there exists multicollinearity issue when interaction variables are included in our regression model. Therefore, we follow Gelb and Zarowin (2002) who include only control variables in their regression. Also, analyst forecasts could be used when unexpected earnings are calculated. In this case, when there are no analyst forecasts available, smaller sample will be used in the analysis and reduce the statistical power of test. Due to this reason, there are many previous studies use last year earnings when they calculate unexpected earnings (Shivakumar 2000; Dhaliwal and Reynolds 1994; Ali and Zarowin 1992). When we use analyst forecasts in the analysis, we still obtain qualitatively similar results, even though slightly less statistically significant.

  3. FnGuide is the database which provides stock returns and analyst forecasts for firms listed in the Korean Stock Markets.

  4. TS2000 database provides financial statement data for firms listed in the Korean Stock Markets.

  5. Even though all listed firms but firms in financial industries are evaluated, only top 200 ranked firms are announced. If the KEJI score of firms is not available, i.e., firm ranks outside top 200, we assign 0 for CSR activities (KDUM).

References

  • Ali, A., & Zarowin, P. (1992). Permanent versus transitory components of annual earnings and estimation error in earnings response coefficients. Journal of Accounting and Economics, 15(2–3), 249–264.

    Article  Google Scholar 

  • Anderson, E. W., Fornell, C., & Lehmann, D. R. (1994). Customer satisfaction, market share, and profitability: Findings from Sweden. Journal of Marketing, 58(3), 53–66.

    Article  Google Scholar 

  • Aupperle, K. E., Carroll, A. B., & Hatfield, J. D. (1985). An empirical examination of the relationship between corporate social responsibility and profitability. Academy of Management Journal, 28(2), 446–463.

    Google Scholar 

  • Ayers, B. C., Cloyd, C. B., & Robinson, J. R. (2002). The effect of shareholder-level dividend taxes on stock prices: Evidence from the Revenue Reconciliation Act of 1993. The Accounting Review, 77(4), 922–947.

    Article  Google Scholar 

  • Ball, R., & Brown, P. (1968). An empirical evaluation of accounting income numbers. Journal of Accounting Research, 6(2), 159–178.

    Article  Google Scholar 

  • Banker, R. D., & Mashruwala, R. (2007). The moderating role of competition in the relationship between nonfinancial measures and future financial performance. Contemporary Accounting Research, 24(3), 763–793.

    Article  Google Scholar 

  • Banker, R. D., Potter, G., & Srinivasan, D. (2000). An empirical investigation of an incentive plan that includes nonfinancial performance measures. The Accounting Review, 75(1), 65–92.

    Article  Google Scholar 

  • Barnea, A., & Rubin, A. (2010). Corporate social responsibility as a conflict between shareholders. Journal of Business Ethics, 97(1), 71–86.

    Article  Google Scholar 

  • Bowen, H. R. (1953). Social responsibility and accountability. New York: Harper & Low.

    Google Scholar 

  • Bozzolan, S., Fabrizi, M., Mallin, C. A., & Mechelon, G. (2015). Corporate social responsibility and earnings quality: international evidence. The International Journal of Accounting, 50, 361–396.

    Article  Google Scholar 

  • Brammer, S., & Millington, A. (2006). Firm size, organizational visibility and corporate philanthropy: An empirical analysis. Business Ethics: A European Review, 15(1), 6–18.

    Article  Google Scholar 

  • Brown, T. J., & Dacin, P. A. (1997). The company and the product: Corporate associations and consumer product responses. Journal of Marketing, 61(1), 68–84.

    Article  Google Scholar 

  • Brown, W. O., Helland, E., & Smith, J. K. (2006). Corporate philanthropic practices. Journal of Corporate Finance, 12(5), 855–877.

    Article  Google Scholar 

  • Casey, R. J., & Grenier, J. H. (2015). Understanding and contributing to the enigma of corporate social responsibility (CSR) assurance in the United States. Auditing: A Journal of Practice and Theory, 34(1), 97–130.

    Article  Google Scholar 

  • Chang, J. I., & Choi, H. S. (2010). The relation between corporate social responsibility and financial performance. Korean Journal of Business Administration, 23(2), 633–648. (in Korean)

    Google Scholar 

  • Chih, H., Shen, C., & Kang, F. (2008). Corporate social responsibility, investor protection, and earnings management: Some international evidence. Journal of Business Ethics, 79(1–2), 179–198.

    Article  Google Scholar 

  • Citizens’ Coalition for Economics Justice Institute. (2011). Proceedings of 20th Economic Justice Forum and Award, Seoul. (in Korean)

  • Clarkson, M. E. (1995). A stakeholder framework for analyzing and evaluating corporate social performance. Academy of Management Review, 20(1), 92–117.

    Article  Google Scholar 

  • Cochran, P. L., & Wood, R. A. (1984). Corporate social responsibility and financial performance. The Academy of Management Journal, 27(1), 42–56.

    Google Scholar 

  • Collins, D. W., & Kothari, S. P. (1989). An analysis of intertemporal and cross-sectional determinants of earnings respoonse coefficients. Journal of Accounting and Economics, 11, 143–181.

    Article  Google Scholar 

  • Davis, K. (1960a). Can business afford to ignore social responsibilities? California Management Review, 2(3), 70–76.

    Article  Google Scholar 

  • Davis, K. (1960b). Can business afford to ignore social responsibilities? California Management Review, 2(spring), 70–76.

    Article  Google Scholar 

  • Dhaliwal, D., Li, O. Z., Tsang, A., & Yang, G. Y. (2011). Voluntary nonfinancial disclosure and the cost of equity capital: The initiation of corporate social responsibility reporting. The Accounting Review, 86(1), 59–100.

    Article  Google Scholar 

  • Dhaliwal, D., Radhakrishnan, S., Tsang, A., & Yang, G. Y. (2012). Nonfinancial disclosure and analyst forecast accuracy: International evidence on corporate social responsibility disclosure. The Accounting Review, 87(3), 723–759.

    Article  Google Scholar 

  • Dhaliwal, D. S., & Reynolds, S. S. (1994). The effect of the default risk of debt on the earnings response coefficient. The Accounting Review, 69(2), 412–419.

    Google Scholar 

  • Edmans, A. (2011). Does the stock market fully value intangibles? Employee satisfaction and equity prices. Journal of Financial Economics, 101(3), 621–640.

    Article  Google Scholar 

  • Epstein, M. J., & Roy, M. J. (2001). Sustainability in action: Identifying and measuring the key performance drivers. Long Range Planning, 34(5), 585–604.

    Article  Google Scholar 

  • Fama, E. F., & French, K. R. (1992). The cross-section of expected stock returns. The Journal of Finance, 47(2), 427–465.

    Article  Google Scholar 

  • Freeman, R. E. (1984). Strategic management: A stakeholder approach. Oxofrd: Oxford University Press.

    Google Scholar 

  • Friedman, M. (1970). The social responsibility of business is to increase its profits. New York Times Magazine September 13, pp. 32–33.

  • Gelb, D. S., & Zarowin, P. (2002). Corporate disclosure policy and the informativeness of stock prices. Review of Accounting Studies, 7(1), 33–52.

    Article  Google Scholar 

  • Godfrey, P. C. (2005). The relationship between corporate philanthropy and shareholder wealth: a risk management perspective. Academy of Management Review, 30(4), 777–798.

    Article  Google Scholar 

  • Grant, T. (2014). Sustainability: Changing the debate in emerging markets. Grant Thornton International Business Report.

  • Guidry, R. P., & Patten, D. M. (2010). Market reactions to the first-time issuance of corporate sustainability reports: Evidence that quality matters. Sustainability Accounting, Management and Policy Journal, 1(1), 33–50.

    Article  Google Scholar 

  • Hayn, C. (1995). The information content of losses. Journal of Accounting and Economics, 20(2), 125–153.

    Article  Google Scholar 

  • Hemingway, C. A., & Maclagan, P. W. (2004). Managers’ personal values as drivers of corporate social responsibility. Journal of Business Ethics, 50(1), 33–44.

    Article  Google Scholar 

  • Ho, S. S., & Wong, K. S. (2001). A study of the relationship between corporate governance structures and the extent of voluntary disclosure. Journal of International Accounting, Auditing and Taxation, 10(2), 139–156.

    Article  Google Scholar 

  • Jensen, M. C. (2002). Value maximization, stakeholder theory and the corporate objective function. Business Ethics Quarterly, 12(2), 235–256.

    Article  Google Scholar 

  • Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98, 225–264.

    Article  Google Scholar 

  • Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1986). Fairness and the assumptions of economics. Journal of Business, 59(4), S285–S300.

    Article  Google Scholar 

  • Kim, Y., Park, M. S., & Wier, B. (2012). Is earnings quality associated with corporate social responsibility? The Accounting Review, 87(3), 761–796.

    Article  Google Scholar 

  • Kormendi, R., & Lipe, R. (1987). Earnings innovations, earnings persistence and stock returns. Journal of Business, 60, 323–345.

    Article  Google Scholar 

  • Kothari, S. P. (2001). Capital markets research in accounting. Journal of Accounting and Economics, 31, 105–231.

    Article  Google Scholar 

  • KPMG. (2015). KPMG Survey of corporate responsibility reporting 2015. Retrieved from http://home.kpmg.com/xx/en/home/insights/2015/11/kpmg-international-survey-of-corporate-responsibility-reporting-2015.pdf.

  • Landon, S., & Smith, C. E. (1997). The use of quality and reputation indicators by consumers: The case of Bordeaux wine. Journal of Consumer Policy, 20(3), 289–323.

    Article  Google Scholar 

  • Lang, M. H., & Lundholm, R. J. (1996). Corporate disclosure policy and analyst behavior. The Accounting Review, 71(4), 467–492.

    Google Scholar 

  • Langbein, J., & Posner, R. (1980). Social investing and the law of trusts. Michigan Law Review, 79, 72–112.

    Article  Google Scholar 

  • Lev, B., Petrovits, C., & Radhakrishnan, S. (2010). Is doing good for you? How corporate charitable contributions enhance revenue growth. Strategic Management Journal, 31(2), 182–200.

    Google Scholar 

  • Margolis, J. D., & Walsh, J. P. (2001). People and profits: The search for a link between a company’s social and financial performance. Mahwah: Lawrence Erlbaum Associates.

    Book  Google Scholar 

  • McNichols, M. (1989). Evidence of informational asymmetries from management earnings forecasts and stock returns. The Accounting Review, 64(1), 1–27.

    Google Scholar 

  • McWilliams, A., & Siegel, D. (2000). Corporate social responsibility and financial performance: Correlation or misspecification? Strategic Management Journal, 21, 603–609.

    Article  Google Scholar 

  • Michelon, G., Boesso, G., & Kumar, K. (2013). Examining the link between strategic corporate social responsibility and company performance: An analysis of the best corporate citizens. Corporate Social Responsibility and Environmental Management, 20(2), 81–94.

    Article  Google Scholar 

  • Milgrom, P. R. (1981). Good news and bad news: Representation theorems and applications. Bell Journal of Economics, 12, 380–391.

    Article  Google Scholar 

  • Mishra, Supriti, & Suar, Damodar. (2010). Does corporate social responsibility influence firm performance of Indian companies? Journal of Business Ethics, 95(4), 571–601.

    Article  Google Scholar 

  • Nelling, E., & Webb, E. (2009). Corporate social responsibility and financial performance: The “virtuous circle” revisited. Review of Quantitative Finance and Accounting, 32, 197–209.

    Article  Google Scholar 

  • Pava, M., & Krausz, J. (1996). The association between corporate social responsibility and financial performance: The paradox of social cost. Journal of Business Ethics, 15(3), 321–357.

    Article  Google Scholar 

  • Peters, G. F., & Romi, A. M. (2015). The association between sustainability governance characteristics and the assurance of corporate sustainability reports. Auditing: A Journal of Practice and Theory, 34(1), 163–198.

    Article  Google Scholar 

  • Posnikoff, Judith F. (1997). Disinvestment from South Africa: They did well by doing good. Contemporary Economics Policy, 15(1), 76–86.

    Article  Google Scholar 

  • Prior, D., Surroca, J., & Tribo, J. (2008). Are socially responsible managers really ethical? Exploring the relationship between earnings management and corporate social responsibility. Corporate Governance: An International Review, 16(3), 160–177.

    Article  Google Scholar 

  • Roberts, Peter W., & Dowling, Grahame R. (2002). Corporate reputation and sustained superior financial performance. Strategic Management Journal, 23(12), 1077–1093.

    Article  Google Scholar 

  • Shivakumar, Lakshmanan. (2000). Do firms mislead investors by overstating earnings before seasoned equity offerings? Journal of Accounting and Economics, 29(3), 339–371.

    Article  Google Scholar 

  • Simnett, Roger, Vanstraelen, Ann, & Chua, Way Fong. (2009). Assurance on sustainability reports: An international comparison. The Accounting Review, 84(3), 937–967.

    Article  Google Scholar 

  • Swanson, D. L. (1999). Toward an integrative theory of business and society: A research strategy for corporate social performance. Academy of Management Review, 24(3), 506–521.

    Article  Google Scholar 

  • Teoh, S. H., & Wong, T. J. (1993). Perceived auditor quality and the earnings response coefficient. The Accounting Review, 68(2), 346–366.

    Google Scholar 

  • Turban, D., & Greening, D. (1996). Corporate social performance and organizational attractiveness to prospective employees. Academy of Management Journal, 40(3), 658–672.

    Google Scholar 

  • Varenova, D., Samy, Martin, & Combs, Alan. (2013). Corporate social responsibility and profitability: trade-off or synergy: Perceptions of executives of FTSE All-Share companies. Sustainability Accounting, Management and Policy Journal, 4(2), 190–215.

    Article  Google Scholar 

  • Waddock, Sandra A., & Graves, Samuel B. (1997). The corporate social performance-financial performance link. Strategic Management Journal, 18(4), 303–319.

    Article  Google Scholar 

  • Weber, Olaf, Koeller, Thomas, Habegger, Dominique, Steffensen, Henrik, & Ohnemus, Peter. (2008). The relation between the GRI indicators and the financial performance of firms. Progress in Industrial Ecology—An International Journal, 5(3), 236–253.

    Article  Google Scholar 

  • Willis, Alan. (2003). The role of the Global Reporting Initiative’s Sustainability Reporting Guidelines in the social screening of investments. Journal of Business Ethics, 43, 233–237.

    Article  Google Scholar 

  • Wright, P., & Ferris, S. P. (1997). Agency conflict and corporate strategy: The effect of divestment on corporate value. Strategic Management Journal, 18(1), 77–83.

    Article  Google Scholar 

  • Young, Susan L., & Makhija, Mona V. (2014). Firms’ corporate social responsibility behavior: An integration of institutional and profit maximization approaches. Journal of International Business Studies, 45(6), 670–699.

    Article  Google Scholar 

Download references

Acknowledgments

Kwang Hwa Jeong gratefully acknowledges financial support from Kangwon National University.

Author information

Authors and Affiliations

  1. College of Business Administration, Kangwon National University, Chuncheon, South Korea

    Kwang Hwa Jeong

  2. Korea University Business School, Seoul, South Korea

    Seok Woo Jeong

  3. Chungnam National University, Daejeon, South Korea

    Woo Jae Lee

  4. School of Business Administration, Kyungpook National University, Daegu, South Korea

    Seong Ho Bae

Authors
  1. Kwang Hwa Jeong
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Seok Woo Jeong
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Woo Jae Lee
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Seong Ho Bae
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Seok Woo Jeong.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Jeong, K.H., Jeong, S.W., Lee, W.J. et al. Permanency of CSR Activities and Firm Value. J Bus Ethics 152, 207–223 (2018). https://doi.org/10.1007/s10551-016-3273-9

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10551-016-3273-9

Keywords

Search

Navigation