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The Impact of Four Types of Corporate Social Performance on Reputation and Financial Performance

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Abstract

The goal of this paper was to investigate whether and how a firm that engages in different kinds of corporate social performance (CSP) can create a favorable corporate reputation among its stakeholders, and as a result achieve a good financial performance. Building on stakeholder theory, we distinguish two types of reputation—reputation among public stakeholders and reputation among financial stakeholders. We argue that CSP activities affect these two reputations differently. In addition, we empirically test the relationship among different types of CSP, reputation among public and financial stakeholders, and financial performance. Our results suggest that (1) Carroll’s four types of CSP (i.e., economic, legal, ethical, and philanthropic) affect financial performance differently, and (2) their effects are mediated by reputation among public and financial stakeholders. Our findings provide guidelines for managers on choosing to emphasize certain CSP aspects in their communication, depending on the specific stakeholder group they are targeting.

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Notes

  1. We follow Rao et al. (2004) to compute Tobin’s q as (share price × number of common stock outstanding + liquidating value of the firm’s preferred stock + short-term liabilities − short-term assets + book value of long-term debt)/book value of total assets.

  2. Size is constructed as the logarithm of Total Assets. We follow Agarwal and Berens (2009) in measuring leverage as Total Debt/Total Assets. Capital Intensity was measured by Net Fixed Assets/Total Assets.

  3. Size has been suggested to be a factor that affects both corporate reputation and firm performance (Hillman and Keim 2001; Roberts and Dowling 2002). Leverage is identified as a factor that can account for differences in CFP across firms (Waddock and Graves 1997). In addition, Capon et al. (1990) argue that capital intensity has a negative effect on firm’s financial performance.

  4. For the PLS algorithm, we used the following settings: path weighting scheme, standardized indicators, maximum 300 iterations, stop criterion <10−5, and initial weights 1.0. For the bootstrapping, we used the following settings: construct level sign changes, and 5,000 resamples of 231 cases.

  5. The calculation of GLB is based on the software FACTOR. See, http://psico.fcep.urv.es/utilitats/factor/index.html.

  6. The results are available upon request.

  7. The f² are calculated as the squared partial correlation between the dependent variable and a predictor (controlling for the other predictors in the model), divided by 1 minus the same squared partial correlation, as described by Cohen (1988).

  8. The VAF is calculated as \((R_{1,i}^{2} \times R_{y,1}^{2} )/(R_{1,i}^{2} \times R_{y,1}^{2} + R_{2,i}^{2} \times R_{y,2}^{2} + R_{y,i}^{2} )\), where \(R_{1,i}^{2}\) (\(R_{2,i}^{2}\)) is the partial \(R^{2}\) of the CSP construct i when regressing the public (financial) reputation on all CSP constructs and control variables, \(R_{y,1}^{2}\) (\(R_{y,2}^{2}\)) is the partial \(R^{2}\) of the public (financial) reputation when regressing the financial performance on all constructs, \(R_{y,i}^{2}\) is the partial \(R^{2}\) of the CSP construct i when regressing the financial performance on all constructs, and i varies across the six CSP constructs. Note that the term \(R_{1,i}^{2} \times R_{y,1}^{2}\) is the explained variance measure \(R_{4.6}^{2}\) in formula 14 by Preacher and Kelley (2011).

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Acknowledgments

We thank Michael Barnett, Stephen Brammer, David Deephouse, Edwin Santbergen and Cees van Riel for their valuable inputs. We also thank the comments of the editor and three anonymous reviewers, which helped improve this study substantially.

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Authors and Affiliations

  1. TiasNimbas Business School, Tilburg University, P.O. Box 90153, 5000 LE, Tilburg, The Netherlands

    Yijing Wang

  2. Department of Business Society Management, Office T11-46, Rotterdam School of Management, Erasmus University, P.O. Box 1738, 3000 DR, Rotterdam, The Netherlands

    Guido Berens

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Correspondence to Yijing Wang.

Appendices

Appendix: A Robustness Check with a Full Set of KLD Indicators Using the Ordinary Least Squares Approach

In the PLS approach, we leave a number of KLD indicators out of the model, in order to improve the validity and reliability for the outer model. As a robustness check, we test our hypotheses with an ordinary least squares (OLS) approach, including all KLD indicators coded by the experts for a comparison. In the OLS approach, we use five CSP constructs, which are the unweighted aggregation of the underlying KLD indicators in each corresponding CSP dimension (see Table 3).

Hypotheses 1a and 1b predict that a higher financial and public reputation lead to a better financial performance. Our test of Hypothesis 1 confirmed the positive impacts. As Table A shows, reputations among financial and public stakeholders significantly influence financial performance (t value = 3.0619, p < 0.01 and t value = 3.5290, p < 0.01, respectively). Hypotheses 2a and 2b predict that reputations among financial and public stakeholders mediate the positive impacts of economic CSP on financial performance. Only the prediction in Hypothesis 2b is confirmed. We observe a significant positive effect of economic CSP on reputation among public stakeholders (t value = 4.0907, p < 0.01), and a significant effect of reputation among public stakeholders on financial performance, as described above. In addition, the bootstrap results in Table B show that the mediation effect is significant, since the 95 % confidence interval does not include 0 (0.024–0.1102). According to Zhao et al.(2010), with an insignificant direct effect of economic CSP on financial performance (t value = −0.233, p > 0.1), we can conclude that economic CSP only has an indirect positive effect on financial performance through reputation among public stakeholders.

Hypotheses 3a and 3b predict that reputations among financial and public stakeholders mediate the impact of (negative) legal CSP on financial performance. Both hypotheses are confirmed. We observe that zero is excluded from the 95 % confidence intervals for the indirect paths through both reputation among public stakeholders (−0.0585 to −0.0115) and reputation among financial stakeholders (−0.0387 to −0.0048).

Hypothesis 4a predicts that ethical CSP influences financial reputation positively. We observe that the impact of positive ethical CSP on financial performance, mediated through reputation among financial stakeholders, is comparable with the impact on reputation among public stakeholders, considering the 95 % confidence interval (from 0.0032 to 0.0235). The impact of negative ethical concern, on the other hand, is insignificant. These findings are supporting our hypotheses, and suggest that financial stakeholders support positive ethical CSP. Hypothesis 4b predicts that reputation among public stakeholders mediates the impact of ethical CSP on financial performance. Specifically, we expect a positive impact of positive ethical CSP on financial performance through reputation among public stakeholders, and a negative impact of negative ethical CSP. We observe that the bootstrap results are in support of the hypothesis. For positive ethical CSP, the lower and upper bounds of the 95 % confidence interval are 0.002 and 0.0281, whereas those for negative ethical CSP are −0.0509 and −0.002.

Hypothesis 5a predicts that philanthropic CSP has a negative impact on reputation among financial stakeholders. We find a significant negative effect of philanthropic CSP on financial reputation (t value = −2.2632, p < 0.05), and the upper and lower bonds of the 95 % confidence interval for the indirect effect are both negative (−0.031 to −0.0025). Therefore, Hypothesis 5a is confirmed. Hypothesis 5b predicts that reputation among public stakeholders mediates the positive impact of philanthropic CSP on financial performance. Observing positive upper and lower bonds of the 95 % confidence interval (0.0028 to 0.0385), we confirm our prediction in Hypothesis 5b. The contrasting impacts of philanthropic CSP on reputation among financial and public stakeholders suggest that while public stakeholders are in support of philanthropic CSP, financial stakeholders do not appreciate it. Instead, they may regard it as activities diverging firm resources from its core business.

Similar to the PLS analysis, we examine our data for potential violations of standard regression assumptions, such as heteroskedasticity, serial autocorrelation, and endogeneity. With respect to heteroskedasticity, the Koenker test has a p value of 0.059 (Koenker statistic = 20.471), suggesting that our model does not suffer from this issue. As for serial autocorrelation and endogeneity, the earlier mentioned arguments for our PLS analysis hold here too.

Results of the Robustness Checks

See Tables 8 and 9.

Table 8 OLS results for mediation effects
Full size table
Table 9 OLS bootstrapping results for mediation effects
Full size table

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Wang, Y., Berens, G. The Impact of Four Types of Corporate Social Performance on Reputation and Financial Performance. J Bus Ethics 131, 337–359 (2015). https://doi.org/10.1007/s10551-014-2280-y

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  • DOI: https://doi.org/10.1007/s10551-014-2280-y

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