Financial performance and reviews of corporate social responsibility reports

J Manag ControlDOI 10.1007/s00187-014-0198-2

ORIGINAL PAPER

Financial performance and reviews of corporate socialresponsibility reports

Orhan Akisik · Graham Gal

© Springer-Verlag Berlin Heidelberg 2014

Abstract The purpose of this study is to examine the relationship between financialperformance and reviews—self, Global Reporting Initiative (GRI), and third party—of corporate social responsibility (CSR) reports provided by North American firmsover the period from 2006 to 2012. Using data obtained from the Compustat NorthAmerica and the GRI websites, the results indicate that reviews of CSR reports aresignificantly related to certain short and long-term measures of financial performance.In addition, for firms in particular industries; mining, chemical, and petroleum, thirdparty review is significantly related to financial performance. Moreover, we find thatthe effect of sales, leverage, and growth on financial performance is influenced byCSR reviews. Conclusions drawn from this study indicate that there is a relationshipbetween financial performance and reviews of CSR reports.

Keywords Financial performance · Corporate social responsibility · Reviews ofcorporate social responsibility reports

JEL Classification M40 · M41 · M42

1 Introduction

In recognition of the impact corporations have beyond that of enhancing shareholderwealth, the governance activities of board of directors are interesting to a broaderrange of stakeholders. Thus, their decisions are examined by all stakeholders, includingshareholders, and as a result additional reviews of board’s decisions are now becoming

O. Akisik · G. Gal (B)Department of Accounting, Isenberg School of Management, University of Massachusetts at Amherst,Amherst, MA 01003, USAe-mail: [email protected]

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available. One particularly relevant area is the board’s decisions that fall under thegeneral category of corporate social responsibility (CSR) activities. The CSR activitiesare not directly disclosed under the traditional financial statements, but can affectfinancial performance of firms through their impact on various factors, such as sales,material costs, operational efficiency, financing costs, and litigation risk (Dhaliwal etal. 2012). While traditional financial statements do not contain information about CSRactivities, firms do have methods to make stakeholders aware of these activities.

Some disclosures are of socially irresponsible activities, and are made by groupsoutside the firm; such as the publication by government bodies of firm’s release of toxicwaste (Khanna et al. 1998). To counter this involuntary release of information, firmsuse other channels to make stakeholders aware of their CSR activities. For instance,firms use various advertising channels not only to provide stakeholders with CSRinformation, but also to enhance their reputation with respect to CSR activities (Perkset al. 2013). The CSR information provided under the context of advertising channels isnot subject to strict review1 and therefore reaction to disclosures through advertising ismixed (Morsing et al. 2008; Morsing and Schultz 2006). In contrast to disclosures madethrough advertising channels, firms may also use accepted CSR disclosure frameworkssuch as the GRI (2006, 2011).2 In addition to being an accepted framework for CSRdisclosures, firms may also choose to have their CSR disclosures reviewed (GRI 2013).Thus, firms can demonstrate not only a desire to communicate their CSR activitiesin a standard format, but also their willingness to have these disclosures reviewed. Aparticularly relevant question is whether these reviews provide additional informationto stakeholders. The importance of reviews has been researched in the context ofopinions made by auditors on traditional financial statements. For instance, Schaub(2006) found that investors overreacted to going concern opinions. The purpose of thispaper is to investigate the reactions by stakeholders to the reviews of CSR reports.

To investigate this question we examine the relationship between measures of finan-cial performance and reviews of CSR reports for North American firms over the periodfrom 2006 to 2012. While these reports are not mandatory a number of firms voluntarilymake disclosures about their CSR activities and still others expend resources to havethese disclosures reviewed. One prevalent view for the voluntary disclosure of theseactions is that adopting environmental and social actions beyond legal requirements,initiating dialogues with broad groups of stakeholders, and altering their operationstoward more sustainable practices, help firms gain trust, consensus, and legitimacy(Benn and Bolton 2011; Carroll and Shabana 2010; Park and Brorson 2005; Perriniet al. 2006; Tilt 2007). There is an expectation that firms with better reputations andthat are seen as more legitimate due to their socially responsible activities will achievecertain benefits, however these benefits may not be realized in the short term.

1 A review of cases and proceedings by the Federal Trade Commission for the past 7 years shows manyactions against companies for deceptive product statements, but none related to deceptive or inaccuratestatements about companies socially responsible activities (Federal Trade Commission 2014).2 CSR reports are non-financial reports in which firms disclose quantitative and qualitative types of infor-mation about their economic, social, and environmental activities and actions. Although reporting formatsmay vary, firms increasingly use GRI G3 reporting guidelines that include categorizations about economic,social and environmental performance indicators (Manetti and Becatti 2009).

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Financial performance and reviews of CSR reports

Stakeholders other than shareholders are seen as having longer term intereststhan those of shareholders; employees’ interests in the possibility of employmentfor their working life, vendors’ concerns for a consistent demand for their out-puts, and communities’ interests in a steady commercial sector are all examples.Thus, the governance decisions of corporations that take these interests into accountwill lead to a strategic direction that will be more sustainable and will be seen asmore socially legitimate (Campbell 1997). However, there is a view that undertak-ing these CSR practices might degrade financial performance in the short-term, butwill improve future financial performance (Klassen and McLaughlin 1996). Werethe benefits of socially responsible activities only achieved in the long run, it wouldbe difficult to convince shareholders to wait for these benefits. However, there isalso evidence of current benefits as firms may not have to wait for their CSRactivities to payoff (Fombrun 1996; Hart and Ahuja 1996; Luo and Bhattacharya2006).

There is an indication that customers do respond to socially responsible messagesand increase their sales from corporations that disseminate this information (Green andPeloza 2011). CSR disclosures can produce “Halo Effects”3 for all products of a firmand increase sales in the near term (Madden et al. 2012). Firms that communicate theirsocially responsible activities may also be able to charge higher prices and can moreeasily gain access to financial markets (Fombrun 1996; Hooghiemstra 2000). So boardof directors and management that take an expanded view of corporate governanceand undertake CSR activities can see improvement in certain short-term performancemeasures as well (Allen 2005).4

In order for firms to achieve benefits (short or long-term) of their socially responsibleactivities, stakeholders must have information about these CSR activities so as to beable to act and to exercise some influence over the corporate decision makers. IndustryCanada recognizes the importance of communication as being critical as it, “…(gives)interested parties the opportunity to see how well the firm is meeting its commitments…” (Government of Canada 2012). In addition to informing stakeholders about theactual activities of firms, the willingness to make CSR disclosures may also changeperceptions of the firm by the broader stakeholder community. However, the differentmetrics used and the different information disclosed make it difficult to compareCSR performance across companies. While firms can choose to make disclosuresin alternative formats, one generally accepted format for CSR disclosures has beenestablished by the GRI (2006, 2011). These two issues; the use of different metricsand the choice of alternative formats, have made the review of CSR disclosures animportant area that independent audit firms have included in their portfolio of servicesas a way to improve their stature by providing broader review and expanded areas ofexpertise (O’Dwyer et al. 2011; O’Dwyer and Owen 2005).

3 Halo Effect results when the perceptions on a brand’s attribute are influenced by perceptions on anotherattribute or by a global impression of the brand (Madden et al. 2012).4 Boards of directors have major responsibility for ensuring that firms meet CSR standards. For example,more and more boards in the United Kingdom have created special board committees devoted to CSR.Half of Britain’s largest 20 listed firms have committees which are responsible for CSR issues (Mackenzie2007).

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In addition to the specification of coverage areas for CSR reports the GRI hasalso made suggestions about the types of reviews that can be done for these reports(GRI 2013). The GRI discloses one of three types of review for reports that usetheir guidelines for the content. Some of these reports are self-declared; that is, theyare released by firms’ management without obtaining an outside review, others arereviewed by the GRI to determine if they are in compliance with GRI guidelines.A third group is reviewed by an independent third-party assurance provider with aresulting increase in credibility.5 One possible approach to assessing the importanceof these reviews, and the one used in this study, is to examine their impact on measuresof financial performance.

Reviews of CSR reports may be an important tool to create positive perceptions,separate from the actual CSR performance, for two reasons (Vanhamme and Grobben2009).6 First, CSR reports are written in a highly complex and technical languagewhich is difficult for non-technical individuals to understand (Schneider et al. 2012).Second, firms do not compete on CSR performance and generally do not read eachother’s reports. One reason for this may be that CSR reports are not easily cross-comparable, even within the same industry. But the major reason is the universallylow readership by, and feedback from the stakeholders. This may be a reason thatsome firms are considering a shift to reporting every other year, to producing shorterreports (Brown et al. 2009), and to using other disclosure channels for more detailedinformation (Morsing and Schultz 2006).

We obtained financial data from the Compustat North America, and qualita-tive data regarding CSR reviews from the GRI website. CSR reports are gen-erally prepared based on criteria established by the GRI (2011) and have someestablished credibility (Ballou et al. 2006). Using fixed effect panel data esti-mation method, for the period 2006–2012, we find that reviews of CSR reportsare significantly related to short and long-term financial performance. In particu-lar, third party reviews have a significant relationship with financial performancefor firms in mining, chemical, petroleum sectors. Moreover, our results provideevidence that the effect of sales, leverage, and growth is influcenced by CSRreviews.

The remainder of the paper is organized as follows: Sect. 2 is a literature review andconsists of three parts. Part 1 discusses CSR activities and financial performance. Part2 presents channels used to disclose CSR activities. Part 3 is about reviews of CSRreports and GRI. Section 3 discusses the hypotheses to be tested. Section 4 presentsthe results of empirical analysis. This section begins with the data and econometricmodel followed by the results of empirical analysis. Finally, Sect. 5 presents theconclusions.

5 These reviews do not assess the CSR performance directly; however, prior research provides evidencethat firms with superior CSR performance are more likely to disclose their CSR activities and strategies bypublishing CSR reports (GRI 2013; Simnett et al. 2009).6 Firms may have little concern with CSR activities themselves. However, they may choose to make thesedisclosures to be seen as legitimate and to induce various stakeholder groups to support them. Contrarily,firms may engage in CSR activities, but they may choose not to disclose them (Cowen et al. 1987).

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2 Literature review

2.1 CSR activities and financial performance

One view is that when firm’s sole (or primary) focus is on increasing shareholdervalue to the exclusion of providing value to other stakeholders this will reduce theirchances for long-term success (Campbell 1997). However, if the rewards for sociallyresponsible activities do not accrue to the firm until some unknown point in the future,then the ability to provide support for any group of stakeholders is in jeopardy. Forexample, the desire of employees to have a stable place of employment cannot berealized in a financially failing company. Thus, it is imperative that CSR activitiesimprove the ability to compete and that stakeholders provide support for firms thatmake the effort to disclose these activities.

Porter (1990) hypothesized that firms will be motivated to innovate when faced withproperly designed environmental regulation, and that this innovation will ultimatelyimprove financial performance. This would seem to imply that the benefits to improv-ing environmental performance may not be recognized in the short-term. In supportof this view, Cordeiro and Sarkis (1997) find that analysts’ forecasts of growth withhigh environmentally performing firms was significantly negative. While this studydid not investigate actual returns there are studies that investigated actual financialperformance. In support of the other view, that socially responsible firms can improvefinancial performance, Rassiers and Earnhart (2010) found that the Clean Water Actimproved both short-run and long-run financial performance. Hart and Ahuja (1996)use three measures of actual financial performance; return on sales, return on assets,and return on equity, and find support for Porter’s hypothesis that when firms becomemore efficient by reducing emissions they improve financial performance. Klassenand McLaughlin (1996) find a positive association between financial performance,as measured by stock market returns, and strong environmental management prac-tices. They also provide some evidence that various types of CSR activities can inducestakeholders to view the value of the firm to be enhanced. Du et al. (2010) argue thatCSR activities will not only generate favorable stakeholder attitudes, but will alsogenerate favorable behaviors such as seeking employment, purchasing their products,and providing capital.

Dhaliwal et al. (2012) find that the issuance of CSR reports that are used as aproxy for non-financial information result in lower forecast errors by financial ana-lysts. These works indicated that CSR activities, particularly those that indicate theenvironmental quality of the product can influence stakeholders’ behaviours. Thereare also works that provide evidence that CSR activities can influence decisions con-cerning the firms’credit risk. When firms undertake manufacturing processes that areenvironmentally sound, they are not only seen as being more socially responsible,but also lower credit risk. In a study on lender’s decisions, Heyes (1996) find that anincrease in lender’s liability for firm’s environmental damage leads to an increase ininterest rates. In other studies, firms with higher environmental risk faced increasedmonitoring of their application prior to loan initiation (Thompson and Cowton 2004).Possibly as a result of this more detailed environmental auditing, firms with undue

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environmental risks do not seek these loans, and so there is a positive market reactionto firms securing these loans (Aintablian et al. 2007).

These works indicate that information about CSR activities is important for stake-holders. The next section looks at ways firms disseminated this information to variousstakeholder groups.

2.2 Channels used to disclose CSR activities

To obtain the benefits of CSR activities, information about these activities must becommunicated. Expectations are not static; rather, they change over time. So it isimportant for firms to effectively address these changing expectations and needs inorder to maintain their legitimacy (Deegan 2002; Lindblom 1994). However, makingthe changes in their products and production techniques to address the expectations ofstakeholders is not sufficient as they would still face the risk of losing their legitimacyunless they communicate these changes on a timely basis. Therefore, a reporting sys-tem that provides a broader set of information about the activities of firms is essentialto support a dynamic governance system which allows management to respond tothe dynamic business environment and to take actions to meet stakeholder objectives(Cooper and Owen 2007).

Although financial reporting still provides the basis for assessing the performanceand accountability of board of directors and of management to shareholders, thesereports do not contain the totality of information required by other stakeholders. Stake-holders, such as employees and customers, look for other types of information such asthe way in which a firm’s products are produced and the impact of the firm’s operationson the society and the environment.

Information on CSR activities can be made available using a variety of commu-nication channels, such as annual CSR reports, press releases, or official corporatewebsites (Du et al. 2010).7 The availability of this broader set of information canalso allow stakeholders to play an important role in changing the focus of corporateboards toward long-term performance by monitoring the strategies and objectives ofthe board and management (OECD 2004). This information can influence their levelof support, their required return for this support, their selection of the firm’s productsand services, and their decision of whether to seek employment at the firm (Freeman1984; Hopwood et al. 2010). There are basically two types of disclosures that can bemade concerning a firms’ environmental activities; involuntary and voluntary.

Because of the various issues related to compliance with environmental regulationsthere are a number of ways in which governmental organizations make informationavailable to stakeholders. The information contained in Toxic Release Inventory (TRI)can have a detrimental impact on the public’s impressions of the firm, and can have anegative impact on stockmarket returns (Hamilton 1995; Khanna et al. 1998). Khannaet al. (1998) also find that this involuntary release of TRI information was a strong tool

7 When information about the activities of organizations is disclosed on corporate websites certain issuesarise if users are required to search for the information as opposed to obtaining it in a predetermined format.See Gal (2008) for more complete discussion of these issues.

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to enforce environmental protection policies in the chemical industry. Thus, firms havea strong incentive to make voluntary disclosures about their CSR activities; sometimesto anticipate release of negative environmental information.

Clarke and Gibson-Sweet (1999) looked specifically at the motivation to makevoluntary disclosurse about their CSR activities. They sought to understand whetherfirms are managing reputation and legitimacy as opposed to responding to their ‘ethi-cal accountability’. While their results were not statistically significant, they did findthat firms made disclosures of environmental issues in dedicated reports as opposedto providing information on community involvement activities. Cowen et al. (1987)find certain firm characteristics, the most important being size, were related to disclo-sures on environmental activities and energy usage. They also looked at the presenceof a social responsibility committee in the firm and find that this was only related todisclosure of human resource issues and not other types of CSR disclosures. Consid-ering disclosures as distinct category of CSR activity, Roberts (1992) documents thatstakeholder power and financial performance are significantly related to disclosure ofCSR activities. Elliott et al. (2014) find evidence that providing CSR information toinvestors can enhance their perception of a firm’s fundamental value.

It is not always clear about exactly how and when to disclose CSR activities. Forinstance, firms are encouraged to engage in CSR activities, but disclosure is not alwaysseen as beneficial (Morsing et al. 2008). Morsing et al. (2008) make a distinctionbetween a more targeted approach to an exclusive group of opinion makers that candisseminate the image to other stakeholders and an expert CSR communication processwhere facts and figures are disclosed generally. They make the observation that Dan-ish companies favor disclosure using expert channels in sustainability reports. In astudy that confirms the findings of Clarke and Gibson-Sweet (1999) and Dean (2004)concludes that the disclosures surrounding a crisis event can have a significant impacton the firm’s reputation.8 In a counter-intuitive result an inappropriate response by afirm with a previously bad reputation can increase the regard for the firm, but the sameresponse by a firm with a good reputation results in a decrease in regard. Vanhammeand Grobben (2009) find that perceptions of firm integrity is greater when there isa long history of CSR activities and that skepticism of CSR disclosures is greaterfor firms with a short history of providing this type information. In a similar result,Madden et al. (2012) find that CSR disclosures can impact overall perceptions of thefirm and its products. Moreover, they provide evidence of a “Halo Effect”; that anassociation with CSR activities can improve perceptions of a firm’s brands, and theperceptions are more pervasive across all their products when some of the productsare also viewed as being high quality. The communication can be enhanced if thecredibility of the endorser is high (Lafferty and Goldsmith 1999). Advertising CSRstrategies can also divert attention from what Perks et al. (2013) call corporate andsocial irresponsibility, and so communication of other CSR activities becomes criticalwhen certain crises events occur. The intention of CSR advertising is to promote anddisclose the CSR activities to a broader group of stakeholders (Farache and Perks2010) and to gain legitimacy with this group. However, all types of advertising are not

8 Corporate crisis is defined as an unexpected, non-routine event that creates uncertainty which threatensorganization’s goals (Dean 2004).

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equal. Certain groups look for different types of disclosures when coming to conclu-sions about a firms’ CSR activities (Smith and Brower 2012; Smith 2010). Smith andBrower (2012) determined that “Millennials” were perceptive of certains signals madeconcerning the environmental qualities of the product. And even more critical, theseperceptions and CSR communications influence purchase behavior (Montoro-Rios etal. 2008; Smith 2010). While these studies have examined what might be traditionaladvertising channels there is an increasing use of corporate websites to make CSRdisclosures.

When making the use of corporate websites to disclose CSR activities two issuesarise. First is the format of the disclosure so as to encourage stakeholders to search foradditional information, and second is the decision concerning exactly what to disclose.Tang et al. (2014) find a significant difference between US and Chinese companiesin the CSR disclosures on the firm’s website. The coverage of elements was one ofthe major differences, as US firms covered additional areas such as philanthropy andlabor conditions. Additionally, there are findings that US firms make very differentdisclosures on their websites (Kampf 2007), and that there are many different headingsused on their websites (Smith and Alexander 2013).

Herzig and Schaltegger (2007) argue that disclosure of nonfinancial informationsignals a willingness to communicate the organization’s role in society at large. Thedisclosure must be sufficient, so stakeholders can assess whether the firm continuesto be a good corporate citizen (Guthrie and Parker 1989). Non-disclosure of CSRinformation may jeopardize the stakeholder’s view of the firm’s legitimacy and theirsupport of the firm’s strategic objectives.9 Thus, it may be argued that there is a closeassociation between legitimacy and financial support. Just as financial informationchanges attitudes of certain stakeholders there is evidence that nonfinancial informa-tion also change attitudes and actions of stakeholders and so there should be interestin the quality of these reports.10 Therefore, the reports for stakeholders should includerelevant information and appropriate reviews in terms of both coverage and data qual-ity. The disclosures made in various voluntary channels can be seen as a general formof advertising CSR activities to the broader group. These disclosures have been seenas ways to manage reputation and in some cases to mitigate the affects of bad publicityor environmental mistakes. The reports themselves do not indicate performance, onlya willingness to communicate about CSR activities. Schneider et al. (2012) concludethat the CSR reports from the petroleum industry do not guarantee performance andthey see a need for published guidelines as a method to increase transparency.

9 “Companies communicate intentionally or unintentionally by everything they do or do not do, say or donot say…. If, for example, a company does not release any statements in times of crisis, its audiences mayperceive this as inconsistent with the image of the company …. Similarly, if companies do not take a stanceon social issues like minority hiring, community involvement or environmental protection, the public mayassume that the company does not deem these issues important. It is thus imperative that companies seizeevery opportunity for public expression to convey messages consistent with the image they seek to protect”(Schlegelmilch and Pollach 2005). However, as previously mentioned these disclosures do not have anagreed upon format or review.10 There is mixed evidence on this point. For instance, Walmsley and Bond (2003) do not find any reactionof investors to environmental reports while other research indicates that consumers expect corporations tobe involved in CSR activities (Demetriou et al. 2010).

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2.3 Reviews of CSR reports and GRI

Both the standardization and quality of CSR reports are critical if the users of CSRinformation are to evaluate the board and management’s strategies and actions toachieve the relevant objectives. CSR reports are generally prepared based on certainreporting criteria established by an outside organization or the firms’ internal guide-lines.11 As noted previously, while there are other avenues for firms to disclose theirCSR activities, such as press releases and corporate websites, the quality of this infor-mation is suspect (Time 2010). In contrast, many CSR reports prepared under GRIguidelines and disclosed at the GRI website have some level of assurance. GRI guide-lines are also regarded as the most reliable set of reporting requirements, “… alongwith the fact that the GRI works closely with the United Nations, gives its reportingcriteria the credibility necessary to be considered generally accepted (Ballou et al.2006, p. 66)”.

In October 2006, GRI released its second comprehensive reporting guidelines calledG3 Reporting Framework (Ballou et al. 2006). There are a number of approaches toreview CSR reports using GRI guidelines. As the content for GRI reports is not fixedthere is an accepted method to assess the level of coverage in a firm’s report. Thecoverage level can range from C to A+ depending on the content coverage (GRI2013). Additionally, the disclosures can also include a level of review.

Since CSR reporting is not mandatory, there are four choices for firms: (1) not todisclose anything about CSR activities, (2) disclosure of their CSR reports withoutadditional review, (3) having their sustainability reports reviewed by GRI in orderto determine if they are in compliance with GRI guidelines, and (4) using a thirdparty review of CSR reports to assure that they are prepared in accordance with GRIguidelines.

While not all firms will choose this last option, independent third party reviewedreports are increasingly becoming important as a result of claims in CSR disclosures(Monaghan 2004). The credibility of reports related to the objectives of stakeholderswould increase if they were independently reviewed (Holm and Birkholm-Laursen2007). Simnett et al. (2009) provide evidence that firms seeking to enhance the cred-ibility of their CSR reports and their reputation are more likely to have these reportsreviewed by a third-party review provider. Using the responses of CSR representativesfrom 20 UK listed firms on whether they consider third party review necessary, Jonesand Solomon (2010) find that half of the respondents believe that third party reviewwould enhance credibility of the reports while the other half was of the opinion thatthird party review was not necessary.

There are three issues with regard to any review of CSR reports. First, there arenot any accepted materiality or quality standards for the data in the reports. Second,in contrast to the financial statement audit report, which is primarily prepared forshareholders, CSR reports are prepared for all stakeholders whose expectations andinterests are diverse and therefore may conflict with each other. Third, much of the

11 For example, there are certain standards of engagement such as AT 101 (American Institute of CertifiedPublic Accountants 2001a) for attestation of non-financial information and AT 201 (American Institute ofCertified Public Accountants 2001b) for agreed-upon procedures.

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data in CSR reports is qualitative in nature, requiring special skills to interpret andreview (Adams and Narayanan 2007).12 So reviews of CSR reports may be importantfor stakeholders’ perceptions of CSR activities as the content of CSR reports aretoo complex and technical (Morsing et al. 2008; Morsing and Schultz 2006; Schneideret al. 2012).13

Stakeholders such as customers and lenders use CSR information to decide whichproducts to purchase and which firms to grant credit. Performing CSR activities maybe not be sufficient unless firms disclose their activities through various channelseffectively. Furthermore, the information contained in CSR reports in general, andGRI reports specifically, can be technical and not easily understood; thus reviewsare critical. The next section presents hypothesis about the relationship between CSRreviews and indicators of financial performance.

3 Hypotheses development

3.1 CSR reviews and financial performance

Eccles et al. (2012) find that firms that emphasize sustainability considerably outper-form their competitors over a long period of time both in terms of stock market andaccounting performance. Moreover, they report that the outperformance is stronger insectors where firms compete on the basis of brands and reputation and in sectors wherefirms’ products depend upon extracting large amounts of natural resources. Finally,firms that stress the importance of sustainability achieve higher profitability. Firmsmay choose whether or not to disclose their CSR activities and also whether or not tohave these disclosures reviewed. There is evidence that the reviews of financial state-ments are used in stakeholders’ decisions, therefore there is also reason to believe thatreviews of CSR disclosures may impact stakeholders’ decisions as well. Additionally,as previously noted, Brown et al. (2009) documented that there is low readership ofCSR reports suggesting that reviews play an important role in stakeholders’ decisions.Hence, we propose the following hypothesis (expressed in null form):

H01: Ceteris paribus, reviews of CSR reports have no effect on financial perfor-mance.

12 There are also issues concerning the delivery of the review service. According to Delfgaauw (2000), it isnot necessary that review be provided by accountant auditors. He argues that their skills and competenciesare not sufficient to perform such as service, and therefore verification of sustainability reports may beperformed by other expert organizations and consultants. This view is supported by Wallage (2000) whoargues that the verification requires multidisciplinary cooperation although financial auditors have thenecessary skills in reviewing information systems, verification of data, and in the reporting of informationto those outside the organization.13 This view is supported by shareholders’ use of audit reports of financial statements. Part of the informationdisclosed is contained in the opinion and there is evidence that shareholders act upon this informationseparately from the information contained in the body of the financial statements themselves (Asare andWright 2012; Schaub 2006).

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3.2 CSR reviews, sales and financial performance

The success of businesses in the long run depends upon the ability of managers toconsider equally the interests of primary stakeholders by creating sufficient value,wealth, and satisfaction commensurate with their expectations. For example, con-sumers/buyers want firms to deliver high quality products that satisfy their complexneeds and wants (Freeman et al. 2010; Polonsky 1995; Spence and Rinaldi 2010). Inparticular, firms need to pay attention to consumers’ views on CSR given the centralrole of consumers in marketing (Öberseder et al. 2013).14 Prior research has doc-umented that CSR has an impact on consumers’ purchase intentions, loyalty, andsatisfaction, and that consumers take firms’ commitments as to CSR initiatives intoaccount when evaluating firms and their products (Madden et al. 2012; Smith andBrower 2012).15 According to this view, profit is a by-product of success in responsi-bly meeting the legitimate needs and expectations of primary stakeholders (Clarkson1995; Preston and O’Bannon 1997). Communication of CSR activities is consid-ered as an attempt to gain legitimacy by creating awareness and reducing stakeholderskepticism (Chaudhri 2014; Du et al. 2010). Dhaliwal et al. (2012) argue that in a mar-ket where consumers have a high level of awareness about CSR activities, superiorCSR performance is likely to improve brand value and legitimacy of firms, which inturn increases the demand for firms’ products (Brown and Dacin 1997; Mohr et al.2001; Coors and Winegarden 2005). Satisfied customers may contribute to profitabil-ity by providing new referrals through positive word of mouth and by a willingnessto pay more (Homburg et al. 2005; Mooradian and Olver 1997). Gaining trust in theinformation source is critical for the success of CSR communication (Maignan andFerrell 2001; Pomering and Dolnicar 2009). If firms cannot adequately and effec-tively communicate CSR issues, their legitimacy and financial performance are likelyto be adversely affected.16 From the corporate communication perspective, it can beargued that CSR reporting may contribute to create a positive image, so that peo-ple are prepared to a greater extent to do business with firms and buy their products(Hooghiemstra 2000). According to a survey conducted by APCO Worldwide (2004),people are receptive and responsive to proactive CSR communication and this com-munication directly impacts consumer and investment behavior. This survey indicatedthat consumers reacted to positive and negative interpretations of a firm’s CSR activi-ties, which in turn affected their purchasing decisions. In light of the views above, weexpect a moderating role of reviews of CSR reports that may reduce or enhance therelationship between sales and financial performance according to how the reviews

14 Consumers/buyers as stakeholders are crucial for firms for attaining their long-term goals.Vlachos et al. (2009) argue that corporate survival requires retaining customers, which implies that thesuccess in the long run cannot be achieved without attaining short-term goals.15 Previous studies show that higher levels of customer satisfaction lead to greater customer loyalty, whichin turn has a positive effect on profitability (Homburg et al. 2005; LaBarbera and Mazursky 1983).16 For example, Shell’s sales revenue dropped by nearly 70 % in some countries because of the company’sdecision to dump an oil platform in the Atlantic and the subsequent call by Greenpeace for a boycott ofShell in June 1995 (Dhaliwal et al. 2012; Werther Jr and Chandler 2005).

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are evaluated.17 Therefore we propose the following hypotheses (expressed in nullform):

H02a: Ceteris paribus, sales have no effect on financial performance.H02b: The effect of sales on financial performance is not moderated by reviews of

CSR reports.

3.3 CSR reviews, leverage and financial performance

Firms with high leverage are regarded risky as they may be unable to pay interest anddebt when they are due. This will likely impede the undertaking of profitable invest-ment opportunities and adversely affect financial performance (Benito and Vlieghe2000; Fazzari et al. 1988; Goddard et al. 2006). Giroud et al. (2012) provide evidencethat reductions in leverage result in better financial performance measured by return onassets. Antoniou et al. (2008) find a negative relationship between leverage and finan-cial performance. Vithessonthik and Tongurai (2014) find that leverage is negativelyassociated with performance. Firms that have better CSR performance and communi-cation may obtain loans with better credit conditions, which might reduce the impact ofcredit risk on financial performance (Ambec and Lanoie 2008; Cheng et al. 2014; Per-rini et al. 2006). Roberts (1992) argues that the greater the degree to which firms rely ondebt financing to fund their investments, the greater the degree to which firms’ manage-ments would be expected to respond lenders’ expectations regarding CSR activities.Accordingly, CSR disclosures that meet lender’s expectations may improve the abil-ity to borrow and therefore impact financial performance positively. However, if CSRdisclosures do not meet the expectations of lenders, firms will be perceived risky, andthis will impact financial performance negatively as a result of deteriorating borrowingconditions. Therefore, we propose the following hypotheses (expressed in null form):

H03a: Ceteris paribus, an increase in debt ratio has no effect on financial perfor-mance.

H03b: The effect of debt ratio on financial performance is not moderated by reviewsof CSR reports.

3.4 CSR reviews, growth and financial performance

Growth is one major determinant of financial performance (Palepu et al. 1996). Dif-ferent variables might be employed to measure growth. For example, growth in salesrevenue and book-to-market ratio are two variables that have been used to assessgrowth (Ruf et al. 2001). It is argued that shareholders as key stakeholders increas-ingly consider CSR reporting in their assessment of firms (Williams 2008; Hockertsand Moir 2004; van Beurden and Gössling 2008). Bill Ford, former CEO of Ford

17 A moderator variable specifies when and under what conditions an independent variable influences adependent variable. A moderator variable may enhance or reduce the direction of the relationship betweenan independent and a dependent variable. It may even change the direction of the relationship between twovariables from negative to positive or vice versa (Baron and Kenny 1986).

123


Motor Company, describes this situation: “We have long identified climate changeas a serious environmental issue, and shareholders are increasingly asking about therisks as well as the opportunities associated with it” (Stephen 2005, p. 2).18 CSRcommunication for shareholders contributes to the overall financial communicationobjectives, for example increasing and maintaining stock price and increasing tradingvolume (Birth et al. 2008). Dowell et al. (2000) provide evidence that socially respon-sible firms have much higher stock market values, suggesting that the communicationof socially responsible behavior leads to growth (Mackey et al. 2007). Consistentwith Dowell et al. (2000) a recent study of US publicly traded firms documents thatfirms which have positive environmental policies experience a significant stock priceincrease, whereas firms that do not have responsible environmental policies face astock price decrease (Flammer 2012). Chen and Zhang (1998) and Fama and French(1998) find that firms with high book-to-market ratio have consistently low earningsand more earnings uncertainty. Penman (1996) finds a strong relationship betweengrowth measured by book-to-market ratio and accounting profitability measured byreturn on equity. On the other hand, Griffin and Lemmon (2002) demonstrated thatthe return on assets is inversely associated with book-to-market ratio and decreases asa firm’s distress risk increases. By engaging in socially responsible behavior and dis-closing information about this behavior, firms can attract new investors, which wouldresult in growth in the long run, which in turn improves financial performance (Du etal. 2010; Tsoutsoura 2004). Consistent with previous studies that indicated investors’use of audit opinions (for example; Asare and Wright 2012) we consider the reviewsof the CSR disclosures as being relevant to the stakeholders’ decisions with regard tothe influence of growth on financial performance. In light of the discussion above, wepropose the following hypotheses (expressed in null form).

H04a: Ceteris paribus, growth has no effect on financial performance.H04b: The effect of growth on financial performance is not moderated by reviews of

CSR reports.

4 Empirical analysis

4.1 Data and econometric model

Our data came from two sources: We obtained qualitative data as to CSR reviews—self-declared, GRI-reviewed, and third party-reviewed—from the website of GRI forfirms operating in North America. We extracted financial data from Compustat NorthAmerica. As previously noted, the study covers the period between 2006 and 2012.Since the number of North American firms that file with the GRI is limited, the overallnumber of observations for the regression analyses ranges from 796 to 605.

18 “In January 2007, Marks and Spencer announced a £ 200 million plan to make its business carbonneutral. Its share price (value) jumped immediately because market considered this green positioning wouldproduce more than enough cachet among consumers (convertible into future profits) to offset the cost ofimplementation” (Corkin 2008, p. 42). Shareholders tend to support CSR activities because CSR gives an‘insurance-like’ protection to firms that preserve shareholder value in case of a negative act (Chaudhri 2014;Godfrey et al. 2009).

123

O. Akisik, G. Gal

We conduct our analysis starting in 2006 because GRI reporting was not widespreadin the periods prior to this year for North American firms. In addition, they have theoption to engage either GRI or some third party review providers, such as independentauditors to check the conformity with GRI guidelines. However, the procedures appliedby third party review providers are not formally endorsed by GRI. There are also firmsthat do not use these options. Such firms declare by themselves that they follow theGRI Guidelines. Note that some firms included in the sample do not disclose that theyhave used any of the three types of reviews; although they apply GRI Guidelines totheir operations. Nor is there consistency for firms using these types of reviews; thatis, to what extent GRI guidelines are considered may be reviewed by GRI in someyears and third party review providers in other years. There are also years for whichno reviews have been reported (Brown et al. 2009).

We use the following model, which had been used in prior research on financialperformance to test our hypotheses (Roquebert et al. 1996; Rumelt 1991; Schmalensee1985).

per f ormanceit = α0 + α1 csrit + α2 salesit + α3 csrit × salesit + α4 leverageit

+α5 csrit × leverageit + α6 growthit + α7 csrit × growthit

+controlsit + industr yit + εi t .

Consistent with prior studies that examine financial performance, per f ormanceit ismeasured by the natural logarithms of return on assets (roa), return on sales (ros),return on equity (roe), and Tobin’s q (tobinq). In contrast to roa, ros, and roe, tobinqis a long term measure of performance because it is based on the market value of thefirm (Lin et al. 2009; Servaes and Tamayo 2013).19 All of the independent variablesare used in 1 year lagged values in estimations. Considering the fact that stakeholdershave so many conflicting goals and interests, it is difficult to define csrit (Dahlsrud2008). This also makes it difficult to measure CSR (McWilliams and Siegel 2001).csrit , which is used as a proxy variable for the benefits of CSR reports, is measuredby sel fi t , griit , and thirdpit . All of the observations on these dummy variables arerestricted to take on values of [0, 1]. salesit refers to the natural logarithm of salesrevenue. salesit ×csrit is the interaction of salesit with csrit . leverageit is the naturallogarithm of the ratio of total debts to total assets. leverageit × csrit is the interactionof leverageit with csrit . growthit is measured by the natural logarithm of the ratio ofbook value to 1 year lagged market value of equity. growthit ×csrit is the interactionof growthit with csrit . industr yit is a dummy variable for industries. The controlvariables are current ratio computed as current assets/current liabilities (currentit,),capital intensity computed as total assets/total employees (intensit ), standard andpoors’ quality ranking (sandpit ), and efficiency computed as cost of goods sold/sales(e f f ii t ) (Servaes and Tamayo 2013).

19 roa is a measure of how efficient assets are used to generate profits, whereas ros indicates how effectivelya firm is utilizing its resources to generate profits. roe measures how much profits are generated frominvestments made by shareholders (Rassiers and Earnhart 2010; Eccles et al. 2012). Tobin’s q is a statisticused as a proxy for the firm’s value form investors’ perspective. Consistent with prior research, we measureTobin’s q as (book value of assets − book value of equity − deferred taxes + market value of equity)/bookvalue of assets (Servaes and Tamayo 2013).

123


Table 1 Descriptive statisticsoverall sample: 2006–2012

Obs. Mean Std. dev. Min. Max.

roa 796 0.11 0.08 −0.75 0.43

ros 788 0.14 0.18 −3.37 0.47

roe 604 0.13 0.34 −4.13 2.11

tobinq 787 0.90 0.30 −0.07 2.16

self 796 0.30 0.45 0 1

gri 796 0.09 0.29 0 1

thirdp 796 0.21 0.41 0 1

sales 796 8.94 1.73 −1.49 12.98

leverage 796 0.17 0.11 0 0.76

growth 796 0.42 0.48 −0.69 4.74

current 796 1.01 0.36 0.19 3.35

intens 796 6.30 1.36 0.31 12.01

effi 793 0.48 0.36 0.05 5.71

sandp 704 5.08 1.75 1 8

4.2 Results of empirical analysis

4.2.1 Univariate analysis

Table 1 presents the descriptive statistics for the overall sample over the period from2006 to 2012. The mean of roa is 0.11 while the means of ros and roe are 0.14 and0.13, respectively. tobinq has a mean of 0.90. self has a mean of 0.30, suggesting thatalmost one third of firms declare their CSR reports by themselves. thirdp and gri havea mean of 0.21 and 0.09, respectively. Accordingly, it can be argued that there is atendency for North American firms to disclose their CSR activities on their own orwith a third party review rather than getting reviewed by GRI.

Table 2 presents the correlations matrix for the period from 2006 to 2012. roa, ros,roe, and tobinq are positively and significantly correlated with each other. In particular,the positive correlation of tobinq with roa, ros, and roe suggests that long-term financialperformance is associated with short-term profitability. The correlation among self, gri,and thirdp is significantly negative. There is a positive significant correlation betweenros and thirdp. self is significantly and negatively correlated with tobinq, suggestingthat self-reviewed CSR report itself is not value creating. The significant correlationof tobinq with leverage and growth suggests that increase in financial leverage andgrowth may contribute to firm value.

4.2.2 Multivariate analysis

We start our analysis by examining the relationship of CSR reviews—self, gri, andthirdp—on financial performance. The results of fixed-effect panel data estimationsfor the overall sample are presented in Table 3. In estimation (1) where financial

123

O. Akisik, G. Gal

Tabl

e2

Cor

rela

tions

mat

rix

2006

–201

2

roa

roa

ros

ros

roe

roe

tobinq

tobinq

self

self

gri

gri

thirdp

thirdp

sales

sales

leverage

leverage

growth

growth

current

current

intens

intens

effieffi

sandp

sandp

roa

roa

1.0000

1.0000

(1145)

(1145)

ros

ros

0.5205

0.5205

**

(( 1120

1120))

1.0000

1.0000

(1120)

(1120)

roe

roe

0.1740

0.1740

**

(836)

(836)

0.1385

0.1385

**

(813)

(813)

1.0000

1.0000

(845)

(845)

tobinq

tobinq

0.3842

0.3842

**

(967)

(967)

0.2305

0.2305

**

(944)

(944)

0.1674

0.1674

**

(723)

(723)

1.0000

1.0000

(978)

(978)

self

self

--0.0334

0.0334

(1145)

(1145)

--0.0303

0.0303

(1120)

(1120)

--0.0132

0.0132

(845)

(845)

--0.0855

0.0855

**

(978)

(978)

1.0000

1.0000

(1171)

(1171)

gri

gri

0.0297

0.0297

(1145)

(1145)

0.0050

0.0050

(1120)

(1120)

0.0362

0.0362

(845)

(845)

--0.0384

0.0384

(978)

(978)

0.1908

0.1908

**

(1171)

(1171)

1.0000

1.0000

(1171)

(1171)

thirdp

thirdp

0.0040

0.0040

(1145)

(1145)

0.1313

0.1313

**

(1120)

(1120)

-- 0.0212

0.0212

(845)

(845)

-- 0.0004

0.0004

(978)

(978)

0.3397

0.3397

**

(1171)

(1171)

0.1572

0.1572

**

(1171)

(1171)

1.0000

1.0000

(1171)

(1171)

sales

sales

0.2773

0.2773

**

(1121)

(1121)

0.1371

0.1371

**

(1105)

(1105)

0.1328

0.1328

**

(820)

(820)

--0.0201

0.0201

(947)

(947)

0.0317

0.0317

(1129)

(1129)

--0.0495

0.0495

**

(1129)

(1129)

--0.0360

0.0360

(1129)

(1129)

1.0000

1.0000

(1129)

(1129)

leverage

leverage

--0.0972

0.0972

**

(1020)

(1020)

--0.0189

0.0189

(995)

(995)

--0.0245

0.0245

(769)

(769)

0.3248

0.3248

**

(889)

(889)

0.0036

0.0036

(1036)

(1036)

--0.0263

0.0263

(1036)

(1036)

0.0217

0.0217

(1036)

(1036)

0.1315

0.1315

**

(1010)

(1010)

1.0000

1.0000

(1036)

(1036)

growth

growth

--0.0835

0.0835

**

(1019)

(1019)

0.0234

0.0234

(995)

(995)

--0.0689

0.0689

(759)

(759)

--0.2051

0.2051

**

(936)

(936)

0.0238

0.0238

(1026)

(1026)

--0.0278

0.0278

(1026)

(1026)

0.0845

0.0845

**

(1026)

(1026)

--0.2198

0.2198

**

(1004)

(1004)

0.0911

0.0911

**

(923)

(923)

1.0000

1.0000

(1026)

(1026)

current

current

--0.0772

0.0772

**

(1043)

(1043)

0.1024

0.1024

**

(1018)

(1018)

--0.1336

0.1336

**

(774)

(774)

--0.0511

0.0511

(978)

(978)

0.0020

0.0020

(1054)

(1054)

--0.0171

0.0171

(1054)

(1054)

--0.0119

0.0119

(1054)

(1054)

--0.3059

0.3059

**

(1022)

(1022)

--0.0194

0.0194

(950)

(950)

0.0435

0.0435

(952)

(952)

1.0000

1.0000

(1054)

(1054)

intens

intens

0.0211

0.0211

(1074)

(1074)

0.2802

0.2802

**

(1063)

(1063)

--0.0767

0.0767

**

(788)

(788)

--0.2509

0.2509

**

(916)

(916)

0.0249

0.0249

(1078)

(1078)

--0.0408

0.0408

(1078)

(1078)

0.1884

0.1884

**

(1078)

(1078)

0.2085

0.2085

**

(1062)

(1062)

0.0980

0.0980

**

(955)

(955)

0.1334

0.1334

**

(964)

(964)

--0.1162

0.1162

**

(977)

(977)

1.0000

1.0000

(1078)

(1078)

effieffi

--0.3027

0.3027

**

(1130)

(1130)

--0.5417

0.5417

**

(1120)

(1120)

--0.1955

0.1955

**

(823)

(823)

--0.0598

0.0598

(952)

(952)

--0.0265

0.0265

(1130)

(1130)

--0.0058

0.0058

(1130)

(1130)

--0.0488

0.0488

**

(1130)

(1130)

--0.2598

0.2598

**

(1115)

(1115)

--0.0123

0.0123

(1005)

(1005)

--0.0206

0.0206

(1004)

(1004)

--0.0032

0.0032

(1028)

(1028)

--0.1375

0.1375

**

(1068)

(1068)

1.0000

1.0000

(1068)

(1068)

sandp

sandp

0.4573

0.4573

**

(955)

(955)

0.1837

0.1837

**

(954)

(954)

0.1595

0.1595

**

(696)

(696)

0.3571

0.3571

**

(849)

(849)

--0.0646

0.0646

**

(955)

(955)

0.0101

0.0101

(955)

(955)

0.0373

0.0373

(955)

(955)

0.1599

0.1599

**

(948)

(948)

--0.0629

0.0629

(849)

(849)

--0.1273

0.1273

**

(898)

(898)

--0.1181

0.1181

**

((854854))

--0.0751

0.0751

**

((913913))

--0.1735

0.1735

**

(954)

(954)

1.0000

1.0000

(955)

(955)

The

tabl

ere

port

sth

eco

rrel

atio

nco

effic

ient

san

dsi

gnifi

canc

ele

vel(

*p

<0.

05).

Pear

son

corr

elat

ion

coef

ficie

nts

are

repo

rted

forc

ontin

uous

vari

able

s.Po

intb

iser

ialc

orre

latio

nsar

ere

port

edfo

rth

eas

soci

atio

nbe

twee

nco

ntin

uous

and

dum

my

vari

able

s.C

orre

latio

nsbe

twee

ndu

mm

yva

riab

les

are

repo

rted

byph

icoe

ffici

ents

(Gos

san

dR

ober

ts20

11;

Tate

1954

)

123


Table 3 Regression results overall sample: 2006–2012

Dependent variable (1) (2) (3)roa ros roe

self 0.090* 0.111 0.262

(0.049) (0.163) (0.274)

gri 0.229*** 0.458** 0.271

(0.056) (0.147) (0.162)

thirdp 0.055 0.541*** 0.424

(0.066) (0.136) (0.431)

sales 0.024*** 0.024** 0.047**

(0.004) (0.009) (0.018)

leverage −0.049 0.115 −0.125

(0.033) (0.077) (0.175)

growth 0.006 0.018 0.028

(0.015) (0.030) (0.049)

self × sales −0.009 −0.004 −0.030

(0.006) (0.016) (0.033)

self × leverage −0.043 −0.274** 0.214

(0.048) (0.096) (0.593)

self × growth −0.027* −0.036 −0.027

(0.013) (0.027) (0.064)

gri × sales −0.024*** −0.045** −0.033*

(0.006) (0.014) (0.018)

gri × leverage 0.062 −0.100 0.912

(0.065) (0.090) (0.530)

gri × growth −0.034 −0.026 −0.116

(0.025) (0.034) (0.107)

thirdp × sales −0.007 −0.050*** −0.038

(0.007) (0.013) (0.038)

thirdp × leverage 0.092** −0.004 0.027

(0.039) (0.109) (0.211)

thirdp × growth −0.022 −0.058* −0.113

(0.022) (0.030) (0.116)

current 0.041*** 0.072** −0.026

(0.006) (0.022) (0.048)

intens 0.003 0.029*** −0.021

(0.002) (0.006) (0.018)

time fixed effect Yes Yes Yes

firm fixed effect Yes Yes Yes

constant −0.158*** −0.387*** −0.141

(0.045) (0.102) (0.212)

123

O. Akisik, G. Gal

Table 3 continued

Dependent variable (1) (2) (3)roa ros roe

Observations 796 788 605

R2-overall 0.18 0.12 0.04

R2-within 0.18 0.13 0.05

R2-between 0.08 0.05 0.57

Robust standard errors in parenthesesAll of the variables with the exception of self, gri, and thirdp are in natural logarithms. self refers to self-declared review. gri is GRI reviewed. thirdp is a third party reviewed. sales is sales revenue in millions USdollars. leverage is the ratio of total liabilities to total assets. growth is measured by the ratio of book valueto 1 year lagged market value of equity. currentrt is current ratio. intens refers to capital intensity***p < 0.01, **p < 0.05, *p < 0.1

performance is measured by roa, self and gri have a significant positive effect on roa.Although thirdp is positively related to roa, it is not significant. In estimation (2),gri and thirdp are significantly and positively associated with ros. In estimation (3),where financial performance is measured by roe, self, gri, and thirdp are positivelyrelated to roe, although not statistically significant. The results suggest that our nullhypothesis (H01) that CSR reviews have no effect on financial performance is rejectedwith the exception of estimation (3). Accordingly, it can be argued that self-, GRI-,and third party reviewed reports contribute to financial performance positively. Wefind a significant positive relation between sales and financial performance in allestimations. However, this positive relation is reduced by GRI-reviewed CSR reportsin all estimations, as suggested by the negative coefficient of the interaction variable(gri × sales). Moreover, the effect of sales on financial performance is reduced bythird party reviewed reports (thirdp × sales) in estimation (2). On the other hand, theeffect of sales on financial performance appears not to be influenced by self-reviewedreports. Given these results, we would be inclined to reject the null hypothesis (H02b).Thus it may be concluded that customers are skeptical that reviews of CSR reflect thetrue picture of CSR activities.

Prior research indicates that CSR activities may even backfire with reduced intentand negative perceptions if consumers believe that they impair corporate abilities (CA),such as product quality and innovativeness (Sen and Bhattacharya 2001).20 CA refersto the perceptions of a firm’s expertise and competency by consumers in producing anddelivering its products. It includes not only product quality, but also attributes suchas customer and innovativeness (Berens et al. 2007; Brown and Dacin 1997). Thisdefinition implies that in addition to the abilities of firms to produce high quality prod-ucts that meet consumers’ expectations, CA also encompasses production processesand environment where production activity occurs. So, even if product quality itselfis good, if consumers perceive that production processes and environment are notfavorable, CA will be perceived as impaired. In this case, no matter how good CSR

20 Sen and Bhattacharya (2001) find that if a substantial proportion of a firm’s potential customers believethat CSR activities are realized at the expense of CA, then the firm’s CSR activities may hurt it.

123


communication regarding the product quality is designed, it will adversely affect thepurchase intent, leading to a decrease in sales. In particular, such adverse effects arelikely to hurt sales when consumers are of the opinion that the firm’s CSR activitiesdo not enhance its CA and that its products are not of high quality.

Except for estimation (2), leverage is negatively associated with financial perfor-mance, though not significant. That the interaction of self with leverage (self × lever-age) is significantly negative suggests that self-reviewed reports do not satisfy lenders’expectations, and therefore do not improve the creditworthiness of firms. However,third party reviews appear to reduce the negative impact of leverage on financial per-formance in estimation (1), as suggested by the positive sign on the coefficient of theinteraction variable (thirdp × leverage). Contrary to our expectations, growth, which isthe ratio of book-to-market, is not significantly associated with performance. However,third party reviewed reports enhances the effect of growth on financial performance,as suggested by the negative sign before the interaction term (thirdp × growth) inestimation (2). We also find a moderating effect of self-reviewed reports via growthon financial performance (1) (self × growth). Among the control variables, currentand intens are significantly related to financial performance.

Table 4 presents the regression results for mining, chemicals, and petroleum sec-tors. In general, self, and thirdp are highly significant in all estimations, suggestingthe rejection of hypothesis (H01).21 Although self is positively related to financialperformance in all three sectors, we find a positive association of thirdp with financialperformance only for mining and chemical sectors. For the mining industry, there is asignificant positive association between sales and performance. However, this positiveassociation is partially reduced by reviews of CSR reports (self × sales; gri × sales).Our results indicate that there is a significant positive relation between leverage andperformance, and that GRI-reviewed CSR reports appear to enhance this positive rela-tion, as suggested by the positive sign on the interaction coefficients (gri × leverage).Moreover, we find that growth is negatively significantly related to performance. Butthis negative effect of growth on performance is reduced by third party review (thirdp× growth) in estimation (2). For the mining industry, CSR is about balancing thediverse expectations and demands of stakeholders, and the imperative to protect theenvironment with the ever-present need to make a profit (Jenkins 2004). One outcomeof the CSR activities is the increasing need for individual firms to justify their existenceand document their performance through the disclosure of social and environmentalinformation (Jenkins and Yakovleva 2006). There has been a dramatic change in min-ing industry in terms of both its thinking and practices around CSR activities. By themid-2000s, most major mining firms in the advanced economies such as Canada, theUS, Japan, Australia, and the UK adopted the principles of sustainable developmentas a means to frame their CSR policies (Dashwood 2012).

For chemical sector, thirdp has a strong positive effect on performance. Among thecontrol variables, leverage and growth are significantly related to performance. Wefind a positive effect of sales on performance, though not significant. thirdp reducesthis positive effect (thirdp × sales). Although leverage is negatively associated with

21 gri has been omitted for petroleum refining sector in Table 5 since it does not vary over time at the firmlevel.

123

O. Akisik, G. Gal

Tabl

e4

Reg

ress

ion

resu

ltsse

ctor

sam

ple:

2006

–201

2

Dep

ende

ntva

riab

le(1

)M

inin

g(2

)(3

)(4

)C

hem

ical

s(5

)(6

)(7

)Pe

trol

eum

(8)

(9)

roa

ros

roe

roa

ros

roe

roa

ros

roe

self

0.27

6*0.

564

0.81

2*0.

154*

0.01

0−0

.068

0.78

4***

0.49

5***

28.7

26**

*

(0.1

38)

(0.3

41)

(0.3

67)

(0.0

72)

(0.1

48)

(0.1

49)

(0.1

01)

(0.1

12)

(0.0

67)

gri

0.23

50.

742

0.38

4−0

.002

−0.2

83*

−0.7

65

(0.1

30)

(0.5

65)

(0.3

88)

(0.0

91)

(0.1

38)

(0.4

91)

thir

dp−0

.024

0.99

8*0.

589

0.37

2***

0.41

0**

0.46

2*−0

.744

**−0

.875

*−1

.378

***

(0.1

25)

(0.4

95)

(0.7

85)

(0.0

64)

(0.1

29)

(0.2

28)

(0.2

20)

(0.4

58)

(0.1

42)

sale

s0.

025*

*0.

052*

0.09

7*0.

007

0.00

9−0

.003

−0.0

11−0

.017

*−0

.036

***

(0.0

09)

(0.0

22)

(0.0

45)

(0.0

05)

(0.0

10)

(0.0

19)

(0.0

06)

(0.0

08)

(0.0

05)

leve

rage

0.34

6*0.

669*

0.41

8−0

.032

−0.2

19**

−0.4

44−0

.966

***

−0.5

95**

*−0

.290

*

(0.1

63)

(0.3

26)

(0.3

55)

(0.0

55)

(0.0

89)

(0.4

70)

(0.0

95)

(0.1

22)

(0.1

48)

grow

th0.

027*

0.03

2*0.

091*

**−0

.042

*−0

.074

**−0

.020

0.10

70.

213*

**−0

.068

***

(0.0

12)

(0.0

53)

(0.0

25)

(0.0

19)

(0.0

28)

(0.0

84)

(0.0

62)

(0.0

61)

(0.0

17)

self

×sa

les

−0.0

28*

−0.0

44−0

.091

−0.0

13*

0.00

10.

004

−0.0

95**

*−0

.056

***

−3.0

98**

*

(0.0

12)

(0.0

28)

(0.0

49)

(0.0

06)

(0.0

14)

(0.0

14)

(0.0

12)

(0.0

13)

(0.0

08)

self

×le

vera

ge−0

.424

−0.8

55−0

.654

−0.1

79**

−0.0

720.

105

1.93

4***

1.19

8***

1.26

2**

(0.2

87)

(0.5

24)

(0.9

81)

(0.0

72)

(0.1

58)

(0.5

06)

(0.1

14)

(0.2

09)

(0.2

25)

self

×gr

owth

−0.1

14−0

.080

− 0.1

300.

019

0.04

8−0

.010

−0.2

41**

*−0

.306

***

12.1

41**

*

(0.0

96)

(0.2

94)

(0.1

24)

(0.0

34)

(0.0

45)

(0.0

90)

(0.0

53)

(0.0

71)

(0.1

01)

gri×

sale

s−0

.037

*−0

.086

−0.0

71−0

.008

0.01

70.

007

−0.0

22−0

.047

***

0.01

1**

(0.0

16)

(0.0

65)

(0.0

54)

(0.0

06)

(0.0

11)

(0.0

31)

(0.0

15)

(0.0

13)

(0.0

05)

gri×

leve

rage

0.66

7***

0.94

7*1.

705*

*0.

250*

*0.

340*

3.78

8**

0.05

9**

0.07

3*

(0.1

83)

(0.4

02)

(0.6

66)

(0.0

95)

(0.1

75)

(1.6

01)

(0.0

18)

(0.0

37)

gri×

grow

th−0

.014

−0.0

19−0

.128

0.02

10.

122

0.07

7

123


Tabl

e4

cont

inue

d

Dep

ende

ntva

riab

le(1

)M

inin

g(2

)(3

)(4

)C

hem

ical

s(5

)(6

)(7

)Pe

trol

eum

(8)

(9)

roa

ros

roe

roa

ros

roe

roa

ros

roe

(0.0

29)

(0.0

75)

(0.1

39)

(0.0

31)

(0.0

66)

(0.3

98)

thir

dp×

sale

s0.

007

−0.1

08−0

.042

−0.0

35**

*−0

.040

**−0

.042

*0.

059*

*0.

073*

0.11

0***

(0.0

16)

(0.0

61)

(0.0

88)

(0.0

06)

(0.0

15)

(0.0

19)

(0.0

18)

(0.0

37)

(0.0

11)

thir

dp×

leve

rage

−0.3

060.

076

−1.0

74−0

.050

0.07

90.

283

1.32

2***

1.71

6*

(0.2

31)

(0.4

11)

(0.6

69)

(0.0

56)

(0.1

16)

(0.4

79)

(0.3

56)

(0.7

42)

thir

dp×

grow

th−0

.043

−0.1

53**

−0.1

99−0

.081

−0.1

53*

−0.2

48−0

.116

−0.2

91**

0.07

7***

(0.0

23)

(0.0

44)

(0.1

83)

(0.0

51)

(0.0

69)

(0.2

44)

(0.0

69)

(0.0

99)

(0.0

22)

curr

ent

0.04

1−0

.071

−0.0

50−0

.026

0.03

5−0

.228

*0.

000

0.02

40.

044

(0.0

30)

(0.1

67)

(0.1

35)

(0.0

19)

(0.0

27)

(0.0

98)

(0.0

26)

(0.0

26)

(0.0

74)

inte

ns0.

001

0.04

1−0

.060

−0.0

020.

025*

**0.

012

−0.0

030.

025

−0.0

08

(0.0

05)

(0.0

26)

(0.0

47)

(0.0

04)

(0.0

03)

(0.0

27)

(0.0

06)

(0.0

19)

(0.0

11)

cons

tant

−0.1

92**

−0.5

10**

−0.2

740.

121

−0.0

320.

448*

*0.

318*

**0.

048

0.69

7***

(0.0

76)

(0.1

85)

(0.4

02)

(0.0

68)

(0.1

13)

(0.1

89)

(0.0

81)

(0.2

07)

(0.0

90)

tim

efix

edef

fect

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

firm

fixed

effe

ctY

esY

esY

esY

esY

esY

esY

esY

esY

es

Obs

erva

tions

132

125

123

142

142

103

4545

41

R2-o

vera

ll0.

300.

140.

270.

310.

490.

480.

430.

710.

98

R2-w

ithin

0.29

0.15

0.26

0.33

0.50

0.50

0.93

0.89

0.98

R2-b

etw

een

0.49

0.08

0.54

0.00

0.24

0.06

0.03

0.13

0.91

Rob

usts

tand

ard

erro

rsin

pare

nthe

ses

All

ofth

eva

riab

les

with

the

exce

ptio

nof

self

,gri

,and

thir

dpar

ein

natu

rall

ogar

ithm

s.se

lfre

fers

tose

lf-d

ecla

red

revi

ew.g

riis

GR

Irev

iew

ed.t

hird

pis

ath

ird

part

yre

view

ed.

sale

sis

sale

sre

venu

ein

mill

ions

US

dolla

rs.l

ever

age

isth

era

tioof

tota

llia

bilit

ies

toto

tala

sset

s.gr

owth

ism

easu

red

byth

era

tioof

book

valu

eto

1ye

arla

gged

mar

ketv

alue

ofeq

uity

.cur

rent

refe

rsto

curr

entr

atio

.int

ense

isca

pita

lint

ensi

ty**

*p

<0.

01,*

*p

<0.

05,*

p<

0.1

123

O. Akisik, G. Gal

performance, this negative association is reduced by GRI-reviewed reports (gri ×leverage). Cowen et al. (1987) find that firms in the US chemical sector have thehighest level of disclosure. Due to public pressure and constant monitoring by gov-ernment regulators, chemical firms in the US have improved their CSR performanceconsiderably (Sun and Stuebs 2013).

For petroleum refining, thirdp appears to be significantly negatively related to finan-cial performance, which may mean higher cost of third-party reviews for petroleumfirms. Among the control variables, sales, leverage, and growth are significantly relatedto performance. The negative effect of sales on performance appears to be enhancedby self- and gri-reviewed reports (self × sales; gri × sales) with the exception of esti-mation (9) for gri. Although self-, and gri-reviewed reports increase the negative effectof sales (self × sales) on performance, third-party reviewed reports reduce it (thirdp× sales), suggesting that third-party review may increase trust and legitimacy of firmsamong stakeholders although it is costly (Government of Canada 2012). Moreover,leverage has a significant negative impact on financial performance for petroleum.However, the negative effect of leverage on performance is reduced by self-, gri-, andthirdparty-reviewed reports (self × leverage; gri × leverage; thirdparty × leverage).Creditors, investors, and rating agencies look for third party review when makinginvestment and rating decisions (GRI 2013). Accordingly, it can be argued that firmsin the petroleum sector, whose CSR reports are reviewed by a third party, are morelikely to obtain financing at a lower cost by better meeting the expectations of creditors.Petroleum industry is one of the largest and most profitable industries in the world, butthis does not necessarily make it successful in terms of sustainability performance.Petroleum firms report all, some, or few of their sustainability efforts. In addition,a firm that reports an extensive list of sustainability efforts may not necessarily havelaudable efforts across the spectrum of environment, health and safety or sustainability(Schneider et al. 2012). While the disclosure of socially responsible activities in CSRreports is relatively recent in the US compared to Europe, firms are becoming moreaware of the benefit of third party reviews if they want their disclosures to be trustedby stakeholders (Bogoslaw 2013).

Firms emphasize responsibility towards shareholders, reflecting their economicresponsibility. They feel responsible for achieving profits and increasing dividends.In addition, they are also responsible for long-term profitability (Öberseder et al.2013). CSR may also contribute to the maximization of firm value (see for example:(Crisóstomo et al. 2011). In Table 5, the results of regressions for firm value, whichis proxied by tobinq, are presented for overall sample and industries. In estimation(1), self, gri, and thirdp are significantly negatively associated with firm value. Forthe mining sector, we find no significant relation between CSR reviews and firmvalue. For chemical sector, self and thirdp are significantly positively related to firmvalue. Moreover, we find evidence that there is a strong negative association of thirdpwith firm value for the petroleum industry. These results indicate that CSR reviewsthemselves are value destroying for firm value with the exception for chemical industry(Crisóstomo et al. 2011). Although sales is significantly negatively associated withfirm value for the overall sample, mining, and petroleum sector, this negative effect ofsales on firm value appears to be moderated by self and thirdp for the overall sampleand petroleum sector (self × sales; thirdp × sales). This may result from the ability

123


Table 5 Regression results dependent variable: tobinq

Overall Mining Chemical Petroleum(1) (2) (3) (4)

self −0.309** −0.105 1.256*** 0.088

(0.105) (0.417) (0.177) (1.008)

gri −0.184* 1.415 −0.235

(0.104) (2.441) (0.297)

thirdp −0.498*** −0.790 1.070*** −2.604***

(0.117) (0.636) (0.232) (0.371)

sales −0.049*** −0.065*** 0.037** −0.145***

(0.006) (0.018) (0.016) (0.016)

leverage −0.457** 0.917*** 0.317* 0.458

(0.176) (0.244) (0.163) (0.493)

self × sales 0.023* −0.030 −0.126*** −0.106

(0.011) (0.054) (0.017) (0.114)

self × leverage 0.240* 2.070*** −0.395 5.761***

(0.122) (0.570) (0.378) (1.630)

gri × sales 0.009 −0.237 0.016

(0.017) (0.334) (0.033)

gri × leverage 0.555 4.079 0.580

(0.548) (3.501) (0.442)

thirdp × sales 0.045*** 0.059 −0.109*** 0.229***

(0.012) (0.080) (0.022) (0.029)

thirdp × leverage 0.003 0.501 0.103 −0.361***

(0.143) (0.534) (0.343) (0.096)

sandp 0.058*** 0.032 0.080*** 0.085***

(0.004) (0.026) (0.006) (0.021)

effi −0.540*** −0.850** −0.430*** −0.842

(0.031) (0.261) (0.111) (1.170)

constant 1.428*** 1.651*** 0.242 2.452**

(0.043) (0.196) (0.150) (0.759)

time fixed effect Yes Yes Yes Yes

firm fixed effect Yes Yes Yes Yes

Observations 750 105 149 46

R2-overall 0.329 0.343 0.409 0.615

R2-within 0.316 0.362 0.531 0.880

R2-between 0.875 0.263 0.294 0.00901

R2-adj. 0.304 0.271 0.486 0.845

Robust standard errors in parenthesesAll of the variables with the exception of self, gri, and thirdp are in natural logarithms. self refers to self-declared review. gri is GRI reviewed. thirdp is a third party reviewed. sales is sales revenue in millions USdollars. leverage is the ratio of total liabilities to total assets. sandp refers to dummy variable for StandardPoor’s quality rating, and effi is lack of efficiency measured as the of costs of goods sold/sales***p < 0.01, **p < 0.05, *p < 0.1

123

O. Akisik, G. Gal

of firms to satisfy customers’ needs. In firms with high innovativeness capability,CSR enhances customer satisfaction, which in turn, contributes to firm value (Luoand Bhattacharya 2006). On the other hand, sales has a significant positive effect onfirm value for chemical sector. However, this positive effect is moderated by self andthirdp, as suggested by the negative coefficient on the interaction variables (self ×sales; thirdp × sales). With the exception of petroleum sector, leverage is significantlyrelated to firm value. The effect of leverage on firm value is enhanced by self-declaredCSR reports in mining and petroleum sectors.

To sum up, the results provide evidence that CSR reviews are significantly pos-itively associated with short-term financial performance with the exception of thirdparty review in petroleum industry. However, we find a negative association betweenCSR reviews and firm value. Especially, third party review of CSR reports is widelypreferred with a larger environmental impact such as mining, chemical, and petro-leum. Firms operating in such sectors are expected to disclose information relatingto their activities in CSR reports to manage the legitimacy and reputation issues thatresult from the perceived damaging effect of their operations (Clarke and Gibson-Sweet 1999; Farache and Perks 2010). Our analyses indicate that reviews of CSRreports affect financial performance not only directly, but also indirectly through theirimpacts on customers, creditors, and investors. We find that sales have a significanteffect on short- and long-term profitability, and that this effect is moderated by CSRreviews. While some consumers automatically associate CSR with high quality prod-ucts, other consumers are not of the opinion that CSR enhances functional value, andtherefore might associate socially responsible products with lower quality (Green andPeloza 2011). This may lead to a decrease in sales and affect performance negatively.Consumers are one of the most important stakeholders for firms as they are vital fora firm’s long-term survival (Clarkson 1995; Öberseder et al. 2013). The results leadus to conclude that with the exception of mining and chemical sectors, CSR reviewsappear to be regarded by consumers by affecting consumers’ decisions to support firmvalue by increasing their purchases. Moreover, we find a negative effect of leverageon performance in chemicals and petroleum sectors. However, this negative effect isreduced by CSR reviews, suggesting that CSR reviews are used by creditors to extendfavorable credit terms to firms in these sectors. Finally, our results suggest that theeffect of growth on performance is enhanced by third party reviewed CSR reports.

5 Conclusions

There is evidence that stakeholders are interested in more than the financial perfor-mance of firms. It is argued that firms that do not engage in socially responsiblebehavior may risk their legitimacy and reputations with customers, workers and otherstakeholders. Therefore, CSR is an area that has become extremely important andfirms have undertaken strategies to improve stakeholders’ awareness of their CSRactivities. To this end they have used a variety of channels to disseminate informationabout these activities. Two issues arise as a result of firm’s release of this information.First, this broad array of channels used by firms means that there are multiple formatsfor what may be the same information. A second issue is that much of this informa-

123


tion is not reviewed in any meaningful way. To overcome the first issue the GlobalReporting Initiative has produced a set of guidelines about the content for reports oncorporate social responsibility. To address the second issue the GRI also suggests thatfirms have these reports reviewed. In our study we investigate whether these reviewscarry information content for stakeholders.

The findings of the study show that there is a significant relationship betweenCSR reviews and measures of short and long-term financial performance, and thatthe effect of sales, leverage and growth is moderated by CSR reviews. While it is notdetermined exactly what additional information is conveyed by each of these types ofreviews, the study shows that there is evidence that the reviews themselves are usedby stakeholders. Furthermore, we find that third party reviewed CSR reports have asignificant association with financial performance in chemical and petroleum sectors.

Because we find a significant association between reviews and financial perfor-mance this suggest that, much like the release of financial information, there needsto be some control over the release of certain types of CSR information. Further,rather than simple guidelines, a standard for review of this information might alsobe necessary. Additional research concerning appropriate regulations over the releaseand review of this information could answer these questions. This research could alsoanswer questions regarding which components of CSR reports stakeholders considerto be most important for their decisions. This study is limited by the number of NorthAmerican firms that file CSR reports with the GRI. Additionally, those firms that dofile CSR reports do not always indicate the type of review for their reports. Finally, theGRI does not have a large number of reports prior to 2006. All of these issues limitedthe availability of data for our analysis. A future study that examines the endogeneityissue between financial performance and reviews might yield interesting results.

Acknowledgments We are grateful to Michael Ash, Christopher F. Baum, D. Anthony Butterfield, Süley-man Özmucur, Rodrigo Dominguez Villegas, William Wooldridge, two anonymous reviewers, and the editorof the Journal for their valuable comments and suggestions.

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Financial performance and reviews of corporate social responsibility reports