FTSE Index Corporate and Financial Disclosure

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CHAPTER 1 INTRODUCTION

Background of the Study

Utilization of several different theoretical approaches explains the findings of the

relationship between CSR and CFP, as various studies have shown globally. Notably, there are

four postulates of the theoretical relationships between CSR and CFP, namely, the trade-off

hypothesis; the supply and demand theory of the company; the social impact of hypothesis; and

the theory of modern corporate stakeholder. All these theories broadly investigate the impact of

CSR on CFP.

The trade-off hypothesis, introduced by Friedman (1970) argues that the only social

responsibility of a company is to enhance its profits. Furthermore, when companies become

involved in social and environmental activities, it incurs extra expenses and decreases the

earnings of the companies. Hence, according to this theory, the higher a company's CSR level,

the lower the CFP. Consequently, increasing the involvement of companies in social activities

could increase the amount of resources spent by the company, and, as a result, reduces the

profitability of the company. Thus, this places the company in a disadvantageous position

compared to a company which is not involved in CSR activities. In this regard, CSR has a

negative impact on CFP (Moore, 2001; Vance, 1975).

The supply and demand theory of the company was introduced by McWilliams and

Siegel (2001). According to this theory, the demand for the involvement of a company in CSR

activities maximizes a company's profits. Steger et al. (2007) state that in an equilibrium

condition, the level of CSR may be different; however, profit may be maximized or not changed.

Hence, there is no relationship between CSR and CFP. This theory is supported by empirical


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findings of previous studies (Mahoney and Roberts, 2007; Patten, 1990; Freedman and Jaggi,

1988; Alexander and Buchholz, 1978) that found no relationship between CSR and CFP.

The social impact hypothesis constructed by Cornell and Shapiro (1987) assumes that the

improvement of a company's CSR activities will improve CFP. Hence, the expected benefits of

carrying out CSR activities will exceed the expenses of doing so (Steger et al, 2007). This theory

supports that a positive relationship exists between CSR and CFP. There are several reasons to

improve the level of CSR activities as suggested, as they would improve the reputation of the

business, improve the relationship with financial institutions, and reduce the risks of the

company. The empirical examination reveals that CSR has a positive impact on CFP (Simpson

and Kohers, 2002; Waddock and Graves, 1997; Roberts, 1992).

The theory of stakeholder could explain the relationship between CSR and CFP (Barnett,

2007; [Jones, 1995; McGuire et al, 1988; Cornell and Shapiro, 1987; Freeman, 1984). According

to the stakeholder theory, the value of a company is related to the cost of both "explicit claims"

and "implicit claims" on a company's resources. Stakeholders have an explicit claim on a

company including owner-lenders, employees, and the government. There are numerous claims

on the management of the company from the external stakeholders, which are referred to as

implicit claims. Cornell and Shapiro (1987) state that some implicit claims consist of the

continuity of supplies, on-time delivery, the increase in the quality of products, work safety, as

well as involvement in social and environmental activities. The price that must be paid by

stakeholders for this claim depends on the company's situation, including the financial policy

applicable to the company.

CSR can be defined as actions that appear to further some social good, beyond the

interests of the firm and that which is required by law. Important in this definition is that CSR


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activities are on a voluntary basis, going beyond the firm's legal and contractual obligations. As

such it involves a wide range of activities such as being employee-friendly, environment-

friendly, mindful of ethics, respectful of communities where the firms' plants are located, and

even investor-friendly (Bnabou and Tirle, 2010). IfCSR activities are beyond the firm's legal

obligation and may require some sacrifice in short-term profits, then why do firms promote

CSR? Is sacrifice of short-term profits compensated by improvement in firms' long-term

financial performance? Or are they purely feel-good activities initiated by corporate insiders?

In academic circles, extensive research has been conducted to assess the empirical

association between CSR and corporate financial performance under diverse geographical

contexts. The results of previous studies, however, are largely indeterminate. For example,

according to 'instrumental stakeholder theory' (Jones, 1995), companies with superior social

performance tend to perform better financially by attracting socially responsible consumers

(Bagnoli and Watts, 2003), alleviating the threat of regulation (Lev et al., 2008), improving their

reputation with consumers (Orlitzky et al., 2003), or soothing concerns from activists and non-

governmental organizations (Baron, 2001). On the other hand, other researchers argue that trying

to satisfy the conflicting objectives of different stakeholders might result in inefficient use of

resources and eventual deterioration of financial performance, and that the costs incurred from

socially responsible actions may put the firms at an economic disadvantage (Aupperle et al.,

1985; Ullman, 1985). Still others argue that it is not possible to determine the relation between

CSR and corporate financial performance since there are so many intervening variables that are

hard to control (Fombrun and Shanley, 1990). It short, it is a moot question whether CSR

contributes to or harms corporate financial performance for all companies or for all types of CSR

activities.


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This research adds to the empirical literature on the relation between CSR and corporate

financial performance by providing the first comprehensive evidence from the FTSE index using

multi-dimensional CSR measures. The business climate in the top companies has traditionally

put more focus on economic value than on softer values such as fair distribution of wealth,

environmental protection, and community relations, etc. Such emphasis upon financial success

still lingers on, particularly when the pursuit of profit and social goals tend to collide with each

other. The two recent cases of a west coast oil spill and large-scale money laundering committed

by Korea's leading conglomerates provide telling evidence in this regard.3 These incidents have

provided momentum for a heated debate about CSR in public arena, led to a rise in public outcry

for changing the old-fashioned way of doing business, and increased concern for environment

and transparency in corporate governance. Moreover, with its first sustainability report published

in 2003, CSR movements emerged as a major social agenda in Korea. In this sense, the Korean

corporate environment provides a pertinent test case for examining the empirical relationship

between corporate financial prosperity and the extent of corporate social initiatives.

Problem Statement

The main idea in this section is based on previous arguments and the theoretical

relationships between CSR and CFP. Previous researchers realize that a company is no longer

only simply oriented in the interests of the company, but is also more likely to be active in efforts

to increase the company's overall performance. According to the arguments of the theories in the

preceding section, those theories concur that the relationship exists between CSR and CFP. For

instance, the trade-off theory supports the existence of the relationship between CSR and CFP,

but it is an indirect relationship. In addition, the stakeholder theory is more acceptable and


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relevant in explaining the relationship between CSR and CFP. In this theory, the interests of

various stakeholders are taken account by a company actively involved in CSR activities.

Signi fi cance of the Study

Corporate social responsibility (CSR) is now seen as an integral part of corporate

strategy. For example, KPMG (2008) reports that about three-quarters of Global Fortune 250

companies surveyed during 2007-2008 have a publicly communicated CSR strategy that includes

defined objectives. According to the Economist Intelligence Unit's 2007 survey (The Economist,

2008), nearly 30% of surveyed global executives consider CSR as the highest priority issue for

their organizations, with a further 40% assigning it high priority. Another piece of evidence for

the growing importance of CSR is the proliferation of a new corporate title such as chief

sustainability officer or chief responsibility officer or the rapidly spreading Socially Responsible

Investment movement that aims at combining investors' financial objectives with their concerns

about social, environmental, and ethical issues.

Examples of CSR activities abound. They range from Intel's education and development

programs in countries such as Afghanistan, Cambodia, Haiti and Uganda, General Electrics

charitable donations and investment in environmentally friendly practices and products, Pfizer's

supply of free name-brand drugs to newly unemployed customers, to Starbucks' offering of

health-care benefits and stock to even part-time employees and promotion of sound

environmental practices by forging partnerships with coffee growers. In 2008, the jury of the

International Design Excellence Awards also stressed the importance of socially responsible

product design; it recognized products that promoted sustainability, helped the electoral process,

eradicated disease, bolstered village education for the poor, etc. Despite the recent financial


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crunch, many large corporations have been sustaining or expanding their CSR budgets. In

Australia too, companies such as BHP and Rio Tinto have been actively engaging in various

community education and development programs in countries where their mining activities could

have negative effects.

Rationale of the Study

Despite the growing importance of CSR all around the world, existing studies are focused

only on corporate environmental performance (Choi et al., 2008; Choi and Kwak, 2010, among

others). Empirical research examining the association between multi-dimensional CSR activities

and corporate financial performance in FTSE index does not exist, to our knowledge. As such,

this study is the first that provides Korean evidence on the relationship between multi-

dimensional CSR and corporate financial performance. Specifically, we measure CSR

performance by the World Economic Justice Institute (WEJI) index developed by the Citizens'

Coalition for Economic Justice (CCEJ). The CCEJ is one of Worlds leading NGOs, and it

established the WEJI for the purpose of evaluating the moral management and social

responsibility of Worlds leading corporations. The WEJI index is the first comprehensive,

multi-dimensional CSR index developed in Korea, and is comparable to the Council on

Economic Priorities (CEP) index in the US, the Corporate Responsibility Index in Australia, and

the Asahi Foundation index of Japan.

Research Aims and Objectives

There is a positive and significant relation between CSR and corporate financial

performance when CSR is measured by a stakeholder-weighted index that takes into account the


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degree with which specific stakeholder groups are prioritized. When CSR is measured by an

equal-weighted index, the relation is insignificant. These results hold for all three financial

performance variables that we use, i.e. return on equity (ROE), return on assets (ROA) and

Tobin's Q. The positive association between the stakeholder-weighted CSR index and corporate

financial performance is robust to alternative model specifications and several additional tests,

further strengthening the case for using the stakeholder- weighted metric in measuring CSR. In

an additional analysis of the bi-directional relationship between CSR and corporate financial

performance after controlling for potential endogeneity, we also find that high levels of corporate

financial performance have a positive impact on the stakeholder-weighted CSR index.

Hypothesis Development

H0: Better CSP leads to higher financial performance H1: Better CSP does not leads to higher financial performance

Pur pose of the study

This study examines the relationship between the corporate social performance of an

organization and three variables: the size of the organization, the financial performance of the

organization, and the environmental performance of the organization. By empirically testing data

from 2010 to 2012, the results of the study show that a firm's corporate social performance is

indeed impacted by the size of the firm, the level of profitability of the firm, and the amount of

pollution emissions released by the firm.


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CHAPTER 2 LITERATURE REVIEW

The empirical literature examining the relation between CSR and corporate financial

performance is extensive. As discussed previously, however, the results are generally mixed,

which could be attributed to the various ways corporate financial performance and CSR have

been operationally defined (Carroll, 1979; Orlitzky et al., 2003), to the lack of appropriate

statistical controls (Margolis and Walsh, 2003; Wood and Jones, 1995), or to the 'stakeholder

misalignment' problem (Akpinar et al., 2008; Wood and Jones, 1995).

Typically used firm performance variables are accounting-based measures such as ROE

and ROA, and market-based measures such as Tobin's Q. Regarding corporate social

performance, existing studies have used a diversity of measures. Earlier studies relied on various

reputational indices, such as Moskowitz's (1972, 1975) tripartite ratings of 'outstanding',

'honorable mention', and 'worst' companies (Cochran and Wood 1984; Sturdivant and Ginter

1997), or the Fortune's ratings of a corporation's responsibility to the community and

environment (Conine and Madden 1987; Fombrun and Shanley 1990; McGuire et al. 1998).

Another widely used index is the measure provided by the CEP based on social audits.

Various studies have used the CEP social audit ranking of companies' pollution records

(Blackburn et al., 1994; Bragdon and Marlin 1972; Fogler and Nutt 1975; Spicer 1978). The

KLD index is one of the most recent measures designed to explicitly evaluate multiple

dimensions of a company's social and financial performance.5 Many recent studies rely on the

KLD index to measure CSR in investigating the relation between CSR and corporate financial

performance (Akpinar et al., 2008; Berman et al., 1 999; McWilliams et al., 2006; Orlitzky et al.,

2003; Waddock and Graves, 1997).


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The so-called 'stakeholder misalignment' problem suggested by Wood and Jones (1995)

is that of relating stakeholder-specific variables to a set of aggregated stakeholder variables,

ignoring many differences between different stakeholder groups. They argue that the research on

CSR should take into account the fact that a company should weigh which sub-dimensions of

social performance are perceived to be important by its stakeholders. To circumvent the

stakeholder misalignment problem, Lev et al. (2008) classify firms into two groups based on the

degree of sensitivity to consumer perceptions.

The first group consists of firms belonging to industries where sensitivity to consumer

perception is high, such as consumer goods and finance industries, and the second group has

firms operating in industries where sensitivity to consumer perception is low. They empirically

show that firms producing goods and services purchased by individual consumers are more

likely to enhance their revenue by having a reputation as a good corporate citizen than firms that

produce goods and services for industrial or government use. Akpinar et al. (2008) measure CSR

by a stakeholderweighted CSR index which aggregates the index scores for CSR sub-dimensions

after taking into account stakeholder conflicts and varying importance of different CSR sub-

dimensions in different industries. They find a significantly positive association between CSR

and corporate financial performance when the stakeholder-weighted CSR index is used to

measure CSR. Our paper is in the same vein as Akpinar et al. (2008) in that we develop a

stakeholder-weighted CSR index.

With a steady increase in the number and kind of stakeholder groups interested in broader

corporate social performance (Shapiro, 1992), a number of studies have elaborated on or

empirically tested the instrumental stakeholder theory (Alexander and Buchholz, 1978; Berman

et al., 1999; Bowman and Haire, 1975; Jones, 1995; Margolis and Walsh, 2003; Waddock and


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Graves, 1997). Graves and Waddock (1994) and Teoh and Shiu (1990) argue that institutional

investors are favorably inclined toward companies with better social performance when other

factors are held constant and independent information on social performance is available.

Bowman and Haire (1975) contend that other stakeholders in addition to stockholders and

bondholders may regard CSR as an indication of management skill. Alexander and Buchholz

(1978) also suggest that CSR makes firms an attractive investment target, since investors

evaluate socially aware and concerned management as possessing the requisite skill to run a

superior company. Similarly, Spicer (1978) finds a positive association between stock price and

corporate social performance, and suggests that the latter provides information about

management competence. Along the same line, Waddock and Graves (1997) report a positive

relation between CSR and the quality of management, where the latter is measured by the

Fortune reputation survey ranking.

Among related Korean research, Choi et al. (2008) study the relation between corporate

environmental disclosure and financial performance over the 7-year period following the

financial crisis of 1997. They find no significant relationship between the quality of disclosure

and economic performance, while corporate size and industry profile are shown to be the most

significant factors behind corporate environmental disclosure. More recently, Choi and Kwak

(2010) studied the relationship between the level of corporate environmental disclosure and

environmental performance using a sample of 1 80 cases of stand-alone environmental reports

and/or environmental information disclosed on corporate websites. They document a positive

association between corporate environmental performance and the level of discretionary

environmental disclosure. As mentioned previously, however, we are not aware of any Korean


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studies that use a comprehensive, multi-dimensional CSR measure in investigating the relation

between CSR and corporate financial performance.

Impacts corporate social r esponsibi li ty activi ties on company f inancial performance

It is no secret that many multinational enterprises (MNEs) have annual turnovers higher

than that of the GDP of a significant number of less developed countries (LDCs) put together. At

the same time, the grad-ual liberalization of trade at the global level, coupled with mounting

external debt, lack of financial capital, and high unemployment in LDCs has resulted in many

cases in the promulgation of enticing foreign investment legislation, rampant corruption, and lax

control over the operations of MNEs, as far as the domestic law and enforcement by the host

State is concerned. Since the addressees and bearers of human rights, labor, and environmental

obligations under traditional treaty and customary international law have been States.

Commentators have argued both for and against the view that corporate social responsibility is

enlightened economic self-interest.

Past economic performance

Those who have theorized that a negative relation exists between social responsibility and

economic performance have argued that a high investment in social responsibility results in

additional costs. According to McGuire et al (1988, p. 855) the added costs may result from

actions such as "making extensive charitable contributions, promoting community development

plans, maintaining plants in economically depressed locations and establishing environmental

protection procedures". These costs might put a firm at an economic disadvantage compared to

other, less socially responsible, firms. In contrast, others have argued the case for a positive


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association. McGuire et al (1988) cite the argument that a firm perceived as high in social

responsibility may face relatively fewer labor problems or perhaps customers may be more

favorably disposed to its products. Alternatively, CSR activities might improve a firm's

reputation and relationship with bankers, investors and government officials. Improved

relationships with them may well be translated to economic benefits. According to Spicer

(1978a,b), Rosen et al (1991), Graves and Waddock (1994) and Pava and Krausz (1996), a firm's

CSR behavior seems to be a factor that influences banks and other institutional investors'

investment decisions. Thus, a high CSR profile may improve a firm's access to sources of

capital.

Corporate social responsibi li ty

The pharmaceutical sector, an industry already facing stiff tests in the form of intensified

competition and strategic consolidation, has increasingly become subject to a variety of other

pressures. Significantly, in common with other large-scale businesses, pharmaceutical firms are

being exhorted to respond positively to the challenge of corporate (social) responsibility (CSR).

Clearly, for individual managers within pharmaceutical firms the issue of CSR in the form of

closely connected questions relating to patient access to health treatment, patent protection and

affordability presents major problems.

Part of the burden of addressing the demands of CSR is the need to engage effectively

with a range of stakeholders. Individual managers in pharmaceutical companies have to confront

the complicated task of choosing which stakeholder dialogue practices to adopt and why. This

real-world management predicament runs parallel to an academic interest in CSR stakeholder

dialogue theory and models. Accordingly, this paper contributes to primarily to the academic


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debate by reviewing past attempts to theorise CSR and stakeholder dialogue, identifying gaps

and weaknesses, and proposing a diagram-type model as a refined prototype framework.

The amount of literature available on CSR is massive and its production continues to

grow. In addition, there is considerable literature on related concepts, such as 'business ethics',

'corporate citizenships' and 'sustainable business', to mention a few. The readings suggested here

focus on literature that explicitly discusses CSR. The Reader is therefore not a complete review

of CSR-relevant literature, but rather an attempt to organize this complex and vast area of

literature . CSR refers to the obligations of the firm to society or, more specifically, the firm's

stakeholders - those affected by corporate policies and practices. Saltaire and other early

examples of paternalistic capitalism reveal three important characteristics of CSR. First, it is not

a new idea, the hype surrounding it today notwithstanding

Second; firms engaging in CSR often have "normative case" for CSR. Third, while there

is substantial agreement that CSR is concerned with the societal obligations of business, there is

much less certainty about what these obligations might be or their scope. Salt's ideas for social

betterment did not meet with universal approval and he opposed legislation to prohibit child

labor. Even corporate champions of CSR today, such as Starbucks meet with opposition from

NGOs (non governmental organizations) and others. As Sethi observed nearly 30 years ago, the

operational meaning of corporate social responsibility is supremely vague and, he suggested, it

can mean all things to all peopleThese three characteristics of CSR are particularly important as

we consider its recent rise to prominence and the challenges it poses.


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CSR and f inancial perf ormance

A modern concept of CSR has evolved since the 1950s, formalized in the 1960s and

proliferated in the 1970s (Carroll, 1999). Based on various studies from the CSR literature

(Carroll, 1999; Engardio et al., 2007; Hart, 1995; Holme and Watts, 2000; McWilliams and

Siegel, 2001; Nicolau, 2008; Tsoutsoura, 2004), CSR can be broadly defined as the activities

making companies good citizens who contribute to society's welfare beyond their own self

interests. Throughout the past several decades, numerous aspects of CSR have been the subject

of investigation in academic and business literature, and according to the framework of Schwartz

and Carroll (2003), economic, legal and ethical domains can be epitomized as the most common

components of CSR.

One aspect of CSR interesting to many financial economists is the economic domain:

financial impact of CSR for profit-seeking corporations. Regarding the relationship between

companies' CSR activities and their performances (especially, financial performance), the

literature presents three assertions.

The first group of researchers, based on the viewpoint of Friedman (1970), has found a

negative relationship between CSR activities and financial performance as measured by, for

example, stock price changes (Vance, 1975), excess return (Wright and Ferris, 1997), or analysts'

earnings-per-share forecasts (Cordeiro and Sarkis, 1997). Friedman argued that managements are

selected by the stockholders as agents and their sole responsibility is acting on behalf of the

principals' best interests. From Friedman's perspective, the one and only social responsibility of

business is to use its resources and engage in activities designed to increase profits and wealth of

owners. Any other activities disturbing the optimal allocation of scarce resources to alternative

uses exert an adverse influence on firm performance.


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The second group argued for positive impact from companies' CRS activities on financial

performance. This group's assertion, based on stakeholder theory (Freeman, 1984), suggests that

firms expand the scope of consideration in their decision-making and activities beyond

shareholders to several other constituencies with interests, such as customers, employees,

suppliers and communities. The second group asserts that CSR activities, which encompass all

legitimate stakeholders' implicit claims as stakeholder theory suggests, can improve firm value

by (1) immediate cost saving, (2) enhancement of firm reputation, and (3) dissuasion of future

action by regulatory bodies including governments which might impose significant costs on the

firm (Bird et al., 2007). A third group has supported no particular relationship between CSR

activities and financial performance (Abbott and Monsen, 1979; Alexander and Buchholz, 1978;

Aupperle et al., 1985; Teoh et al., 1999), partially arguing for the existence of too many

confounding factors for researchers to uncover a particular impact from CSR on firm

performance.

Seemingly contradictory themes between Friedman's (1970) viewpoint and the

stakeholder theory arise from the assumption that CSR, which considers the interests of a broad

spectrum of stakeholders (suggested by stakeholder theory), is in fact detrimental to value

maximization activities of the firm (asserted by Friedman's viewpoint). However, Jensen (2001)

attempted to reconcile the potential conflict between these two viewpoints by proposing

enlightened stakeholder theory, which asserts that a firm cannot maximize its long-term value if

it ignores the interests of diverse stakeholders. And, according to Post et al. (2002), a firm's

capacity that generates sustainable wealth over time and its long-term value are determined by

the relationship with both internal and external stakeholders. CSR, if it contributes to enhancing


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firm value, can be an appropriate corporate strategy as the stakeholder theory suggests, not an

exploitation of shareholders' wealth to benefit other parties, as Friedman (1970) worried.

Accounti ng disclosures and social responsibi li ty

A significant body of literature is focused on the nature of and motivations for corporate

social responsibility. Indeed, as the importance placed by investors on socially responsible

behavior has increased, so has the examination of this phenomenon by academics. As much of

this research indicates, the prevailing attitude toward CSR has changed dramatically over the last

few decades. Initially, the notion of a corporation engaging in costly social projects was

questioned, if not criticized outright. Today, the practice of CSR, labeled variously as

"stakeholder management" (e.g., Freeman, 1984; Donaldson and Preston, 1995) or "corporate

citizenship" (e.g., Maignan et al., 1999), is viewed as a legitimate, even critical endeavor.

Friedman (1962, 1970) is generally credited with espousing the "traditionalist" view of

the corporation and its role in society According to Friedman, the business entity is accountable

only to its stockholders; its sole social responsibility is to maximize the value of the firm.

Adhering to this traditional view of the role of business, much of the research examining

manifestations of CSR has focused on the association between perceived CSR and measures of

financial performance, hypothesizing that greater levels of CSR would lead to reduced levels of

financial performance.

Reacting to this view, Pava and Krausz (1996) conducted a comprehensive investigation

of the phenomenon that they term the "paradox of social cost" - the persistent empirical finding

that firms perceived as socially-responsible perform as well as or better than their counterparts

that do not engage in costly social activities. Pava and Krauz supplemented a review of 21


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studies that examined the relationship between CSR and financial performance with their own

analysis of the long-term financial performance of a group of 53 firms identified by the Council

on Economic Priorities as socially responsible. These researchers concluded that there is little

evidence that the performance of firms screened on the basis of social responsibility criteria is

weaker than that of other firms. Indeed, they found the opposite to be true - the empirical results

suggest that socially responsible firms outperform their counterparts. After examining and

rejecting a number of possible explanations for this result, the authors conclude that

"SOMETIMES [sic], a conscious pursuit of corporate social-responsibility goals causes better

financial performance" (p. 333).

In contrast to the traditionalist view, Freeman (1984) advanced the argument that

systematic attention to stakeholder interests is critical to firm success. In his view, management

must pursue actions that are optimal for a broad class of stakeholders rather than those that serve

only to maximize shareholder interests. Donaldson and Preston (1995) refined the stakeholder

management paradigm by categorizing stakeholder theories into three groups: normative,

descriptive/empirical, or instrumental (examines the effects of alternative stakeholder

management strategies on the achievement of traditional corporate objectives). More recent work

has been directed at further development of the stakeholder management model. These efforts

have considered and evaluated the descriptive accuracy of competing stakeholder theories

(Berman et al., 1999; Ogden and Watson, 1999), investigated the impact of firm characteristics

on corporate social performance (Logsdon and Yuthas, 1997; Johnson and Greening, 1999), and

identified the stakeholder groups that corporations view as most significant (Mitchell et al.,

1997; Agle et al., 1999).


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CHAPTER 3 RESEARCH METHODOLOGY

Research Designs

The initial sample utilized for this paper consists of the 200 largest companies, which are

taken out of 350 companies listed on the FTSE350 index during the period 2008-2011. The

selection is based on their highest market capitalization ranking. According to Tsang (1998) a

higher proportion of large and medium-sized companies disclosed social information compared

to small companies as companies wishing to increase business have larger responsibilities and

principles (Gardiner et al. , 2003).

In this paper, the sample of the companies was collected for the years 2008-2011. This

time span is selected because this is the recovery period from the financial crisis that hit Asian

countries and particularly the Malaysian capital market. It is perceived that when the financial

crisis is over, most companies could then allocate their spending on CSR activities including

CSRD which are non-mandatory. Data are collected from the companies' annual reports, through

the use of various libraries and investments reports of the particular companies being selected.

Companies' annual reports constitute the main data for this paper and were chosen because the

annual report is the primary source of CSRD, and, in Malaysia, annual reports of listed

companies are the most accessible source of information, either in hard copies or electronic

formats (Sumiani et al. , 2007; Christopher et al. , 1997). We would be using the mixed

methodology to carry out our analysis.


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Mixed Methodology

Mixed method is a research orientation that possesses unique purposes and techniques. It

integrates techniques from quantitative and qualitative paradigms to tackle research questions

that can be best addressed by mixing these two traditional approaches. As long as 40 years ago,

scholars noted that quantitative and qualitative research were not antithetical and that every

research process, through practical necessity, should include aspects of both quantitative and

qualitative methodology. In order to achieve more useful and meaningful results in any study, it

is essential to consider the actual needs and purposes of a research problem to determine the

methods to be implemented. The literature on mixed methods design is vast, and contributions

have been made by scholars from myriad disciplines in the social sciences. Therefore, this entry

is grounded in the work of these scholars. This entry provides a historical overview of mixed

methods as a paradigm for research, establishes differences between quantitative and qualitative

designs, shows how qualitative and quantitative methods can be integrated to address different

types of research questions, and illustrates some implications for using mixed methods. Though

still new as an approach to research, mixed methods design is expected to soon dominate the

social and behavioral sciences

The models

To prepare my panel data for analysis, I first dropped all companies that were not present

on both the 2005 and 2008 Fortune Most Admired Companies list. One may imagine that are a

number of reasons why companies would not be present on both lists. For example, it is possible

that they were no longer members of the Fortune-1000 or that they were sold or no longer


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operating under the same ticker symbol. Second, I dropped 12 outlying dependent variables (six

sale variables, four roa variables and two mkbk variables) that threatened to skew my analysis.

For example, mean sample sale was $18572.19 million, but in 2008, Exxon Mobile

Corporation recorded revenues of $425071.00 million, 17.56 standard deviations removed from

the mean. Generating scatter plots of score against each independent variable provided a visual

illustration of these extreme outliers. Third, to address distortions caused by negative market

values, I dropped 12 negative mkbk variables that reported negative roa and price to earnings

(p/e) ratios. Fourth, as discussed, to increase the number of observations per industry, I restricted

naics variables to two digits per company. This expanded my industry classification, which in

turn lent statistical strength to my results and simplified my analysis. Finally, inputting these

remaining data, I modeled a cross-sectional time-series panel and ran six regressions of CFP on

CSR for each of my dependent variables using controls for industry, year, and revenue. My first

two regressions control for factors that affect financial performance from 2005 to 2008 to isolate

the overall effect of CSR on each dependent variable. My second two analyses test that same

relationship, but control for firm size. My third two regressions similarly examine the CSR-CFP

relationship, but control for industry differences. My fourth two analyses explore the impact of

firm size and industry differences on the CSR-CFP link. My fifth two analyses my most

rigorous CSR-CFP testcontrol for company size with firm fixed effects. My final two

regressions explore the CSR-CFP relationship within particular industries. In summary, my

regression controls are presented in Table below


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Empirical Research Model

According to the above hypothesis and the selection of measures for dependent and

independent variables, our econometric model (t=2010 and 2011) is:

SRt = b0 + b1 CSRscoreb-1 + b2 CAPb-1 + b3 BETAb-1 + b4 SRb-1 + ut

Where:

SRt is the stock return for the year t

CSRscoret-1 is the index for CSR for the year t-1 CAPt-1 is the market capitalization for the year t-1 BETAt-1 is the CAPM beta for the year t-1 SRt-1 is the stock return for the year t-1 ut is a disturbance term

The data set

Data on the accounting disclosures of firms are taken from the annual Association for

Investment Management and Research Corporate Information Committee Reports (AIMR

Reports). These reports provide annual intraindustry rankings of firms' disclosure practices.

Firms in each industry are rated by a committee of analysts who follow that industry. Three

disclosure performance rankings are assigned to each firm based on the level of disclosure

provided by the firm's: (1) annual reports and 10-Ks, (2) quarterly reports and other published


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materials voluntarily issued by the firm, and (3) investor relations programs. An aggregate score,

which is a weighted average of these three categories, is also provided.

Several factors are frequently cited in the AIMR Reports as affecting analysts' ratings of

a firm's accounting disclosures. Among those factors affecting the scores assigned to published

information (annual reports, 10-Ks, quarterly reports and other materials) are the inclusion of

segment reports, a thorough management discussion and analysis section, and cash flow

statements (in quarterly reports). Frequently cited determinants of the investor relations scores

are the nature and extent of management's responses to analysts' queries and management's

general accessibility to investors and analysts.

CSR is measured using the ratings provided by the CEP. These annual ratings, which are

assigned to each firm by the CEP for various social issues areas, are based on a comparison of all

the companies in the CEP's database. (Environmental grades are an exception; firms are rated

relative to their industry.) Nine areas were evaluated for each of the four years examined in this

study. Of these nine areas, three (environmental issues, family issues in the workplace, and

animal testing) were eliminated because each had less than three hundred non-missing

observations. Because the CSR score us use is a composite score comprised of the ratings for the

individual issues areas identified by the CEP, including these three areas would have

significantly reduced our sample size. Two areas (investment in South Africa and contracts with

the U.S. military) were also excluded because these issues are considered to be more

controversial and ambiguous.

The CSR score used in this study is, therefore, comprised of the total of the scores

assigned to the firm in each of the following areas: company policies regarding the advancement

of women and minorities in the workplace (separate scores were assigned to each by the CEP),


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philanthropic activities, and involvement in community projects (such as volunteer programs,

school partnerships and investments in housing and businesses in low-- income neighborhoods).

Financial data for the firms included in the sample are taken from Compustat. Data on

stock returns for the sample firms are taken from the CRSP database and data on firm's securities

offerings (both debt and equity) are obtained from the Securities Data Company's New Issues

database. The sample consists of all non-banking firms in the AIMR rankings for the years 2008

through 2011 for which CEP ratings for the four issues areas used in our CSR measure were

available. Banks were excluded because their accounting and reporting practices differ

significantly from those of other sectors. Industries that were assigned only aggregate AIMR

scores (without a breakdown for each of the three categories) were also excluded. Finally, AIMR

industry reports that did not rank firms, but only assigned a rating of either above average,

average or below average to each firm were also excluded.

The table below shows the company being selected from the FTSE 350 inderx for the

purpose of our research.


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CHAPTER 4 Empirical Analysis

The li nk between Corporate Social Responsibi li ty and F irm's F inancial Performance

The examination of relationship between CSR and firm financial performance has been

highly developed and researched in the modern literature. The link between may be positive,

neutral or negative. Based on the summary of findings in the research of Ullmann (1985), it is

easily to find out that the linkage between CSR and financial performance is unclear. Thus, we

can divide researches in three groups: those which found positive relationship, suggesting that

CSR improves firms' value, those which found negative relationship, adopting the idea that firm

must use its resources only to maximize its profits and otherwise it will have adverse results, and

those which found neutral relationship, implying that there are many factors that can prevent

researchers from secure results (Kang et al., 2010). Neutral association can be explained if CSR

is perceived as pure marketing strategy (D'Arcimoles and Trebucq, 2002).

This relationship may have two ways of evaluation. CSR may be linked with subsequent

financial performance as to find out in what degree financial performance is improved but also it

can be linked with past firm performance to explore if firms with high financial performance

take on CSR actions. Waddock and Graves (1997) based on the theories of "slack resources" and

"good management", did approved that better financial performance results in improved CSP and

improved CSP leads to improved financial performance. The previous conclusions are supported

also by the research of Surroca et al., (2010). Therefore, a serious conflict among researchers is

whether CSP is independent or dependent variable in the relationship between CSP and CFP.

Based on the research of Margolis and Walsh (2003), in a total of 127 reviewed studies, CSP has

been treated as independent variable in 109 cases.


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The mixed results referred above are consistent with our literature review. The

examination of literature on past and subsequent financial performance shows conflicting results.

Positive association was found in the studies of Wahba (2008), Hull and Rothenberg (2008),

Rettab et al., (2009), and Herremans et al., (1993). Moreover, Moskowitz (1972) suggested that

the high listed companies in terms of CSR reported higher than average stock returns while Bird

et al., (2007), concluded that firms who engage CSR activities will be rewarded in the market

place but market seem to evaluate more negatively firms which do not include CSR strategy in

their business. Nelling and Webb (2009), using ROA and annual stock return as dependent

variables, found positive and significant relationship with CSR score. The research of Feldman et

al., (1997) revealed that an improvement in environmental management system and future

environmental performance will increase shareholder wealth by five percent. On contrast,

negative relationship was proved in the study of Wood and Jones (2005). Brammer et al., (2006)

found that the overall CSR measure has significant but negative effect on stock returns.

Evaluating each social performance indicator, they found that the measure of employee

performance has significant and negative effect on stock returns, community measure has

positive but not significant effect and environment measure has negative and no significance too.

In addition, Vance (1975) found a negative correlation between rankings of social responsibility

and stock market performance. Finally, in the literature review of Wood and Jones (2005), there

is an important finding by other researchers that is pointed out: Negative impact on abnormal

stock returns was noticed after the announcement of CSR actions in eight out of nine studies.

This finding indicates that market does not recognize CSR efforts but indeed punished them.

Mixed results were observed in the studies of McGuire et al., (1988), and D'Arcimoles and

Trebucq (2002). Neutral relationship (no significance) was found in the studies of Fauzi (2009),


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Mahoney and Roberts (2007), Goukasian and Whitney (2008) and Fogler and Nutt (1975). In the

research of Fiori et al., (2009), no significant correlation was found between stock price and CSR

parameters.

Measur ing financial perf ormance

The dependent variable in this study is stock return as to measure the market value that

companies gain or lose implementing CSR activities. As was mentioned in our literature review,

measures of financial performance could be either accounting-based or market based. There are a

lot of studies that used stock return as measure of financial performance.

Measur ing corporate social responsibi li ty

In order to measure CSR, because of the lack of data availability in Top 200 FTSE

companies, we use the method of content analysis on CSR annual reports. So far, we have to

point out that there are a lot of Top 200 FTSE companies, listed on FTSE Stock Exchange,

which undertake CSR activities but neither have disclosed them in annual reports nor have they

disclosed them in reports under certified guidelines. This problem is also indicated by

Panayiotou et al. (2009c), who support that some of Top 200 FTSE firms may present only their

strengths and cover their weaknesses as most of them decide themselves what to report. As a

result, and for the reasons of accuracy and reliability of data, as our main instrument of research,

we choose annual reports under specific certified guidelines. Content analysis is defined as "a

systematic, replicable technique for compressing many words of text into fewer content

categories based on explicit rules of coding" (Montabon et al., 2007, pp.1002). This method was

used by many authors in their studies (Montabon et al., 2007; Khan, 2010; Aras et al., 2010;


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Rolland and Bazzoni, 2009). According to Cochran and Wood (1984), content analysis is an

objective procedure. We choose GRI as reporting guidelines in order to achieve greater

reliability and accuracy.

As we referred previously, companies may obtain higher stock returns if they apply GRI

guidelines (Schadewitz and Niskala, 2010). Moreover, GRI guidelines have been used by a lot of

researches, something that indicates GRI's great acceptance. Based on GRI reports according to

G3 guidelines, we tried to create a CSR index. Using the rating systems of Sutantoputra (2009)

on social performance and Clarkson, et al., (2008) on environmental performance which were

developed based on GRI reporting, we evaluate firms' CSR performance. Social performance

was evaluated by 16 indicators on policies and systems on social issues (Table 1). Environmental

performance was evaluated by 10 indicators (Table 2). In order to achieve a proper scale score

for our research, we followed the studies of Graves and Waddock (1994) and Fiori et al., (2009).

All the above indicators were rated on a scale from 0 to 3. When a company does not take into

account the specific indicator at all, it is rated with 0. A company is ranked with 1 or 2

depending on the broadness of the description (e.g. 1 if the company only names the indicator

and 2 if there is a very poor description (e.g. if the company only names the variable without any

or with an unclear description). The company is rated with 3 if it takes the indicator into

consideration with a satisfying description. So, a total score for social performance could reach

the maximum score of 48 and for environmental performance the score of 30. A compound CSR

score for our analysis is created adding both score, giving a maximum of score of 78 for each

company.


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Descri ptive stati stics

First of all, we are going to present the descriptive statistics for the variables of our

model. Observing from a qualitative view, the results show an increasing adoption of CSR

actions by Greek companies. The mean of CSR score has risen from 44.00 in 2007 to 53.77 in

2008. Furthermore, stock returns appear to have a significant increase during the two-year

period. Specifically, during the year of 2008, negative returns (-0.593) are observed in this

portfolio while positive ones are observed (0.276) in the year 2009. Table 4 presents summary

statistics for our measures of financial performance, CSR score and control variables. The

variable SR ranges from -0.766 to 0.700. The minimum of CSR score is 30 with a maximum

value of 72 and a mean of 48.8846. Moreover, the wide range of CAP indicates that the size of

sample companies varies in a great extent. Statistics are provided also for the ratio of CAPM beta

(BETA) and stock returns of previous year. The mean of BETA, which almost gets the value of

zero, shows that our stocks have no risk, their returns move regardless of market.


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Correlation matri x and bivari ate resul ts

After calculating the correlation matrix for the dependent and continuous independent

variables, we can be seen, there is a very significant and positive relationship between SR and

CSR score (0.550) at p


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Regression Analysis

To test the multivariate relationship between firm performance and corporate social

responsibility, we also conducted regression analysis. Assessing the following matrix, we have to

keep in mind that there is one year lag among the data of dependent (2009 and 2008) and

independent variables (2008 and 2007). Useful conclusions can be extracted form the Tables 6

and 7 about our econometric model. The multiple correlation coefficient (R), using all predictors

simultaneously, is 0.881. The model explains about 77 percent (R2= 0.776) of the variation on


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stock returns ranking. Moreover, the Standard Error of the Estimate is 0,2438572 which is lower

than the standard deviation of SR, as it has to be. The model appears to be statistically significant

(p=0.000) and so, the independent variables predict significantly the dependent variable.

According to our empirical model, the constant term is statistically significant and

negative (-1.027). We found out that the coefficient of CSR score is positive (b1=0.013) and

significant at the 1% level (p=0.003). This result confirms our main hypothesis and is consistent

with the largest portion of studies in the literature that found out a positive relationship between

CSR and financial performance and specifically between CSR and stock returns (Moskowitz,

1972; Nelling and Webb, 2009). The significance of the rest of control variables is consistent

with the previous results of Pearson correlations. The coefficient of market capitalization is

negative and significant (p=0.000). The coefficient of BETA is positive but not significant.

Furthermore, the other control variable, SR of previous year appears to have negative and too

significant relationship with SR (p=0.000).


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Tests for normality of residuals of data were done and no serious problems were

indicated. Also absence of autocorrelation is indicated as the value of Derbin-Watson (Table VI)

is 2.248. We investigated multicollinearity problems by examing variance inflation factors

(VIFs). According to Katos (2004), if VIF of a variable exceeds ten, then this variable is

collinear to the others. Observing the VIFs for the three independent variables in the Table VI,

we can conclude that it is unlikely that multicollinearity influence our regression results, since

the range of VIFs is varied from 1.024 to 1.290. This conclusion is also supported by the

coefficients of tolerance.


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CHAPTER 5 CONCNLUSION

Our study is an attempt to explore the relationship of CSR and firms' financial

performance in Top FTSE firms. Based on stakeholder theory and mainly on the theory of "good

management", we try to find out if an improvement in CSR actions results in higher stock

returns. The evaluation of CSR performance is held using the method of content analysis of

sustainability reports according to GRI guidelines and performance indicators. A compound CSR

score is so generated and constitutes our main independent variable. Control variables (market

capitalization for controlling size, CAPM beta for controlling risk and stock return of previous

year) are added in our model. Data are obtained for two-year period using one year lag. The

results of our research are consistent with the larger portion of studies. A positive and significant

relationship among stock returns and CSR is found. Our econometric model appears to be

statistically significant and its results show that a company which adopts CSR strategy could be

evaluated positively by the market and its stakeholders. This result interprets that a Greek

company which adopts CSR strategy and practices may obtain higher stock values due to the fact

that stakeholders (shareholders) evaluate positively these activities. This generalization is based

on the fact that our sample companies are of a wide variety on market capitalization and that they

represent different kinds of industry.

The method of measuring CSR on a specific kind of CSR reporting is something to

confront in order to achieve even more objective results. We suggest another way of measuring

CSR or the use of content analysis in websites reporting in a larger sample, achieving greater

reliability. Accounting-based variables could be used instead of stock returns. Finally, a wider

time period of analysis could provide more secure results.


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This study compiles a prime effort to set some standards on the relation between

corporate social responsibility and firm performance especially given the fact that this market

constitutes a "Top Performing firms" for those involved in gathering as well as evaluating the

CSR data. This research hides the academic ambition to be used as a guide for further

examination and research on the relationship between CSR and Greek companies. Last but not

least, in operational level, these results aim at persuading managers to implement CSR actions in

a greater extent to enhance firm market efficiency and at a larger outcome scale to improve the

CSR state in Greece. In spite of the costs that may occur, adopting CSR strategy, companies may

obtain higher stock returns and satisfy the needs of their stakeholders.

Documents

FTSE Index Corporate and Financial Disclosure