Академический Документы
Профессиональный Документы
Культура Документы
John Wiley & Sons is collaborating with JSTOR to digitize, preserve and extend access to Strategic
Management Journal.
http://www.jstor.org
StrategicManagementJournal
Strat. Mgmt. J., 21: 603-609 (2000)
I
Researchers have reporteda positive, negative, and neutral impact of corporate social responsibility (CSR) on financial performance. This inconsistency may be due to flawed empirical
analysis. In this paper, we demonstratea particularflaw in existing econometric studies of the
relationship between social and financial performance. These studies estimate the effect of CSR
by regressingfirm performance on corporate social performance, and several control variables.
This model is misspecified because it does not control for investmentin R&D, which has been
shown to be an important determinant of firm performance. This misspecification results in
upwardlybiased estimates of the financial impact of CSR. When the model is properly specified,
we find that CSR has a neutral impact on financial performance. Copyright ? 2000 John
Wiley & Sons, Ltd.
error
to: AbagailMcWilliams,Schoolof Manage*Correspondence
ment,ArizonaStateUniversityWest,PO Box 37100, Phoenix,
AZ 85069-7100,U.S.A.
604
(1)
where
There are basicallytwo types of empiricalstudies
of the relationshipbetweenCSR and financialperPERFi= long-run economic or financial performance of firm i (measures of
formance.One set of studiesuses the event study
financial
accountingprofits)
methodology to assess the short-run
CSPi = a proxy for corporatesocial responsiimpact (abnormalreturns)when firms engage in
bility of firm i (based on an index of
socially responsibleor irresponsibleacts (see, for
social performance)
example, Clinebell and Clinebell, 1994; Hannon
=a
andMilkovich,1996;Posnikoff,1997;Teoh,Welch
SIZEi proxy for the size of firm i
andWazzan,1999;Worrell,Davidson,andSharma, RISKi=a proxy for the "risk" of firm i
(debt/assetratio)
1991; Wright and Ferris, 1997). The results of
thesestudieshavebeen mixed.Forexample,Wright INDi = industryof firm i (4 digit SIC code)
Posnikoff
and Ferrisfound a negativerelationship;
reporteda positive relationship;and Teoh et al. The inclusion of the industrydummy (IND) is
found no relationshipbetween CSR and financial to control for some industry-levelfactors that
performance,when examining divestituresfrom have been shown to explain variation in firm
SouthAfricaduringthe Apartheidcontroversy(see performanceacross industries,such as economies
McWilliams,Siegel and Teoh, 1999, for a dis- of scale and competitiveintensity.2We hypothecussionof these studies).Otherstudiesare similarly size thatEquation1 is misspecifieddue to omitted
inconsistenton the relationshipbetweenCSR and variables,becauseit does not controlfor a firm's
shortrun financialreturns(McWilliamsand Siegel, rate of investmentin R&D and the advertising
1997, providesa theoreticaland empiricalcritique intensityof its industry.A more appropriatespecof the use of the event study methodologyfor ificationis:
examiningthe impactof CSR).
A second set of studies examines the nature PERFi= f
of the relationship between some measure of
(CSPi, SIZEi,RISKi,INDi, RDINTi, INDADINTi)
corporatesocial performance,CSP (a measureof
(2)
CSR), and measures of long term firm performance, using accountingor financialmeasuresof
profitability(see, for example,Aupperle,Carroll, where the additionalcovariatesare:
and Hatfield, 1985; McGuire, Sundgren and
Schneeweis, 1988; and Waddock and Graves,
RDINTi = R&D intensity of firm i
(R&D expenditures/sales)
1997). The results from these studies have also
been mixed. Aupperleet al. foundno relationship INDADINTi= advertising intensity of the
between CSP and profitability,McGuire et al.
industryof firm i
found that prior performancewas more closely
relatedto CSP than was subsequentperformance, Excluding R&D in the econometricmodel is
and Waddockand Graves found significantposi- especially problematic,because there is a long
tive relationshipsbetween an index of CSP and standingtheoreticalliteraturelinking investment
performancemeasures such as ROA in the fol- in R&D to improvementsin long-runeconomic
performance(Griliches, 1979). In these models,
lowing year.
The inconsistencyof the resultsfromthese stud- R&D is consideredto be a form of investmentin
ies of the relationshipbetween CSR and perfor- "technical"capital.Investmentin technicalcapital
mance is not surprising,given the natureof the resultsin knowledgeenhancement,which leads to
models that form the basis for the empiricalesti- productand process innovation.This innovative
mation.For example,Waddockand Graves(1997) activityenablesfirmsto enhancetheirproductivity.
estimatethe followingeconometricmodel:'
'Note that many studies simply examine correlation coefficients, but with causal implications.
Copyright ? 2000 John Wiley & Sons, Ltd.
2We will argue that a very specific type of industry effectindustry advertising intensity-must also be (separately) controlled for, because it is so closely associated with CSR.
Strat. Mgmt. J., 21: 603-609 (2000)
605
606
A. McWilliamsand D. Siegel
ationX" shoppers.We need only look at the rapid (Powell, 1996; Rumelt,1991; Schmalansee,1975;
growthof such socially responsiblecompaniesas Waring, 1996), the consensus is that industry
Ben & Jerry's,the Body Shop, and HealthValley factors "matter,"in the sense that they explain
to confirmthe importanceof CSR in marketing. a non-negligiblepercentageof the variationin
Supportof CSR may also be used to create a profitability across firms. Thus, INDADINTi
reputationthat a firm is reliable and honest, and should be included in the model, along with
some consumers may assume that the products "size" and "risk,"as a controlvariable.
of a reliable and honest firm will be of high
If our conjectures are true (corr (RDINT,
quality.Therefore,advertisingthatprovidesinfor- PERF)> 0, corr (RDINT, CSP) > 0), then the
mation about CSR attributesmay be used to consequencesof omittingR&D from Equation1
create a reputationfor quality or reliability or are clear. As noted in Theil (1971), if an omitted
honesty-all attributes that are important,but regressor,in this case RDINT,is positivelycorremay be difficultfor consumersto determine.Such lated with both the dependentvariable (PERF)
advertisingmakes consumers aware of product and the includedregressor(CSP), then the coefdifferentiation(quality) based on CSR attributes. ficient on CSP, in the misspecifiedEquation 1,
For example, New United Motor Manufactur- will be overestimated.
ing, Inc., or NUMMI,the innovativejoint venture
Simply put, the positive and significantcoefbetween Toyota and GeneralMotors, was estab- ficient on CSP, as reportedby Waddock and
lished in Fremont, Californiain 1984 to build Graves (1997), could simply reflect the impact
small cars for both companies.The NUMMIplant of R&D on firm performance.It is impossibleto
implementedmany of the latest Japanese"lean isolate the impact of CSP on firm performance
manufacturing"methods (process innovation), unless the model is properlyspecified.A similar
and producedthe Geo Prism, the prototypefor argument could be made for other omitted
GM's new generation of small cars (product regressors,such as advertisingintensity, if they
innovation). Furthermore, through its unique are also positively correlatedwith CSP and firm
partnership with the United Auto Workers performance.
(UAW), NUMMI also implemented a number
of progressive workplace practices, such as a
strong emphasis on teamwork and employee EMPIRICAL ANALYSIS
empowerment. The bottom line is that some
consumersperceived that NUMMI cars, such as To assess the validity of the results reportedin
the Geo Prism, were superior to traditional, studies that employ Equation 1 (Waddock and
American-madecars, in terms of quality and Graves, 1997), we estimate the model outlined
reliability. More germanely, many customers in Equation 2. For this estimation, we linked
also believed that by purchasingthese cars, they Compustatdatato informationon corporatesocial
were demonstratingtheir supportof progressive performanceprovidedto us by the firmof Kinder,
human resource managementpractices and the Lydenberg, and Domini (KLD), which began
UAW.
compiling this informationin May 1991. KLD
providesratingsof corporatesocial performance,
or CSP (a measure of corporate social
The link between advertising and firm
responsibility),for portfolio managersand other
performance
institutionalinvestors who wish to incorporate
The remainingindependentvariablein our pro- social factors into their investment decisions.
posed model-Equation 2- (INDADINTi) is Many of these social investorswant to "screen"
designed to serve as a proxy for the extent of their portfoliosto exclude companiesthat violate
product differentiationat the industrylevel and their social principles. In this context, CSP is
entry barriersthat might serve to enhance firm definedas a (0,1) variable;a firm is either sociprofitability.Entry barriers are a shared asset ally responsibleor it is not, based on the "screen"
across firmsin an industry,becauseentrybarriers applied.For example, an investmentfirm that is
are an industrylevel construct(McWilliamsand managing a portfolio for evangelical Christians
Smart, 1993). While there is considerabledebate will avoid companiesin the gamblingand alcoregardingthe magnitudesof industrylevel effects hol industries.
Copyright? 2000 John Wiley & Sons, Ltd.
607
DISCUSSION
Over the last 3 decades, the pressureon firms to
engage in corporatesocial responsibility(CSR)
has increased.Many managershave respondedto
these pressures,but many have resisted. Those
who resist typically have invoked the trade-off
between socially responsiblebehavior and profitability.Managementresearchershave responded
to this by attemptingto demonstratethe effect of
CSR on profitability.However, the results of
6A caveat is in order. Our result of no financial impact from
CSR may be a result of the lack of a good measure of CSR.
We use the KLD rating system, which relies heavily on
negative screens and includes philanthropic activities. A more
business-oriented definition of CSR might yield a different
result. We thank a reviewer for pointing this out.
Strat. Mgmt. J., 21: 603-609 (2000)
608
Table 1. Definitions of key variables, descriptive statistics, and correlations (N = 524 firms)
Variable
Definition
Mean
Std Dev
PERF
-0.011
1.043
1.000
CSP
PERF
Financial Performance
CSP
Corporate Social
Performance
0.619
0.345
0.356**
1.000
RDINT
0.011
0.949
0.403**
0.449***
RDINT
1.00
609