Further evidence on the

association between corporate

social responsibility and nancial
performance
Li Sun
Department of Accounting, Miller College of Business, Ball State University,
Muncie, Indiana, USA
Abstract
Purpose The purpose of this paper is to examine the association between corporate social
responsibility (CSR) and nancial performance.
Design/methodology/approach This paper performs an empirical test on the association
between CSR and nancial performance of a rm.
Findings The regression analysis reveals a signicant and positive association between CSR and
nancial performance. In addition, it nds that the age of long-termassets is highly correlated with CSR.
Originality/value This paper extends Cochran and Wood by using a larger and more recent
sample to examine the association between CSR and nancial performance of a rm. It contributes to
the CSR literature.
Keywords Corporate social responsibility, Financial performance, Age of long-term assets, Assets,
Assets management
Paper type Research paper
Introduction
Cochran and Wood (1984) examine the association between corporate social
responsibility (CSR) and nancial performance by using approximately 400 rm-year
observations. They nd that, after controlling for rmsize, risk, industry, and the age of
long-termassets, CSRis positively associated with nancial performance at a signicant
level. One interesting nding in their study is that the age of long-term assets is
signicantly related to CSR ratings. That is, rms with younger assets seem to have
better CSR performance than rms with older assets. Cochran and Wood (1984) call for
more empirical evidence on the association between CSRand nancial performance, and
also on the link between the age of long-term assets and CSR.
The purpose of this paper is to extend Cochran and Wood (1984) by using a larger and
more recent sample to examine the association between CSR and nancial performance
of a rm. I also investigate whether the age of long-term assets is highly related to CSR.
I obtain CSR data from Kinder, Lydenberg, and Dominis (KLDs) database. The sample
consists of 11,432 rm-year observations for the period of 1999-2009. This study
documents two major ndings. First, regression analysis reveals a signicant and
positive association between CSR and nancial performance. This evidence, consistent
with many prior studies, suggests doing CSR can be benecial to rms. Second, the age
of long-termassets is highly correlated with CSR. This suggests that rms with younger
assets demonstrate better CSR performance than rms with older assets.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1754-243X.htm
IJLMA
54,6
472
International Journal of Law and
Management
Vol. 54 No. 6, 2012
pp. 472-484
qEmerald Group Publishing Limited
1754-243X
DOI 10.1108/17542431211281954
This study makes several contributions. First, it extends Cochran and Wood (1984)
by using a larger and more recent sample and delivers new evidence on the association
between CSR and nancial performance of a rm. It contributes to the CSR literature.
Second, it responds to the Cochran and Wood (1984) call for more empirical evidence on
the association between CSR and the age of long-term assets. Although there are many
studies examining the relationship between CSR and nancial performance, very few
studies have examined the correlation between the age of long-term assets and CSR.
I deliver new empirical evidence on the relation between CSR and the age of long-term
assets. This signicant correlation between CSR and the age of long-term assets
suggests that future CSR studies need to include the age of long-termassets as a control
variable in their regression analysis. Last, from a practical perspective, the results
should be of interest to managers who contemplate engaging in socially responsible
activities, investors and nancial analysts who assess rm performance, and policy
makers who design and implement guidelines on CSR.
The remainder of the paper is organized as follows. The second section reviews
prior research. The third section describes the research design. The fourth section
describes sample selection and descriptive statistics, while the fth section reports the
results from the regression analysis. The sixth section summarizes the study.
Review of prior research
CSR is dened as the voluntary integration of social and environmental concerns into
business operations and into their interaction with stakeholders (European Commission,
2002). Vilannova et al. (2008) propose that the denitionof CSRconsists of ve dimensions,
including vision (Carter et al., 2003; Freeman, 1999; Humble et al., 1994; Joyner and Payne,
2002; Pruzan and Thyssen, 1990; Sison, 2000), community relations (Freeman, 1999;
Frooman, 1999; Grey, 1996; Hess et al., 2002; Jones, 1995; Jones andWicks, 1999), workplace
(European Commission, 2002; United Nations Global Compact, 2000; International Labor
Organization, 2007; Sum and Nagi, 2005), accountability (Elkington, 1998; Global
Reporting Initiative, 2002), and marketplace (Fan, 2005; Schnietz and Epstein, 2005;
Whetten et al., 2001). For example, vision includes CSR conceptual development, codes,
and value within the organization. Community relations include partnerships with
different stakeholders, like customers, supplier, etc. Workplace includes human rights
and labor practices within the organization. Accountability includes the transparency in
communication and nancial reporting. Marketplace includes the relationship between
CSR and core business processes, like sales, purchase process, etc.
The topic of CSR has received increasing attention in recent years. The practice of
CSR is still controversial since it requires rms to undertake additional investments in
CSR. These CSR investments are often examined through the economic cost-benet
analytical lens, and assumed benets from CSR activities drive CSR decisions. Some
argue that CSR activities increase costs without sufcient offsetting benets, hurt
performance and compete with value-maximizing activities. Examples of these
additional costs include making charitable donations, developing plans for community
improvement, and establishing procedures to reduce pollution. The majority of CSR
studies have focused on examining the link between CSR and nancial performance of
a rm. Empirical results are somewhat mixed. For example, Aupperle et al. (1985) use
survey to assess chief executive ofcer (CEO)s perspectives on CSR activities and
report a signicant and negative association between CSR and accounting-based
CSR and
nancial
performance
473
performance measures. Moore (2001) focuses on eight main companies in the UK
supermarket industry and nds a negative temporaneous relationship between CSR
and nancial performance. Nelling and Webb (2009) use the KLD index as the measure
of CSR and return on assets (ROA) to measure nancial performance. They nd no
evidence that CSR is related to a rms nancial performance.
Many other CSR-nancial performance studies document a positive relationship
between CSRand nancial performance. Early work by Cochran and Wood (1984) nd a
positive link between CSR and nancial performance. Cochran and Wood (1984) point
out that more comprehensive measures of CSRare neededto further researchinthis area.
McGuire et al. (1988) document a positive association between CSR and
accounting-based and market-based nancial performance measures. In particular,
their results suggest that, compared to a rms subsequent performance, its prior
performance is more closely related to CSR. Waddock and Graves (1997) use KLDdata to
measure CSR performance, ROA, return on equity (ROE), and return on sales (ROS) to
measure nancial performance, and document two major ndings:
(1) better nancial performance leads to better future CSR performance; and
(2) better CSR performance leads to better future nancial performance.
Similar to Waddock and Graves (1997) and Tsoutsoura (2004) uses rms selected on
the S&P 500 Index for the period of 1996-2000 to measure the effect of CSR on nancial
performance measures. Tsoutsoura (2004) nds a signicant and positive association
between KLD data and nancial performance, including ROA, ROE, and ROS.
Dhaliwal et al. (2011) nd rms with a high cost of capital in the previous year are more
likely to disclose CSR activities in current year, and those rms with superior CSR
performance receive a low cost of capital in subsequent year. In addition, those rms
with superior CSR performance also receive favorable analyst coverage and achieve
lower absolute forecast errors and dispersion. Thus, Dhaliwal et al. (2011) conclude that
engaging in CSR activities may bring future benets to rms.
A recent literature review (Beurden and Gossling, 2008) and meta-analysis
(Orlitzky et al., 2003) both conclude a positive relationship between CSR and nancial
performance. They suggest that being socially responsible can bring rms economic
benets that contribute to wealth maximization. CSR activities improve relationships
with stakeholders which can ultimately lead to improved returns. Asocially responsible
rm may face fewer labor problems, fewer complaints from the community, and fewer
environmental concerns from the government. In addition, socially responsible rms
may have improved relationships with their investors, bankers, and government
ofcials. The above factors suggest that rms that care about their social responsibilities
may perform well in todays society.
Research design
Measurement of the dependent variable CSR
KLD, a Boston-based consulting rm, has been actively providing rating data on CSR
since 1991. KLD data is an inuential measure of CSR. While many investment
managers rely on KLD data when making social screening, the KLD data are also
frequently used in academic literature. It is the largest multidimensional corporate
social performance database available to the public and is used extensively in research
on corporate social performance (Deckop et al., 2006, p. 334). KLD accumulates CSR
IJLMA
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474
information for more rms than other CSR data sources. It has become the de facto
corporate social performance research standard at the moment (Waddock, 2003, p. 369).
KLDprovides ratingdatafor approximately80 variables insevenqualitative areas for
each selected rm. The seven areas include community, corporate governance, diversity,
employee relations, environment, human rights, and product. For each qualitative
variable, positive ratings indicate strengths, and negative ratings indicate concerns. For
example, the environment area contains six strength items (benecial products, pollution
prevention, recycling, clean energy, property plant and equipment, and other strengths)
andsixconcernitems (hazardous waste, regulatoryproblems, ozone depletingchemicals,
substantial emissions, agriculture chemicals, and other concerns). In addition to these
seven qualitative areas, KLDalso evaluates six controversial issues that include, alcohol,
gambling, rearms, military, nuclear power, andtobacco activities. Involvement inanyof
these six controversial issues results in a negative rating. Acomplete listing of strengths
and concerns for KLD variables is provided in the Appendix table.
Consistent with prior research (Chen et al., 2008; Cho et al., 2006; Deckop et al., 2006;
Nelling and Webb, 2009; Ruf et al., 2001; Johnson and Greening, 1999; Grifn and
Mahon, 1997; Shropshire and Hillman, 2007; Waddock and Graves, 1997; Graves and
Waddock, 1994), I subtract total concerns from total strengths and assign equal
importance/weight to each area in calculating the KLD index score.
The KLD index score is computed as follows:
KLD Total strengths of Community 2Total concerns of Community
Total strengths of Corporate Governance
2Total concerns of Corporate Governance
Total strengths of Diversity 2Total concerns of Diversity
Total strengths of Employee Relations
2Total concerns of Employee Relations
Total strengths of Environment 2Total concerns of Environment
Total strengths of Human Rights
2Total concerns of Human Rights Total strengths of Product
2Total concerns of Product 2Any concerns of Alcohol
2 Any concerns of Gambling 2Any concerns of Firearm
2Any concerns of Military 2Any concerns of Nuclear Power
2Any concerns of Tobacco
Empirical specication
I use the following regression model to test the association between CSR and nancial
performance of a rm. The CSR performance is the regression models dependent
variable, while the nancial performance is the independent variable of interest.
Consistent with Cochran and Wood (1984) and other prior studies, additional variables
are included to control for rm size (ASSETS), risk (LEV), the age of long-term assets
(ASSETAGE), and industry (IND):
Model : KLD
it
a
0
a
1*ROA
it
a
2*ASSETS
it
a
3*LEV
it
a
4*ASSETAGE
it
a
5219*IND1
it
CSR and
nancial
performance
475
Variable denition:
KLD
it
corporate social responsibility (CSR) score of rm i in year t.
ROA
it
return on asset ratio of rm i in year t [operating income
(Compustat item no. 13) depreciation and amortization
(Compustat item no. 14)]/total assets (Compustat item no. 6).
ASSETS
it
total assets (Compustat item no. 6) of rm i in year t.
LEV
it
leverage ratio [total liabilities (Compustat item
no. 9 no. 34)/total assets (Compustat item no. 6)] of rm i in
year t.
ASSETAGE
it
net value of property, plant and equipment (Compustat item
no. 8) of rm i in year t/gross value of property, plant and
equipment (Compustat item no. 7) of rm i in year t.
IND a dummy variable to control for industry effect.
Sample selection and descriptive statistics
I begin my sample selection process by downloading KLD data, including the seven
major areas and six controversial issues, during the period from 1999 to 2009. The KLD
sample consists of 24,283 rm-year observations. Next, I use Compustat to obtain
nancial statement data, whichinclude total assets, total liabilities, net value of property,
plant and equipment (PPE), gross value of PPE, operating income, depreciation and
amortization, and total net sales. I merge the two samples, based on the rst six digits of
the Committee on Uniform Security Identication Procedures. A few observations are
lost due to missing values. The nal sample consist 11,432 rm-year observations with
complete data. Table I provides the descriptive statistics for sample rms.
Panel A of Table I reports the mean value of CSR performance (KLD), ROA, total
assets, total sales, leverage ratio, and the age of long-term assets by year. For example,
the mean values of the KLD rating are negative after 2000. The mean value of the age of
long-term assets (ASSETAGE) is the lowest (0.478) in 2009. This suggests that rms
have younger assets in 2009 than in other years. Panel B reports the mean value of CSR
performance (KLD), ROA, total assets, total sales, leverage ratio, andthe age of long-term
assets by industry category. For example, the chemical industry category
(SIC 2800-2899) has the highest mean value of the KLD scores. This suggests that
chemical rms engage in more CSR activities, relative to other industries. This is not
surprising, since chemical rms are normally subject to tough mandatory regulations on
pollution reduction. The transportation industry (SIC 4000-4789) has the highest
mean value of the age of long-term assets (ASSETAGE). This suggests that the
transportation industry has older assets than other industries in this study. Panel C of
Table I reports the mean, standard deviation, minimum and maximum values of CSR
performance (KLD), ROA, total assets, total sales, leverage ratio, andthe age of long-term
assets for the entire sample rms. For example, the mean value of KLDis 20.586, while
the minimum value and the maximum value of KLD are 211 and 15, respectively.
Table II provides the correlation matrices for the key variables for the years
1999-2009. Those variables include KLD, ROA, ASSETS, SALES, COGS, LEV, and
ASSETAGE. For each pair of variables, the Pearson and Spearman correlation
IJLMA
54,6
476
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Descriptive statistics
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CSR and
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Table I.
IJLMA
54,6
478
coefcients and related p-values are provided. Both Pearson and Spearman correlations
indicate a positive and signicant association between CSR (KLD) and nancial
performance (ROA). This association provides initial evidence supporting a positive
association between CSR and nancial performance. Table II also indicates that CSR
(KLD) is positively and signicantly ( p , 0.0001 under both Pearson and Spearman
correlation) related to total assets. This suggests that larger rms have better CSR
performance than smaller rms. Results in Table II reveal a positive and signicant
( p , 0.0001 under both Pearson and Spearman correlation) association between CSR
and the age of assets (ASSETAGE). This nding suggests that rms with younger
assets demonstrate better CSR performance than rms with older assets.
Results
Consistent with prior research, I predict a positive association between CSR and
nancial performance. As shown in Table III, the interaction between CSR and
nancial performance (ROA) is positive and statistically signicant ( p , 0.0001),
supporting a positive relation between CSR and nancial performance. This suggests
that rms have better nancial performance also do better in CSR activities.
The regression model includes four additional variables to control for size
(ASSETS), risk (LEV), industry (IND), and the age of long-term assets (ASSETAGE).
Results indicate a signicantly positive relation between CSR and rm size (ASSETS)
and the age of long-term assets (ASSETAGE), and a signicantly negative association
between CSR and risk (LEV). The above ndings suggest that:
KLD ROA ASSETS SALES COGS LEV ASSETAGE
KLD 0.0682 0.0468 20.0641 20.1124 20.0893 0.0944
(,0.0001) (,0.0001) (,0.0001) (,0.0001) (,0.0001) (,0.0001)
ROA 0.0754 0.0202 0.0623 0.0423 20.1918 0.0722
(,0.0001) 20.0502 (,0.0001) (,0.0001) (,0.0001) (,0.0001)
ASSETS 0.0731 0.0914 0.4629 0.3498 0.1525 0.0738
(,0.0001) (,0.0001) (,0.0001) (,0.0001) (,0.0001) (,0.0001)
SALES 20.0715 0.2044 0.8962 0.9728 0.1073 0.0791
(,0.0001) (,0.0001) (,0.0001) (,0.0001) (,0.0001) (,0.0001)
COGS 20.1034 0.1429 0.8425 0.9672 0.1059 0.0781
(,0.0001) (,0.0001) (,0.0001) (,0.0001) (,0.0001) (,0.0001)
LEV 20.1145 20.0963 0.4685 0.4151 0.4417 0.0442
(,0.0001) (,0.0001) (,0.0001) (,0.0001) (,0.0001) (,0.0001)
ASSETAGE 0.0823 0.0653 0.2375 0.1535 0.1527 0.1006
(,0.0001) (,0.0001) (,0.0001) (,0.0001) (,0.0001) (,0.0001)
Notes: Pearson correlation is above and Spearman correlation is below the diagonal; p-values based on
two-tailed tests are in parentheses; variable denition: KLD
it
corporate social responsibility (CSR)
score of rmi in year t; ROA
it
return on asset ratio of rmi in year t [operating income (Compustat item
13) depreciation and amortization (Compustat item 14)]/total assets (Compustat item no. 6);
ASSETS
it
total assets (Compustat item no. 6) of rm i in year t; SALES
it
total net sales (Compustat
itemno. 12) of rmi in year t; COGS
it
total cost of goods sold (Compustat itemno. 41) of rmi in year t;
LEV
it
leverage ratio [total liabilities (Compustat itemno. 9 no. 34)/total assets (Compustat itemno. 6)]
of rm i in year t; ASSETAGE
it
net value of property, plant and equipment (Compustat item no. 8) of
rm i in year t/gross value of property, plant and equipment (Compustat item no. 7) of rm i in year t
Table II.
Correlations among
selected variables
CSR and
nancial
performance
479
.
Larger rms demonstrate better CSR performance than smaller rms. This
nding is consistent with Udayasankar (2007), which suggests small rms and/or
large rms are equally motivated to participate in CSR activities. However,
compared to smaller rms, larger rms tend to do better in CSR, due to higher
visibility, greater resource access, and better internal operating system.
.
Firms with lower leverage ratios demonstrate better CSR performance than rms
with higher leverage ratios.
.
Firms with younger assets demonstrate better CSR performance than rms with
older assets.
This association between CSR and the age of long-term assets is consistent with the
ndings in Cochran and Wood (1984). One explanation is that rms with older assets
may simply be less responsive in social dimensions than rms with younger assets.
Specically, managers of rms with younger assets are more likely to engage in CSR
activities than managers of rms with older assets.
Another explanation is that rms with older assets may build plants or purchase
equipment in a period when regulatory constraints were less severe than they are
today. For example, government agencies, like Environmental Protection Agency,
impose tougher environmental regulations on companies. Thus, rms with younger
assets can deal with tougher regulations better than rms with older assets, since
younger/newer assets may have already been designed to meet the regulatory needs.
On the other hand, rms with older assets may need to spend more to upgrade their
facilities to satisfy regulatory needs.
Conclusion
In this study, I extend Cochran and Wood (1984) by using a larger and more recent
sample to examine the association between nancial performance and CSR of a rm.
Model:KLD
it
a
0
a
1*
ROA
it
a
2*
ASSETS
it
a
3*
LEV
it
a
4*
ASSETAGE
it
a
5219*
IND 1
it
Variable Parameter estimate SE t-value Pr . jtj
Intercept 20.9036 0.4739 21.91 0.0566
ROA 1.3244 0.2018 6.56 ,0.0001
* * *
ASSETS 4.31 10
26
1.01 10
26
4.28 ,0.0001
* * *
LEV 20.6402 0.1002 26.39 ,0.0001
* * *
ASSETAGE 0.8717 0.1708 5.10 ,0.0001
* * *
IND Omitted Omitted Omitted Omitted
Adj. R
2
0.0601
Notes: Signicant at:
*
p , 0.1,
* *
p , 0.05, and
* * *
p , 0.01; observation: 11,432; period: 1999-2009;
variable denition: KLD
it
corporate social responsibility (CSR) score of rm i in year t; ROA
it

return on asset ratio of rm i in year t [operating income (Compustat item 13) depreciation and
amortization (Compustat item 14)]/total assets (Compustat item no. 6); ASSETS
it
total assets
(Compustat item no. 6) of rm i in year t; LEV
it
leverage ratio [total liabilities (Compustat item
no. 9 no. 34)/total assets (Compustat item no. 6)] of rm i in year t; ASSETAGE
it
net value of
property, plant and equipment (Compustat item no. 8) of rm i in year t/gross value of property, plant
and equipment (Compustat item no. 7) of rm i in year t; IND a dummy variable to control for
industry effect
Table III.
Regression analysis
IJLMA
54,6
480
I also investigate whether the age of long-termassets is highly related to CSR. Regression
analysis reveals a positive and signicant association between CSR and nancial
performance, after controlling for size, risk, industry, and the age of long-termassets. This
evidence, consistent with many prior studies, suggests doing CSR can bring benets to
rms. In addition, the signicant association between CSRand the age of long-termassets
suggest that future CSR studies need to include the age of long-term assets in their
regression analysis. This study has several limitations. First, rms often participate in
CSRactivities gradually, and the stages of such participation can be difcult to determine.
Second, this study, like other prior studies, may be subject to selection bias. That is, rms
selected and rated by KLD database may already be good CSR performers.
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Corresponding author
Li Sun can be contacted at: lsun@bsu.edu
(The Appendix follows overleaf.)
CSR and
nancial
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Appendix
Category Strengths Concerns
Community Generous giving Investment controversies
Innovative giving Negative economic impact
Housing support Indigenous people relations
Education support Tax disputes
Peoples relations Other concerns
Non-US giving
Voluntary programs
Other strengths
Corporate governance Limited compensation High compensation
Ownership strength Ownership concern
Transparency strength Transparency concern
Accountability strength Accountability concern
Public policy strength Public policy concern
Other strengths Other concerns
Diversity CEO Controversies
Promotion Non-representation
Board of directors Other concerns
Work-life benets
Women and minority
Employment of the disabled
Gay and lesbian policies
Other strengths
Employee relations Union relations Union relations
No-layoff policy Health and safety concern
Cash prot sharing Workforce reductions
Employee involvement Retirement benets concern
Retirement benets Other concerns
Health and safety
Other strengths
Environment Benecial products Hazardous waste
Pollution prevention Regulatory problems
Recycling Ozone depleting chemicals
Clean energy Substantial emissions
PPE Agriculture chemicals
Other strengths Climate change
Other concerns
Human rights Positive record in S. Africa S. Africa
Indigenous people relations Northern Ireland
Labor rights strength Burma concern
Other strengths Mexico
Labor right concern
Indigenous people relations concern
Other concerns
Products Quality Product safety concern
R&D, innovation Marketing-contracting concern
Benets to economically disadvantages Antitrust
Other strengths Other concerns
Others Alcohol concern
Gambling concern
Tobacco concern
Firearms concern
Military concern
Nuclear concern
Table AI.
List of the strengths
and concerns in
KLD database
IJLMA
54,6
484