J Bus Ethics
DOI 10.1007/s10551-013-1809-9
The Effect of Corporate Social Performance on Financial
Performance: The Moderating Effect of Ownership
Concentration
Chih-Wei Peng • Mei-Ling Yang
Received: 25 March 2012 / Accepted: 9 July 2013
Ó Springer Science+Business Media Dordrecht 2013
Abstract The purpose of this study is to extend prior
research on this topic by investigating whether the impact
of ownership concentration moderates the link between
corporate social performance (CSP) and financial perfor-
mance (FP). This study uses a set of unique, hand-collected
pollution control data to measure CSP, based on a sample
of Taiwanese listed companies during the period from 1996
to 2006. The results of the empirical analysis provide firm
support for the idea that the divergence between control
rights and the cash flow rights of controlling owners neg-
atively moderates the link between social and short- and
long-run FP.
Keywords Corporate social performance  Financial
performance  Ownership structure  Control rights 
Cash flow rights
Introduction
An increasing number of scholars and practitioners today
are paying attention to corporate social responsibility
(CSR). In particular, an association between corporate
social performance1 (CSP) and financial performance (FP)
has gained enthusiastic research interest (McGuire et al.
1988). However, previous studies have found empirical
C.-W. Peng (&)
Department of Accounting, National Changhua University
of Education, Changhua 500, Taiwan, ROC
e-mail: nqd6281@cc.ncue.edu.tw
M.-L. Yang
Department of Finance, National Sun Yat-Sen University,
Kaohsiung 804, Taiwan, ROC
e-mail: mlyang@mail.nsysu.edu.tw
relations between CSP and FP to be largely inconclusive
(Margolis and Walsh 2003). Some studies have found a
negative relationship (e.g., Gollop and Roberts 1983; Smith
and Sims 1985) and suggest that firm investment in CSP
diverts funds that could be used for productive investments.
Other studies have found a positive relationship (e.g.,
Simpson and Kohers 2002; Spicer 1978; Wu 2006; Chien
and Peng 2012; Servaes and Tamayo 2013) and suggest
that not only may CSP be considered a business objective
in and of itself but that it serves as a means to an end in
regard to FP. However, still others have reported no rela-
tionship at all (e.g., Moore 2001; Seifert et al. 2003; Soana
2011). While some attention has been paid to the associ-
ation between CSP and FP, the impact of corporate gov-
ernance on CSP and FP has received even less attention.
Friedman (1970) asserts that engaging in CSP is symp-
tomatic of an agency problem or a conflict between the
interests of CEOs and shareholders. In essence, agency
theory provides a theoretical basis with which to describe
the potential divergent and convergent interests between
CEOs and other stakeholders and to predict how this
affects CSP.
According to agency theory, separation of ownership
and control leads to a divergence in the pursuit of mana-
gerial interests that are not in concurrence with owner
interests (Jensen and Meckling 1976), and thus monitoring
CEO decisions becomes essential for boards of directors in
order to assure that shareholder interests are protected
(Fama and Jensen 1983). In keeping with agency theory
prescriptions, stronger managerial alignment will lead to
1
Maron (2006) indicates that corporate social performance (CSP)
has multiple dimensional constructs that measure organizational
behavior across a wide range of dimensions, and the current study
uses one of these measures, which is the extent that a firm invests in
pollution control equipment.
123

maximization of owner interests (Jensen 1983). Jensen and
Meckling (1976) indicate that an increase in managerial
ownership can help with regard to the alignment of the
divergent interests of CEOs and shareholders. However, a
controlling shareholder usually exercises control but owns
only a small fraction of firm ownership as a result of the
use of pyramidal control structures and cross-stockholdings
in emerging markets (Claessens et al. 2000, 2002; La Porta
et al. 1999, 2002). Thus, because of high control–owner-
ship disparities, these controlling shareholders have an
incentive to pursue their private interests at the expense of
other shareholders. This study is an attempt to investigate
whether the divergence between the control rights and cash
flow rights of controlling owners (hereafter, control–cash
flow divergence) moderates the link between CSP and FP.
In this article, we expect control–cash flow divergence to
negatively moderate the link between CSP and FP. Our
argument is built on the following premise: First, when
controlling shareholders have control rights in excess of
their cash flow rights, this situation may exacerbate infor-
mation asymmetry (Claessens et al. 2002). Managerial
decisions in the area of CSP are likely to reflect both high
information asymmetry and low programmability (Deckop
et al. 2006). Thus, controlling shareholders will have greater
incentive to pursue self-interest at the expense of society and
other stakeholders (Amihud and Lev 1981; Jensen and
Meckling 1976). Second, compensation systems may be
ineffective with regard to providing an incentive for CEOs to
improve firm CSP when control–cash flow divergence is
high. Core et al. (1999) suggest that firms with weaker
governance structures have greater agency problems that
lead to the ability of CEOs to extract greater compensation.
In such an ineffective corporate governance system, CEOs
may focus on meeting short-term earnings goals, and they
are reluctant to engage in CSP because issues related to
environmental neglect are not likely to be caught immedi-
ately (Short 2004). Finally, CSP also affects the reputation
of a firm, with good CSP improving investor perceptions of
companies (e.g., Orlitzky et al. 2003), which in turn may
affect stock prices. Well-designed corporate governance
systems will align managers to engage in CSP actions that
can aid in improving firm reputation.
The sample used in this study is composed of all of
Taiwan’s listed companies in five highly polluting indus-
tries: cement, plastics, chemicals, paper and pulp, and iron
and steel, during the period of 1996–2006. The empirical
results show that: (1) a weak relationship between CSP and
short-run FP and control–cash flow divergence negatively
moderates the link between CSP and short-term FP, and (2)
there exists a positive relationship between CSP and long-
run FP. However, there is found to be a significant inverse
function of control–cash flow divergence on the CSP and
long-run FP relationship.
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C.-W. Peng, M.-L. Yang
This article extends the existing literature in two distinct
ways. First, the impact of ownership concentration on the
link between CSP and FP has become of great interest to
shareholders, practitioners, and governance regulators.
There have been, however, relatively few empirical studies
examining this issue (Jo and Harjoto 2011). Claessens et al.
(2000) point out that most East Asian companies, including
those in Taiwan, have lower average ratios of cash flow to
voting rights than those of Western European companies.2
Fan and Wong (2002) also argue that the actual degree of
ownership concentration in East Asia should be higher than
the nominal statistics notwithstanding the data limitations.
Our study is an attempt to shed light on the mixed results of
previous studies related to the CSP–FP link by considering
the control–cash flow divergence in emerging markets. It is
anticipated that the results will be important as a means by
which to assess whether CSP, along with well-designed
corporate governance systems, can enhance firm short- and
long-run value.
Second, Margolis and Walsh (2003) summarize over
120 studies between 1971 and 2001 regarding the CSP–FP
link. They suggest that previous studies have been subject
to various imperfections, such as measurement problems
related to the CSP, the FP, omitted variables and a lack of
methodological rigor. Our study is an attempt to develop an
appropriate statistical method that applies factor analysis to
integrate different FP measures into a single index, such as
return on assets (ROA), return on equity (ROE), earnings
per share (EPS), and cash flows to assets (CFA). This
approach will strongly support the premise that an aggre-
gated indicator prevents the conflicting results character-
istic of different financial indicators. In addition, we also
focus on both short-term and long-term FP. This mea-
surement may prevent the conflicting results shown in prior
studies regarding the association between CSP and short-
term FP.
The rest of this article is organized as follows: second
section presents the hypotheses, while third section
describes the sample and descriptive statistics. Fourth
section presents the research design and empirical results,
and fifth section concludes this study with recommenda-
tions for managers and regulators, as well as suggesting
some of the limitations of this work.
Hypotheses Development
In general, CEOs are recognized as having extensive
decision-making power and the ability to significantly
2
Claessens et al. (2000) report that the average ratio of cash flow to
voting right in East Asian companies is lower than that of Western
European companies (i.e., 0.75 \ 0.87).
Effect of CSP on FP
influence their firm’s CSP (Kochan 2002; Orlitzky and
Swanson 2002). The next question is how CEOs as indi-
viduals consider the economic utility of CSP as it relates to
their firms and to themselves. Agency theory provides a
theoretical basis with which to describe the potential
divergent and convergent interests between CEOs and
other stakeholders and to predict how this affects CSP.
According to agency theory, separation of ownership
and control leads to a conflict of interest between principals
and agents and is commonly applied to the divergence
observed in the pursuit of managerial interests (agents)
versus owner interests (principals) (Jensen and Meckling
1976). To eliminate self-interest behavior by an agent, a
principal may monitor managerial decisions that shift some
of the performance risk from the principal to the agent and
thus more closely align principal–agent interests (Fama and
Jensen 1983). However, the fundamental agency problem
for listed companies in emerging markets, including Tai-
wan, is not a conflict of interest between managers and
owners, but a conflict of interest between controlling
shareholders and minority shareholders (Shleifer and
Vishny 1997). Claessens et al. (2000) find that 80 % of the
management in Taiwanese listed companies is derived
from the controlling family, whereas Yeh et al. (2001)
report that 76 % of Taiwanese listed companies are con-
trolled by family shareholders. Thus, concentration of
ownership by controlling shareholders has been associated
with the principal–principal agency problem in emerging
economies such as that of Taiwan.
The concentration of ownership by controlling share-
holders has two major effects based on: (1) the conver-
gence-of-interests hypothesis and (2) the entrenchment
hypothesis. Regarding the convergence-of-interests
hypothesis, when cash flow rights are concentrated in the
hands of a single shareholder, that controlling shareholder
has an incentive to optimize firm performance, as increases
in firm wealth translate into increases in personal wealth
(Jensen and Meckling 1976). Alternatively, the entrench-
ment hypothesis argues that when ownership rights are
concentrated in the hands of a single shareholder, that
controlling shareholder exercises greater discretionary
power and tends to be more self-interested, which leads to
even more severe agency problems (Jensen and Ruback
1983). However, a single large controlling shareholder
frequently possesses control rights in excess of cash flow
rights and enjoys almost total control over managers by
using pyramidal control structures and cross-stockholdings
(Claessens et al. 2000, 2002; La Porta et al. 1999, 2002).
The high level of separation between cash flow rights and
voting rights motivates the controlling shareholder to
entrench him- or herself at the expense of outside minority
shareholders (Claessens et al. 2000; La Porta et al. 1999).
With regard to the expropriation incentive of controlling
shareholders, prior studies have found divergence in con-
trol rights and cash flow rights to be associated with lower
market valuations and firm performance (Claessens et al.
2002) and reduced earnings quality (Fan and Wong 2002;
Francis et al. 2003; Haw et al. 2004).
We posit that control–cash flow divergence might serve
as an important moderator on the link between CSP and FP.
First, the ownership concentration of firms exacerbates
agency costs. The influential role of the controlling
shareholders generates information asymmetry caused by
their incentive to obtain the necessary information to
effectively control corporate policies (Attig et al. 2006).
This perspective is documented by Claessens et al. (2002),
who showed that control–cash flow divergence leads to the
agency problem and decreases firm value. Decisions in the
area of CSP are likely to reflect both high information
asymmetry and low programmability (Deckop et al. 2006).
McWilliams et al. (2006) indicate that asymmetric infor-
mation about CSP allows CEOs to hide the more practical
motivations behind their CSR activities although they may
perceive that many external stakeholders view CSR activ-
ity more favorably. Alternatively, the extraction of private
control benefits, if detected, is likely to invite external
intervention by minority shareholders, analysts, stock
exchanges, or regulators. Thus, we propose that control–
cash flow divergence increases the cost of monitoring and
thus enhances agents’ opportunities to pursue self-interest
at the expense of principals.
Second, compensation systems are ineffective in respect
to providing incentives for CEOs to improve firm CSP
when firms have bad corporate governance systems. Core
et al. (1999) suggest that firms with weaker governance
structures have greater agency problems and that CEOs are
therefore able to extract greater compensation. Both Chien
and Peng (2012) and Falck and Heblich (2007) indicate
that CSR investments are most likely to pay off in the long
run. As a result, CSR investment might actually be a bur-
den for firms in the short run. Issues related to environ-
mental neglect are not likely to be caught immediately
(Short 2004) and are unlikely to show up in short-term FP.
As a result, CEOs may be concerned with meeting their
short-term goals and may not invest in CSP due to goal
conflicts related to time horizons (Bushee 1998). In con-
trast, McGuire et al. (2003) indicate that corporate gover-
nance effects regarding social performance may tend to be
more reactive in nature as a result of deterring socially
risky behavior. We expect that firms with ineffective
executive compensation mechanics may discourage CEOs
to pursue social objectives.
Finally, CSP also affects organizational reputation,
thereby improving investor perceptions of firms (e.g., Or-
litzky et al. 2003), which in turn may affect stock prices.
For example, KLD Research & Analytics dropped Coca-
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 C.-W. Peng, M.-L. Yang

Cola Co. from its Broad Market Social Index in July 2006 information. For example, the current study carefully iden-
because of concerns about the company’s labor and envi- tifies the level of divergence between ownership and control
ronmental practices in the developing world. As a result, rights for controlling shareholders in order to test for nega-
TIAA-CREF, the largest U.S. retirement fund, subse- tive entrenchment effects. A binary summary of KLD’s
quently sold more than 50 million shares of Coca-Cola Co. positive and negative ratings may not fully catch this effect.
stock (Chatterji et al. 2009). Thus, we expect that good In addition, KLD rated companies are not globally focused
corporate structure is associated with better monitoring and only trade on the US stock exchange (Turker 2009).
because failure to comply with environmental regulations Literature on this topic has indicated that it is also important
can lead to penalties and bad publicity that effective to assess corporate CSR practices in places in the world
monitors would consider avoidable. other than in the U.S. (Chapple and Moon 2005; Matten and
We propose a negative relationship between CSP and Moon 2008). Therefore, this study hand-collected pollution
short-term or long-term FP for Taiwanese firms with a high control investment data were used to test CSR practices in
degree of control–cash flow divergence (i.e., the Taiwan in order to represent emerging markets.
entrenchment effect is expected to be found). Accordingly, In addition, the ultimate control and ownership structure
this study proposes the following hypotheses (in alternative and financial variable data of each firm were mainly col-
form): lected from company prospectuses and the Taiwan Eco-
nomic Journal (TEJ) database.
Hypothesis 1 Control–cash flow divergence negatively
moderates the relationship between corporate social per-
Descriptive Statistics
formance and short-term financial performance.
Hypothesis 2 Control–cash flow divergence negatively Table 1 shows the descriptive statistics for all the variables
moderates the relationship between corporate social per- included in this study. It can be seen that the short-term FP
formance and long-term financial performance. (Short-run FP) has a mean of -0.142; the 3-year window
long-term FP (Long-run FP1) has a mean of -0.151, and
the 5-year window long-term FP (Long-run FP2) has a
Sample and Descriptive Statistics mean of -0.111, suggesting, on average, that most firms
exhibited negative short-term and long-term FP during the
Sample sample year. In addition, the mean of Pollution (indicator
variable) is 0.210, suggesting that about 21 % of sample
This study’s sample is composed of all firms in the cement, firms mention pollution control investment disclosures in
plastics, chemical, paper and pulp, and iron and steel their annual reports. The mean of Divergence is 44.1 %,
industries with annual environmental capital expenditures in
Taiwan’s SFI (Securities and Futures Institute) database. By Table 1 Descriptive statistics
examining the annual reports of firms listed on the Taiwan Variable N Mean SD Minimum Maximum
Stock Exchange (TSE) for the fiscal years from 1996 to
Short-run FP 400 -0.142 0.626 -1.574 1.359
2006, we hand-collected data on their pollution control
investments in order to measure CSP. This data includes the Long-run FP1 364 -0.151 0.544 -1.657 1.240
date, amount, purposes, and expected benefits of each pol- Long-run FP2 333 -0.111 0.460 -1.299 0.969
lution control investment. As a result, a sample of 400 firms- Pollution 400 0.210 0.407 0 1
year observations was obtained for the purposes of this Divergence 400 0.441 0.246 0 0.973
study. 84 firm-year observations included pollution control MTB 400 1.503 0.954 0.068 6.358
investment data, and 316 firm-year observations did not SIZE 400 15.448 1.193 11.749 19.244
have this information, or only disclosed the amount that they DEBT 400 0.397 0.148 0.093 0.789
expected to spend for this purpose. Notably, previous studies Short-run FP denotes the difference in a firm’s factor score between
have commonly used the Kinder, Lydenberg, and Domini Year(t ? 1) and Year(t - 1). Long-run FP1 then denotes the differ-
(KLD) database to measure CSP (Graves and Waddock ence in the average factor score of Year(t ? 1) to Year(t ? 3) and
Year(t - 3) to Year(t - 1). Long-run FP2 then denotes the difference
1994; Hillman and Keim 2001; Johnson and Greening in the average factor score of Year(t ? 1) to Year(t ? 5) and
1999). However, KLD rated companies are not globally Year(t - 5) to Year(t - 1). Pollution is an indicator variable, which
focused and only trade on the US stock exchange based on is set to a numerical value of 1 for firms with pollution control
eight attributes of social activities (Turker 2009). As a result, investment, and 0 otherwise. Divergence represents the divergence
between the ultimate controlling shareholder’s voting rights and cash
they only disclose binary summaries for ENVIRONMENT flow rights. MTB is the ratio of a firm’s market value of equity to its
and GOVERNANCE. The KLD’s dichotomous variable for book value of equity. SIZE is the natural logarithm of a firm’s total
‘‘strength’’ and ‘‘concern’’ may ignore some valuable assets. DEBT is measured by the ratio of debt to assets

123
Effect of CSP on FP

suggesting that, on average, the ultimate controlling
shareholders’ voting rights are substantially in excess of
their cash flow rights, and thus they have greater incentive
to expropriate minority wealth. Finally, the means of MTB,
SIZE, and DEBT are 1.503, 15.448, and 0.397, respectively.
Table 2 shows the Pearson correlation matrix of all the
variables. It can be seen that the Pollution 9 Divergence
interaction variable is significantly and negatively corre-
lated with FP (the correlation between Short-run FP and
Pollution 9 Divergence is -0.124 with a p value \0.05;
the correlation between Long-run FP2 and Pollu-
tion 9 Divergence is -0.094 with a p value \0.1). This
finding is consistent with the negative entrenchment effect
hypothesis, which suggests that the divergence in control-
ling shareholders’ control and ownership moderates the
link between CSP and FP. In addition, Table 2 shows that
the highest correlation between the dependent and inde-
pendent variables is 0.502 (the correlation between Pollu-
tion and Pollution 9 Divergence). Gujarati (1995) suggest
that correlations in excess of 0.8 may indicate collinearity,
and thus this study does not expect collinearity to be a
problem for the multivariate estimations.
Research Design and Empirical Results
Test of Hypothesis 1: The Effect of Short-Run
Performance
The following empirical model (1) is used in this study to
test the effect of the divergence in regard to controlling
shareholder control and ownership on CSP and short-run
FP. All t-values are estimated based on standard errors
adjusted for heteroskedasticity (White 1980).
Shortrun FPi ¼ a0 þ a1 Pollution þ a2 Divergence
þ a3 Pollution  Divergence þ a4 MTB
þ a5 SIZE þ a6 DEBT þ a7 PRIOR
þ a8 GDPGW þ a9 PRIOR  Pollution
þ ei;t ð1Þ
Short-run FP. Factor analysis with varimax rotation is
performed to generate factor scores from four performance
variables (ROE, ROA, EPS, and CFA) since prior studies
have used these financial variables (Jaggi and Freedman
1992). In this study, the factor analysis to identify the
factor patterns yields only one factor (with an eigenvalue
[1) that captures the commonality among these four
variables, and its factor score essentially represents an
index that integrates these four performance measures.
Notably, the factor scores were standardized to a mean of
zero and a standard error of one, which ranged from
approximately -3.0 to ?3.0. Thus, employment of factor
scores to measure FPs can reduce the impact of an
extreme value, which may inadvertently distort the
relationship between the variables of interest. Essentially,
the estimate of the factor score is based on the
contribution or weight (termed loadings) of each
variable. In contrast, an average number of financial
variables assume that these variables are equally weighted.
Thus, the employment of an integrated factor score may
avoid the inconclusive results characteristic of previous

Table 2 Pearson correlations

Short-run Long-run Long-run Pollution Divergence Pollution 9 MTB SIZE DEBT
FP FP1 FP2 Divergence

Short-run FP 1 0.292** 0.493** -0.059 -0.158** -0.124** -0.048 -0.136** 0.066

Long-run FP1 1 0.667** 0.048 -0.214** -0.054 -0.288** 0.242** 0.251***
Long-run FP2 1 0.038 -0.313** -0.094* 0.328** 0.209** 0.202***
Pollution 1 -0.022 0.502** 0.115* -0.046 0.059
Divergence 1 0.137*** -0.010 -0.133** 0.042
Pollution 9 Divergence 1 0.101** -0.027 -0.081
MTB 1 -0.082 -0.239
SIZE 1 -0.028
DEBT 1
Short-run FP denotes the difference in a firm’s factor score between Year(t ? 1) and Year(t - 1). Long-run FP1 then denotes the difference in
the average factor score of Year(t ? 1) to Year(t ? 3) and Year(t - 3) to Year(t - 1). Long-run FP2 then denotes the difference in the average
factor score of Year(t ? 1) to Year(t ? 5) and Year(t - 5) to Year(t - 1). Pollution is an indicator variable, which is set to a numerical value of
1 for firms with pollution control investment, and 0 otherwise. Divergence represents the divergence between the ultimate controlling share-
holder’s voting rights and cash flow rights. MTB is the ratio of a firm’s market value of equity to its book value of equity. SIZE is the natural
logarithm of a firm’s total assets. DEBT is measured by the ratio of debt to assets
***, **, and * represent significance at the 1, 5, and 10 % levels using the two-tailed test, respectively

123

studies that have used individual financial indicators.
Following the approach proposed by Megginson et al.
(1994) to measure short-term (1-year window) FP, letting
Year(t) be the year of investment, Short-run FP denotes
the difference in a firm’s factor score between Year(t ? 1)
and Year(t - 1).
Pollution is an indicator variable which is set to a
numerical value of 1 for firms with pollution control
investments, and 0 for firms without them.
Divergence represents the divergence between the ulti-
mate controlling shareholder’s voting rights and cash flow
rights. The core agency problem arising from a controlling
shareholder is measured by the divergence of his or her
control and ownership. In previous research, it has been
shown that control rights and ownership can be measured
based on voting rights and cash flow rights, respectively
(Claessens et al. 2000; La Porta et al. 1999). Regarding
Hypothesis 1, this study predicts a3 \ 0, indicating the link
between CSP and short-run FP to be negatively moderated
by the high divergence in controlling shareholder control
and ownership.
Fama and French (1992) use market-to-book ratio, firm
size, and firm risk as control variables. Thus, MTB denotes
the ratio of the market value of equity to the book value of
equity. SIZE denotes the natural logarithm of total assets.
DEBT measured by the ratio of debt to assets. Prior studies
have used DEBT to test the association between firm risk
and FP (Jensen 1986; Harris and Raviv 1991). PRIOR is
used to examine whether pre-investment performance
affects post-investment performance. GDPGW is measured
by the annual growth rate of Taiwan GDP to control the
macroeconomic factor. Finally, with regard to the last
control variable, it is open to question whether firms with
better pre-investment performance tend to over comply
with regulations, in other words, whether firms with greater
FP are more likely to engage in CSP because they can
afford to, relative to investments in CSP providing a
greater FP return. To investigate this in more detail, this
study also includes an interactive pre-investment FP vari-
able and pollution control indicator (PRIOR 9 Pollution)
in the regression models as control variables. Table 3
summarizes the definitions of the key variables employed
in this study.
Table 4 shows the results of regressing short-term FP
(Short-run FP) on Pollution, Divergence, Pollu-
tion 9 Divergence and on the control variables. All t-val-
ues are based on standard errors using White’s (1980)
correction; the coefficient for Pollution is 0.018, and this is
insignificant at the 10 % level, which indicates no direct
relationship between CSP and firm short-run FP. This
result is similar to the stream of findings for Moore (2001),
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C.-W. Peng, M.-L. Yang
Table 3 Definition of variables
Variables Definition
Dependent variable
Short-run Factor analysis is performed to generate factor scores
FPi from four accounting variables (ROE, ROA, EPS, and
CFA). Following the approach proposed by
Megginson et al. (1994), financial performance is
measured with three different windows. Let Year(t) be
the year of investment; Short-run FP then denotes the
difference in a firm’s factor score between
Year(t ? 1) and Year(t - 1)
Long-run As above, Long-run FP1 then denotes the difference in
FP1 the average factor score of Year(t ? 1) to Year(t ? 3)
and Year(t - 3) to Year(t - 1)
Long-run As above, Long-run FP2 then denotes the difference in
FP2 the average factor score of Year(t ? 1) to Year(t ? 5)
and Year(t - 5) to Year(t - 1)
Independent variables
Pollution Pollution is an indicator variable, which is set to a
numerical value of 1 for firms with pollution control
investment, and 0 otherwise
Divergence Divergence represents the divergence between the
ultimate controlling shareholder’s voting rights and
cash flow rights
Control variables
MTB MTB is the ratio of a firm’s market value of equity to its
book value of equity
SIZE SIZE is the natural logarithm of a firm’s total assets
DEBT DEBT is measured by the ratio of debt to assets
PRIOR PRIOR represents the difference in factor scores
between the investment year and the pre-investment
year
GDPGW GDPGW as measured by the annual growth rate of
Taiwan’s GDP
Seifert et al. (2003), and Soana (2011). The coefficient of
Divergence is -0.004, and this is significant at the 1 %
level, which means that a firm’s short-run FP will be
adversely affected by the level of the controlling share-
holders’ divergence in regard to cash flow rights and
control rights. This finding is consistent with the argument
of Claessens et al. (2002), who suggest that divergence in
control and cash flow rights is associated with worse firm
performance. The coefficient for Pollution 9 Divergence
is -0.024, which is significant at the 1 % level, and this
result is therefore consistent with the prediction of
Hypothesis 1, indicating that the link between CSP and
short-run FP is significant and negative when the control–
cash flow divergence is high. In addition, for the control
variables, SIZE is 0.075, and DEBT is 0.559, both
of which are significant at the 1 % level. However, MTB
is -0.009; PRIOR0 is 0.007; GDPGW is 0.090, and
Effect of CSP on FP

Table 4 The effect of ownership concentration on the relationship Hypothesis 2, this study predicts the coefficients for Pol-
between corporate social performance and short-run financial lution 9 Divergence \ 0, indicating the link between CSP
performance
and long-run FP to be negatively moderated by the high
Independent variable Parameter Standard t-value p value level of divergence in controlling shareholders’ control and
estimates error ownership.
Dependent variable: short-run FP Table 5 shows the regression results regarding long-term
Intercept -1.312*** 0.410 -3.19 \0.01 FP, in which it can be seen that the coefficients for Pollution
Pollution 0.018 0.083 0.22 0.83 are 0.355 and 0.284, which are significant at the 1 % level.
Divergence -0.004*** 0.001 -3.98 \0.01 These results indicate that firms with higher levels of pol-
Pollution 9 -0.024*** 0.008 -3.00 \0.01
lution control investment tend to have higher long-run per-
Divergence formance. The coefficients for Divergence are -0.004 and
MTB -0.009 0.035 -0.26 0.79 -0.002, which are significant at the 10 and 5 % level,
SIZE 0.075*** 0.024 3.09 \0.01 respectively. This finding is consistent with the argument of
DEBT 0.559*** 0.205 2.72 \0.01 Claessens et al. (2002) that the divergence in control and
GDPGW 0.090 0.062 1.44 0.15 cash flow rights is associated with worse long-run firm
PRIOR0 0.007 0.030 0.25 0.80 performance. The coefficients for Pollution 9 Divergence
PRIOR0 9 Pollution 0.002 0.009 0.27 0.78 are shown to be -0.007 and -0.005, which are significant at
F-statistic (p value) = 6.12 (p \ 0.01), adjusted R2 = 9.60 %, the 1, 5 % level, respectively. These results confirm
N = 400 Hypothesis 2, indicating that the relationship between long-
run performance and pollution control investment is sig-
Definitions of variables appear in Table 3. PRIOR0 is the difference in
factor scores between the investment year and prior investment year nificant and negative when the control–cash flow divergence
t(-1). The maximum VIF is 1.40, which is \5, and thus multicol- is high. In addition, the control variables in Table 5 are
linearity is not a major concern similar to the findings in Table 4.
***, **, and * represent significance at the 1, 5, and 10 % levels using In addition, Tobin’s Q is also used as a measure of firm
the two-tailed test, respectively. The t-values based on standard errors market performance for a long-run focus. This is calculated
are adjusted for heteroskedasticity (White 1980)
as the market value of common stock plus the book value
of the preferred stocks and total liabilities deflated by total
assets (Chung and Pruit 1994). The results are reported in
PRIOR0 9 Pollution is 0.002. All of the above variables Table 6. The coefficient for Pollution is shown to be
are insignificant at the 10 % level. positive and significant (coefficient = 0.283, p \ 0.01),
while that for Pollution 9 Divergence is negative and
Test of Hypothesis 2: The Effect of Long-Run significant (coefficient = -0.005, p \ 0.05), consistent
Performance with the results reported in Table 5. Therefore, replacing
FP with Tobin’s Q does not influence the results reported
To test Hypothesis 2, the ordinary least-squares approach above.
was also used to estimate the regression parameters, and
standard regression diagnostics were performed to evaluate Robustness Tests
the reliability of the results (Greene 1997). All t-values are
estimated based on standard errors adjusted for heter- In this section, the following additional tests are discussed
oskedasticity (White 1980). to assure the above findings. First, we used the absolute
As discussed before, factor analysis using a varimax value of pollution control investment to investigate the
rotation was performed to generate factor scores from the association between CSP and FP. Chen and Metealf (1980)
four performance variables (ROE, ROA, EPS, and CFA). point out that the size effect will affect the above rela-
Following the approach proposed by Megginson et al. tionship since large firms tend to provide more voluntary
(1994), letting Year(t) be the year of investment, Long-run pollution control records than is the case for small firms. As
FP1 denotes the difference in the average factor score of a result, in this study, the natural log of the 84 firms’
Year(t ? 1) to Year(t ? 3) and Year(t - 3) to Year(t - 1), investment on pollution control is used to control for the
and Long-run FP2 denotes the difference in the average size effect and test the hypotheses. The first to third col-
factor score of Year(t ? 1) to Year(t ? 5) and Year(t - 5) umns in Table 7 show the empirical results, and the results
to Year(t - 1). It is also worth noting that the windows we are generally consistent with prior findings, while the result
use to measure long-run performance are those that have for Pollution 3 Divergence is negative and significant
been commonly adopted in the literature (for example, (coefficient = -0.002, -0.001, and -0.001; p \ 0.01,
Loughran and Ritter 1995, among others). Regarding p \ 0.01, and p \ 0.05).

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 C.-W. Peng, M.-L. Yang

Table 5 The effect of ownership concentration on the relationship between corporate social performance and long-run financial performance
Dependent variable: long-run FP1 (N = 364) Dependent variable: long-run FP2 (N = 333)
Independent variables Parameter estimates t-value p value Independent variables Parameter estimates t-value p value

Intercept -1.693*** -5.10 \0.01 Intercept -0.750*** -2.70 \0.01

Pollution 0.355*** 2.85 \0.01 Pollution 0.284*** 2.86 \0.01
Divergence -0.004* -1.65 0.10 Divergence -0.002* -3.17 \0.01
Pollution 9 Divergence -0.007*** -2.73 \0.01 Pollution 9 Divergence -0.005** -2.40 0.02
MTB -0.114*** -4.04 \0.01 MTB -0.155*** -6.88 \0.01
SIZE 0.090*** 4.43 \0.01 SIZE 0.053*** 3.25 \0.01
DEBT 0.879*** 4.76 \0.01 DEBT 0.417*** 3.03 \0.01
GDPGW 0.004 0.55 0.57 GDPGW -0.001 -0.11 0.92
PRIOR1 0.238*** 9.06 \0.01 PRIOR2 0.153*** 6.92 \0.01
PRIOR1 9 Pollution -0.147** -2.43 0.02 PRIOR2 9 Pollution -0.069* -1.65 0.10
F-statistic (p value) 17.14 (p \ 0.01) F-statistic (p value) 19.00 (p \ 0.01)
Adjusted R2 22.97 % Adjusted R2 30.92 %
PRIOR1 is the difference in factor scores between the investment year and Avg(-3,-1). PRIOR2 is the difference in factor scores between the
investment year and Avg(-5,-1). Definitions of other variables appear in Table 3. The maximum VIF is 4.59, which is much \5, and thus
multicollinearity is not a major concern
***, **, and * represent significance at the 1, 5, and 10 % levels using the two-tailed test, respectively. The t-values based on standard errors are
adjusted for heteroskedasticity (White 1980)

Table 6 The effect of ownership concentration on the relationship Second, it is important to clarify the definition of firms
between corporate social performance and Tobin’s Q not providing relevant data or only disclosing the amount
Independent variable Parameter Standard t- p value that they expect to spend on pollution control. Thus, this
estimates error value study also includes an additional 46 firm observations in
Dependent variable: Tobin’s Q which expected spending on pollution control is assigned a
Intercept -0.205 0.261 -0.79 0.43 numerical value of 1 for firms with pollution control
Pollution 0.283*** 0.119 2.37 0.01
investments, and 0 for firms without this information. The
Divergence 0.006** 0.003 2.14 0.03
fourth to sixth columns in Table 7 show the empirical
Pollution 9 Divergence -0.005** 0.002 -2.20 0.02
results, and the results are consistent with prior findings,
while the result for Pollution 9 Divergence is negative and
SIZE -0.010 0.032 -0.34 0.73
significant (coefficient = -0.022, -0.008, and -0.004;
ROE -1.881*** 0.483 -3.89 \0.01
p \ 0.01, p \ 0.01, and p \ 0.05).
SALE 0.005 0.007 0.76 0.44
Finally, based on the type of moderator for ownership
GDPGW 0.004 0.010 0.46 0.64
concentration, subgroup analysis has been suggested to
PRIOR0 0.247*** 0.053 4.62 \0.01
measure the impact of a moderator variable (Sharma et al.
PRIOR0 9 Pollution 0.087 0.083 1.04 0.29
1981). In this study, the full sample is split in half, based on
F-statistic (p value) = 5.23 (p \ 0.01), adjusted R2 = 8.82 %,
N = 400
ownership concentration, in order to validate whether there
is a difference in CSP for low versus high concentration
This study follows Chung and Pruit (1994), who define Tobin’s Q as firms. The seventh to final columns in Table 7 show the
(market value of equity ? preferred stocks ? debt)/total assets. ROE
is defined as the net income to average equity. SALE is defined as a empirical results, and the results are consistent with prior
sales growth percentage from the prior 3 year’s sales. PRIOR0 is the findings, while there is negative association between pol-
difference in factor scores between the investment year and prior lution control investment and both short-term and long-
investment year t(-1). Definitions of other variables appear in term FP for high concentration firms (coefficient =
Table 3. The maximum VIF is 3.02, which is \5, and thus multicol-
linearity is not a major concern -0.221, -0.440, and -0.181; p \ 0.01, p \ 0.01, and
***, **, and * represent significance at the 1, 5, and 10 % levels using p \ 0.05). However, this study finds that there is insignifi-
the two-tailed test, respectively. The t-values based on standard errors cant association between pollution control investment and
are adjusted for heteroskedasticity (White 1980) both short- and long-run FP for low concentration firms.

123
 Effect of CSP on FP

Table 7 Additional test

Panel A: absolute value of pollution control investment Panel B: reclassification sample Panel C: split sample based on low versus high concentration firms

Dependent variable Short-run Long-run Long-run Short-run Long-run Long-run High concentration firms Low concentration firms
FP FP1 FP2 FP FP1 FP2
Short-run Long-run Long-run Short-run Long-run Long-run
FP FP1 FP2 FP FP1 FP2
Independent variable Parameter estimates

Intercept -1.147*** -1.196*** -0.647** -1.429*** -1.608*** -0.610** -1.916*** -1.830*** -1.020** -1.337** -1.892*** -1.002**
Poll_Indicator -0.008 0.016** 0.014** 0.008 0.361*** 0.256** -0.221** -0.440*** -0.181** -0.091 -0.132 -0.046
Divergence -0.004*** -0.002 -0.002** -0.004*** -0.004 -0.003***
Poll_Indicator 9 Divergence -0.002*** -0.001*** -0.001** -0.022*** -0.008*** -0.004**
MTB -0.002 -0.095*** -0.149*** 0.020 -0.107*** -0.151*** -0.053 -0.056 -0.246*** -0.030 -0.220*** -0.173***
SIZE 0.065*** 0.053*** 0.046*** 0.084*** 0.085*** 0.047*** 0.095** 0.097*** 0.073*** 0.077** 0.097*** 0.061**
DEBT 0.591*** 0.336* 0.190 0.459** 0.895*** 0.372*** 0.667** 0.700** 0.205 0.489 1.636*** 0.949***
GDPGW 0.001 0.116*** 0.118*** 0.044 0.239*** 0.136*** 0.026 0.287*** 0.343*** 0.122** 0.450*** 0.320***
PRIORi 0.008 0.001 -0.001 -0.008 0.003 -0.001 0.024 -0.159 -0.138 -0.013 0.023** -0.115
PRIORi 9 Poll_Indicator 0.003 0.005 -0.003 -0.005 -0.132** -0.052 0.153 -0.007 0.011 0.079 -0.003 -0.006
F-value 7.85 9.37 11.91 7.24 17.64 17.36 2.97 8.67 12.23 2.87 24.52 12.41
(p value) (p \ 0.01) (p \ 0.01) (p \ 0.01) (p \ 0.01) (p \ 0.01) (p \ 0.01) (p \ 0.01) (p \ 0.01) (p \ 0.01) (p \ 0.01) (p \ 0.01) (p \ 0.01)
Adj. R2 (%) 12.82 14.80 25.37 13.17 22.94 28.52 10.63 19.06 27.05 9.0 39.61 27.45
N 400 364 333 400 364 333 200 182 167 200 182 166

In Panel A, this study uses the absolute value of pollution control investment as Poll_Indicator. In Panel B, this study also includes additional 46 firm observations in which they disclose their expected spending on
pollution control records as a numerical value of 1 for firms with pollution control investments (Poll_Indicator = 1), and 0 for firms without this information (Poll_Indicator = 0). In Panel C, Poll_Indicator is an
indicator variable, which is set to a numerical value of 1 for firms with pollution control investment, and 0 otherwise. Definitions of variables appear in Table 3. The t-values based on standard errors are adjusted for
heteroskedasticity (White 1980). The maximum VIF is 4.60, which is \5, and thus multicollinearity is not a major concern
***, **, and * represent significance at the 1, 5, and 10 % levels using the two-tailed test, respectively

123

Conclusions
This study examines the role of the ownership concentra-
tion on the link between CSP and FP from five highly
polluting industries in Taiwan. We demonstrate that the
relationship between CSP and short-run FP is negatively
moderated by a high degree of control–cash flow diver-
gence. The link between CSP and long-run FP is also found
to be negative among firms with a high degree of control–
cash flow divergence. As a result, the impact of ownership
concentration plays a critical monitoring role in the link
between CSP and FP in emerging markets such as Taiwan.
The results of this study have a number of important
implications for business. First, the increasing focus on
CSP has made it critical for owner interests (principals) to
understand how specific agency problems may accomplish
or deter social performance goals. Margolis and Walsh
(2003, p. 268) argued that, ‘‘we need to understand the
conditions under which a corporation’s efforts benefit
society before we can understand the link between a firm’s
social and financial performance.’’ Our findings highlight
this question by allowing us to better understand when
agency problems caused by ownership concentration affect
both the upsides and downsides of the social responsibil-
ity–firm performance relationship.
Second, our findings support the hypothesis of negative
entrenchment and provide more nuanced insights concern-
ing the CSP–FP relationship. While a lot of attention has
been paid to the value creation aspect of corporate gover-
nance and the reduction of agency costs aspects of corporate
governance, limited research has actually considered how
good corporate governance systems can prevent managers
from making poor social decisions. We find that firms with a
high degree of control–cash flow divergence (i.e., the neg-
ative entrenchment effect) exacerbate the negative rela-
tionship between CSP and FP. Thus, the results of this study
are able to advance our understanding of managerial social
decisions through which expropriation of minority share-
holders takes place in firms with concentrated ownership.
Finally, our findings can help policy-makers and regu-
lators better identify how the ownership concentration that
is common in emerging markets is associated with firm
incentives to engage in pollution control. Regulatory
agencies can use this signal to assess, reframe and improve
CSR policies, in terms of their efficiency and effectiveness,
by considering the governance that could lead to
enhancement of both social and financial performance.
Some limitations of this work should be noted. The first
is that this study uses only a single emerging country,
Taiwan, to examine the role of ownership concentration on
the link between CSP–FP, and thus it may not be possible
to generalize the results to other countries. Another limi-
tation of this study is the measurement of the divergence
123
C.-W. Peng, M.-L. Yang
between the ultimate controlling shareholder’s voting
rights and cash flow rights. This study only includes listed
firms in Taiwan, but unlisted firms may have direct and
indirect ownership links with those that are listed. There-
fore, the divergence level of ultimate ownership and con-
trol may have been underestimated. However, the effects of
unmeasured variables are always unpredictable, and it is
possible that this limitation does not materially affect the
results of this work.
Our results suggest opportunities for future research.
First, this study finds a significant difference between CSP
and FP for low versus high concentration firms. We
encourage future research to build rich, in-depth case
studies related to these findings in order to continuously
contribute to the practice of CSR in the business world. A
qualitative case study approach will enable the derivation
of in-depth understanding and explanations (Eisenhardt
1989) about firm CSR activities and will contribute to a
better understanding of how well-formed corporate gov-
ernance provides an assurance of addressing most CSR
issues. For example, firms with well-formed corporate
governance programs will direct their attention toward the
operation of productive and sustainable companies that
benefit both society and their own FP as a whole.
Second, our study uses ownership concentration as a
moderating variable to investigate the link between CSP
and FP in the Asia pacific region. In fact, different regions
have different corporate governance features, environ-
mental policies, business practices, as well as their own
specific cultures, etc. Thus, more studies from various
perspectives and different countries are essential to
enhance the understanding of the impact of corporate
governance on the link between CSP and FP. We leave this
important question to future research. For example, future
researchers may include more corporate governance
mechanisms in their regions, e.g., institutional ownership,
outside blockholder ownership, or board characteristics. It
would be interesting to gain a better understanding of the
impact of the interaction between governance mechanisms
and the link between CSP and FP.
Finally, most studies have focused on stakeholder theory
that assumes managers conduct CSR to fulfill their moral,
ethical, and social duties for the benefit of their stake-
holders. CEO short- (e.g., salary and bonus) and long-term
(e.g., stock options) compensation payments rarely contain
direct and explicit incentives to focus on CSR. The
importance of CSR raises the question of whether CEOs
are given incentives through pay packages to improve firm
CSP. For example, a long-term compensation plan will
reduce CEO pressure to maximize short-term earnings,
which provides a longer-term time frame wherein CSP
investments are unlikely to show up in short-term FP. We
look forward to future research addressing these issues.
Effect of CSP on FP
Acknowledgments The authors thank two anonymous referees for
their invaluable advice. We also thank Joëlle Vanhamme, JBE’s
Editor, for her cordiality and encouragement through the review
process. Research support from the National Science Council, Taiwan
(grant # NCS 102-2410-H-018-040) is gratefully acknowledged. All
errors are our own.
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