Academic journal article
By Peters, Richard; Mullen, Michael R.
Journal of Global Business Issues , Vol. 3, No. 1
Most observers agree that corporate social responsibility (CSR) is an important consideration for firms and their stakeholders. There is, however, disagreement in the literature about the motivation for firms to engage in socially responsible behavior. The CSR-Firm financial performance relationship has been investigated previously without substantial agreement about its nature or even its very existence. While CSR has traditionally been defined as a strategic 'process', empirical studies to date have been almost exclusively cross-sectional in nature, studying the immediate or short-term effects of CSR on firm performance. Nonetheless, many authors argue that the CSR-financial performance link should be studied over time. In this study, we use time series data to empirically analyze the cumulative effects of CSR on future firm financial performance. While cross-sectional analyses of CSR have produced ambiguous results, our analysis provide evidence that time-based, cumulative effects of CSR on firm financial performance are positive and strengthen over time. The results provide support for the ideal that long term corporate social responsibility is positive for a firm's stockholders as well as other stakeholders.
Most observers agree that corporate social responsibility is an important consideration for firms and their stakeholders. There is, however, disagreement in the literature about the motivation for firms to engage in socially responsible behavior. The theoretical foundation for the normative stakeholder model premises that businesses are moral agents, entrusted with direct obligations to all of society (Donaldson and Preston, 1995; Gibson, 2000). Therefore, corporate social responsibility is undertaken as a duty, with moral intentions leading to CSR. A rival alternative view is based on Nobel Lauriat Milton Friedman's (1962, 1970) assertions that managers of firms have a prime 'social' responsibility to make profits. In this model, if individual firms bear differential costs of 'socially responsible' behavior, CSR will negatively impact firm financial performance. Therefore, managers should only expend scarce resources on CSR if recognized corporate social performance1 (CSP) leads to improved firm financial performance. As such there is an ongoing "need to uncover the link between social responsibility and firm performance" (Tenbrunsel, 2007).
Scholars have recently shown considerable interest in CSR, its motivations and consequences (Becker-Olsen et al., 2005; Dentchev, 2004; Godfrey and Hatch, 2007; Heugens and Dentchev, 2007; Hood and Logsdon, 2002; Husted and Allen, 2000; Maignan and Ferrell, 2003; Mengue and Ozanne, 2003). For instance, several studies show that corporate social initiatives lead to positive cognitive, affective and behavioral responses by consumers (Becker-Olsen, 2005; Creyer and Ross, 1997; Ellen et al., 2000, Folkes and Kamins, 1999; Murray and Vogel, 1997; and Sen and Bhattacharya, 2001). On the other hand, evidence suggests that corporations with poor CSR records experience significant negative consequences (e.g., reductions in brand images, or temporary drops in sales) when their negative records become public (Sen and Bhattacharya, 2001). Consumer watchdog groups such as CorpWatch successfully publicize irresponsible firms with their name-and-shame publicity programs (Becker-Olsen et al., 2005).
Empirical cross-sectional studies of the effects of various 'aspects' of corporate social responsibility such as pollution abatement or firm reputation on firm financial performance have yielded inconsistent and contradictory results (Aupperle et al., 1985; Godfrey and Hatch, 2007; Ullmann, 1985). These early studies found some positive linkages (Moskowitz, 1972; Parket and Eilbirt, 1975), some negative (i.e., Vance 1975) and several found no significant relationship between aspects of CSR performance and firm performance at all (i.e., Folger and Nutt, 1975; Alexander and Buchholz, 1978). …