The Impact of Corporate Social Performance on Financial Risk and Utility: A Longitudinal Analysis
Oikonomou, Ioannis, Brooks, Chris, Pavelin, Stephen, Financial Management
This study focuses on the wealth-protective effects of socially responsible firm behavior by examining the association between corporate social performance (CSP) and financial risk for an extensive panel data sample of S&P 500 companies between the years 1992 and 2009. In addition, the link between CSP and investor utility is investigated. The main findings are that corporate social responsibility is negatively but weakly related to systematic firm risk and that corporate social irresponsibility is positively and strongly related to financial risk. The fact that both conventional and downside risk measures lead to the same conclusions adds convergent validity to the analysis. However, the risk-return trade-off appears to be such that no clear utility gain or loss can be realized by investing in firms characterized by different levels of social and environmental performance. Overall volatility conditions of the financial markets are shown to play a moderating role in the nature and strength of the CSP-risk relationship.
Within the rapidly evolving research area of Corporate Social Responsibility (CSR), a significant portion of the relevant theoretical and empirical literature has concentrated on studying the specificities of the relationship between the corporate social performance (CSP) and measures of the corporate financial performance (CFP) of the firm. For many researchers, managers, and investors, the question of whether there is a business case for CSR is of key importance. Perceptions of a positive (or negative) direct or indirect relationship between a corporation's social responsibility and its bottom line promote (or deter) the implementation of CSR principles in both corporate and investment strategies. The academic debate concerning the nature of the link between CSP and CFP is a persistent and controversial one. Due to a variety of definitional, measurement, and methodological issues, there is no consensus in the relevant literature, either at the firm or portfolio level of analysis, with results often in sharp conflict (Griffin and Mahon, 1997; Margolis and Walsh, 2003)--some studies indicate a positive CSP-CFP relationship (Hillman and Keim, 2001), others point to a negative link (Brammer, Brooks, and Pavelin, 2006) or to no significant association between the two (Renneboog, Ter Horst, and Zhang, 2008a; Bauer, Koedijk, and Otten, 2005). Among these studies, the common denominator is the use of measures of financial performance that focus on firm profitability (accounting measures) or on stock returns (market measures), sometimes using risk (either accounting or market risk, respectively) only as an adjustment factor.
The inherent assumption in these papers is that CSP can influence CFP solely through a front door mechanism. Under the stakeholder management perspective, CSP is expected to contribute to the creation of sustainable comparative advantages that will enhance firm profitability and lead to an overall positive CSP-CFP relationship (Jones, 1995). In contradiction to this, there are those who view CSR practices as a misappropriation and misallocation of valuable corporate resources which are detrimental to firm performance (Friedman, 1970). The final possibility is that there are so many intervening variables between CSP and CFP that identifying a consistent, statically significant relationship between the two is prohibitively difficult (Ullmann, 1985).
In this study, we attempt to offer an alternative empirical pathway in relation to the CSP-CFP connection by investigating the possibility of the existence of a back door mechanism between the two so that CSP has wealth-protective instead of wealth-enhancing effects that are captured in the corporations' stock market valuations. To investigate such effects, we will focus our analysis upon the relationship between CSP and financial risk (rather than profitability or returns on share ownership) at the firm level. Thus, in a substantive departure from previous studies of the CSP-CFP link, risk will be employed as a key dependent variable. …