We examine the relationship between CSR ratings and long-term financial performance by collecting financial performance data from 2002 to 2006 for all samples of firms. Measures of financial performance are return on asset, return on equity, earnings per share, stock returns and price earning ratio. The first three are accounting-based measures and the latter two are market-based.
Table 7 presents correlation coefficients between four CSR measures and five-year average financial performance of firms. From the left part of Panel A which all samples are used, we observe a striking result which shows that the correlation coefficients between CSR ratings and ROA, ROE and EPS are positive, but correlation coefficients between CSR and STOCKRET and P/E ratio are negative regardless what CSR measure is used. It means that firms with higher CSR ratings are accompanied by better average long-tern return on asset, return on equity and earnings per share, but worse long-term average stock returns and price earnings ratio. That's firms with better CSR performance have better accounting-based performance but lower market-based performance. Good firms are good in books, but not good investments for investors. From right part of Panel A which firms of traditional industry are used, similar results are obtained. Firms with higher CSR ratings have better long-term accounting-based performance but worse long-term market-based performance.
Table 7. Correlation between CSR and Long-term Financial Performance Panel A. Samples-All Firms and T.I
Performance Measure All Firms T.I
COM ENV FIN TOT COM ENV FIN TOT
ROA 0.165 0.157 0.252 0.237 0.327 0.165 0.245 0.338
ROE 0.118 0.116 0.235 0.190 0.272 0.082 0.196 0.266
EPS 0.196 0.123 0.235 0.245 0.333 0.111 0.225 0.323
STOCKRET -0.083 -0.016 -0.088 -0.092 -0.134 0.014 -0.163 -0.142 P/E Ratio -0.066 -0.130 -0.110 -0.114 -0.140 -0.186 -0.117 -0.175
Panel B. Samples-F.I, E.I and TTTM.I Performance
Measure
F.I E.I TTTM.I
COM ENV FIN TOT COM ENV FIN TOT COM ENV FIN TOT ROA 0.226 0.264 0.326 0.309 0.095 0.140 0.238 0.183 0.115 -0.055 0.474 0.277 ROE -0.016 0.045 0.457 0.137 0.094 0.148 0.234 0.183 0.106 -0.087 0.343 0.206 EPS 0.317 0.183 0.125 0.296 0.137 0.106 0.235 0.202 0.244 -0.037 0.527 0.395 STOCKRET -0.063 -0.172 -0.055 -0.093 0.036 0.034 0.119 0.075 0.070 -0.242 -0.012 -0.008 P/E Ratio -0.283 0.076 0.070 -0.165 -0.022 -0.120 -0.059 -0.065 0.050 -0.233 -0.379 -0.182
Panel B of table 7 presents correlation coefficients between four CSR measures and five-year average financial performance of firms of financial industry, electronics industry and the industry of transportation, tourism, trade and merchant. First, as we observe the left part of panel B of table 7, the correlation coefficients between measures of community participation are positive for ROA and ROE but negative for EPS, STOCKRET and P/E ratio.
The correlation coefficients between measures of environmental protection are positive for all accounting-based performance but negative for market-based performance. Similar results are obtained if measure of financial transparency and aggregate CSR measure are used. Second, from the middle part of panel B which firms of electronic industry are used, we observe that
correlation coefficients between CSR and long-term average ROA, ROE, EPS and STOCKRET are positive, but are negative between CSR and P/E ratio regardless what CSR measure is used. Third, from the right part of panel B where firms of industry of transportation, tourism, trade and merchant are used, we observe that if CSR measure is community participation, correlation coefficients between CSR and five long-term financial performance indicators are all positive, but are all negative if environmental protection is used as CSR measure. If financial transparency is used as the CSR measure, correlation coefficients between CSR and long-term accounting-based performance indicators are positive, but correlation coefficients between CSR and long-term market-based performance indicators are negative. Similar results are obtained if aggregate CSR measure is used. Although the results are slight mixed, we get general results that more philanthropic firms have better accounting performance but worse market performance.
According to aggregate CSR measure, we divide firms into five groups on descending order of CSR ratings. As mentioned before, the first group composed of top 20% quantile of samples, the second group composed of 20%-40% quantile of samples. The fifth group composed of bottom 20%
quantile of samples. Table 8 reports five year long-term simple average financial performance of five groups of firms. Panel A shows five-year average of return on asset of five groups of firms. From the second column which all firms are used, average ROAs of group I and II are 8.286% and 6.19%, respectively. The average ROA of group V is 1.585%. The difference between group I and group V is 6.7%. Thus, it seems to have descending trend in performance which presents that group of firms with better CSR ratings get higher average returns on asset. As we further do this analysis using different industries, we get similar results. For example, the third
column in panel A, only the firms of traditional firms are used, average ROAs of group I and II are 7.09% and 6.149%, respectively, and the average ROA of group V is 0.981%. The difference between group I and group V is 6.109%.
It also show descending trend in performance which presents that group of firms with better CSR ratings get higher average returns on asset. Similar results obtained if only firms in financial Industry, firms in electronic industry and firms in transportation, trade, tourism and merchandise industry are used.
The panel B shows long-term five year average returns on equity of five groups of firms. As all samples of firms are used, as shown in the second column, average ROEs of group I and II are 12.03% and 8.381%, respectively. The average ROE of group V is -3.139%. The difference between group I and group V is 15.17%. Thus, it also shows descending trend in performance which presents that group of firms with better CSR ratings get higher average returns on equity. Similar results are obtained if only firms in traditional, financial, electronics and transportation, trade, tourism and merchandise industries are used. Panel C show familiar results and presents a trend that groups of firms with better CSR ratings got higher long-term average earnings per share. From panel A to panel C we can make a conclusion that firms with better CSR ratings get better accounting-based financial performance.
Panel D in table 8 shows long-term five year simple average stock returns of five groups of firms. As all samples of firms are used, as shown in second column, the trend of higher CSR-lower performance is not obvious.
For example, average STOCKRETs of group I and II are 16.83% and 13.54%, respectively. The average STOCKRET of group V is 26.31%. The difference between group I and group V is -9.47%. Similar results are obtained if only firms in traditional, financial, electronics or transportation, trade, tourism and
merchandise industries are used. Panel E is similar to panel D but presents weighted average stock returns of five groups of firms. When all samples of firms are used, average STOCKRETs of group I and II are 21.37% and 16.18%, respectively. The average STOCKRET of group V is 24.09%. The difference between group I and group V is -2.714%. As we use firms in traditional industry, firms in financial industry, firms in electronic industry and firms in transportation, trade, tourism and merchandise industry for analysis, we did not get a clear trend that higher CSR-lower performance is presented.
Panel F show even contrary results relative to panel A to panel C.
Average P/E ratio of group I and II are 44.79 and 31.58, respectively. The average STOCKRET of group V is 101.4. The difference between group I and group V is -56.58. Similar results are obtained if only firms in traditional, financial industry, electronics or transportation, trade, tourism and merchandise industries are analyzed. At the same time we can find a slightly different trend which is contrary to the trend obtained from panel A to panel C, that's the group with higher CSR ratings get lower P/E ratio.
From now on, we can make a conclusion that the group of firms with higher CSR ratings tend to have higher returns on assets, returns on equity and earnings per share, but not on stock returns and price earnings ratio.
Especially, firms with higher CSR ratings tend to have lower price earnings ratio than firms with lower CSR ratings. This is partially consistent with former results that higher CSR firms have better accounting-based performance but worse market-based performance than firms with lower CSR ratings. Good companies are good in books but not necessarily good investments for investors.
Table 8. Long-term Financial Performance of Firms Panel A. Performance Measure: ROA
Portfolio All Firms T.I F.I E.I TTTM.I
Group I 8.286 7.090 5.748 9.193 10.92
Group II 6.190 6.149 1.911 7.640 6.002
Group III 4.769 4.798 1.650 6.392 5.494
Group IV 4.838 3.937 0.222 5.186 0.824
Group V 1.585 0.981 1.524 2.797 2.347
Diff (I and V) 6.700 6.109 4.225 6.396 8.572
Panel B. Performance Measure: ROE
Portfolio All Firms T.I F.I E.I TTTM.I
Group I 12.03 9.292 7.111 14.11 18.74
Group II 8.381 8.475 0.652 9.662 10.35
Group III 3.061 8.053 1.785 9.109 -10.89
Group IV 4.633 5.059 -28.48 3.438 0.584
Group V -3.139 -7.033 -3.332 0.384 1.420
Diff (I and V) 15.17 16.33 10.44 13.73 17.32
Panel C. Performance Measure: EPS
Portfolio All Firms T.I F.I E.I TTTM.I
Group I 2.520 2.077 1.271 3.165 2.964
Group II 1.793 1.437 0.099 2.311 1.708
Group III 1.244 1.222 0.288 1.756 1.099
Group IV 1.410 1.097 0.977 1.678 0.040
Group V 0.500 0.306 -0.176 1.031 0.322
Diff (I and V) 2.020 1.771 1.447 2.134 2.642
Panel D. Performance Measure: Average Yearly Stock Returns (Weighted by Market Cap.)
Portfolio All Firms T.I F.I E.I TTTM.I
Group I 16.83 33.33 13.49 10.79 33.10
Group II 13.54 32.20 14.67 3.647 20.26
Group III 19.28 26.55 10.84 8.688 47.23
Group IV 19.39 32.16 10.20 9.210 24.61
Group V 26.31 40.79 16.30 12.44 32.62
Diff (I and V) -9.479 -7.461 -2.815 -1.650 0.475
Panel E. Performance Measure: Average Yearly Stock Returns (Equally Weighted)
Portfolio All Firms T.I F.I E.I TTTM.I
Group I 21.37 29.81 15.85 13.04 30.20
Group II 16.18 22.60 17.26 10.49 18.54
Group III 19.59 26.89 21.61 9.072 41.89
Group IV 18.18 27.88 17.07 11.06 23.86
Group V 24.09 37.99 18.31 5.789 25.32
Diff (I and V) -2.714 -8.186 -2.463 7.252 4.874
Panel F. Performance Measure: Average P/E Ratio
Portfolio All Firms T.I F.I E.I TTTM.I
Group I 44.79 22.75 96.76 46.98 27.65
Group II 31.58 31.23 119.2 32.73 17.21
Group III 36.78 33.82 17.87 42.62 34.35
Group IV 104.4 111.9 32.40 39.90 576.3
Group V 101.4 47.70 455.7 63.87 123.6
Diff (I and V) -56.58 -24.96 -359.0 -16.89 -95.98
Figure 1 presents a bar chart of five long-term average financial performance indicators of each group firms. As before, samples of firms are divided into five groups by their aggregate CSR ratings. From A we can find that there exits a descending trend in return on assets from group I to group V.
Similar results are obtained for B and C. This means that the group of firms with higher CSR ratings gets better accounting-based performance indicators.
But this trend disappeared as we observe diagram D, E and F, which shows stock returns (simple average, weighted average) and price earnings ratio of five groups of firms. Thus, the group of firms do not necessarily get better market-based performance indicators. This is consistent with our former results that Good Companies which engage more efforts in CSR are good in books, but not good investments, firms with corporate social responsibility is not necessarily responsible for investors.
Figure 1. Bar Chart of Long-term Financial Performance of Firms A.ROA B.ROE
C.EPS D. Stock Return (Simple Average)
E. Stock Return (Weighted Average) F. P/E Ratio
Table 9 reports similar data as table 8 but with the difference of using three disaggregate measures as rankings to divide samples of firms into five groups. For example, the left part of panel A shows long-term five-year average returns on assets of five groups of firms. Firms are grouped according to descending order of community participation ratings. The samples of firms for analysis are five, all samples of firms, firms in traditional industry, firms in financial industry, firms in electronic industry and firms in transportation, tourism, trade and merchandise industry. We can get similar results as before that groups with better CSR ratings (in community participation) have higher five-year average returns on assets. When we observe the middle and right part of panel A, which CSR measures are environmental protection and financial transparency, a similar trend is obtained. For panel B and panel C, although it is not perfect, we still find a trend that group of firms with better CSR ratings get higher returns on equity and earnings per share no matter what CSR ratings are used. But as we observe panel D to panel F, this trend is non-existent. Thus, as before, we get a general result which state that firms with better CSR ratings have higher accountings-based performance indicators but not market-based indicators, and this results is invariant to different measures of CSR.
Table 9. Long-term Financial Performance of Firms (Grouping Firms Based on Three Disaggregated CSR Measures)
Panel A. Performance Measure: Average ROA
Portfolio COM ENV FIN
All T.I F.I E.I TTTM All T.I F.I E.I TTTM All T.I F.I E.I TTTM Group I 7.60 6.24 5.75 8.40 10.3 7.42 7.15 5.96 9.04 5.69 8.54 8.57 3.41 10.6 10.9 Group II 5.92 6.40 -0.55 7.85 4.23 5.53 3.29 1.54 5.80 2.30 7.16 4.28 2.63 7.29 9.29 Group III 4.84 5.36 1.65 5.42 -0.05 6.34 6.19 -0.64 8.07 4.90 4.08 4.27 4.09 5.49 2.29 Group IV 4.14 4.89 2.82 5.60 3.78 2.95 4.88 2.59 6.24 11.3 3.50 4.65 1.54 4.80 1.02 Group V 3.19 0.11 1.83 3.88 7.37 3.41 1.43 1.78 2.05 1.38 2.37 1.18 2.35 3.02 2.06 Diff (I and V) 4.41 6.13 3.92 4.53 2.89 4.01 5.73 4.18 6.98 4.32 6.17 7.39 1.05 7.59 8.86
Panel B. Performance Measure: Average ROE
Portfolio COM ENV FIN
All T.I F.I E.I TTTM All T.I F.I E.I TTTM All T.I F.I E.I TTTM Group I 10.7 8.01 7.11 13.0 17.4 9.85 9.32 6.34 12.9 8.97 12.4 12.0 3.57 15.9 18.7 Group II 6.24 9.45 -34.5 11.3 6.73 6.40 4.74 -1.48 8.40 -12.7 10.8 6.42 4.46 10.6 13.3 Group III 5.04 8.37 1.79 5.73 -15.6 9.26 9.60 -31.5 10.9 6.51 3.31 5.11 5.60 4.33 -14.2 Group IV 2.42 7.30 6.55 1.64 1.61 -1.95 2.53 5.28 7.48 15.3 3.13 6.79 0.59 5.67 -0.41 Group V 0.57 -9.19 -0.07 4.93 10.2 1.41 -2.64 0.86 -3.07 2.14 -4.69 -6.59 -3.50 0.12 2.78 Diff (I and V) 10.2 17.2 7.19 8.07 7.19 8.44 12.0 5.49 16.0 6.84 17.1 18.6 7.07 15.8 16.0
Panel C. Performance Measure: Average EPS
Portfolio COM ENV FIN
All T.I F.I E.I TTTM All T.I F.I E.I TTTM All T.I F.I E.I TTTM Group I 2.36 1.89 1.27 3.00 2.87 2.08 1.96 1.17 2.70 1.41 2.61 2.54 0.66 3.48 2.96 Group II 1.76 1.61 0.20 2.41 0.96 1.61 0.85 -0.06 1.48 0.62 1.99 0.96 0.59 2.26 2.27 Group III 1.23 1.22 0.29 1.46 0.19 1.71 1.53 0.58 2.92 1.11 1.04 0.99 0.95 1.63 0.28 Group IV 1.36 1.46 0.88 1.84 0.63 1.01 1.21 0.69 1.78 2.46 1.00 1.23 0.18 1.41 0.19 Group V 0.75 -0.03 0.19 1.22 1.47 1.04 0.59 0.30 1.05 0.54 0.82 0.42 0.55 1.17 0.42 Diff (I and V) 1.61 1.92 1.08 1.79 1.40 1.04 1.37 0.87 1.65 0.87 1.78 2.12 0.11 2.31 2.54
Panel D. Performance Measure: Average Yearly Stock Returns (Weighted by Market Cap.)
Portfolio COM ENV FIN
All T.I F.I E.I TTTM All T.I F.I E.I TTTM All T.I F.I E.I TTTM Group I 15.0 30.4 13.5 9.96 31.0 17.7 34.2 12.2 10.6 17.7 18.0 34.6 17.2 10.5 33.1 Group II 16.2 36.6 12.2 7.06 27.1 10.8 23.8 11.7 3.38 41.8 14.7 27.9 12.1 8.70 23.3 Group III 25.0 29.0 10.8 12.6 37.1 21.1 35.9 16.9 17.6 18.6 15.1 24.7 12.6 10.5 47.8 Group IV 21.2 35.3 15.9 11.0 32.9 15.9 32.8 12.4 7.01 46.0 19.3 30.5 7.30 8.29 29.9 Group V 23.4 35.8 17.4 11.2 31.9 22.4 27.6 16.4 15.3 17.3 24.4 39.2 11.7 5.95 18.4 Diff (I and V) -8.35 -5.42 -3.93 -1.23 -0.89 -4.75 6.60 -4.22 -4.68 0.40 -6.33 -4.64 5.52 4.58 14.7
Panel E. Performance Measure: Average Yearly Stock Returns (Equally Weighted)
Portfolio COM ENV FIN
All T.I F.I E.I TTTM All T.I F.I E.I TTTM All T.I F.I E.I TTTM Group I 18.8 25.7 15.8 12.8 29.8 22.1 32.9 14.7 13.0 17.2 21.5 30.4 19.4 13.4 30.2 Group II 19.6 27.9 14.1 9.16 29.4 15.4 22.9 15.1 7.25 33.3 17.7 24.5 17.6 10.4 29.1 Group III 19.8 26.8 21.6 12.3 24.8 20.9 32.2 21.6 11.4 25.7 16.0 23.2 17.6 7.66 31.2 Group IV 15.1 32.1 20.2 5.77 27.2 19.3 28.5 18.1 12.0 48.2 20.1 29.2 18.6 13.8 23.5 Group V 26.0 32.9 18.7 9.44 28.7 21.7 29.1 21.2 5.78 15.4 24.0 37.8 18.0 4.20 25.9 Diff (I and V) -7.18 -7.27 -2.85 3.36 1.07 0.34 3.84 -6.51 7.17 1.80 -2.51 -7.46 1.36 9.22 4.34
Panel F. Performance Measure: Average P/E Ratio
Portfolio COM ENV FIN
All T.I F.I E.I TTTM All T.I F.I E.I TTTM All T.I F.I E.I TTTM Group I 46.0 32.3 96.8 43.3 27.9 33.6 38.9 177 32.7 27.1 46.9 22.4 176 36.9 27.6 Group II 63.6 26.3 112 38.1 402 47.5 36.4 360 55.3 35.7 30.4 35.4 50.5 30.4 15.0 Group III 49.1 27.6 17.9 44.7 247 45.2 41.7 13.8 36.6 443 62.8 30.2 17.2 50.6 34.8 Group IV 73.8 111 48.2 50.8 90.4 108 33.3 38.5 19.1 68.9 90.2 98.2 364 67.7 562 Group V 85.2 50.4 366 48.0 47.9 83.3 104 52.9 79.7 225 90.0 62.8 134 40.5 227 Diff (I and V) -39.2 -18.1 -269 -4.63 -20.0 -49.7 -65.1 124 -47.0 -198 -43.2 -40.4 41.2 -3.61 -200
The idea of the above analysis is to use portfolio comparisons of long-term performance for various groups of firms. Under this framework, if performance indicator is stock returns, then comparing portfolio stock returns should consider risks associated with portfolio returns. Based on above
analysis, we compute Sharpe ratio for each group of firms in order to measure portfolio excess returns per unit of risks of this returns. To compute a five-year average Shape ratio for each group, first we compute one-five-year Sharpe ratio by subtracting yearly average return by risk-free interest rate for that year, and then divided by the standard deviation of portfolio returns for that year. Second, we compute five-year average by summing one-year Sharpe ratio and divided by five. The larger the Sharpe ratio, the portfolio excess returns which considering risks for that excess return, is larger.
Table 10 shows the Sharpe ratios of five groups of firms. Firms are grouped according to orders of four CSR measures, which are community participation, environmental protection, financial transparency and aggregate measure of CSR which are presented in panel A to panel D in order. For each kind of CSR ranking of firms, samples of analysis are all samples of firms, firms in traditional industry, firms in financial industry, firms in electronic industry, and firms in transportation, tourism, trade and merchandise industry.
From the second column of panel A, all firms are included in the analysis, Sharpe ratio are highest in Group I and lowest in Group V. For firms in other industries such as shown in the third to sixth column, although not perfect there exists a slight trend that groups of firms with higher CSR ratings getting larger Sharpe index. Although it is not so obvious, but there exist a similar trend that better CSR-larger Sharpe ratio if we use other three disaggregate CSR measures to rank firms into five groups. Thus, after we consider portfolio risks, good companies can be a good investment.
Table 10. Average Sharpe Ratio of Firms Panel A. Grouping Firms According to Aggregate Measure of CSR
Portfolio All Firms T.I F.I E.I TTTM.I
Group I 1.102 1.515 1.942 -3.841 1.400
Group II 0.805 1.201 3.122 -10.21 1.496
Group III 0.988 1.454 1.554 -4.497 1.284
Group IV 0.783 1.372 1.564 -12.35 2.621
Group V 0.766 1.076 2.645 -14.28 1.270
Diff (I and V) 0.336 0.439 -0.704 10.44 0.130
Panel B. Grouping Firms According to C.P Aspect of CSR
Portfolio All Firms T.I F.I E.I TTTM.I
Group I 1.115 1.342 1.942 -5.004 1.375
Group II 0.923 1.327 2.253 -5.089 3.100
Group III 0.852 1.547 1.554 -9.349 0.694
Group IV 0.606 1.354 2.243 -16.42 1.200
Group V 0.928 0.956 2.644 -9.729 1.727
Diff (I and V) 0.188 0.386 -0.702 4.725 -0.352
Panel C. Grouping Firms According to E.P Aspect of CSR
Portfolio All Firms T.I F.I E.I TTTM.I
Group I 1.176 1.911 2.399 -1.456 7.346
Group II 0.658 1.199 1.529 -10.01 1.046
Group III 1.052 1.575 1.928 -9.067 2.322
Group IV 0.754 0.982 2.277 -7.900 3.219
Group V 0.780 0.948 1.913 -16.97 0.976
Diff (I and V) 0.396 0.962 0.486 15.51 6.370
Panel D. Grouping Firms According to F.T Aspect of CSR
Portfolio All Firms T.I F.I E.I TTTM.I
Group I 1.062 1.557 3.622 -5.067 1.400
Group II 0.948 1.318 2.078 -7.950 1.243
Group III 0.708 1.100 1.505 -11.11 0.912
Group IV 0.889 1.230 1.427 -4.987 1.659
Group V 0.792 1.185 1.776 -16.71 1.966
Diff (I and V) 0.270 0.372 1.845 11.64 -0.567
C. Examining CSR as Insurance Protection of Financial