If we extend to data, which started from 1990 to 2006 for accounting-based performance indicators, and leave the data period of market-accounting-based performance indicators unchanged (limited by database), that's 2002 to 2006 for market, then we can examine time trend of performance change for firms.
As mentioned before, Peloza (2006) proposed that most of researches related corporate social performance to its financial performance, some examine the influence of firm's CSR activities on consumer satisfaction and purchase intentions [Sen and Bhattacharya (2001)], sales growth [Brown and Dacin (1997)], business image [Fombrun and Shanley (1990)] and employee loyalty.
The numbers of studies which examine CSR as an insurance protection of firms are rare. An important yet underemphasized benefit from CSR is insurance against negative events that would otherwise harm financial performance. Although previous researchers conceptualized CSR as a form of
"operating license", or simply the actions of the firm that conform to social norms, the potential for CSR to act as an insurance policy that can mitigate the effects of negative events, that's the corporate social responsibility as a role of insurance for financial performance.
Because of data constraint, we can not get precise data about adverse events of specific firms of our samples, thus cannot work toward the direction of analyzing negative specific events on financial performance of firms, such as Blacconiere and Patten (1994). We implement similar analysis by examining time trend of financial performance of five groups of firms in order to check whether different performance in CSR will present different performance during economic downturns. To define macro conditions of economy, we adapt the Monitoring Indicator11 constructed by the Council for Economic Planning and Development (CEPD) and compare financial performance of Group I and II (defined as high-CSR-firms) versus group IV and V (defined as low-CSR-firms) during 1990 to 2006.
The construct method is illustrated in Table 11. Based on this Monitoring Indicators of CEPD, we get monthly indicators for economic conditions.
Averaging 12 month of given year we get yearly monitoring indicators. We define a bad state as a yearly indicator score below 22 and otherwise it is in a good state. Under this definition, the years of bad state are 1990, 1993, 1996, 1998 and 2001, and the years of good state are 1991, 1992, 1994, 1995, 1997, 1999, 2000 and from 2002 to 2006. We want to check whether
high-CSR-11. The monitoring Indicator is constructed by Council for Economic Planning and Development (CEPD) since 1977. Based on nine indicators with high correlation with economic activity (four are about financial sector: money supply M1B, direct & indirect finance, bank clearings & remittance, stock price; five are about real sector: MFGs' new orders (deflated), exports (deflated), industrial production, MFGs' inventory ratio, nonagricultural employment), score of each indicators got 1 point at minimum and 5 point at maximum. Thus, score on composite indicators ranged from 9 to 45 point. The score greater than 38 is marked by overheated, and represented by red light. The score ranged from 32 to 37 is marked by overheated, and represented by yellow-mixed-red light. The score ranged from 23 to 31 is marked by steady, and represented by green light. The score ranged from 17 to 22 is marked by down alert, and represented by yellow-mixed-blue light.
The score less than 17 is marked by slowdown, and represented by blue light.
firms outperform low-CSR-firms in years of bad state. If the answer is yes, the evidence supports the view that CSR is financial performance of firms during economic downturns.
Table 11. Check Points of Monitoring Indicators Check Points
Indicator
Red Yellow-Red Green Yellow-Blue Blue 5 point 4 point 3 point 2 point 1 point
Financial Stock Price Percentage change- 12-month span
37 20 0 -13 Exports (Deflated) Percentage change- 12-month span
17 12 4 1 Total Scores Overheat Heat Alert Steady Down Alert Slowdown
45-38 37-32 31-23 22-17 16-9
Figure 2 draws time trend of performance indicators of group I, II, IV and V. We drop group III because we want to compare high-CSR-firms (group I, II) and low-CSR-firms (group IV, V) and exclude those firms in the middle part of the rankings. Part A draws time trend of average ROA of above four groups, ranging from 1990 to 2006, and bad state of the economy is painted
by shaded area. First, ROA for group I is higher than that for group V during data period. Second, during economic downturns, except for 1993, ROA of group I and II are decreasing as group IV and V, thus implies that high-CSR-firms suffer from performance slowdown as low-CSR-high-CSR-firms. Third, the advantage position of ROA for group I disappear in downturns of 1993 and 1996, even lower than that of group IV. Thus, high-CSR-firms do not outperform low-CSR-firms during economic downturns, their ROA will decrease as much as or even larger than low-CSR-firms. This pattern is obtained as we observe diagram B and C, which shows the time trend of ROE and EPS of four groups, respectively. High-CSR-firms do not outperform low-CSR-firms during economic downturns in returns on equity and earnings per share.
Figure 2. Time Trend of Financial Performance of Four Groups of Firms A. ROA B. ROE
C. EPS D. Stock Returns (Equally Weighted)
E. Stock Returns (Weighted by Market Cap.) F. Price Earnings Ratio
Table 12 reports percentage change (relative to last year) of performance indicators of four groups, group I, II, IV and V. The period of economic downturns (bad state) is marked by shaded area. Panel A reports results of using ROA as performance indicator. We observe that in 1993, relative to 1992, ROA of group I, II, IV and V change 8.02%, -4.60%, 50.2% and -18.8%. It is not clear that high-CSR-firms decrease more in ROA than low-CSR-firms in this year. But as we observe year 1996, relative to 1995, ROA of group I, II, IV and V change -18.4%, -30.4%, -7.70% and -4.74%; in 1998, relative to 1997, percentage changes of ROA for group I, II, IV and V are
-36.9%, -23.6%, -22.1% and -36.3%; in 2001, relative to 2000, percentage changes of ROA for group I, II, IV and V are -45.6%, -18.4%, -39.8% and -23.4%. Thus, relative to low-CSR-firms, high-CSR-firms do not decrease less in ROA, and this means that doing CSR does not guarantee preventing performance slowdowns. Instead, we observe that in 1996, 1998 and 2001, percentage change in performance is greatest in group II, group I and group I.
This implies that groups with higher CSR ratings get larger performance decrease in economic downturns. As we observe on panel B and C which the performance indicators are ROE and EPS, respectively. Although the trend is not so obvious, at least we do not get result of better CSR-less decrease in performance. Thus, CSR does not provide insurance for financial performance during stagnations of the economy.
Table 12. Time Trend of Percentage Change of Financail Performance for Four Groups of Firms
Panel A. ROA
Portfolio Percentage Change Relative to Last Period
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Group I -21.0 20.9 8.02 28.8 2.35 -18.4 -6.38 -36.9 23.6 25.4 -45.6 26.2 21.1 20.3 -15.0 -21.2 Group II -7.50 -29.0 -4.60 50.4 26.9 -30.4 34.9 -23.6 -19.1 27.8 -18.4 17.6 10.4 -19.1 -4.57 -2.52 Group IV 6.22 -27.1 50.2 -2.27 -2.71 -7.70 79.5 -22.1 -19.3 22.6 -39.8 -0.61 25.9 -22.4 -17.8 -7.44 Group V 77.3 18.8 -18.8 12.8 -10.0 -4.74 19.1 -36.3 3.74 27.8 -23.4 -40.0 6.68 14.4 -97.0 271
Panel B. ROE
Portfolio Percentage Change Relative to Last Period
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Group I -16.6 26.5 4.85 32.3 5.4 -20.3 -11.1 -49.4 36.4 41.8 -49.8 11.3 65.4 21.4 -25.8 -28.2 Group II 36.7 -35.9 -4.24 79.0 27.8 -31.4 18.0 -26.2 -40.2 29.9 14.9 -6.37 36.2 -22.0 -19.3 -5.59 Group IV 24.2 -32.0 93.0 -19.7 -148 -328 -59.2 192 -23.1 17.1 -48.3 16.3 40.0 -42.4 -66.2 81.2 Group V -18.4 -14.8 -9.20 -35.5 89.2 -22.6 51.9 -45.7 -5.23 23.9 -49.9 -203 -69.2 -159 -1245 -59.8
Panel C. EPS
Portfolio Percentage Change Relative to Last Period
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Group I -10.2 51.7 -17.2 26.4 13.3 -24.4 -61.5 -1.77 70.5 33.4 -47.9 34.7 47.6 26.4 -7.10 -18.7 Group II -25.6 -29.6 15.8 50.1 55.5 -23.9 34.2 -26.9 -2.32 11.9 -16.8 5.63 20.1 -20.0 -1.49 -15.0 Group IV 12.0 -9.20 48.0 -29.8 30.4 -18.8 107 -22.0 -22.0 34.9 -46.8 -4.01 43.5 -12.4 -10.4 -15.8 Group V 32.7 -16.2 -1.00 -2.70 -19.3 36.5 3.28 -33.0 -24.7 23.6 -32.9 -73.4 312 -19.1 -30.6 46.8
Next, based on the previous classification of high-CSR-firms (group I and group II) and low-CSR-firms (group IV and group V) and separation of macroeconomic condition of good state and bad state, we can get four quadrants for our samples of firms, that are high-CSR-firms in good state, high-CSR-firms in bad state, low-CSR-firms in good state, low-CSR-firms in bad state. By doing this we can observe the performance difference of good state and bad state for high-CSR-firms and low-CSR-firms. If CSR plays a role of insurance of financial performance, we should observe perfornace differnce between high-CSR-firms and low-CSR-firms increase during a good state.
Table 13 reports financial performance of high-CSR-firms and low-CSR-firms in two states of economy. We observe that average ROA of high-CSR-firms is larger than low-high-CSR-firms by 2.38% and is statistically significant. But this difference is reduce to 1.32% in a bad state, and the statsitical significance is also decrease. We also find that average ROE of high-CSR-firms is larger than low-CSR-firms by 5.56% and is statistically significant and this difference is reduce to 1.93% in a bad state; average EPS of high-CSR-firms is larger than low-CSR-firms by 0.86 and is statistically significant and this difference is reduce to 0.33 in a bad state. This evidence shows that inspite of outperformance of high-CSR-firms in good state, this superioty decreases in bad state. Thus, insurance role of CSR is not supported
by our evidence.
Table 13. Financail Performance of High-CSR versus Low-CSR Firms in Two States of the Economy
Performance
Variable Statistics
State of Economy (Good) State of Economy (Bad) Good
No. obs 1,267 1,295 469 493
ROE
No. obs 1,272 1,296 471 494
EPS
No. obs 1297 1335 491 508
Figure 3 draws histograms of financial performance indicaors of high-CSR-firms and low-high-CSR-firms. For a given performance indicator, we draws two overlapped histograms of high-CSR-firms and low-CSR-firms for a given state. For example, left part of A diagram plots when economy is in a good state, the distributions of two kinds of firms. The right part of A diagram plots when economy is in a bad state, the distributions of two kinds of firms. As we observe A diagram, although it is not so obvious, we could see that distribution of ROA for high-CSR-firms gets relatively right positions than
distribution of ROA for low-CSR-firms in good state of the economy, but the position difference between two distribution decrease or nearly overlap in bad state of the economy. This means that in a good state, average ROA of high-CSR-firms is larger, but this superioty decrease in bad state of the economy.
As we observe diagram B and C, similar results are obtained.
Figure 3. Histograms of Financail Performance of High-CSR versus Low-CSR Firms in Two States of the Economy
A. ROA
B. ROE
C.EPS
To sum up, most of our evidence do not show supportiveness of high-CSR-firms have even larger performance superioty than low-high-CSR-firms during bad state on the economy, instead, performance superioty decreases when economy is in the bad state. Thus, our empirical results do not support the view that CSR could act as a role of financial performance insurance of firms duning stagnations.
V. Conclusion
This paper examines the relationship between corporate social responsibility and financial performance of TSE listing companies by using a set of disaggregated social performance indicators (community participation, environmental protection and financial transparency) from the Global Views Monthly.
Our empirical results are fivefold. First, scores on composite social performance indicator are negatively related to stock returns and this relationship cannot be rationalized by multi-factor models for explaining the cross-sectional variation in stock returns. Second, the poor market reward offered by such firms is attributable to their good social performance on the
financial transparency and to a lesser extent the community participation and environmental aspects. Thus, for stock returns as performance indicator, this result favors shift of focus hypothesis and against social impact hypothesis.
CSR advocates that companies cannot count only on financial performance to survive in this ever-changing scenario of global competition, but also take responsibilities to the various stakeholders in which and where they exist.
Although these established practices are prevalent in modern business environment, but based on this study, it is regret that managers have to consider that CSR and profit maximization may be conflicting goals.
Third, the impact of different aspects of social performance on stock returns among industries are diversified which is consistent with Porter and Kramer (2006)'s suggestion that business should not blindly engage themselves in any scope of CSR activities, instead, wise managers have to put a new premium on specific area of CSR issues that most to be beneficial to core business of firm. Speaking in more detail, a firm should devote to a CSR issue which not only have benefits to social but also establish competitive advantage, reach a positive-sum rather than zero-sum game. For example, issue of environmental protection is not the most important concern for pharmaceutical firm. Instead, they can make efforts in development and deterrence of HIV proliferation in Africa. TOYOTA strategically place importance to the issue of planetism. They successfully develop and go on sale of eco-car, the Prius, which using of petrol and electricity hybrid technology and boast nearly 70% fewer smog-forming emissions than the average new vehicle. Nowadays, with the anxiety of radical weather change and exhausting resources, they build up good reputation to the public today and strike root competitive advantage from advanced technology for the future.
Fourth, composite social performance indicator are positively related to long-term accounting performance but negatively related to long-term market performance, and thus implies that good companies are good in books, but not good investments. Finally, high-composite-score firms exhibit a more aggravating decline of their financial performance than low-composite-score firms in stagnations, which is inconsistent with view suggested by Peloza (2006), that CSR is an insurance of financial performance of firms.
Future research could proceed in following directions. First, we find that firms with higher CSR ratings have higher accounting-based performance but lower market performance. Does this means stock market is inefficient, that's good accounting performance does not reflect on market performance?
Second, we observe that in figure 3, some earnings measures of performance show evidence of earning management to avoid zero earnings proposed by Burgstahler and Dichev (1997), Degeorge, Patel and Zeckhauser (1999), so it also worth examining whether CSR-firms engage more in earning management activities to try to obtain semblant reputation from the public.
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