International Journal of Productivity and Performance Management

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The main part of this paper is based upon an exploration of the relationship between corporate social responsibility and ﬁnancial performance in developing countries. The authors do this by investigating the Istanbul Stock Exchange (ISE) 100 index companies and their social responsibility policy and ﬁnancia.

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International Journal of Productivity and Performance Management Emerald Article: Managing corporate performance: Investigating the relationship between corporate social responsibility and financial performance in emerging markets Güler Aras, Asli Aybars, Ozlem Kutlu Article information: To cite this document: Güler Aras, Asli Aybars, Ozlem Kutlu, (2010),"Managing corporate performance: Investigating the relationship between corporate social responsibility and financial performance in emerging markets", International Journal of Productivity and Performance Management, Vol. 59 Iss: 3 pp. 229 - 254 Permanent link to this document: http://dx.doi.org/10.1108/17410401011023573 Downloaded on: 17-10-2012 References: This document contains references to 57 other documents To copy this document: permissions@emeraldinsight.com Users who downloaded this Article also downloaded: * Honghui Chen, Xiayang Wang, (2011),"Corporate social responsibility and corporate financial performance in China: an empirical research from Chinese firms", Corporate Governance, Vol. 11 Iss: 4 pp. 361 - 370 http://dx.doi.org/10.1108/14720701111159217 Sebastian Arendt, Malte Brettel, (2010),"Understanding the influence of corporate social responsibility on corporate identity, image, and firm performance", Management Decision, Vol. 48 Iss: 10 pp. 1469 - 1492 http://dx.doi.org/10.1108/00251741011090289 Hui Chen, Miguel Baptista Nunes, Lihong Zhou, Guo Chao Peng, (2011),"Expanding the concept of requirements traceability: The role of electronic records management in gathering evidence of crucial communications and negotiations", Aslib Proceedings, Vol. 63 Iss: 2 pp. 168 - 187 http://dx.doi.org/10.1108/00012531111135646 Access to this document was granted through an Emerald subscription provided by UNIVERSITY OF ECONOMICS HO CHI MINH For Authors: If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service. Information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.com With over forty years' experience, Emerald Group Publishing is a leading independent publisher of global research with impact in business, society, public policy and education. In total, Emerald publishes over 275 journals and more than 130 book series, as well as an extensive range of online products and services. Emerald is both COUNTER 3 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. *Related content and download information correct at time of download.
The current issue and full text archive of this journal is available at www.emeraldinsight.com/1741-0401.htm Managing Managing corporate performance corporate Investigating the relationship between performance corporate social responsibility and ﬁnancial performance in emerging markets 229 ¨ Guler Aras Received October 2008 Yildiz Technical University, Istanbul, Turkey Revised April 2009 Accepted April 2009 Aslı Aybars Bahcesehir University, Istanbul, Turkey, and Ozlem Kutlu Yildiz Technical University, Istanbul, Turkey Abstract Purpose – Corporate social responsibility is important and fundamental to the sustainable operations of corporations. Similarly ﬁnancial performance is undoubtedly fundamental to the continuing operating of any corporation. This paper aims to investigate the relationship between corporate social responsibility and ﬁrm ﬁnancial performance. Design/methodology/approach – The main part of this paper is based upon an exploration of the relationship between corporate social responsibility and ﬁnancial performance in developing countries. The authors do this by investigating the Istanbul Stock Exchange (ISE) 100 index companies and their social responsibility policy and ﬁnancial indicators. The relationship between CSR and ﬁnancial performance is empirically examined between 2005 and 2007 with different approaches and measurement methods. The authors show that some causality is related to lagging between periods for ﬁnancial performance and CSR. Based upon previous empirical studies, this study conducts the analysis based on the assumption that there may be a relationship between ﬁrm size, proﬁtability, risk level and CSR. Findings – In doing this analysis the authors found a relationship between ﬁrm size and corporate social responsibility. However the authors were not able to ﬁnd any signiﬁcant relationship between corporate social responsibility and ﬁnancial performance/proﬁtability. Research limitations/implications – The paper has implications in enhancing the understanding of performance management through understanding the relationship between corporate social responsibility and ﬁnancial performance particularly in a developing country, although it is necessarily limited by the size of the sample. Originality/value – This paper increases the understanding of the relationship between corporate social responsibility and ﬁnancial performance. This research is also the ﬁrst research that has examined Turkish companies. Keywords Corporate social responsibility, Financial performance, Proﬁt, Economic sustainability Paper type Research paper Introduction International Journal of Productivity Corporate social responsibility (CSR) is an important issue in contemporary and Performance Management Vol. 59 No. 3, 2010 international debates. In the past two decades, CSR appears to have become more pp. 229-254 ubiquitous and perceived as being relevant to corporations all over the world (Aras and q Emerald Group Publishing Limited 1741-0401 Crowther, 2008a). Moreover the link between CSR and business performance has DOI 10.1108/17410401011023573
IJPPM become largely unquestioned. There have been various studies undertaken to 59,3 investigate this important issue. Consequently much of the previous research regarding CSR deals with this issue and with the problems in the development of standards for managing and reporting such indeterminate activity. CSR is problematic as it is often perceived that there is a dichotomy between CSR activity and ﬁnancial performance with one being deleterious to the other and corporations having an 230 imperative to pursue shareholder value. Moreover there is no agreed upon deﬁnition of exactly what constitutes CSR (Ortiz Martinez and Crowther, 2005) and therefore no agreed upon basis for measuring that activity and relating it to the various dimensions of corporate performance. Both academics and practitioners point to Howard Bowen’s Social Responsibilities of the Businessman (Bowen, 1953) as the initial attempt to thoroughly examine and analyse the relationship between corporations and society (for example, Carroll, 1979; Preston, 1975; Wartick and Cochran, 1985). Later on during the 1970s, most of the work conducted by the scholars and practitioners focused on the application process of CSR in the business and social environment. Fitch (1976) studied in depth the best procedure for the ﬁrm that desires to become socially responsible. In his work, applied behaviour analysis is used as a method of social problem solution. Murray (1976) concentrated on the social response process in the commercial banking industry to explore how the banks respond to different social pressures. There have been many theoretical and empirical debates about the relationship between corporate social performance and ﬁrm ﬁnancial performance (see for example, Aras and Crowther, 2007). The relationship between CSR and ﬁnancial performance has been empirically examined by one hundred twenty-seven published studies between 1972 and 2002 with different measurement methods (Margolis and Walsh, 2003). In these studies basically two types of ﬁnancial performance measures have been used in order to investigate the link between different aspects of ﬁrm performance and CSR. The ﬁrst one is the accounting based ﬁnancial performance measures but this method has certain drawbacks. It only shows historical ﬁrm performance, can be affected by the manipulation of the managers and produces incomparable results between ﬁrms because of the different accounting procedures applied. The characteristics of different sectors and the risks associated with them should also be taken into consideration when using accounting based measures. To deal with the stated short comings, stock-market-based measures can be used to analyse ﬁrm ﬁnancial performance. The beneﬁts associated with this second type of measure are that they are less dependent on varying accounting measures applied by ﬁrms and on managerial manipulations. This type of measure is also successful at attaining the companies’ future economic earnings rather than past performance. However, the shortcoming of this method is that the investors’ perception of the company may not be enough to gauge ﬁrm ﬁnancial performance (McGuire et al., 1988; Ullmann, 1985). Some of these studies have indicated a positive relationship between CSR and ﬁnancial performance, whereas others have not. One of the studies that investigated this relationship from the perspective of environmental management practices (EMPs) is that of Montabon et al. (2007). They conducted an empirical study to investigate the link between ﬁnancial performance and EMPs. As a result of the application of content analysis methodology on a set of 45 corporate reports, they found a positive and signiﬁcant relationship between ﬁrm performance and the EMPs (Montabon et al.,
2007). Another study was conducted by Orlitzky et al. (2003) who found a strong Managing correlation between corporate ﬁnancial performance and corporate corporate social/environmental performance. This relationship is more strongly pronounced for the accounting based measures of performance than the market-based measures of performance performance (Orlitzky et al., 2003). In the work of Becchetti et al. (2005) covering a sample of around 1,000 ﬁrms in a 13-year interval, it was observed that total sales per employee were signiﬁcantly higher while return on equity were signiﬁcantly lower 231 when large caps or R&D investing ﬁrms were not in the sample and returns on capital invested and on investment were always lower in socially responsible ﬁrms. Table I lists some of the recent studies related to ﬁrm performance and CSR. There is generally expected to be a positive relationship between CSR and ﬁnancial performance according to both modern stakeholder theory and agency theory. Contrarily and probably the most important point is that what the stakeholders are concerned about in developing/emerging economies is ﬁnancial performance. Investors are easily able to get excess returns in emerging markets so they do not take into account long-term sustainability and corporate responsibility in these markets. Thus, it is not possible to ﬁnd the link between CSR and ﬁnancial performance. The second important point is concerned with how CSR and ﬁnancial performance are measured. Three methods have mainly been used by prior studies for the measurement of CSR (McGuire et al., 1988). The ﬁrst method is the expert evaluation of corporate policies. The accuracy of this method depends on the access of the investigator to full scope of activities of the ﬁrm and the expertise of the investigator (Abbott and Monsen, 1979). The second method is the content analysis of annual reports and other corporate documents. Weber (1990) deﬁnes content analysis as “a set of procedures to make valid inferences from text”. Krippendorff (2004, p. 18) states that “content analysis is a research technique for making replicable and valid inferences from texts (or other meaningful matter) to the contexts of their use”. Content analysis has important advantages when compared to the other methods. The procedure applied in this method is substantially objective after the variables employed are chosen and also enables the usage of larger samples. However, this method has some disadvantages. The subjectivity of the selection of the variables and the possible difference between what the ﬁrms state they are doing in their annual reports and what they are actually doing are the major drawbacks (Cochran and Wood, 1984). The performance of companies in controlling pollution as a proxy measure is the third method for the measurement of CSR (McGuire et al., 1988). Chen and Metcalf (1980) and Spicer (1978) used pollution control in their studies for the measurement of CSR. However the usage of pollution control as a proxy measure can bias the results where there are differences between the industries in terms of pollution; this measure also emphasizes only one dimension of social responsibility. All of these different measurement methods and approaches produce different results. The last important point related to CSR and ﬁnancial performance measurement concerns data collection and reliability of the sample. Mostly CSR data relies on company reporting activity that can be manipulated and/or misreported. So data collection and reliability testing are always problematic in these studies. Some studies explore the link between ﬁrm size and CSR. However, these studies produce ambiguous results. Udayasankar (2008) found a U-shaped relationship
CSR 59,3 232 Table I. IJPPM Relationship between ﬁrm performance and Measures used Authors Name of article Source Method used Social performance Results Brine et al. CSR and ﬁnancial Australian treasury Cross sectional Analysis of ROA, ROE, ROS No signiﬁcant (2006) performance in the regression analysis sustainability relationship Australian context and OLS reports Ngwakwe Environmental International Journal Multiple regression Field survey of ROTA Positive relationship (2009) responsibility and ﬁrm of Humanities and analysis environmental performance: evidence Sciences practices from Nigeria Mackey CSR and ﬁrm Academy of An economic analysis CSR investments Economic value of Conditional relationship et al. (nd) performance: investor Management Review the ﬁrm depending on demand preferences and and supply corporate strategies Fiori et al. CSR and ﬁrms SSRN working paper Multiple regression Analysis of CSR Stock price No signiﬁcant (2007) performance. An series analysis disclosure reports relationship analysis of Italian listed companies Chatterji How well do social Centre for Responsible Panel data analysis KLD evaluation Company ratings Positive relationship et al. ratings actually measure Business (2008) corporate social responsibility? Montabon An examination of Journal of Operations Multiple data CSR disclosure ROI, sales growth Positive relationship et al. corporate reporting, Management analysis, content reports (2007) environmental analysis management practices and ﬁrm performance Orlitzky Corporate social and Organization Studies Correlation and meta CSR disclosure Accounting and Positive relationship et al. ﬁnancial performance: a analysis, content reports market based (2003) meta-analysis analysis measures
between CSR participation and ﬁrm size with very small and very large ﬁrms being Managing equally motivated to engage in CSR with medium-sized ﬁrms being the least corporate motivated. These results caused Udayasankar to conclude that ﬁrm characteristics should also be considered when conducting analysis in the CSR context. Another study performance performed by Perrini et al. (2007) evidenced that the tendency of large ﬁrms to participate in environmental management practices was larger than those of SMEs. This study examines and investigates the relationship between CSR and ﬁnancial 233 performance of corporations in developing countries through an investigation of Turkish publicly held companies. We try to show that some causality is related to lagging between periods for ﬁnancial performance and CSR. This study builds upon the idea that there may exist a relationship between ﬁrm size, proﬁtability, risk level and CSR. In doing so we show the necessity of understanding the relationship between performance management and CSR. The paper is therefore developed through an explanation and justiﬁcation of the data collected and analysis undertaken. It continues with the results and a discussion of their meaning before ﬁnishing with a consideration of the implications. Methodology Sample and data collection The sample employed in this study consists of the companies listed on the Istanbul Stock Exchange (ISE) 100 for the four consecutive years until 31 December 2006. Thus the annual reports of 40 companies were selected after removing the companies in the ﬁnancial sector and two companies in the automobile sector because of the fact that their annual reports varied greatly from those of the remaining sample. One of the essential aspects of CSR and ﬁnancial performance is the direction of causality. Waddock and Graves (1997) studied the empirical linkage between ﬁnancial and social performance and found out that CSR was positively associated with prior ﬁnancial performance. The results were in line with the slack resource theory that supports that the existence of slack resources resulting from better ﬁnancial performance made companies invest in areas that are related to social domains. The results also supported good management theory that states that good management practice resulting from engagement in social domains enhances the relationship with stakeholders causing better ﬁnancial performance (Freeman, 1984). The issue of causality has created problems in the studies that investigate topics related to ﬁrm performance. In order not to generate biased results, the direction of the relationship between the variables that are being analysed has to be determined. Thus, we took the 2005 and 2007 ﬁnancial data for the ISE and studied the relationship between this data and CSR of the companies derived from the 2006 annual reports. We used the same method as Waddock and Graves (1997) for our analysis. We used ﬁnancial data from 2005 for the part of our analysis where CSR is the dependent variable. For the part of our analysis where ﬁnancial performance is the dependent variable, we used proﬁtability (ROE, ROA and ROS) in 2007 as the dependent variable and 2006 data for CSR and control variables. In their study, McWilliams and Siegel (2000) posited the argument that studies analysing the link between CSR and ﬁnancial performance were mis-speciﬁed unless they controlled for the research and development (R&D) intensity of the ﬁrm since it
IJPPM was a crucial determinant of ﬁrm performance. They concluded that CSR had a neutral 59,3 effect on ﬁrm performance as measured by proﬁtability when the variable of the research and development intensity was included in the model. They argued that this occurred as a result of the high correlation between CSR and R&D. Thus, when R&D Intensity is introduced as a variable, good management theory will not be supported. As a result a third hypothesis was introduced as an extension of the work of Waddock 234 and Graves in the light of the criticism of McWilliams and Siegel. Following these theories, we hypothesize that CSR is both a predictor and consequence of the ﬁnancial performance of ﬁrms: H1. Better ﬁnancial performance results in improved CSR. H2. Improved CSR leads to better ﬁnancial performance. H3. There is a neutral relationship between ﬁnancial performance and CSR. Measuring CSR This research uses the content analysis method that was ﬁrst used by Bowman and Haire (1975). Other studies on social and environmental disclosures also employed this approach (Abbott and Monsen, 1979; Hughes et al., 2001; Hackston and Milne, 1996; Ingram, 1978; Anderson and Frankle, 1980). The disclosure related to CSR is derived from the 2006 annual reports of the 40 companies constituting the sample as is the case with prior studies (Hackston and Milne, 1996; Hughes et al., 2001; Gray et al., 1995a; Hall, 2002). The usage of annual reports for the medium of CSR disclosures has been supported by Hughes et al. (2001) because of their easy reach and the fact that they are tools that enable companies to communicate with their shareholders. The importance of a range of measures is emphasized by Joiner et al. (2009) while Garengo and Bernardi (2007), relate this in particular to SMEs. The content analysis of social and environmental disclosures consists of two processes that are the development of a categorization scheme and determination of the rules to be used as a guide for the decision of what and how to code (Milne and Adler, 1999). The method of categorization used in this study is based on the study of Ng (1985) who further developed this comprehensive checklist from the work of Ernst and Ernst (1978). The original checklist together with the modiﬁcations of Ng can be seen in Appendix 3 while the decision rules can be seen in Appendix 4. The number of the sentences related to the corporate social responsibility disclosed in the companies’ annual report, is the unit of analysis used in this study to determine the degree of CSR based on the work of Hackston and Milne (1996). Using sentences as a medium for the basis of coding is far more reliable than any other unit of analysis because unreliability is increased when words or areas of a page are used instead (Milne and Adler, 1999). Ng (1985) used number of words because of his criticism of the portion of pages that could distort the results because of differences in print, column and page sizes of the annual reports. However, number of words is also not a precise measure because of the subjectivity in deciding which individual word is related to CSR or not (Crowther, 2002). Thus, it can be argued that number of sentences solves the problem of standardization of words (Hackston and Milne, 1996). The checklist used as the interrogation instrument is disclosed in Appendix 2. This instrument enables the
researcher to record the amount of CSR in various categories and has four dimensions Managing that are listed below (Tables II and III): corporate (1) Theme: environment, energy, products/consumers, community, and employee performance health and safety, employee other, general. (2) Evidence: monetary quantiﬁcation, non-monetary quantiﬁcation and declaration. 235 (3) News type: good, bad and neutral news. (4) Amount: number of sentences. The reliability and measurement of content analysis The problem of reliability exists for content analysis just like any quantitative technique. The disagreement between the coders will distort the signiﬁcance of the analysis (Janis et al., 1943). Three types of reliability have been deﬁned by Krippendorff: stability, reproducibility and accuracy. Stability, which is the weakest form of reliability, is measured as the degree that a coder reaches the same results while analysing the data over time. Reproducibility, which is a stronger form of reliability than stability measures the repeatability of the data by multiple coders. The strongest form of reliability is named as accuracy and it measures the performance of coding against the Term Deﬁnition Monetary Financial deﬁnition in currency Non-monetary (quantitative) Disclosure in quantiﬁed terms, but not in currency (i.e. measures of weight, mass, volume or size), can be in absolute terms or percentages Declarative If not one of the above Table II. Source: Tilt (1998) Deﬁnitions of evidence Term Deﬁnition Neutral news Statement of policy or intent within statutory minimum with no details of what or how; statement of facts whose credit/discredit to the company is not obvious – which are unaccompanied by editorialising Good news Statements beyond the minimum which include (for example) speciﬁc details where these details have a creditable or neutral reﬂection on the company; any statements which reﬂect credit on the company; upbeat analysis/discussion/statements Bad news Any statement which reﬂects/might reﬂect discredit on the company. Include, for example, numbers made redundant (if redundancy is spoken of as a human rather than an economic act), and any increase in accidents Table III. Source: Gray et al. (1995b) Deﬁnitions of news type
IJPPM performance of a method that has been applied by experts and regarded as being 59,3 correct. In this study, the annual reports were read by two coders who are academicians familiar with social and environmental disclosure research. In order to capture the degree of stability of the data, the annual reports that have been read once by a coder were read a second time after two weeks. It was seen that no signiﬁcant difference 236 existed between the two readings. To analyse the degree of reproducibility, the two coders read the annual reports independently applying the same set of dimensions and decision rules for coding. Again, no signiﬁcant difference were noted between the two coders. To achieve accuracy, Hackston and Milne’s coding approach which has been cited by many academic studies was undertaken. In this study Krippendorff’s a was calculated to measure the degree of inter-coder agreement that occurs above chance on the decision of “is this a sentence a social disclosure, yes or no?” A pre-testing was conducted on the 10 per cent of the sample and Krippendorff’s a was measured to be 0.9793 as a result of the reliability tests. Krippendorff’s a theoretically ranges between the values of þ 1.0 (perfect agreement) and 2 1.0 (perfect disagreement). The result of 0.9793 shows a considerably high degree of reliability in this study. Control variables Previous studies have employed company size, risk, research and development intensity as control variables. Different studies used different variables as a proxy for size. Net log of sales was used in the study of Belkoui and Karpik (1989), while Chen and Metcalf (1980) employed total assets. Waddock and Graves (1997) used total assets, total sales and number of employees. Stanwick and Stanwick (1998) used annual sales of the ﬁrm in their study. The study of Orlitzky et al. (2003) summarized the predictors of size used in prior studies some of which are number of employees, number of shareholders, Fortune rank, total assets, total sales, owners’ equity, net worth, lines of business, ln of average revenues and log of sales. Waddock and Graves (1997) also deﬁned size as a signiﬁcant variable since the socially responsible behaviour disclosed by larger ﬁrms tend to be more than those disclosed by smaller ﬁrms. In our study, we used three measures to control for size that are ln of sales, ln of assets and ln of market capitalization. In order to control for risk, Waddock and Graves (1997) used the long term debt to total assets ratio of the ﬁrm while D’Arcimoles and Trebucq (2002) used the debt to total capital ratio. In this study, the debt to total assets ratio (DTA) has been used as a proxy to control for the riskiness of the ﬁrm. In order to control for the ﬁnancial risk of the company and measure the effect of the ﬁnancial policy on performance, this study employs the ratio of debt to total assets (DTA) as a control variable. Majumdar and Chhibber (1999) indicate that the increase in the amount of debt that is undertaken by the company results in an enhanced monitoring of the company by private and governmental creditors. Thus, the business risk is to be reduced according to the principle agent reasoning. Previous empirical studies performed by Majumdar and Chhibber (1999), Barbosa and Louri (2005), Perrini et al. (2008), Kapopoulos and Lazaretou (2007) signal to a signiﬁcant and negative relationship between the level of debt and ﬁrm performance. As this paper
investigates the link between CSR and performance, it is crucial to include the level of Managing debt as a control variable. corporate As in the work of McWilliams and Siegel (2000) and D’Arcimoles and Trebucq (2002), the research and development expenditures to net sales ratio is employed in this performance study to control for the impact of innovative activity on ﬁrms’ performance. The product or process innovations occurring as a result of investments in technical capital are crucial elements for the ﬁrms that engage in CSR. Thus, in our study R&D 237 Intensity has been used as a control variable for the innovativeness of the ﬁrm in the third hypothesis. Proﬁtability EPS growth, stock price change, price per share change, ROE, average ROE, P/E ratio, net income, net proﬁt margin, operating earnings/assets, operating earnings/sales were determined as some of the variables of economic performance (Ullmann, 1985). McGuire et al. (1988) used both accounting and stock-market-based measures. The accounting based measures employed by these studies were ROA, total assets, sales growth, asset growth and operating income growth. Proﬁtability was measured by Hackston and Milne (1996) by average ROE and average ROA. In order to capture ﬁnancial performance we used accounting based measures of ROE, ROA and ROS. Analysis Table IV depicts the descriptive statistics for social disclosure measures in ISE 100 companies. The issues related to theme, evidence and news type is reported in four different perspectives, i.e. disclosed sentences as a percentage of all disclosed sentences shown in the fourth column. Disclosing the ﬁgures in terms of percentages makes one get a clearer understanding of the situation. For example 52.50 per cent of companies constituting the sample make disclosures in the theme of energy in their annual reports. However, the theme of energy makes up only 2.41 per cent of all disclosed sentences that shows that these companies disclose a small amount in this particular theme. One, if only focusing on the incidence ﬁgures in the second column, might think that non-monetary and declarative disclosures are almost equally presented. However, when disclosed sentences as a percentage of all disclosed sentences is considered, it can easily be seen that declarative disclosures are far more than non-monetary disclosures with 76.19 and 21.46 per cent respectively. Further analysis reveals that companies disclose 89 declarative sentences each on average while they disclose 26 non-monetary sentences. When news type is considered, it can be seen that companies making disclosures of good news disclose about 107 sentences each while those disclosing bad news disclose about 1 sentence each. Meanwhile, the disclosure of neutral news is about 17 sentences each. The total number of sentences disclosed by the 40 companies is 4,687, with an average of 117 sentences. The company making the maximum disclosure disclosed 321 sentences while the one making the minimum disclosure disclosed ﬁve sentences. Table V provides the descriptive statistics for the measures of size, proﬁtability, risk, R&D Intensity and CSR.
IJPPM Disclosing Disclosing Number of 59,3 companies (making companies as a disclosed Disclosed sentences at least one percentage of total sentences as a percentage of all disclosure) sample (incidence) (amount) disclosed sentences Theme 238 Environment 24 60.00 418 8.92 Energy 21 52.50 113 2.41 Product/ consumers 37 92.50 1657 35.35 Community involvement 31 77.50 840 17.92 Employee health and safety 21 52.50 217 4.63 Employee other 40 100.00 1350 28.80 General 18 45.00 92 1.96 Total 4687 100.00 Evidence Monetary 28 70.00 110 2.35 Non- monetary 38 95.00 1006 21.46 Declarative 40 100.00 3571 76.19 Total 4687 100.00 News Table IV. Good 38 95.00 4058 86.58 Descriptive statistics for Bad 6 15.00 7 0.15 social disclosure Neutral 36 90.00 622 13.27 measures in ISE 100 Total 4687 100.00 In order to test H1 we employed regression analysis, using CSR as the dependent variable and ﬁnancial performance (proﬁtability), indicated by ROE, ROA and ROS as independent while net log of assets, net log of sales and net log of market capitalization were used as the control variables for size and debt to total assets was used to control for risk. In H2, proﬁtability was used as the dependent variable and CSR as the independent variable, with the same measures employed as control variables. In H3, R&D intensity was added as an independent variable in order to prevent a possible ﬂawed relationship between CSR and ﬁnancial performance. As a result of the lack of information from two companies in terms of R&D intensity, the third hypothesis was tested on a total of 38 ﬁrms. The correlation matrices for the variables are given below. Table VI shows the correlation between 2006 CSR and 2005 ﬁnancial data. The models employing the data in this matrix treated CSR as the dependent variable. As can be seen in Table VI, 2006 CSR is positively and signiﬁcantly correlated at 0.01 level with the control variables for size which are ln sales05, ln asset05 and ln mcap05. The correlations between the measures of 2007 proﬁtability (ROA, ROE, ROS) and 2006 CSR and ﬁnancial controls
Managing n Min. Max. Mean SD corporate Measures of size sales2005 40 17.138 23.421 20.462 1.446 performance asset2005 40 18.550 22.699 20.543 1.249 marcap2005 40 18.342 23.445 20.357 1.196 sales2006 40 17.240 23.724 20.643 1.459 239 asset2006 40 18.769 22.885 20.700 1.252 marcap2006 40 18.321 23.479 20.363 1.210 Measures of proﬁtability ROE2005 40 20.300 3.738 0.170 0.593 ROA2005 40 20.126 0.258 0.047 0.075 ROS2005 40 20.196 0.368 0.070 0.116 ROE2007 40 20.980 0.380 0.112 0.229 ROA2007 40 20.130 0.270 0.082 0.098 ROS2007 40 20.120 31.790 0.904 5.011 Measure of risk DTA05 40 0.060 1.010 0.429 0.220 DTA06 40 0.020 0.910 0.439 0.215 RDINT06 38 0.000 0.050 0.004 0.009 Table V. CSR2006 40 5.000 321.000 117.175 84.259 Descriptive statistics for Valid N (listwise) 38 the variables CSR06 ROA05 ROE05 ROS05 ln sales05 ln asset05 lnmcap05 DTA05 CSR06 1 0.143 20.128 0.082 0.634 * * 0.677 * * 0.665 * * 0.163 ROA05 1 20.015 0.784 * * 0.008 0.018 0.296 2 0.368 * ROE05 1 0.023 20.089 20.223 20.084 0.394 * ROS05 1 20.311 20.095 0.192 2 0.374 * ln sales05 1 0.862 * * 0.698 * * 0.345 * ln asset05 1 0.864 * * 0.224 ln mcap05 1 0.014 DTA05 1 Table VI. Notes: *Statistically signiﬁcant at 5 per cent level; * *Statistically signiﬁcant at 1 per cent level; This Pearson correlations table reports the correlations among 2005 ﬁnancial data and 2006 CSR. The correlations among the matrix for ISE 100 CSR variables and ﬁnancial data use the sample period, 2005-2006 companies are shown in Table VII. The models employing the data in this matrix treated ﬁnancial performance (proﬁtability) as the dependent variable. In Table VII, it can also be observed that 2006 CSR is again positively and signiﬁcantly correlated at 0.01 level with the control variables for the same year. In Table VIII, R&D intensity is added as a control variable with the other variables being the same as those in Table VII. In all of the tables, no signiﬁcant relationship between CSR and ﬁnancial performance measures (ROA, ROE, ROS) can be observed. Furthermore, the negative and signiﬁcant relationship between the control variable for risk and ﬁnancial performance should be noted in all three tables.
IJPPM CSR06 ROA07 ROE07 ROS07 ln sales06 ln asset06 lnmcap06 DTA06 59,3 CSR06 1 0.114 0.077 20.066 0.639 * * 0.653 * * 0.569 * * 0.178 ROA07 1 0.777 * * 0.238 0.014 0.070 0.457 * * 2 0.447 * * ROE07 1 0.087 0.049 0.071 0.382 * 2 0.349 * ROS07 1 20.009 20.102 2 0.017 2 0.331 * 240 Lagged ln sales06 1 0.870 * * 0.662 * * 0.391 * Lagged ln asset06 1 0.822 * * 0.304 Lagged ln mcap06 1 2 0.007 DTA06 1 Table VII. Pearson correlation Notes: * Statistically signiﬁcant at 5 per cent level; * *Statistically signiﬁcant at 1 per cent level; This matrix for ISE 100 table reports the correlations among 2007 proﬁtability, 2006 CSR and 2006 ﬁnancial controls. The companies correlations among the CSR variables and ﬁnancial data use the sample period, 2006-2007 Results The models, which use CSR as the dependent variable, ﬁnancial performance as the independent variable and control for ln mcap05, ln assets05, ln sales05 and DTA05 are presented in Table IX. All of the three models in Table IX employ CSR as the dependent variable while the measures of ﬁnancial performance that are used as independent variables vary. Note that there is a one-year lag between the measurement of CSR and the measures of ﬁnancial performance. In all of the nine models employed in this study, the method of regression analysis is stepwise. The excluded variables as a result of this method are shown in each of the models. The method of stepwise regression is usually applied in order to decide on the best set of explanatory variables for the regression model. The decision to include or remove a variable is judged by the probability of F. When there are no more variables to add or drop this method terminates (Gujarati, 2003). In order to examine the existence of multicollinearity in the sample, variance inﬂation factors (VIF) are calculated and investigated. It has been seen that the degree of multicollinearity is acceptable which is indicated by the VIF values changing between 1 and 3. As can be seen in Table IX, each of the three models are signiﬁcant at p , 0.001 level. The results reject H1, which states that better ﬁnancial performance results in improved CSR. However, the dependent variable, CSR, is related to ln assets05 at p , 0.001 level for all the models as well. Waddock and Graves (1997) found a signiﬁcant and positive relationship between CSR and the measures of ﬁnancial performance while D’Arcimoles and Trebucq (2002) failed to ﬁnd an impact of ﬁnancial performance on CSR. The second hypothesis in this study proposes that improved CSR leads to better ﬁnancial performance in line with good management theory (Aras and Crowther, 2008b). A set of regression analysis was conducted using measures of ﬁnancial performance (ROA, ROE, ROS of 2007) as dependent variable with CSR 2006 as the independent variable, the measures of size and risk related to the year 2006 as control variables. As can be seen in Table X, the results reject H2 which states that improved CSR leads to
CSR06 RDINT06 ROA07 ROE07 ROS07 ln sales06 ln asset06 ln cap06 DTA06 CSR06 1 0.098 0.114 0.077 20.066 0.639 * * 0.653 * * 0.569 * * 0.178 RDINT06 1 2 0.077 2 0.066 20.073 20.039 0.085 2 0.002 0.315 ROA07 1 0.777 * * 0.238 0.014 0.070 0.457 * * 2 0.447 * * ROE07 1 0.087 0.049 0.071 0.382 * 2 0.349 * ROS07 1 20.009 20.102 2 0.017 2 0.331 * Lagged ln sales06 1 0.870 * * 0.662 * * 0.391 * Lagged ln asset06 1 0.822 * * 0.304 Lagged ln mcap06 1 2 0.007 DTA06 1 Notes: *Statistically signiﬁcant at 5 per cent level; * *Statistically signiﬁcant at 1 per cent level; This table reports the correlations among 2007 proﬁtability, 2006 CSR, 2006 ﬁnancial controls and 2006 R&D intensity. The correlations among the CSR variables and ﬁnancial data use the sample period, 2006-2007 corporate Pearson correlation performance Managing companies matrix for ISE 100 Table VIII. 241
IJPPM Independent variable: Independent variable: Independent variable: 59,3 Dependent ROE05 ROA05 ROS05 variable: CSR06 Model 1 Model 2 Model 3 Control variable: lnmcap05 242 lnassets05 45.671 * 45.671 * 45.671 * lnsales05 DTA05 R 0.677 0.677 0.677 R2 0.459 0.459 0.459 Adj. R 2 0.444 0.444 0.444 F 32.175 * 32.175 * 32.175 * Excluded lnsales05, lnmcap05, lnsales05, lnmcap05, lnsales05, lnmcap05, Table IX. variables: ROE05, DTA05 ROA05, DTA05 ROS05, DTA05 Regression results for predictive variables Notes: p , 0.001; This table reports the regression results using 2006 CSR as the dependent variable (2005-2006) and 2005 ﬁnancial data as independent variables Dependent variable: Dependent variable: Dependent variable: Independent variable: ROE07 ROA07 ROS07 CSR06 Model 1 Model 2 Model 3 Control variable: lnmcap06 0.188 * 0.100 * lnassets06 20.137 * * 2 0.074 * lnsales06 DTA06 27.698 * * R 0.572 0.704 0.331 R2 0.327 0.496 0.109 Adj. R 2 0.291 0.469 0.086 F 9.003 * * 18.209 * 4.660 * * Excluded variables CSR06, lnsales06, CSR06, lnsales06, CSR06, lnmcap06, lnassets06, DTA06 DTA06 lnsales06 Table X. Regression results for Notes: *p , 0.001; * *p , 0.05; This table reports the regression results using 2007 ﬁnancial predictive variables performance (proﬁtability) as dependent variable and 2006 CSR as the key independent variable with (2006-2007) 2006 ﬁnancial control variables better ﬁnancial performance. However, a positive and signiﬁcant relationship between ROE of the year 2007 and ln mcap at the p , 0.001 level can be observed while a negative and signiﬁcant relationship between ln assets06 and ROE 2007 exists at the p , 0.05 level. The three models which are employed in this set of regression analysis fail to ﬁnd a signiﬁcant relationship between CSR 2006 and ﬁnancial performance 2007. In their studies, Waddock and Graves (1997) found a signiﬁcant and positive relationship between ROA, ROS and CSR while D’Arcimoles and Trebucq (2002) found a negative and signiﬁcant relationship between CSR and ROE. Considering the work of McWilliams and Siegel (2000), the exclusion of R&D intensity as a control variable in H1 and H2 does not create a problem because no link
can be found between CSR and ﬁnancial performance. If there were such a relationship, Managing omitting R&D intensity would overestimate the results because of the positive corporate correlation that exists between R&D expenditures and CSR. In all of the three models in the Table XI, no relationship has been found between CSR and the measures of performance ﬁnancial performance. Also, the R&D intensity has been found to have no signiﬁcant relationship with proﬁtability. D’Arcimoles and Trebucq (2002) detected the existence of a positive and signiﬁcant relationship between R&D intensity and ﬁnancial 243 performance and conﬁrmed the existence of the neutral relationship between CSR and ﬁnancial performance. Summary of the results In this study we examined the relationship between CSR and ﬁnancial indicators/performance of companies for the years of 2005, 2006 and 2007 in the ISE National 100 index. We stated three hypotheses. In order to test our H1 we employed regression analysis, using CSR as the dependent variable and ﬁnancial performance (proﬁtability), indicated by ROE, ROA and ROS as independent variables while net log of assets, net log of sales and net log of market capitalization were used as the control variables for size and debt to total assets was used to control for risk. In H2, proﬁtability was used as dependent variable and CSR as the independent variable with the same measures employed as control variables. In H3, R&D intensity was added as an independent variable in order to prevent a possible ﬂawed relationship between CSR and ﬁnancial performance. H1, which states that “better ﬁnancial performance results in improved CSP” is rejected. We were not able to ﬁnd any signiﬁcant relationship between proﬁtability and CSR. The second hypothesis in this study proposes that improved CSR leads to better ﬁnancial performance in line with good management theory. H2 which states that improved CSR leads to better ﬁnancial performance is rejected also. However, we found that there is a signiﬁcant relationship between company size and CSR. Thus, no link can be found between CSR and ﬁnancial Dependent variable: Dependent variable: Dependent variable: Independent variable: ROE07 ROA07 ROS07 CSR06 RDINT06 Model 1 Model 2 Model 3 Control variable: lnmcap06 0.196 * 0.105 * lnassets06 2 0.145 * * 20.078 * lnsales06 DTA06 2 7.935 * * R 0.582 0.727 0.336 R2 0.339 0.529 0.113 Adj. R 2 0.301 0.502 0.88 F 8.972 * * 19.660 * 4.568 * * Excluded variables CSR06, RDINT06, CSR06,RDINT06, CSR06, RDINT06, lnmcap06, lnsales06, DTA06 lnsales06, DTA06 lnassets06, lnsales06 Note: This table reports the regression results using 2007 ﬁnancial performance (proﬁtability) as Table XI. dependent variable and 2006 CSR as the key independent variable together with R&D intensity and Regression results for 2006 ﬁnancial control variables predictive variables
IJPPM performance. This is perhaps unsurprising as previous studies have shown mixed 59,3 result. For example, Waddock and Graves (1997) found a signiﬁcant and positive relationship between CSR and the measures of ﬁnancial performance while D’Arcimoles and Trebucq (2002) failed to ﬁnd an impact of ﬁnancial performance on CSR. Also, the R&D intensity has been found to have no signiﬁcant relationship with proﬁtability. Conversely, D’Arcimoles and Trebucq (2002) detected the existence of a 244 positive and signiﬁcant relationship between R&D intensity and ﬁnancial performance and conﬁrmed the existence of the neutral relationship between CSR and ﬁnancial performance. The three models employed in this set of regression analyses fail to ﬁnd a signiﬁcant relationship between CSR 2006 and ﬁnancial performance 2007. Waddock and Graves (1997) found a signiﬁcant and positive relationship between ROA, ROS and CSR while D’Arcimoles and Trebucq (2002) found a negative and signiﬁcant relationship between CSR and ROE. It is interesting to speculate on the reason why no signiﬁcant relationship is found but difﬁcult to determine a reason. It is not related to the fact that the study is undertaken in a developing country: Aras and Crowther (2009) argue that there is no difference in characteristics between developed and developing economies. Selection of variables may be pertinent but the investigation of this would lead to a whole new research project. We therefore must conclude that the reason is uncertain and that our results do not contradict some other similar studies. Conclusion For many, the relationship between CSR and ﬁnancial performance is clearly established. Thus the relationship between CSR and ﬁnancial performance has been empirically examined by many studies and there have been many theoretical debates and discussions concerning the positive relationship between corporate social performance and ﬁrm ﬁnancial performance. However in our study no link can be found between CSR and ﬁnancial performance. We found only a relationship between ﬁrm size and CSR. We tested CSR and ﬁnancial performance relationship with different directions which are improved ﬁnancial performance leads to better CSR, improved CSR leads to better ﬁnancial performance and a neutral relationship between the variables. Thus we try to show that some causality is related to the lagging of periods between ﬁrm size, proﬁtability, risk level and CSR. We were only able to ﬁnd a signiﬁcant relationship between ﬁrm size and CSR. This result suggests that CSR is perhaps not sufﬁciently related with ﬁrm ﬁnancial and economic performance in developing countries yet. Overall, there are a number of reasons why the empirical results of the relationship between ﬁnancial performance and CSR are not positive. CSR is still a very broad and active research topic, not only in emerging market countries, and the strength and usefulness of many results are still hotly debated. Thus, it is no easy task to consistently evaluate their signiﬁcance. Nevertheless it remains clear that the management of performance must take into account the CSR activities of an organisation as the sustainability of that performance is dependent upon such CSR activity.
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