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«The Impact of Corporate Social Responsibility on Firm Value: The Role of Customer Awareness Henri Servaes London Business School and Ane Tamayo ...»

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Forthcoming, Management Science

The Impact of Corporate Social Responsibility on Firm Value: The Role

of Customer Awareness

Henri Servaes

London Business School


Ane Tamayo

London School of Economics

July 2012


We are grateful to Bruno Cassiman, Paul Coombes, Julian Franks, Bruce Hardie, Kanishka Misra,

Madan Pilutla, Richard Taffler, Nader Tavassoli, an anonymous associate editor, three

anonymous referees, and seminar participants at London Business School for useful comments and discussions. We also thank the Centre for Corporate Governance at London Business School for financial support. Ramin Baghai, Oguzhan Karakas, and Inma Urra provided excellent research assistance.

Electronic copy available at: http://ssrn.com/abstract=2116265 The Impact of Corporate Social Responsibility on Firm Value: The Role of Customer Awareness Abstract This paper shows that corporate social responsibility (CSR) and firm value are positively related for firms with high customer awareness, as proxied by advertising expenditures. For firms with low customer awareness, the relation is either negative or insignificant. In addition, we find that the effect of awareness on the value-CSR relation is reversed for firms with a poor prior reputation as corporate citizens. This evidence is consistent with the view that CSR activities can add value to the firm but only under certain conditions.

Electronic copy available at: http://ssrn.com/abstract=2116265

1. Introduction Corporate social responsibility (CSR) has become an integral part of business practice over the last decade or so. In fact, many corporations dedicate a section of their annual reports and corporate websites to CSR activities, illustrating the importance they attach to such activities. But do such activities create value for the firm’s shareholders or do they focus too much on other stakeholders, thereby lowering firm value? Despite much research on the topic [see Griffin and Mahon (1997), Orlitzky (2001), Orlitzky, Schmidt, and Rynes (2003), Margolis and Walsh (2003), and Margolis, Elfenbein and Walsh (2007) for reviews of the literature], few firm conclusions can be drawn, except that the literature is divided. While there appears to be more support for the view that CSR activities are positively related to profitability and firm value, a large number of studies find the opposite relation. As a result, the normative implications of research on corporate social responsibility are still uncertain.

The relation between CSR activities and firm value is unclear partly because of methodological concerns [Margolis and Walsh (2001)], and, in particular, model misspecification. Even more important is, perhaps, the lack of understanding about the channels through which CSR affects firm value. Most theoretical models assume a direct link between CSR and firm value. In this paper, we propose an indirect link. In particular, we rely on Barnett’s (2007) insight that the impact of CSR on firm value depends on the ability of CSR to influence stakeholders in the firm. We focus on one of the key stakeholders, consumers, and suggest that a necessary condition for CSR to modify consumer behavior and, hence, affect firm value, is consumer awareness of firm CSR activities. Moreover, we argue that consumers are less likely to respond to CSR activities, even if they are aware of them, if the CSR activities are not aligned with the firm’s reputation as a responsible citizen [see also Du, Bhattacharya, and Sen (2010), and Schuler and Cording (2006)].

In this paper, we revisit the relation between CSR and firm value taking into account the concerns mentioned above. Using models with firm fixed effects to address model misspecification problems, we examine whether and under what conditions CSR can add value to the firm. More specifically, we study whether CSR activities are more value enhancing if they are conducted by firms with more consumer awareness. Although the relation between CSR and firm value ought not to be confined to the consumer channel, consumers constitute a natural starting point to uncover such a relation, given that their purchasing behavior clearly affects a company’s financial performance and, ultimately, firm value. We also investigate whether the impact of awareness is attenuated for firms with a poor prior reputation for responsible behavior, and contrast the consumer awareness story with an alternative in which CSR is employed by socially-conscious entrepreneurs who wish to signal product quality.

1 In our analyses, we employ the KLD Stats database over the period 1991-2005, which covers CSR activities of a large subset of US companies, and combine it with financial statement data obtained from Compustat. Our main performance metric is Tobin’s Q, which is the market value of the firm, divided by the replacement value of the assets. We start by assessing whether firms with high consumer awareness, as proxied by advertising spending, can enhance firm value by increasing CSR, and find this to be the case. CSR activities have a negligible or negative impact on firm value for firms with low advertising intensity, which suggests that for these firms the costs sometimes outweigh the benefits. Conversely, we find a positive impact for firms with high advertising intensity. However, we show that the positive impact of advertising intensity reverses for firms with a poor prior reputation for being responsible citizens, as measured by Fortune’s rating on the list of America’s Most Admired Companies.

Interestingly, we find no evidence of a direct link between CSR and firm value after controlling for unobservable time-invariant firm characteristics (i.e., in models that employ firm fixed effects).

This article contributes to the debate on the role of CSR in corporate strategy. We show that in certain circumstances CSR enhances the value of the firm, but in others, it could destroy value, suggesting that some firms adhere to the shareholder model, while others may consider broader objectives [see Jensen (2001)]. Our analyses also illustrate the importance of controlling for omitted variables in this type of studies and highlight the complexity of the mechanism through which CSR affects firm value. By empirically establishing one condition under which such a relation can be uncovered, our research validates Schuler and Cording’s (2006) and Barnett’s (2007) claim that understanding the link between CSR and value requires models of stakeholder behavior that explain how CSR activities enhance/destroy value.

The remainder of this paper is organized as follows. In Section 2, we define CSR and briefly summarize the literature on the impact of CSR activities on firm value; we also discuss various reasons why advertising spending may enhance/moderate the relation between CSR and firm value. Section 3 describes our data collection procedure and variable construction. Our results are contained in Section 4.

Section 5 concludes the paper, discusses the managerial implications of our findings, and proposes several avenues for further research.

2. CSR, Advertising Intensity and Firm Value

2.1. Defining CSR Before discussing ways in which CSR activities can enhance firm value, it is important to discuss those activities that encompass CSR. Notwithstanding the large literature on the topic, a general 2 consensus as to what activities are included under the CSR umbrella has not emerged. In fact, Baron (2001) argues that “Corporate Social Responsibility is an ill- and incompletely defined concept” (p. 10).

We rely on the broad definition proposed by the World Business Council for Sustainable Development (WBCSD) (2004) who argues that “CSR is the commitment of a business to contribute to sustainable economic development, working with employees, their families, the local community and society at large to improve their quality of life.” 1 This definition includes the elements that are generally included in empirical work on CSR, such as the community, the environment, human rights, and the treatment of employees. While some of these elements relate to social dimensions, others focus on stakeholders (e.g., treatment of employees). As such, this definition is consistent with Griffin and Mahon’s (1997) multidimensional notion of CSR and with the work of Dahlsrud (2008), who reviews various definitions of CSR and finds that the stakeholder and the social dimensions receive exactly the same attention based on frequency counts in Google searches.

The inclusion of stakeholders within the remit of CSR is, however, not without controversy, especially given that the boundary between stakeholder management and CSR is not clear cut. For example, Jensen (2001) argues that anyone who can potentially benefit from its engagement with the firm is a stakeholder. That would include issues related to human rights, the environment and the community, elements that others would consider more ‘social’. This definition of stakeholder is similar in spirit to Freeman’s (1984) definition of a stakeholder as “any group or individual who can affect or is affected by the achievement of an organization’s purpose”, although Freeman (1984) explicitly considers groups and individuals that can be negatively affected by the firm’s actions as well. According to this view all CSR activities fall under the remit of stakeholder management. On the other hand, Harrison, Bosse, and Phillips (2010) make a clear distinction between stakeholder orientation versus a focus on social issues, and consider only the latter activities as CSR.

In sum, while there are some dissenting opinions, much of the literature includes both the social and stakeholder dimensions in the CSR remit. Thus, consistent with this view and our definition, we consider both facets of CSR in our work.

2.2. Customer awareness and CSR There is a substantial theoretical literature suggesting that CSR activities can enhance profitability and, hence, the value of the firm. Berman, Wicks, Kotha, and Jones (1999) provide an excellent overview 3 of the various elements of CSR and the ways in which these activities can increase firm value. 2 The concern, of course, is that CSR activities are costly and that the costs do not (always) outweigh the benefits. In fact, empirical studies on the relation between the value of the firm and CSR activities find mixed results, including an “impressive number” of studies reporting negative relations [see Griffin and Mahon (1997) – for a differing view see Roman, Hayibor and Agle (1999)].

Our goal is to examine under which circumstances CSR involvement may be beneficial. We focus on the customer channel and examine the effect of a potential moderating variable, advertising intensity, on the CSR-firm value relation. We posit that through advertising a firm reduces the information gap between itself and its customers, which, in turn, makes it more likely that customers will find out about the firm’s CSR involvement, and reward the firm for its CSR efforts.

In developing our prediction that advertising intensity enhances the benefits of CSR, we turn to the literature in strategy, marketing and business ethics, which has established two facts. First, customers take into consideration firms’ CSR activities when making purchase decisions [see, for example, Brown and Dacin (1997), Creyer and Ross (1997), Sen and Bhattacharya (2001), Bhattacharya and Sen (2004), and Penn, Schoen, and Berland (2010)]. Some of this research suggests that consumers are willing to pay a higher price for products of firms with more CSR engagement; other work suggests that, while consumers are not willing to pay a higher price, they will more likely purchase goods from firms that are more socially responsible. These findings support Baron’s (2001) original insight that “a practice labelled as socially responsible … increases the demand for its (the firm’s) product. This strategic CSR is simply a profit-maximizing strategy motivated by self-interest …” (p. 9) In this context, CSR is considered a product attribute, and therefore a strategic investment chosen to maximize firm value. The second fact is that consumers are often not aware of a firm’s CSR activities [see, for example, Sen and Bhattacharya (2001), Bhattacharya and Sen (2004), Pomering and Dolnicar (2009), and Du et al. (2010)].

There is a clear disconnect between these two facts. As articulated by Bhattacharya and Sen (2004) and Schuler and Cording (2006), the lack of customers’ awareness about CSR initiatives is a major limiting factor in their ability to respond to these initiatives. Similarly, McWilliams and Siegel (2001) argue that potential customers must be fully aware of CSR characteristics for CSR differentiation to be successful; they also and predict a positive correlation between advertising intensity and the provision of 1 WBCSD is a CEO-led organization focused on organizing the global business community to create a sustainable future for business, society and the environment. It has 200 member companies with combined revenues of over $7 trillion and, according to Google Scholar, it has large visibility in academic research (over 45000 citations).

2 See also Bies, Burtunek, Fort, and Zald (2007) and the other articles in the special topic forum on “Corporations as Social Change Agents”, published in the Academy of Management Review 32 (2007).

4 CSR. 3 All of these authors recommend that companies work on increasing CSR awareness levels, if CSR is to be a profitable strategic investment. 4 This work also suggests that not all firms fully appreciate the importance of customer awareness when evaluating CSR as a strategic investment.

In this paper, we posit that advertising enhances a firm’s information environment, thereby increasing the firm’s (potential) customers’ awareness about the firm and likely prompting them to become further informed about the firm, its products, and practices, including its corporate social performance. The notion that advertising provides information about the firm goes back to at least to Nelson (1974) (see also Bagwell (2007) for a review of the literature). More recently, relating advertising to CSR, McWilliams and Siegel (2000, 2001) suggest that CSR-related advertising and media coverage may increase consumer awareness of CSR. This, in turn, increases the demand for socially responsible behavior and the returns to engaging in such behavior. They do not, however, formally model or test this conjecture.

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