Corporate social performance and corporate financial performance: theory and empirical evidence from the recent global financial crisis

Abstract

This thesis searches for the theoretical influence of corporate social performance (CSP) on corporate financial performance and to provide empirical evidence for this effect from the recent global crisis. Hence, the author investigates how and why CSP influences financial performance from the international perspective with a global dataset of Fortune World’s Most Admired Companies in three distinctive studies.

The first study develops a model on how and why independent directors using CSP disclosure affect profitability. The model is built on Schmidt and Keil’s (2013) theory of the conditions and mechanisms that make resources valuable to a firm. The regression results support the proposed model in a way that the synergy of independent directors using CSP disclosure probably increases profitability. The second study tests the agency theory on the impact of executive remuneration combining with CSR disclosure on profitability. The study finds that a combination of executive remuneration and CSP disclosure are likely to improve profitability; however, higher salary and stock might be the drivers that affect executives to disclose more information on CSP, which enhances the corporate reputation in CSP. The third study tests the theory of transaction costs in a model on the influence of CSR on profitability intervened by corporate governance. The data support the model, suggesting that well-informed and good governance is the condition for a positive influence of CSP on financial performance.

The novel contributions of the thesis are as follows. From an international perspective and use of a global-level dataset, the thesis confirms and extents the global theories related to corporate governance, and opens up the new research avenues. Empirically, this thesis is the first that proposes and tests a model on how and why independent directors using CSP disclosure affects profitability, underpinned by Schmidt and Keil’s (2013) function. Methodologically, the studies used the two measures of CSP in terms of disclosure and reputational rank; the structures of two simultaneous equations were used to fit the data. Further, the problem of endogeneity was addressed in the studies.

At the firm level, the thesis implies that first, the strategy in which independent directors use CSP is likely to improve financial performance due to the willingness to pay for the increased resources and social capital of their firm. Second, the study results raise the concerns on managerial manipulation of CSP disclosure due to agency problems and information asymmetry problems, thus recommending independent directors’ role of monitoring CSP. Third, the study suggests that positive effect of CSP on financial performance is conditional on the intervention of transparent and good governance. Moreover, the thesis reveals the advantages of the two coordinating forms of economic activities from the recent financial crisis, one based on networks and the other on governance hierarchy. These should be macro policy considerations during periods of economic recession when the market mechanism might fail.

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ORCID for Simon Wolfe: orcid.org/0000-0001-9815-9535

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