Corporate social responsibility (CSR) has grown in importance the last decades. This development occurs because of a number of reasons: stakeholders demand more disclosure, customers are more interested in companies’ ethical behavior, a growing amount of investors takes ethical considerations into account, and suppliers face increasing pressure to produce ethically (IISD, 2013). CSR can destroy shareholder value if the money spent on CSR does not deliver a return. Therefore, it is interesting to investigate the link between CSR and financial performance.
The relationship between corporate social responsibility and a firm’s financial performance has often been investigated. Previous studies found mixed results for example, Cheung, Tan, Ahn, and Zhang (2010), Montabon, Sroufe, and Narasimhan (2007) and Ngwakwe (2009) find a positive relationship between CSR and firm performance while Fiori, Donato, and Izzo (2007), Brine, Brown, and Hackett (2007), Aras, Aybars, and Kutlu (2009) do not find a significant relationship. If previous findings are compiled the results tend to suggest a positive relationship (Margolis & Walsh, 2003).
However, the evidence is not very strong. Therefore, it is interesting to investigate the relationship in more detail. Next to that most of the previous studies are conducted in Western countries. Welford (2004) and Welford (2005) find that CSR activity differs between different regions in the world.
CSR tends to be less developed in Asia and more developed in Europe and the US. If the quality of CSR differs between regions the relationship between CSR and financial performance might also differ between regions. Therefore, conducting a study in a region with less developed CSR practices will complement the current literature. Finally, this thesis contributes to the literature by investigating CSR and financial performance in a different time period. The definition of CSR changed over time (for more details see section 2.2) from a kind of corporate philanthropic concept to a concept that is anchored in business. If CSR develops into creating shared value as Porter and Kramer (2011) claim, it is more likely that money spent on CSR will result in a financial return for the company.
From a business perspective it is interesting to see whether CSR influences market valuation and operating performance. This thesis considers operating performance and market valuation together as financial performance If good CSR practices increase financial performance, managers should implement these to maximize shareholder wealth. The positive side effect is that other stakeholders will benefit as well. This thesis examines the relationship between corporate social responsibility and financial performance in Asia and answers the following research question: Does corporate social responsibility influence financial performance? To answer this question this thesis investigates the link between CSR and market valuation and CSR and operating performance. If a positive relationship is found for both links, this thesis will test whether the effect of CSR on market valuation is mediated via operating performance.
Furthermore, this thesis tests whether the relationship between CSR and financial performance differs between countries with high versus low country corporate governance scores as given by Credit Lyonnais Securities Asia (CLSA, 2010a). The sample consist out of 50 companies (see Appendix A) graded by CLSA (2010b) in the fiscal year 2009. This thesis contributes to the literature by providing evidence that CSR is positively related with market valuation and operating performance in Asia. The previous literature showed mixed evidence whether a relationship between CSR and financial performance exists. This thesis extends the literature in this field by providing strong evidence of a positive relationship between CSR and financial performance. Furthermore, most previous studies are done in Western countries. Therefore, providing evidence from a different market area extents the literature. The remainder of this thesis is organized as follows.
The second section describes the findings in previous literature and states the hypotheses. Section three elaborates on the sample and the model that is used in this thesis. Section four shows the results of the different regression analyses. Section five discusses and provides arguments for the findings. Finally, section six presents the conclusion and the limitations of this thesis.