The prominence of corporate social responsibility (CSR) has been growing in recent years, but the empirical relationship between CSR and firm value is still inconclusive. Though many studies show a positive impact of CSR on firm value, others provide evidence to the contrary. This relationship may be unclear because of the lack of understanding about the mechanisms through which CSR may affect firm value. In a new paper, we investigate whether CSR affects firm value by improving perceived product quality (brand value) and differentiating among products. More specifically, we investigate whether CSR activities, especially those visible to customers such as environmental and community measures, affect product market perception and, indirectly, firm value.
There is a lot of anecdotal evidence of CSR’s positive effect on brand value. For example, according to a survey by Accenture and United Nations Global Compact, 72 percent of CEOs consider improving “brand, trust, and reputation” as the main reasons for undertaking CSR activities. Similarly, a survey conducted by the Economist Intelligence Unit in 2005 found that most investors and executives (61 percent) believe that brand enhancement is the most important business benefit of CSR.
The literature on the relationship between CSR and firm value has two main perspectives. The first, known as the Friedman view, argues that CSR is evidence of agency costs and therefore should have a negative effect on firm value. The second, known as both the Freeman view and stakeholder theory, suggests that CSR increases shareholder wealth by focusing on the interests of other stakeholders. Customers, for example, develop a more favorable view of a firm and, as a result, enhance its product market perception and brand value and improve its financial performance and share value.
To examine whether CSR affects share value by strengthening a company’s brand, we use a large proprietary database of customer brand evaluation. The measures we use rely on a customer survey-based approach and, therefore, reflect the product market perception, in contrast with models based on financial measures or expert evaluation, which do not reflect customers’ perception. Our data come from Brand Asset Valuator, a proprietary brand assessment model developed by BAV Consulting, a subsidiary of Young & Rubicam. BAV surveys more than 16,000 U.S. households to evaluate brands on a wide range of attributes. We use the following attributes to construct our Product Market Perception measure: 1) Relevance, 2) Knowledge, 3) Distinctiveness, 4) Uniqueness, 5) Dynamism, 6) Innovativeness, 7) Leadership rank, 8) Reliability, 9) Quality, and 10) Trustworthiness.
We find a positive and economically meaningful relationship between CSR and product market perception: One standard deviation increase in the CSR measure increases the product market perception measure by 10.5 percent. This result holds for both the community and environmental components of CSR. We find that the results are driven by CSR strengths rather than concerns. This result suggests that the strength components of CSR are more visible. We find no relationship between product market perception and other components of CSR (employee friendliness, employee diversity, and corporate governance). Moreover, the positive association between community and environmental CSR is most pronounced for firms with standardized rather than differentiated goods and for companies in competitive industries. Our results are most pronounced for a more refined measure of perceived product quality.
The results could suffer from endogeneity, reverse causality, and omitted variable bias. It is possible that firms with strong product market perception can afford to spend more on CSR. We address these issues in several ways. First, we do an instrumental variable analysis using as instruments per capita CO2 emissions from fossil fuel combustion and the percentage of population that volunteers for non-profit and community organizations in the state where the firm is headquartered. Second, we do a quasi-natural experiment to examine the effect of the 2010 Deepwater Horizon oil spill on product market perception of firms and find that the impact of environmental and community related CSR activities on product perception was stronger after the spill for energy firms. Overall, these analyses suggest that our results are robust to endogeneity concerns.
Finally, we examine the indirect link between CSR and firm value, as measured by Tobin’s Q and profit margin. We find that the product market perception is significantly and positively related to firm value and profit margins. One standard deviation change in product market perception increases firm value by 5.8 percent. Mediation analysis suggests that partial mediation occurs when product market perception is included in the Tobin’s Q regression together with CSR. These results confirm our prediction that product market perception is one way that CSR creates firm value.
This post comes to us from professors Katsiaryna Salavei Bardos at Fairfield University and Mine Ertugrul and Lucia Silva Gao at the University of Massachusetts, Boston. It is based on their recent paper, “Corporate Social Responsibility, Product Market Perception and Firm Value,” forthcoming in the Journal of Corporate Finance and available here.