Corporate Social Responsibility and Fina PDF

Corporate Social Responsibility and Financial Performance
Author(s): Philip L. Cochran and Robert A. Wood

Source: The Academy of Management Journal, Vol. 27, No. 1 (Mar., 1984), pp. 42-56
Published by: Academy of Management
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?Academy of Management Journal
1984,Vol. 27, No. 1, 42-56.
Corporate Social Responsibility

and Financial Performance1
PHILIP L. COCHRAN
ROBERT A. WOOD
Pennsylvania State University
Therelationshipbetweencorporatesocialresponsibility
and financial performance is reexaminedusing a new
methodology,improvedtechnique,and industry-specific
controlgroups.Averageage of corporateassetsisfound
to be highlycorrelatedwithsocial responsibilityranking.
After controllingfor thisfactor, therestill is some cor-
relationbetweencorporatesocialresponsibilityandfinan-
cial performance.
The relationshipbetweena firm'scorporatesocialresponsibility(CSR)-

or, morerecently,its corporatesocialresponsiveness-andits financialper-
formancehas beenthe subjectof a livelydebatesincethe 1960s.Researchers
havereachedno realconsensuson the relationshipbetweenthesevariables.
In fact, a recentworkreviewedsevenearlierempiricalstudiesandconcluded
that "economic performanceis not directlylinked, in eithera positive or
negativefashion,to socialresponsiveness" (Arlow& Gannon,1982,p. 240).
Whetheror not a relationshipexistsclearlyis an importantissue for cor-
porate management.If certainactions (classifiedas socially responsible)
tend to be negativelycorrelatedwith financialperformanceof firms, then
managersmightbe advisedto be cautiousin this area.If, on the otherhand,
a positive relationshipcan be shown to exist, then managementmight be
encouragedto pursuesuch activitieswith increasedvigor or to investigate
the underlyingcauses of this relationship.The focus of this paper is on
the questionof whetherthesetwo factors(CSRand financialperformance)
are related.Only once this questionis answeredcan the questionof causa-
tion be addressed.
This paperextendspriorempiricalresearchin threeareas. Certainfac-
tors omittedin previousstudiesare explicitlycontrolledfor by use of im-
provedfinancialperformancemeasuresandadditionalvariables.A statistical
tool, logit analysis, more suited to the data is employed. Finally, the
'The authors would like to express their appreciation to Anthony Curley, Keith Ord, Robert Pitts,
Steven Wartick, and three anonymous referees for their helpful comments and suggestions.
42

1984 Cochranand Wood 43
sampleis enhancedby utilizinga largeindustry-specificcontrolgroupand

using two test intervals.
Resultsof these improvementsindicatethe crucialrole of firm assetsin
test outcomes.Consequently,assetturnoverand assetage are addedas ex-
planatoryvariables.This expandedanalysisrevealsthat the key correlate
with CSR is asset age and that the omission of this variablein previous
studiesmay have led to spuriouspositive correlationsbetween CSR and
financialperformance.Nonetheless,with this variableincluded,therestill
is weak evidence of a positive correlationbetween CSR and financial
performance.
Previous Research
Althoughthe examinationof previousresearchdoes, to a certainextent,

parallelthe work of Arlow and Gannon, the numberof studiesexamined
hereinis considerablylarger.In addition, this surveyof earlierwork pro-
videsthe rationalefor the bulkof thispaper,namely,a newandconsiderably
more extensiveempiricaltest of this researchquestion.
Measurementof CorporateSocial Responsibility
Thereare two generallyacceptedmethodsof measuringCSR. The first

method is the reputationindex. In this method knowledgeableobservers
rate firms on the basis of one or more dimensionsof social performance.
This method has some advantages.First, it tends to be internallyconsis-
tent becauseone evaluatoris applyingthe same (albeitusuallysubjective)
criteriato each firm. Second, it makesno pretenceof applyinga rigorous
objectivemeasureto a dimensionthat may be innatelysubjective.Third,
it may summarizethe perceptionsof a key constituencyof variousfirms.
This alone may be an importantfactor in determiningthe relationshipbe-
tween CSR and financialperformance.
Thereare, however,disadvantages as well. Themostimportant(andmost
obvious) is that such are
rankings highlysubjectiveand thus may varysig-
nificantlyfrom one observerto another.This raisesthe spectreof unreli-
ability. A second problemis one of samplesize. Most reputationindexes
generatedto date cover only a relativelysmall numberof firms. Thus one
must be cautious about generalizingfrom the results of these studies.
The firstreputationindexwasa fairlynarrowone, generatedby the Coun-
cil of EconomicPriorities(CEP) in the late 1960sand early 1970s. In this
study the CEP rankedthe pollution control performanceof 24 firms in
the pulp and paperindustry(Councilof EconomicPriorities, 1971). This
measureof CSR has been used by a numberof other studies, including
Bragdonand Marlin(1972), Folger and Nutt (1975), and Spicer(1978).
A secondreputationindexwasgeneratedby MiltonMoskowitz,who over
a periodof severalyearsrateda numberof firmsas "outstanding,""honor-
able mention," or "worst" (Moskowitz,1972, 1975).The 1972versionof

44 Academyof ManagementJournal March
this index was used by Moskowitzand a composite of his 1972-1975in-

dexeswas used by Sturdivantand Ginter(1977)in theirstudiesof the rela-
tionship between CSR and financial performance.
Anotherpopularreputationindexalso can be tracedbackto Moskowitz.
A surveywas conductedby the National Associationof ConcernedBusi-
ness Students("How businessschool studentsrate corporations," 1972)
in which300 graduatestudentsof businessadministrationwerequestioned
about their views on the social responsibilityof some of the Fortune 500
firms. Indexesgeneratedby this study were used subsequentlyby Vance
(1975), Heinze (1976), and Alexanderand Buchholz (1978).
The second method of measuringCSR is content analysis. Normally,
in contentanalysisthe extentof the reportingof CSR activitiesin various
firmpublicationsand especiallyin the annualreportis measured.This can
consist of simply noting whetheror not a particularitem (such as pollu-
tion control)is discussedeitherqualitativelyor numerically,or it can mean
actuallycountinga numberof items. A commonlyused sourcefor content
analysisis a series of studies conductedby Beresford(1973, 1975, 1976).
Contentanalysishas two significantadvantages.First, once the particu-
lar variableshave been chosen (a subjectiveprocess),the procedureis rea-
sonablyobjective.Thereforethe resultsare independentof the particular
research.Second, becausethis techniqueis more mechanical,largersam-
ple sizes are possible.
However,contentanalysisalso has some drawbacks.The choiceof vari-
ables to measureis subjective.Further,content analysisis only an indica-
tion of what firmssay they are doing, and this may be verydifferentfrom
what they actuallyare doing. At best, one certainlycould postulatethat
firmsthat are awareof these issuesare those that will discussthem as well
as act on them. On the other hand, one could imaginethat firms that are
doingpoorlyon this frontwouldfeel an extraincentiveto makethemselves
look good by touting their achievementsin their annual reports.
The first study to use content analysiswas Bowmanand Haire (1975).
In this study the authorsexaminedonly the food processingindustryand
developedtheirown indexbasedon the numberof linesof the annualreport
devoted to CSR. Subsequently,severalother studies (Abbott & Monsen,
1979;Anderson& Frankle,1980;Ingram,1978;Preston, 1978)used con-
tent analysisindexes based on Beresford'swork.
Neithercontentanalysisnor reputationindexescan be consideredwholly
adequatemeasuresof CSR. The problemof measuringsocial responsibil-
ity or responsivenessof firmsneedsconsiderablymoreattentionin this lit-
erature. Yet, at the moment there obviously are not better measures
available.
Measurement of Financial Performance
Although one might have expected a certain diversity of measures of

CSR, there is no real consensus on the proper measure of financial

1984 Cochran and Wood 45
performanceeither. In fact, thereis a wide rangeof such measures.How-

ever,mostmeasuresof financialperformancefall into two broadcategories:
investorreturnsand accountingreturns.Both haveenjoyedperiodsof pop-
ularity, and both have evolved considerablyover the course of the past
decade.
InvestorReturns.Thebasicideaunderlyinginvestorreturnsis thatreturns
should be measuredfrom the perspectiveof the shareholders.The first
studiesto employ investorreturnsas a measureof financialperformance
werethose of Moskowitz(1972)and Vance(1975). In both of thesestudies
changesin priceper sharewas used as the investorreturnsindex. As most
subsequentstudieshave noted, this measureis clearlyflawed. The change
in priceper shareis only one elementof investorreturns.Dividendincome
is the other, and it must be includedin any measureof investorreturns.
Abbott and Monsen(1979)used the changein sharepriceplus dividends
as their measureof investor returns.However, this, too, is insufficient.
Simple returns(changein price per share plus dividends)fail to capture
another dimensionof vital importanceto investors-namely, risk.
In acceptedfinancetheory, the risk of holdingassetsis measuredby the
covarianceof the expectedreturnon the assetwiththatof the overallmarket.
This measure,which is commonlyreferredto as "beta," typicallyis ob-
tained for a stock by regressingits realizedreturnson those of a broad
basedmarketindex. The regressionslope coefficientprovidesthe beta esti-
mate. An averagebeta is 1. A stock with a beta above 1 is consideredan
aggressivestock because it will tend to move faster, either up or down,
thanthe market.Correspondingly, a stockwitha betabelow 1 is considered
a defensive stock (Curley& Bear, 1979).
It was preciselythis failureto adjustfor riskthat led to the (apparently)
contradictory resultsof Moskowitz(1972)andof Vance(1975).Moskowitz's
studyindicatedthat firmswithhighCSRratingsoutperformedthe market.
Vance, two years later, concludedjust the opposite. An examinationof
Moskowitz'shigh CSR firms over the 1970-1979periodindicatesthat the
portfolio of these firms had a beta of 1.56. The period that Moskowitz
examined,the first half of 1972, was a bull market(i.e., rising), and the
periodthat Vancelooked at, 1972through 1974, was a bear market(i.e.,
falling). Therefore,the apparentcontradictionbetweentheir results can
be explainedby the riskinessof the returnsof the firmsthat they had clas-
sifiedas sociallyresponsibleand not by the variabletheybelievedthey were
examining.
Two studies did use risk adjustedmeasuresof investorreturns.These
were Alexanderand Buchholz(1978) and Andersonand Frankle(1980).
However, there is a problemwith the use of even a "clean" measureof
investorreturnsfor this type of study. This problemis summarizedby one
of the tenets of modernfinancetheory, the efficient marketshypothesis.
Simplystated,this tenetpositsthat as informationthat mightaffect future
cash flows of a firm becomesavailable,it immediatelywill be reflectedin
its currentshareprice.The implicationof this is that evenif CSRdoes lead
to improvedfinancialperformance,as soon as the marketbecomesaware

of any change in a firm's CSR rating it will immediatelyalter price per

shareto reflectthatinformation.As Alexanderand Buchholz(1978)noted,
after this reactiononly new informationregardinga firm's social respon-
sibilitywill have any affect on the firm's financialperformance.Thus, if
the perceptionof a firm'ssocial responsibilitychangedin 1975and a naive
researcherexaminedonly the period 1977-1979,then he or she probably
wouldconcludethat CSRand financialperformanceareunrelated.In order
to employ investorreturnsmeasuresof financial performanceproperly,
the researchermust conductan "eventstudy." Failureto do so could lead
the researcherincorrectlyto the conclusionthat thereis no relationshipbe-
tween CSR and financial performance,even if one actually exists.
One particularlyinnovativemethodologythat avoidsmanyof the earlier
problemswithinvestorreturnsis employedby Ingram(1978).Ingramtests
for a correlationbetweensocial responsibilitydisclosures(used by others
as a proxyfor CSR)and financialperformancewhile controllingfor both
riskand industryeffects. The proceduremay be viewedas a reversecluster
analysis, in which the sample is iteratively split into subgroups, with the
groupingcriterionbeingmaximizationof the differenceof a functionalrela-
tionship betweeneach of the two subgroupsat each iteration. The func-
tional relationshipthat Ingramuses is excess marketreturnfor each firm
as the dependentvariable;he uses fiscal year, excessaccountingearnings,
and industryas explanatoryvariables.
Ingram'sproceduredivideshis sampleof 116 firms into 10 subgroups
whereineach subgrouphas two sets of firms-one having higher excess
marketreturnsthan the other. In seven of these subgroupings,firms in
the higherexcessmarketreturncategoryhave betterCSR ratingsthan do
those in the lower excess marketreturncategory. The reverseis true for
the remainingthree subgroups.
Although this techniqueavoids many of the problemsencounteredby
earlierstudies,one mustbe cautiousin interpretingIngram'sresultsas sup-
port for a correlationbetweenCSR and financialperformance.If, in fact,
Ingram'snullhypothesis,thatis, thatthereis no relationshipbetweensocial
responsibilitydisclosuresand financialperformance,were true, then 7 or
more of the 10 groupswould have disclosureratingsin the higherfinan-
cial performancecategorieswith a frequencyof 11.32 percent.This clear-
ly is not a strong rejectionof the null hypothesis.
AccountingReturns.Accountingreturnsare the other primarymethod
of measuringfinancialperformance.The basicidea behindusingaccount-
ing returnsas a measureof financialperformanceis to focus on how firm
earningsrespondto differentmanagerialpolicies.The most commonmea-
suresof accountingreturnsusedin studiesof this questionare simplyearn-
ings per share(EPS) or price/earnings(P/E) ratios. Bragdonand Marlin
(1972),Bowmanand Haire(1975),Folgerand Nutt (1975),Heinze(1976),
Preston(1978),andSpicer(1978)all usedEPS, P/E ratios,or somealgebraic
variationof them as at least one of the measuresof financialperformance
in their studies.

There are several problems, however, associated with using EPS or P/E
ratios as such a measure. Both are strongly influenced by the rate of growth
and accounting practicesof firms (Beaver& Morse, 1978). In addition, these
financial performance measures cannot be accuratelycompared across firms
without considering financial leverage influences and risk differences. This
does not mean that one cannot use accounting returns, quite the opposite-
accounting returns may be the best proxy for financial performance. How-
ever, the particular measures used in previous studies have serious defects.
Samples in Previous Studies
Most of the previous work in this area employed samples that were too
small to result in any safely generalizableresults. The Folger and Nutt (1975)
study, for example, examined only nine firms. In fact, 6 of the 14 studies
examined here had samples of less than 30 firms.
Second, the control groups in a number of these studies were too small.
In several of the studies the small sample of CSR firms was segmented and
subgroups were compared. In others the sample was matched with an ex-
ternal control group of similar size. All but four of the studies employed
control groups smaller than 100 firms.
In order to overcome this problem, several researchers(Abbott & Monsen,
1979; Alexander & Buchholz, 1978; Moskowitz, 1972; Preston, 1978; Vance,
1975) compared their samples to broad market averages such as the Stan-
dard and Poors 500. This step represents an improvement, but compar-
ison to industry control groups is superior. Accounting practices, operat-
ing leverage, and other variables that may influence test results will be more
homogeneous within industries.
Sturdivant and Ginter (1977) recognized this problem and grouped their
sample into four somewhat homogeneous subgroups. Unfortunately, by
doing so they reduced their overall sample size and did not, necessarily,
create subgroups with sufficient homogeneity.
Finally, the time period(s) employed in a number of the previous studies
was too short. Seven of these studies employed time periods equal to or
less than two years. Only five of the studies used time periods greater than
or equal to five years.
Results of Previous Studies
As noted earlier, the previous empirical work in this area reached no real
consensus on the nature of the relationship between CSR and financial per-
formance. Of the 14 studies examined, fully 9 (Anderson & Frankle, 1980;
Bowman & Haire, 1975; Bragdon & Marlin, 1972; Heinze, 1976; Ingram,
1978; Moskowitz, 1972; Preston, 1978; Spicer, 1978; Sturdivant & Ginter,
1977) found some positive relationship between CSR and financial perfor-
mance. However, as noted earlier, because of incorrect specification of the

financialperformanceproxy, small sample size, and questionablemeth-

odology, these resultsmust be viewed with suspicion.
Three studies (Abbott & Monsen, 1979;Alexander& Buchholz, 1978;
Folger& Nutt, 1975)found no reallinkbetweenthesevariables.Alexander
and Buchholz,as wellas AbbottandMonsen,usedformsof investorreturns
as proxiesfor financialperformance.Abbott and Monsen,however,failed
to accountproperlyfor risk.Alexanderand Buchholzdid properlyaccount
for risk, but they did not employan eventstudyand thus could have failed
to discovera relationshipeven if one did exist.
Onestudy(Vance,1975)founda negativerelationshipbetweenthesevari-
ables. However, as discussedearlier,his proxy for investorreturns(only
change in share price) clearlywas insufficient.
Method
Measuresof Social Responsibility
As noted earlier,neitherof the two major categoriesof CSR measures

(reputationindexes and content analyses)is wholly adequate. However,
becauseit has beenusedextensivelyin the literatureon thissubject,a specific
reputationindex, the combinedMoskowitzlist (as used by Sturdivantand
Ginter), is employedby this study (see Table 1).
In orderto avoid some of the problemsof inadequatesamplesencoun-
teredin previousstudies,each firm on this list is independentlycompared
to its industrygroup as defined by the four-digitStandardand Poor In-
dustry Codes.
The 61 firms (6 firmswereeliminatedbecausethey no longerexistedin
their originalform) are containedin 42 such groups. Of these groups, 13
wereeliminatedeitherbecausetherewereinsufficientdata on the Compu-
stat tapes for calculatingthe three financial performancemeasuresover
each of two five yearperiods(1970-1974,1975-1979)or becausetherewas
less than a total of 10 firmsin the industry(thus makingindustryaverages
suspect).
Therefore,in the first time period(1970-1974)the samplecontained39
firmsin 29 industries,whichwerecomparedto 386 firmsin theirindustry
control groups. In the second period (1975-1979)there were 36 firms in
28 industriesand a total of 366 firms in the control groups.
Two time periods were studied to increasethe sample size. Averaging
accountingdata across five years will control for unusualaccountingen-
tries in any one year that might distort test results.
Measuresof FinancialPerformance
This studyfollowedthe precedentof most of the previousstudiesof this
questionand used accountingdata to measurefinancialperformance.The
use of accountingdata raisesthe possibilityof distortionsfrom inflation

Table 1
Firms in Sample
CSR SIC
#a Firm # Industry
2 Amax, Inc. 1000 Metal mining
3 American Brands, Inc.b 2111 Cigarettes
3 American Can Co. 3410 Metal cans & shipping containers
3 American Home Products Corp. 2830 Drugs
2 American Telephone & Telegraph 4811 Telephone communication
2 Atlantic Richfield Co. 2911 Petroleum refining
3 Bethlehem Steel Corp. 3310 Blast furnaces & steel works
2 Campbell Soup Co.b 2030 Canned-preserved fruits-vegetables
3 Colgate-Palmolive Co. 2841 Soap & other detergents
2 Dayton-Hudson Corp. 5311 Retail-department stores
1 Dow Chemical 2800 Chemicals & allied products
3 DuPont (E. I.) de Nemours 2800 Chemicals & allied products
2 Eastern Gas & Fuel Assoc. 1211 Bituminous coal & lignite mining
3 Farah Mfg. Co. 2300 Apparel & other finished products
2 Giant Food, Inc. 5411 Retail-grocery stores
3 Goodyear Tire & Rubber Co. 3000 Rubber & miscellaneous plastics products
2 International Business Machines Corp. 3570 Office computing & accounting machines
I Jewel Cos., Inc. 5411 Retail-grocery stores
I Johnson & Johnson 3841 Surgical & medical instruments & appliances
3 K Mart Corp. 5331 Retail-variety stores
2 Koppers Co. 2800 Chemicals & allied products
3 Kraft, Inc. 2020 Dairy products
2 Masco Corp. 3430 Heating equipment & plumbing fixtures
1 McGraw-Hill, Inc. 2731 Books: publishing & printing
2 Mobil Corp. 2911 Petroleum refining
3 Nabisco, Inc. 2000 Food & kindred products
I Owens-Illinois, Inc. 3221 Glass containers
2 Phillips-Van Heusen 2300 Apparel & other finished products
2 Polaroid Corp. 3861 Photographic equipment & supplies
1 Quaker Oats Co. 2000 Food & kindred products
2 RCA Corp.b 3651 Radio-TV receiving sets
3 Standard Oil Co. (California) 2911 Petroleum refining
I Standard Oil Co. (Indiana) 2911 Petroleum refining
I Syntex Corp. 2830 Drugs
3 Texaco, Inc. 2911 Petroleum refining
3 U.S. Steel Corp. 3310 Blast furnaces & steel works
1 Weyerhaeuser Co. 2400 Lumber & wood products
I Whirlpool Corp. 3630 Household appliances
1 Xerox Corp. 3570 Office computing & accounting machines
aCSR #s: 1. best; 2. honorable mention; 3. worst.
bThese three firms were used in the first period only; all others were used in both periods.
differencesacrossfirmsas well as differentapplicationsof accountingprin-

ciples. These distortionswere controlled for insofar as possible.
Threeaccountingreturnsmeasureswereemployedinitially:(1) the ratio
of operatingearningsto assets, (2) the ratio of operatingearningsto sales,
and (3) excessmarketvaluation.Eachhas certainstrengthsand weaknesses.
The ratio of operatingearnings(as measuredby operatingearningsbe-
fore depreciation,Compustatdata item 13, less depreciationand amorti-
zation, Compustatdata item 14) to assets measuresthe relativeefficiency
of asset utilization. A major strengthof this ratio is that it is free from
the effects of bias that can resultfrom differencesin capital structurebe-
tween firms. However,it can be distortedby the effect of inflation on the
book valueof the assets.For example,two firmsmayhaveidenticalphysical

assetsthat they purchasedat differenttimes. If so, the book valueof these

assets, in all likelihood, will be different, reflectingthe effect of inflation
on nominal asset prices.
Furthersourcesof distortionare depreciation,which is stated as a his-
toricalratherthan a currentcost, and the impactof inflation on book in-
ventoryvalues. Comparingsample firms against others in their industry
will partiallycontrol for these distortions.
The ratio of operatingearningsto sales, though free from leveragedif-
ferences,also is subjectto inflation distortionof depreciation.However,
it too has a seriousweakness-it fails to capturethe relativeeffectiveness
of the use of assets by competitors.
The third measureof financialperformanceemployed in this study is
excessvalue(EV). This is a relativelynew measurein the financeliterature,
used by Thomadakis(1977) and Errunzaand Senbet (1981). Excessvalue
is definedas the differencebetweentotal firm marketvalue (marketvalue
of equity and book value of debt) and the book value of assets, normal-
ized by sales or, in the absenceof wealthtransfersof the agencytradition:
MarketValue of Equity and Book Value of Debt - Total Assets
Sales
This measurecapturesthe value premiumsor discountsaccordedby the
marketto variouscompanies.Thus if CSR is correlatedwith superioror
inferiorfutureprospects,then it will be correlatedwith EV. However, to
the extent that the inflation distortion of asset values and income (and
therebyretainedearnings)varyacrossfirms,a potentialfor bias exists. An
advantageof this measureis that it reflectsthe market'sevaluationof each
firm.
EmpiricalResults
Initial Analysis. The initial analysisphase of this study basicallyrepli-
cates earlierwork in this area by evaluatingthe relationshipbetweenCSR
and financialperformancethroughanalysisof covariance.The threefinan-
cial performancemeasuresfor each firm are (separately)regressedupon
industrydummyvariablesand dummyvariablesfor the MoskowitzCSR
categorieswith the constant term omitted. Specifically,the three regres-
sion models tested for each intervalwere:
FPi =bjCSRj +bkINDk + , i= 1, 2, 3
where FPi are the averaged financial performancemeasures described

above for each firm, CSRjare 0, 1 dummyvariablesreflectingthe Mos-
kowitz categories, INDk are 0, 1 dummy variables reflecting industry.
Recall that 29 industrieswere includedin the first test intervaland 28 in

the second.This regressioncan be consideredan analysisof covariancethat

tests for CSR effects while controllingfor industryeffects.
The purposeof this analysisis to examineif CSR is significantlycorre-
latedwith eithersuperioror inferiorfinancialperformancewithinindustry
groups. The results of these regressionsare shown in Table 2.
Table 2
Regression Results
t Statistics for
CSR Dummy Variables__ Coeficient of
Dependent Variable/ Honorable Multiple Determination
Interval Best Mention Worst (Adjusted for d.f.)
Financial performance measures
Operating earnings/sales
1970-1974 1.44* .91 .09 .47
1975-1979 2.19** 1.34* -1.34 .59
Operating earnings/assets
1970-1974 .35 .57 -.21 .29
1975-1979 .42 .58 -.89 .15
Excess value
1970-1974 4.03*** 1.92* -.04 .50
1975-1979 3.19** 1.05 1.13 .38
Supplemental measures
Asset age
1970-1974 1.07 .24 -2.07** .29
1975-1979 1.22 .59 -2.24** .34
Asset turnover
1970-1974 -1.24 -.68 .08 .76
1975-1979 -1.78* -1.04 -.02 .69
1
"*p<.
**p< .05
***p<.01
Withoperatingearnings/salesas the financialperformancemeasure,firms

with "best"ratingsoutperform"honorablemention"firms,which,in turn,
outperform"worst" firms. This patternis repeatedfor the excess value
measure,with a slightreversalbetween"worst"and "honorablemention"
categoriesin the 1975-1979interval.
However,the patterndiffers for the operatingearnings/assetsmeasure.
All statisticalsignificanceis lost, and "honorablemention" firms appear
slightlysuperiorto "best" firms. This result, also found by Bowmanand
Haire(1975),raisesinterestingquestionsconcerningthe natureof the assets,
or their use, by these firms. Why might this puzzlingresult occur? Pos-
sible explanationsare differencesin the effectivenessof the use of assets
or differencesin asset age between the CSR groups.
Further Test Procedures.In order to explore furtherthese influences,
two additionalvariablesareintroduced.Assetturnover,or the ratioof sales
to assets, is used to measurethe effectivenessof the use of assetsby firms.
This ratio is equal to the operatingearningsto assets ratio dividedby the
operatingearningsto sales ratio. In addition, the ratio of net fixed assets

52 Academy of Management Journal March
to grossfixedassetsis usedto measureassetage. The newera firm'sassets,

the closer this ratio will be to unity. As a firm's assets age, this ratio will
approachzero.
When these new variablesare regressedon the industryand CSR dum-
mies, it is obviousthat the above suspicionsare confirmed(Table2). Asset
age and asset turnoverare related with Moskowitz's CSR categories. In
particular,assetage is stronglyand significantlynegativelycorrelatedwith
the "worst" CSR firms. In addition, asset turnoveris weakly correlated
to Moskowitz's ratings.
There are two possible explanationsfor these results. First, firms that
aremoresociallyresponsiblemay utilizetheirassetsin a less efficientman-
ner. This explanation,however,clearlyis not consistentwith the evidence
regardingreturnon sales.A secondexplanationis thatinflationhas seriously
distortedreportedasset values. The positive correlationof asset age and
CSR rankingssupport this explanation. Newer firms have higher CSR
ratingsand higherreportedassetvaluesrelativeto theiroldercompetitors.
At this stage,fourof the five variablesemployedappearto be significantly
relatedto CSR. The relativestrengthof each is not yet clear. Note that
EV has the highestt statisticand asset turnoverhas the highestcoefficient
of multipledetermination.Also, thereis evidenceof interactionsbetween
the variables,so proxyingmay be occurringwithineach regression.There-
fore, the next step is to test simultaneouslythe associationbetweenCSR
and the various measuresof financial performance.
Logit Analysis. Anotherstatisticaltechnique,logit analysis,providesan
appropriatetestprocedureby whichthe underlyingassumptionsof themodel
are met by the data. The apparentproblemof multicollinearityis a factor
in consideringwhichexplanatoryvariablesto includein the logit analysis.
Correlationsbetweenpossibleexplanatoryvariablesare shown in Table 3
for both testintervals.Operatingearnings/assetandoperatingearnings/sales
have the highestcorrelationsin both time periods. Becausethe lattervari-
able has a higher correlationwith CSR, operatingearnings/assetsis ex-
cludedin the logit analysis.The remainingcorrelationsindicatea possible
Table 3
FinancialVariableCorrelation
1970-1974, 1975-1979a
Operating Operating
Earnings/ Earnings/ Asset Asset Excess
Assets Sales Age Turnover Value
Operating earn-
ings/assets 1.000 (1.000) .587 (.823) .055 (.136) .115 (.249) .570 (.561)
Operating earn-
ings/sales 1.000 (1.000) .241 (.102) -.469 (-.226) .567 (.656)
Asset age 1.000 (1.000) -.036 (-.233) .207 (.062)
Asset turnover 1.000 (1.000) -.178 (.005)
Excess value 1.000 (1.000)
al975-1979 data in parentheses.

multicollinearity problembetweenEV and operatingearnings/sales.There-

fore the test was repeatedwith the inclusion of each and both of these
variables.
Logit analysisprovidesa chi-squaretest for the significanceof each ex-
planatoryvariablein predictingthe CSR categoryin whichan observation
(firm) will fall. The logit model estimatedis:
CSR = a0+ a1OES + a2AGE + a3TURN + a4EV+ E,
wherethe accountingvariablesare averagedin each test interval.For this

model, industryinfluencesare controlledby subtractingindustryaverages
from the firm variables.
The chi-squarestatisticis reportedfor eachpairwisecombinationof CSR
categories.The resultsshownin Table4 indicatethatassetage is statistically
Table 4
Logit Results
1970-1974
Pairwise Coefficient Chi-Square
Effect CSR Comparisons Estimate Statistic
Intercept Best/worst -.408 .53

Honorable mention/worst .237 .25
Best/honorable mention .645 1.61
Operating earnings/sales Best/worst -6.219 .08
Honorable mention/worst -2.121 .01
Best/honorable mention -4.098 .08
Asset age Best/worst 19.616 5.05*
Honorable mention/worst 15.346 4.08*
Best/honorable mention 4.271 .38
Asset turnover Best/worst -.957 .36
Honorable mention/worst -.533 .15
Best/honorable mention -.425 .10
Excess value Best/worst 1.611 1.80
Honorable mention/worst .974 .70
Best/honorable mention .637 .92
1975-1979
Pairwise Coefficient Chi-Square
Effect CSR Comparisons Estimate Statistic
Intercept Best/worst .416 .29

Honorable mention/worst .994 2.00
Best/honorable mention .578 1.02
Operating earnings/sales Best/worst 38.745 2.93
Asset age Best/worst 45.035 5.63*
Best/honorable mention 3.431 .22
Asset turnover Best/worst -2.242 .94
Honorable mention/worst -3.768 2.40
Excess value Best/worst -1.606 .50
Honorable mention/worst -.868 .16
Best/honorable mention 2.162 1.32
*p< .05

significantin the 1975-1979time intervalat the .018 confidencelevel for

the best/worstdistinction,at the .025levelfor the honorablemention/worst
distinction,and at the .636 level for the best/honorablemention distinc-
tion. Asset age is the only variablethat is significantin predictingwhether
or not an observation(firm) will be best versusworst or honorablemen-
tion versusworst in both time periods. No variablessignificantlyclassify
firms between the best and honorablemention categories.
Operatingearnings/salesis significantat the .035 level in distinguishing
betweenhonorablemention/worstand significantat the .087 level in dis-
tinguishingbetweenbest and worst in the second five-yearperiod. It is in-
significantin both respectsfor the 1970-1974interval.
In orderto examinethe possibilityof bias in coefficientsignificancetests
from multicollinearity,the analysiswas modified for both intervalsby al-
ternativelydroppingthe EV and operatingearningsvariables.In everycase,
the significanceof the asset age variableincreased,and in most cases the
significanceof the remainingfinancial performancevariablesincreased.
The EV best/worst pairbecamemarginallysignificantin the first interval.
Operatingearnings best/worst became significant and honorable men-
tion/worst droppedto marginalsignificancein the second interval.Con-
sequently, multicollinearitydoes not appear to alter the test outcome
significantly.
With all variablesincluded,asset age is significant,and operatingearn-
ings/sales and EV are alternativelymarginallysignificant.Whenasset age
is dropped,eitherEV or operatingearnings/salesbecomesignificant,sug-
gestingthat thesevariablesmayhaveproxiedfor assetage in previoustests.
The evidencestronglysuggeststhat the financialvariablemost significant-
ly associatedwith CSR is asset age-specifically, firms with older assets
have lower CSR ratings.The associationis strongestwith the best/worst
comparison.This is understandable.The CSR measurementerrorwould
be minimizedfor this comparison.The associationof CSR and financial
performance,however, still is marginallysignificant.
Conclusionsand Implications
Thispaperextendsthe studyof financialperformanceandcorporatesocial
by usingan enhancedsample,industry-specific
responsibility controlgroups,
and statisticaltools new to this area of research.The major conclusionis
that withinindustrygroupsthe financialvariablemost stronglycorrelated
with CSRis assetage and that omissionof this variableresultsin a spurious
correlationof CSRand financialperformance.Specifically,firmswitholder
assets have lower CSR ratings.
The source of the correlationbetweenasset age and CSR is of interest.
One possibleexplanationis that firmswith older assetsconstructedplants
in a periodwhenregulatoryconstraintswereless severethanthey aretoday.
For example,if a firm built a plant priorto the mid-sixtiesthereis an ex-
cellentchancethat its facilitypollutesmorethanone builtin the recentpast.

1984 Cochranand Wood 55
Managementof such a firm may be attemptingto respondto the social

demandsfor a cleanerenvironmentand may actuallyhave spent more to
upgradeits facilitiesthan did firmsthat built laterin anticipationof these
new constraints.Thusthe simpleaccidentof whena firmbuilt or acquired
its plant and equipmentmay have contributedto highercosts in meeting
new social demandsand, at the same time, may be responsiblefor poorer
CSR ratings.
Another explanationis that older firms may possess less flexibilityin
adaptingto social change-corporate "hardeningof the arteries."Man-
agementof "older" firms may simplybe less responsivein both business
and socialdimensionsthanmanagementof "younger"firms.Alternatively,
the type of managersthat "old" firms attractmay differ from those at-
tractedby "young"firms.Thisresultis consistentwiththe resultsdiscovered
by Sturdivantand Ginter (1977).
However,even after controllingfor asset age, using a largesample,and
industry-specificcontrol groups, there still is weak supportfor a link be-
tweenCSRand financialperformance.Therefore,partof AbbottandMon-
sen's conclusioncan be reiterated:"[B]eingsociallyinvolved[does not ap-
pear to be] dysfunctionalto the investor. Perhapsit is this latter finding
thathas greatersignificancefor decisionmakingpurposes,particularly given
currentpolitical and social pressures"(1979, p. 514).
Future ResearchDirections
Futureresearchin this area could proceed in a numberof directions.
First,bettermeasuresof CSR are desperatelyneeded.It may neverbe pos-
sibleto measureCSRobjectively.Thereforeresearchin this areacouldfocus
onperceptionsof CSR.Regularsurveysof businesspeople,businesswriters,
businessschool faculty, and the publicat largecould give researchersreli-
able reputationindexesfor time seriesstudies. In addition, the Beresford
studiescould be replicatedfor recentyears. Such content analysisstudies
in some sensesmay reflectthe firm'sperceptionsof its socialresponsibility.
Second, more extensivemeasuresof CSR also are needed. It would be
very useful to have CSR rankingson at least the Fortune 500 firms over
severalyears.Theremightbe separaterankingsfor eachof severaldifferent
constituencies.This could give researcherssome indicationsof the effects
of certainpolicy changes on perceptionsof CSR and subsequenteffects
on financial performance.
Third, the possibilityand implicationsof additionalexplanatoryvari-
ablesmustbe explored.The resultsof this study(i.e., that assetage is highly
correlatedwith CSR)throwdoubt on the resultsof most previousstudies.
The implicationsof this new factor should be exploredand additionalex-
planatoryfactors sought.
Finally,causalityshouldbe investigated.No workto datehas statistically
demonstratedthe directionof causationbetweenthese two variables.One
promisingtechniquewouldbe an eventstudy.However,in orderto conduct
a valideventstudybetterand moreextensiveCSRrankingswillbe required.

56 Academy of Management Journal March
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Philip L. Cochran is Assistant Professor of Business Adminis-

tration at Pennsylvania State University.
Robert A. Wood is Assistant Professor of Finance at Pennsyl-
vania State University.


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Corporate Social Responsibility and Financial Performance

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