Corporate Social Responsibility and Financial Performance

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
Stable URL: http://www.jstor.org/stable/255956
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?Academy of Management Journal
1984,Vol. 27, No. 1, 42-56.
Social
Responsibility
Financial
Performance1
Corporate
and
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 correlationbetweencorporatesocialresponsibilityandfinancial performance.
The relationshipbetweena firm'scorporatesocialresponsibility(CSR)or, morerecently,its corporatesocialresponsiveness-andits financialperformancehas 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 corporate 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 causation be addressed.
This paperextendspriorempiricalresearchin threeareas. Certainfactors omittedin previousstudiesare explicitlycontrolledfor by use of improvedfinancialperformancemeasuresandadditionalvariables.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 explanatoryvariables.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 providesthe 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 internallyconsistent 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 relationshipbetween CSR and financialperformance.
Thereare, however,disadvantages
as well. Themostimportant(andmost
is
that
such
are
obvious)
rankings highlysubjectiveand thus may varysignificantlyfrom one observerto another.This raisesthe spectreof unreliability. 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 Council 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,""honorable mention," or "worst" (Moskowitz,1972, 1975).The 1972versionof
44
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this index was used by Moskowitzand a composite of his 1972-1975indexeswas used by Sturdivantand Ginter(1977)in theirstudiesof the relationship between CSR and financial performance.
Anotherpopularreputationindexalso can be tracedbackto Moskowitz.
A surveywas conductedby the National Associationof ConcernedBusiness 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 pollution 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 particular variableshave been chosen (a subjectiveprocess),the procedureis reasonablyobjective.Thereforethe resultsare independentof the particular
research.Second, becausethis techniqueis more mechanical,largersample sizes are possible.
However,contentanalysisalso has some drawbacks.The choiceof variables to measureis subjective.Further,content analysisis only an indication 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 content analysisindexes based on Beresford'swork.
Neithercontentanalysisnor reputationindexescan be consideredwholly
adequatemeasuresof CSR. The problemof measuringsocial responsibility or responsivenessof firmsneedsconsiderablymoreattentionin this literature. 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.However,mostmeasuresof financialperformancefall into two broadcategories:
investorreturnsand accountingreturns.Both haveenjoyedperiodsof popularity, 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 obtained for a stock by regressingits realizedreturnson those of a broad
basedmarketindex. The regressionslope coefficientprovidesthe beta estimate. 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)
resultsof Moskowitz(1972)andof Vance(1975).Moskowitz's
contradictory
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 classifiedas 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
46
March
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 responsibilitywill 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 relationshipbetween 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 functionalrelationship betweeneach of the two subgroupsat each iteration. The functional 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 support 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 higherfinancial performancecategorieswith a frequencyof 11.32 percent.This clearly is not a strong rejectionof the null hypothesis.
AccountingReturns.Accountingreturnsare the other primarymethod
of measuringfinancialperformance.The basicidea behindusingaccounting returnsas a measureof financialperformanceis to focus on how firm
earningsrespondto differentmanagerialpolicies.The most commonmeasuresof accountingreturnsusedin studiesof this questionare simplyearnings 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.
Cochran and Wood
1984
47
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 oppositeaccounting returns may be the best proxy for financial performance. However, 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 external 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 Standard and Poors 500. This step represents an improvement, but comparison to industry control groups is superior. Accounting practices, operating 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 performance. 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 performance. However, as noted earlier, because of incorrect specification of the
48
March
financialperformanceproxy, small sample size, and questionablemethodology, 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 negativerelationshipbetweenthesevariables. 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 inadequatesamplesencounteredin previousstudies,each firm on this list is independentlycompared
to its industrygroup as defined by the four-digitStandardand Poor Industry Codes.
The 61 firms (6 firmswereeliminatedbecausethey no longerexistedin
their originalform) are containedin 42 such groups. Of these groups, 13
wereeliminatedeitherbecausetherewereinsufficientdata on the Compustat 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 unusualaccountingentries 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
49
Cochran and Wood
1984
Table 1
Firms in Sample
CSR
#a
2
3
3
3
2
2
3
2
3
2
1
3
2
3
2
3
2
I
I
3
2
3
2
1
2
3
I
2
2
1
2
3
I
I
3
3
1
I
1
Firm
SIC
#
Industry
1000 Metal mining

Amax, Inc.
2111 Cigarettes
American Brands, Inc.b
3410 Metal cans & shipping containers
American Can Co.
American Home Products Corp.
2830 Drugs
4811 Telephone communication
American Telephone & Telegraph
2911 Petroleum refining
Atlantic Richfield Co.
Bethlehem Steel Corp.
3310 Blast furnaces & steel works
2030 Canned-preserved fruits-vegetables
Campbell Soup Co.b
2841 Soap & other detergents
Colgate-Palmolive Co.
5311 Retail-department stores
Dayton-Hudson Corp.
2800 Chemicals & allied products
Dow Chemical
DuPont (E. I.) de Nemours
1211 Bituminous coal & lignite mining
Eastern Gas & Fuel Assoc.
2300 Apparel & other finished products
Farah Mfg. Co.
Giant Food, Inc.
5411 Retail-grocery stores
3000 Rubber & miscellaneous plastics products
Goodyear Tire & Rubber Co.
3570 Office computing & accounting machines
International Business Machines Corp.
5411 Retail-grocery stores
Jewel Cos., Inc.
3841 Surgical & medical instruments & appliances
Johnson & Johnson
5331 Retail-variety stores
K Mart Corp.
Koppers Co.
2020 Dairy products
Kraft, Inc.
3430 Heating equipment & plumbing fixtures
Masco Corp.
2731 Books: publishing & printing
McGraw-Hill, Inc.
Mobil Corp.
2000 Food & kindred products
Nabisco, Inc.
3221 Glass containers
Owens-Illinois, Inc.
2300 Apparel & other finished products
Phillips-Van Heusen
3861 Photographic equipment & supplies
Polaroid Corp.
2000 Food & kindred products
Quaker Oats Co.
3651 Radio-TV receiving sets
RCA Corp.b
Standard Oil Co. (California)
Standard Oil Co. (Indiana)
2830 Drugs
Syntex Corp.
Texaco, Inc.
U.S. Steel Corp.
3310 Blast furnaces & steel works
2400 Lumber & wood products
Weyerhaeuser Co.
3630 Household appliances
Whirlpool Corp.
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 accountingprinciples. 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 operatingearningsbefore depreciation,Compustatdata item 13, less depreciationand amortization, 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 structurebetween firms. However,it can be distortedby the effect of inflation on the
book valueof the assets.For example,two firmsmayhaveidenticalphysical
50
March
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 historicalratherthan a currentcost, and the impactof inflation on book inventoryvalues. Comparingsample firms against others in their industry
will partiallycontrol for these distortions.
The ratio of operatingearningsto sales, though free from leveragedifferences,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, normalized 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 basicallyreplicates earlierwork in this area by evaluatingthe relationshipbetweenCSR
and financialperformancethroughanalysisof covariance.The threefinancial performancemeasuresfor each firm are (separately)regressedupon
industrydummyvariablesand dummyvariablesfor the MoskowitzCSR
categorieswith the constant term omitted. Specifically,the three regression 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 Moskowitz categories, INDk are 0, 1 dummy variables reflecting industry.
Recall that 29 industrieswere includedin the first test intervaland 28 in
1984
Cochran and Wood
51
the second.This regressioncan be consideredan analysisof covariancethat

tests for CSR effects while controllingfor industryeffects.
The purposeof this analysisis to examineif CSR is significantlycorrelatedwith eithersuperioror inferiorfinancialperformancewithinindustry
groups. The results of these regressionsare shown in Table 2.
Table 2
Regression Results
Dependent Variable/
Interval
Best
t Statistics for
CSR Dummy Variables__
Honorable
Worst
Mention
Financial performance measures

Operating earnings/sales
1.44*
1970-1974
1975-1979
2.19**
Operating earnings/assets
1970-1974
.35
.42
1975-1979
Excess value
1970-1974
4.03***
1975-1979
3.19**
Supplemental measures
Asset age
1970-1974
1975-1979
Asset turnover
1970-1974
1975-1979
Coeficient of
Multiple Determination
(Adjusted for d.f.)
.91
1.34*
.09
-1.34
.47
.59
.57
.58
-.21
-.89
.29
.15
1.92*
1.05
-.04
1.13
.50
.38
1.07
1.22
.24
.59
-2.07**
-2.24**
.29
.34
-1.24
-1.78*
-.68
-1.04
.08
-.02
.76
.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? Possible 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 dummies, 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 efficientmanner. 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.Therefore, 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 lattervariable has a higher correlationwith CSR, operatingearnings/assetsis excludedin the logit analysis.The remainingcorrelationsindicatea possible
Table 3
FinancialVariableCorrelation
1970-1974, 1975-1979a
Operating
Earnings/
Assets
Operating earn1.000 (1.000)
ings/assets
Asset age
Asset turnover
Excess value
Operating
Earnings/
Sales
.587
Asset
Age
(.823)
.055
(.136)
1.000 (1.000)
.241
1.000
(.102)
(1.000)
Asset
Turnover
.115
Excess
Value
(.249)
.570
(.561)
-.469 (-.226)
-.036 (-.233)
1.000 (1.000)
.567
.207
-.178
1.000
(.656)
(.062)
(.005)
(1.000)
al975-1979 data in parentheses.
1984
Cochran and Wood
53
multicollinearity
problembetweenEV and operatingearnings/sales.Therefore the test was repeatedwith the inclusion of each and both of these
variables.
Logit analysisprovidesa chi-squaretest for the significanceof each explanatoryvariablein 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
Effect
Intercept
Asset age
Asset turnover
Excess value
Pairwise
CSR Comparisons
Coefficient
Estimate
Chi-Square
Statistic
Best/worst
Honorable mention/worst
Best/honorable mention
Best/worst
Best/worst
Best/worst
Best/worst
-.408
.237
.645
-6.219
-2.121
-4.098
19.616
15.346
4.271
-.957
-.533
-.425
1.611
.974
.637
.53
.25
1.61
.08
.01
.08
5.05*
4.08*
.38
.36
.15
.10
1.80
.70
.92
1975-1979
Effect
Intercept
Asset age
Asset turnover
Excess value
Pairwise
CSR Comparisons
Coefficient
Estimate
Chi-Square
Statistic
Best/worst
Best/worst
Best/worst
Best/worst
Best/worst
.416
.994
.578
38.745
48.046
-9.301
45.035
41.604
3.431
-2.242
-3.768
-1.374
-1.606
-.868
2.162
.29
2.00
1.02
2.93
4.46*
.33
5.63*
5.02*
.22
.94
2.40
.71
.50
.16
1.32
*p< .05
54
March
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 distinction. Asset age is the only variablethat is significantin predictingwhether
or not an observation(firm) will be best versusworst or honorablemention 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 distinguishingbetweenbest and worst in the second five-yearperiod. It is insignificantin both respectsfor the 1970-1974interval.
In orderto examinethe possibilityof bias in coefficientsignificancetests
from multicollinearity,the analysiswas modified for both intervalsby alternativelydroppingthe 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 mention/worst droppedto marginalsignificancein the second interval.Consequently, multicollinearitydoes not appear to alter the test outcome
significantly.
With all variablesincluded,asset age is significant,and operatingearnings/sales and EV are alternativelymarginallysignificant.Whenasset age
is dropped,eitherEV or operatingearnings/salesbecomesignificant,suggestingthat thesevariablesmayhaveproxiedfor assetage in previoustests.
The evidencestronglysuggeststhat the financialvariablemost significantly 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
controlgroups,
responsibility
by usingan enhancedsample,industry-specific
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 excellentchancethat 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."Managementof "older" firms may simplybe less responsivein both business
and socialdimensionsthanmanagementof "younger"firms.Alternatively,
the type of managersthat "old" firms attractmay differ from those attractedby "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 betweenCSRand financialperformance.Therefore,partof AbbottandMonsen's conclusioncan be reiterated:"[B]eingsociallyinvolved[does not appear 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 possibleto measureCSRobjectively.Thereforeresearchin this areacouldfocus
onperceptionsof CSR.Regularsurveysof businesspeople,businesswriters,
businessschool faculty, and the publicat largecould give researchersreliable 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 additionalexplanatoryvariablesmustbe 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 additionalexplanatoryfactors 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
References
Abbott, W. F., & Monsen, R. J. On the measurement of corporate social responsibility: Self-report
disclosure as a method of measuring social involvement. Academy of Management Journal, 1979,
22, 501-515.
Alexander, G. J., & Buchholz, R. A. Corporate social responsibility and stock market performance.
Academy of Management Journal, 1978, 21, 479-486.
Anderson, J. C., & Frankle, A. W. Voluntary social reporting: An iso-beta portfolio analysis. The
Accounting Review, 1980, 55(3), 467-479.
Arlow, P., & Gannon, M. J. Social responsiveness, corporate structure and economic performance.
Academy of Management Review, 1982, 7, 235-241.
Beaver, W., & Morse, D. What determines price-earnings ratios? Financial Analysts Journal, 1978,
34(4), 65-86.
Beresford, D. R. Compilation of social measurement disclosures in Fortune 500 annual reports-1973.
Ernst and Ernst, 1973.
Beresford, D. R. Social responsibility disclosure in 1974 Fortune 500 annual reports. Ernst and Ernst,
1975.
Beresford, D. R. Social responsibility disclosure-1975 survey of Fortune 500 annual reports. Ernst
and Ernst, 1976.
Bowman, E. H., & Haire, M. A strategic posture toward corporate social responsibility. California
Management Review, 1975, 18(2), 49-58.
Bragdon, J. H., & Marlin, J. A. T. Is pollution profitable? Risk Management, 1972, 19(4), 9-18.
Council of Economic Priorities. Economic priorities report, 1971, 1(6), 13-23.
Curley, A. J., & Bear, R. M. Investment analysis and management. New York: Harper, 1979.
Errunza, V. R., & Senbet, L. W. The effects of international operations on the market value of the
firm: Theory and evidence. Journal of Finance, 1981, 36(2), 401-417.
Folger, H. R., & Nutt, F. A note on social responsibility and stock valuation. Academy of Management Journal, 1975, 18, 155-159.
Heinze, D. C. Financial correlates of a social involvement measure. Akron Business and Economic
Review, 1976, 7(1), 48-51.
How business school students rate corporations. Business and Society Review, 1972, 2, 20-21.
Ingram, R. W. An investigation of the information content of (certain) social responsibility disclosures.
Journal of Accounting Research, 1978, 16, 270-285.
Moskowitz, M. Choosing socially responsible stocks. Business and Society Review, 1972, 1, 71-75.
Moskowitz, M. Profiles in corporate responsibility. Business and Society Review, 1975, 13, 29-42.
Preston, L. E. Analyzing corporate social performance: Methods and results. Journal of Contemporary
Business, 1978, 7(1), 135-149.
Spicer, B. H. Investors, corporate social performance and information disclosure: An empirical study.
The Accounting Review, 1978, 53(1), 94-111.
Sturdivant, F. D., & Ginter, J. L. Corporate social responsiveness: Management attitudes and economic
performance. California Management Review, 1977, 19(3), 30-39.
Thomadakis, S. A value-based test of profitability and the market structure. The Review of Economics
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Vance, S. Are socially responsible corporations good investment risks? Management Review, 1975,
64(8), 18-24.
Philip L. Cochran is Assistant Professor of Business Administration at Pennsylvania State University.
Robert A. Wood is Assistant Professor of Finance at Pennsylvania State University.

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Corporate Social Responsibility and Financial Performance

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Corporate Social Responsibility and Financial Performance

Author(s): Philip L. Cochran and Robert A. Wood

?Academy of Management Journal

1984,Vol. 27, No. 1, 42-56.

sampleis enhancedby utilizinga largeindustry-specificcontrolgroupand

Thereare two generallyacceptedmethodsof measuringCSR. The first

Although one might have expected a certain diversity of measures of

Cochran and Wood

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

Cochran and Wood

As noted earlier,neitherof the two major categoriesof CSR measures

Cochran and Wood

1000 Metal mining

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

where FPi are the averaged financial performancemeasures described

Cochran and Wood

the second.This regressioncan be consideredan analysisof covariancethat

Financial performance measures

Withoperatingearnings/salesas the financialperformancemeasure,firms

Academy of Management Journal

to grossfixedassetsis usedto measureassetage. The newera firm'sassets,

al975-1979 data in parentheses.

Cochran and Wood

wherethe accountingvariablesare averagedin each test interval.For this

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

Managementof such a firm may be attemptingto respondto the social

Academy of Management Journal

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