THE ACCOUNTING REVIEW American Accounting Association

Vol. 89, No. 1 DOI: 10.2308/accr-50577

2014
pp. 275302

The Unintended Effect of Corporate Social

Responsibility Performance on Investors
Estimates of Fundamental Value
W. Brooke Elliott
Kevin E. Jackson
Mark E. Peecher
University of Illinois at UrbanaChampaign
Brian J. White
The University of Texas at Austin

ABSTRACT: We provide theory and experimental evidence consistent with an

unintended, causal relation between Corporate Social Responsibility (CSR) performance
and investors estimates of fundamental value that can be attenuated by investors
explicit assessment of CSR performance. Consistent with affect-as-information theory
from psychology, we find that investors who are exposed to, but do not explicitly assess,
CSR performance derive higher fundamental value estimates in response to positive
CSR performance, and lower fundamental value estimates in response to negative CSR
performance. Explicit assessment of CSR performance, however, significantly dimin-
ishes this effect, indicating that the effect among investors who do not explicitly assess
CSR performance is unintended; i.e., they unintentionally use their affective reactions to
CSR performance in estimating fundamental value. Supplemental findings shed light on
consequences of these fundamental value estimates: investors who do not explicitly
assess CSR performance rely on their unintentionally influenced estimates of
fundamental value to increase the price they are willing to pay to invest in the stock of
a firm with positive CSR performance. Overall, our theory and findings contribute to the
CSR and affect literatures in accounting by revealing the contingent nature of how and to

We appreciate helpful comments from Donald V. Moser (editor), John Harry Evans III (senior editor), two anonymous
reviewers, Joy Begley, Gary Biddle, Brian Bratten, Monika Causholi, Matt DeAngelis, Jon Grenier, Max Hewitt, Steve
Glover, Erin Hamilton, Frank Hodge, Jane Kennedy, Marsha Keune, Todd Kravet, Ken Lo, Russell Lundholm, Linda
McDaniel, Linda Quick, Robert Ramsay, Shiva Rajgopal, Kristi Rennekamp, D. Shores, Scott Vandervelde, Carolyn
Westfall, Jennifer Winchel, David Ziebart, Aaron Zimbelman, participants at the 2011 UBC, Oregon, Washington PhD-
Faculty Alumni Accounting Conference, and the 2012 FARS Midyear Meeting, as well as at workshops at the University
of Kentucky, University of South Carolina, and University of Notre Dame. We also thank Billy Brewster, Tracy Henn,
Yoon Ju Kang, and Jajah Wu for their assistance.
Editors note: Accepted by Donald V. Moser.
Submitted: March 2012
Accepted: July 2013
Published Online: July 2013

275
276 Elliott, Jackson, Peecher, and White

what extent CSR performance influences investors beliefs about firm value and the bids
these investors are likely to make in equity markets.

Keywords: fundamental value; corporate social responsibility; affect as information;

investor awareness.
Data Availability: Contact the authors.

I. INTRODUCTION

A
s part of the Corporate Social Responsibility (CSR) disclosure movement, firms are
increasingly voluntarily disclosing CSR performance measures on websites and in annual
reports (PricewaterhouseCoopers [PwC] 2010; Mohin 2012). Many investors now
regularly consider firms CSR performance measures along with traditional financial performance
measures when making investment decisions. The Social Investment Forum (2009) estimates that
$3 trillion, or 12 percent, of the $25 trillion in managed investment capital in the U.S. during 2009
followed some socially responsible investing strategy. The Forum also notes, however, that 71
percent of the top U.S. investment consultant firms, including Goldman Sachs, are reticent to use
CSR performance in an investment strategy unless their client prompts them to do so. Thus, while
many investors become familiar with the CSR performance of firms they follow (International
Federation of Accountants [IFAC] 2012), there is considerable variation in terms of whether and
how explicitly they assess CSR performance (Social Investment Forum 2009).
This study investigates whether an unintended, causal relation exists between CSR
performance and investors estimates of fundamental value that can be attenuated by their explicit
assessment of CSR performance. While recent archival studies have examined the association
between CSR performance and various proxies of firm value (Plumlee, Brown, Hayes, and
Marshall 2010; Dhaliwal, Li, Tsang, and Yang 2011; Matsumura, Prakash, and Vera-Munoz 2011),
the archival method is not as well suited as experimentation for distinguishing between intentional
and unintentional effects of CSR performance on a firms fundamental value. This distinction is
important, however, because there is a significant ongoing debate about conditions under which
positive CSR performance tends to increase, not change, or decrease firms fundamental value
(Benabou and Tirole 2010; Moser and Martin 2012). In the absence of a clear standard for the
effect, if any, of CSR performance on firm value, the best that investors can do is to act in
accordance with their beliefs about the CSR performance-fundamental value relation, a process that
will be hampered if CSR performance has an unintended influence on the investors own estimates
of firm value.
We argue that CSR disclosures likely cause affective responses in investors because of their
imagery-provoking and value-laden nature.1 Affect-as-information theory holds that when people
are prompted to attribute their affect to its source, their affective responses have little influence on
their subsequent judgments (Schwarz and Clore 1983, 2003). However, the theory also holds that
when the individuals do not attribute the affect to its source, their subsequent judgments will be
unintentionally influenced by their affective responses. Thus, we hypothesize that, absent an
explicit assessment of CSR performance, investors will unintentionally use affect generated by
positive (negative) CSR performance to increase (decrease) their estimates of fundamental value.
Consistent with this theory, we expect an explicit assessment of CSR performance that prompts
investors to attribute affect to its source will diminish the unintended influence of investors
affective reactions to CSR performance on their estimates of fundamental value. Specifically,

1
Affect is a term originating in the psychology literature and refers to a range of related phenomena including
emotion, feelings, and moods (e.g., Wyer and Srull 1986; Fiske and Taylor 1991; Frijda 2006).

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The Unintended Effect of CSR Performance on Investors Estimates of Fundamental Value 277

attributing affect to its source, which here is CSR performance, reduces its unintended influence on
subsequent fundamental value estimates, without changing the degree to which affect is
experienced. As a result, compared to investors who explicitly assess CSR performance, we
expect investors who do not explicitly assess CSR performance to derive fundamental value
estimates that are more heavily influenced by CSR performance. Further, consistent with this effect
being unintended, we expect these investors to have relatively low awareness about the influence of
CSR performance on their estimates of fundamental value.
To test our predictions, we conduct an experiment that uses a 2 3 2 control design. Graduate
business students in a financial statement analysis course take on the role of investors who estimate
the fundamental value of a firm. They receive CSR reports that are either relatively positive,
relatively negative, or neutral in a control condition. Moreover, participants are either prompted to
explicitly assess the firms CSR performance in addition to conducting traditional financial
statement analysis in the Explicit Assessment condition, or are asked to conduct traditional financial
analysis without being prompted to explicitly assess CSR performance in the No Explicit
Assessment condition.
The experimental results support our predictions. Absent an explicit assessment of CSR
performance, investors estimates of fundamental value significantly increase (decrease) with
positive (negative) CSR performance. However, consistent with this effect being unintentional, a
prompt to explicitly assess CSR performance significantly diminishes this effect. Further, post-test
responses of investors who are not prompted to explicitly assess CSR performance indicate that
they have relatively low awareness about the significant influence of CSR performance on their
estimates of fundamental value. Taken together, these findings provide theory-driven support for
our prediction that explicit assessment of CSR performance significantly moderates the degree to
which such performance has an unintended influence on investors subsequent estimates of
fundamental value.
In supplemental analyses, we report evidence that investors who do not explicitly assess CSR
performance are also willing to pay significantly higher prices to invest in the common stock of a
firm with positive CSR performance, and that this effect is fully mediated by their unintentionally
influenced estimates of fundamental value. Explicit assessment of positive CSR performance,
however, significantly decreases the price they are willing to pay. This overall pattern of findings
suggests that the unintentionally influenced fundamental value estimates of investors who do not
explicitly assess CSR performance have consequences for the bids these investors are likely to
make in an equity market.
This study makes several contributions. First, its theory and findings complement the recent
archival examinations of the association between CSR performance and proxies of firm value,
including Plumlee et al. (2010), Dhaliwal et al. (2011), Matsumura et al. (2011), and Izzo and
Magnanelli (2012). Our study responds to Moser and Martins (2012, 10) recent call for
experimental research to address important CSR issues that are difficult to address effectively in
archival studies. An experiment enables us to hold constant firm characteristics and other factors
that influence investors judgments and decisions in real-world investment settings. In particular,
we provide evidence that, absent explicit assessment, there is an unintended, causal relation
between CSR performance and investors estimates of fundamental value.
Second, unlike archival studies, our experimental approach does not rely on market prices to
draw inferences about investors underlying estimates of fundamental value. This is advantageous
as both theory and empirical evidence indicate that price and fundamental value can substantially
and systematically diverge (Lee, Myers, and Swaminathan 1999; Lee 2001; Abreu and
Brunnermeier 2002; Bosch-Domenech, Montalvo, Nagel, and Satorra 2002; Elliott, Krische, and
Peecher 2010). Our experimental approach contributes to the accounting literature by cleanly
disentangling the intended from the unintended effects of CSR performance on investors beliefs

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278 Elliott, Jackson, Peecher, and White

about a firms fundamental value and the price they are willing to pay to invest in the stock of that
firm.
Third, in identifying CSR performance as a determinant of investors affective reactions, we
provide a robustness test of prior accounting literature documenting that affective reactions can
influence subsequent judgments in accounting contexts. Examples include affective responses to
employees loss of retirement savings influencing jurors judgments of auditor negligence (Kadous
2001) and affective responses to a supervisors arrogant personality influencing managers
judgments (Moreno, Kida, and Smith 2002). Fourth, we provide evidence that explicit assessment
of CSR performance has a likely benefit, even for investors who do not plan to use a CSR
investment strategy. Specifically, explicit assessment of CSR performance helps investors to form
beliefs about firm value that are less susceptible to being influenced by their affective reactions to
CSR. Thus, these investors are less likely to make bids in the equity markets that are driven by
unintentionally influenced estimates of fundamental value.
Section II next discusses background, while Section III develops our hypothesis. Section IV
describes our experiment. Section V discusses the results of our hypothesis test and additional
evidence of our underlying theory. Section VI discusses supplemental analyses, and we summarize
our study and conclude in Section VII.

II. BACKGROUND

Demand for and Archival Studies on CSR Performance

There is widespread recognition of investors growing demand for information about firms
CSR performance, including the development of new integrated reporting frameworks (Eccles and
Krzus 2010; Global Reporting Initiative 2011). Examples include the growth of mutual funds that
include only firms with preferred CSR performance characteristics, such as KLD funds, the
inclusion of CSR performance measures in annual reports and on firm websites, and the trend
toward third-party organizations generating independent CSR ratings and attest reports (Ballou,
Casey, Grenier, and Heitger 2012).2,3 Despite the growing demand for CSR disclosures, it is an
open empirical question as to whether better CSR performance systematically has positive
implications for future financial performance and fundamental value (Benabou and Tirole 2010;
Moser and Martin 2012).
The corresponding normative question about the conditions under which investors correctly
believe that better CSR performance changes a firms fundamental value is itself a matter of
significant debate. McWilliams and Siegel (2001) point out that, although positive CSR
performance likely has direct costs, the demand of consumers and other stakeholders for better
CSR performance means that positive CSR performance also has benefits for some firms. Although
the authors conclude that the costs and benefits of an optimal level of CSR performance are exactly
offsetting, a sub-optimal level of CSR performance is likely costly. Empirically, most archival
studies provide evidence of a small positive relation between CSR performance and firm value (see
Margolis, Elfenbein, and Walsh [2009] for a review; and also Matsumura et al. [2011], Dhaliwal et

2
Consistent with growing stakeholder demand, an increasing number of independent organizations, such as the
Fair Labor Association (Bartley 2003), are reporting on firm CSR performance, as discussed in the Green
Rankings Business Report (Newsweek 2011).
3
The large scale of CSR reporting also is evident in Francis (2011), which reports that the International
Organization for Standardizations (a developer of environmental management and reporting standards or ISOs)
2009 revenues were approximately U.S.$41 billion, greater than the combined total 2009 revenues of KPMG and
Ernst & Young (also see, e.g., discussions of ISO 14000 and 26000 certifications as in Castka and Balzarova
[2007]).

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The Unintended Effect of CSR Performance on Investors Estimates of Fundamental Value 279

al. [2011], and Plumlee et al. [2010]). Recently, however, Izzo and Magnanelli (2012) find that
better CSR performance is associated with a higher cost of debt, which they note is consistent with
investment in CSR performance tending to be a waste of resources (Izzo and Magnanelli 2012,
6). This finding is consistent with recent conjecture that at least some CSR activities are undertaken
at the expense of shareholders (Moser and Martin 2012, 798).
Our study complements archival studies by experimentally examining whether an unintended,
causal relation exists between CSR performance and investors estimates of fundamental value.
Specifically, while some investors may intentionally infer a link between CSR performance and
fundamental value, we also suggest that archival results may be partially driven by the unintended
influence of investors affective reactions to CSR performance.

III. HYPOTHESIS DEVELOPMENT

CSR Performance, Affective Responses, and Estimates of Fundamental Value

CSR disclosures likely evoke affective reactions in investors. Specifically, CSR disclosures are
often vivid and imagery provoking, which consumer behavior research suggests elicits affective
reactions (Keller and Block 1997). For example, CSR disclosures of sweatshop labor practices or
sustainable coffee bean harvesting are likely to create related vivid images in an investors mind in
contrast to the related financial disclosures of wage expense and cost of sales. CSR disclosures
about sweatshop labor practices are likely to evoke negative affective reactions, and those related to
sustainable coffee bean harvesting are likely to evoke positive affective reactions. In addition, CSR
disclosures ostensibly reveal corporate values. When these disclosures indicate that a firms values
are aligned (misaligned or in conflict) with the investors values about proper firm behavior, we
expect a positive (negative) affective reaction.
In the absence of a prompt to attribute affect to its source, affect-as-information theory
predicts that investors will unintentionally use their affective reactions to CSR performance in
making subsequent judgments (Schwarz and Clore 1983, 2003). This would impair their ability to
react to CSR performance in estimating fundamental value in the way that they intend. Specifically,
in our setting, investors will unintentionally interpret the affect generated by the positive or negative
valence of the CSR performance as if it were informative about the firms fundamental value, and it
will influence their subsequent financial analysis. Thus we expect, absent a prompt to attribute
affect to its source, investors affective reactions to CSR performance will influence their analysis
of the firm such that investors who experience positive (negative) affect will derive a higher (lower)
estimate of firm value.

Reducing the Unintended Influence of Affective Reactions on Estimates of Fundamental

Value
Affect-as-information theory also indicates that prompting investors to attribute affect to its
source reduces its unintended influence on subsequent judgments. Attributing affect to its source is
not theorized to change the degree to which affect is experienced, but rather to change how
experienced affect is interpreted and used in subsequent judgments. For example, Schwarz and
Clore (1983, 2003) find that individuals who are reminded about the state of the weather, which is
the source of the affect, no longer use their weather-related affect as an indicator of general life
satisfaction, the subsequent judgment. Similarly, Kadous (2001) finds that providing jurors with an
instruction effectively discrediting the use of negative affect as an indicator of auditor responsibility
reduces the influence of negative outcome information on the jurors auditor negligence judgments.
In our setting, we expect that explicitly assessing CSR performance, as part of an overall investment

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analysis, will reduce the unintended influence of CSR performance on investors estimates of
fundamental value by prompting investors to attribute their affect to its source.4
Recent reports indicate that investors use a variety of investment strategies that range from a
purely traditional financial statement analysis approach to an approach that prominently features
explicit assessment of CSR performance (Social Investment Forum 2009). We abstract from the
range of variation in investors strategies by recognizing that one key distinction among investors is
that some explicitly assess CSR performance while others do not. Regardless of whether investors
plan to use a CSR-based investment strategy in which they would favor or only invest in socially
and environmentally responsible firms, we conjecture that there is a likely benefit of explicit
assessment of CSR performance, particularly as investors gain access to more CSR performance
information. Specifically, investors who explicitly assess CSR performance are less likely to
generate estimates of fundamental value that are unintentionally influenced by their affective
reactions to CSR performance.
To summarize, affect-as-information theory predicts that prompting investors to attribute their
affect to its source, a firms CSR performance, will not impact the degree of affect investors
experience, but will reduce its unintended influence on subsequent estimates of fundamental value.
As a result, compared to investors who do not explicitly assess CSR performance, we expect CSR
performance to have a smaller effect on the fundamental value estimates of investors who do
explicitly assess CSR performance as part of their investment analysis. We formalize our prediction
in the following hypothesis, as depicted in Panel A of Figure 1:5
Hypothesis: When CSR performance is positive (negative), investors who do not explicitly
assess CSR performance will estimate the firms fundamental value to be higher
(lower), but the influence of CSR performance will diminish with explicit
assessment of CSR performance.

VI. EXPERIMENTAL METHOD

Design
To test our predictions, we conducted an experiment with a full-factorial 2 3 2 control,
between-subjects design, with CSR performance and explicit assessment of CSR performance as
manipulated independent factors. We manipulated CSR performance by varying whether analyst
reports depicted positive performance, negative performance, or neutral performance for the control
condition. We manipulated explicit assessment of CSR performance by either prompting
participants to explicitly evaluate the firms CSR performance (Explicit Assessment) or not
prompting participants (No Explicit Assessment).

4
We operationalize this approach to investment analysis as a prompt to explicitly assess the firms CSR
performance prior to estimating the fundamental value of the firms stock. We recognize that investors in our No
Explicit Assessment conditions may spontaneously assess CSR performance, but if so, then that would bias
against our hypothesis.
5
A priori, we do not have a theoretical or empirical basis to predict a directional influence of CSR performance on
fundamental value estimates among investors who do explicitly assess CSR performance. That is, the intended
relation between CSR performance and estimates of fundamental value could be positive, neutral, or negative,
consistent with the ongoing debate in the literature (e.g., McWilliams and Siegel 2001; Benabou and Tirole
2010; Moser and Martin 2012). We reflect these three possibilities in Figure 1 by allowing for the slope of the
Explicit Assessment line to be upward, flat, or downward sloping.

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The Unintended Effect of CSR Performance on Investors Estimates of Fundamental Value 281

FIGURE 1
The Joint Effects of Corporate Social Responsibility (CSR) Performance and Explicit
Assessment of CSR Performance on Estimates of Fundamental Value

Panel A: Predicted Effects

Panel B: Observed Effects

Panel A depicts the pattern consistent with the hypothesized interaction of corporate social responsibility
performance (positive or negative) and an Explicit Assessment of CSR performance (absent or present) on
investors estimates of fundamental value. We depict the Explicit Assessment line to reflect that we have no a
priori basis upon which to make a prediction about the intended relation between CSR performance and
fundamental value. Panel B depicts the observed pattern of cell means for participants estimates of
fundamental value (see Table 2, Panel A). This pattern is tested using the ANOVA presented in Panel B of
Table 2.

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282 Elliott, Jackson, Peecher, and White

Participants
Eighty-eight graduate business students enrolled in a financial statement analysis course at a
large state university participated in the experiment as proxies for reasonably informed investors.6
These participants had taken, on average, eight accounting courses and three finance courses. All
participants reported that they had used financial statements to evaluate a firms performance at
least once. In addition, 36 percent of participants stated that they had purchased common stock or
debt securities, while 86 percent said they planned to do so in the next five years. Participants
completed the experiment during a normally scheduled class, with the instructor giving participants
extra credit in the course for completing the experiment.

Procedures
Participants received materials in three envelopes, labeled Envelopes 1, 2, and 3, and read and
completed the contents of each envelope in sequential order. Envelope 1 included background
information about a hypothetical firm and its retail industry. Participants then read two analyst
reports, one reporting the firms social performance and the other reporting the firms environmental
performance. Appendix A reproduces these analyst reports that collectively reflect the CSR
performance of the firm.7
The materials then asked Explicit Assessment condition participants to evaluate the firms CSR
performance by responding to five questions about social performance and five similar questions
about environmental performance, as shown in Appendix B. Participants in the other conditions
observed the same analyst reports but did not explicitly evaluate CSR performance. After reviewing
the information in Envelope 1, participants proceeded to Envelope 2, which contained a press
release with summary financial statement information for the same hypothetical firm. All
participants then evaluated the firms current financial performance by responding to five questions
about the firms recent financial statements and estimating the fundamental value of the firms
stock.8 Participants completed the experiment in a computer lab with a computer that displayed a
residual earnings valuation template in a spreadsheet.
In deriving an estimate of the fundamental value of the firms stock, participants were asked to
provide the estimates necessary to complete a residual earnings valuation model. Participants
provided forecasts of earnings for each of the four subsequent years, a cost of capital estimate, and
an estimated residual earnings growth rate after the fourth year (Penman 2009). The template then
calculated and displayed the resulting estimate of fundamental value, which participants recorded
on their pencil-and-paper materials. Appendix C reproduces one participants completed template.

6
In the analyses in Section V, we exclude one participant who provided an estimate of fundamental value that was
more than six times greater than the average of all other participants responses and more than eight standard
deviations greater than the mean. Results are inferentially identical if we include this participant in our analyses.
7
These analyst reports were adapted from Newsweeks 20102011 Green Rankings Business Report (Newsweek
2011). Background and financial information was loosely based on a composite of two retail firms, Kohls and
Ross Stores. We use analyst reports as the disclosure venue as opposed to an unfiltered management disclosure
venue to avoid concerns about the credibility and/or reliability of the reported performance measures. In
addition, to ensure that our results were not an artifact of the order of the two analyst reports, we counterbalanced
presentation order. We do not detect any significant order effect in our analyses.
8
We asked all participants to evaluate current financial performance in order to provide a consistent investment
analysis approach for CSR and financial performance for those in the Explicit Assessment conditions. To the
extent that the assessment of current financial performance provided a target for participants affective reactions
to CSR performance in the No Explicit Assessment condition, this design choice had the potential to weaken the
unintended effect of participants affective reactions on estimates of fundamental value, thus biasing against our
hypothesized result.

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The Unintended Effect of CSR Performance on Investors Estimates of Fundamental Value 283

Next, to measure willingness to invest in the firms stock, which we examine in supplemental
analyses, participants were asked to assume that they had received an inheritance of $10,000 from a
distant relative. They then identified the maximum price per share at which they would be willing to
invest 25 percent, 50 percent, 75 percent, and 100 percent of their inheritance in the firms stock.9
After completing the materials in Envelope 2, participants proceeded to Envelope 3, which contained
manipulation checks and other post-task questions that they completed before leaving the lab.

V. RESULTS

Manipulation Checks
To assess the effectiveness of our manipulation of CSR performance, we asked participants in a
post-test questionnaire whether the firms social performance was above the industry average,
about at the industry average, or below the industry average. Ninety-three percent of
participants correctly answered this question. Ninety-one percent of participants correctly answered
a similar question about the firms environmental performance.
In addition, to ensure that our positive and negative CSR performance measures elicited affect
in our participants, we included post-task questions that asked about the extent to which they were
happy, angry, disappointed, and pleased with the firms environmental and social
performance.10 To create a single measure of participants affective reactions to the firms CSR
performance, we perform a factor analysis on responses to these eight questions. All questions load
in the expected direction, and a single factor explains 85 percent of the variance in responses
(eigenvalue 6.77). We use this factor as an affect score, with higher (lower) scores indicating a
greater positive (negative) affective reaction. Table 1 presents descriptive statistics for this affect
score and the eight underlying affect measures.
A comparison of means across conditions reveals that, on average, affect scores for participants
in positive CSR performance conditions (mean 0.97, standard deviation 0.44) are significantly
greater than those of participants in negative CSR performance conditions (mean "1.04, standard
deviation 0.47; t 17.96, p , 0.01, two-tailed). Further, compared to affect scores when CSR
performance is neutral (mean 0.17, standard deviation 0.44), participants affect scores are
significantly higher when CSR performance is positive (t 6.46; p , 0.01, two-tailed), and
significantly lower when CSR performance is negative (t 9.31; p , 0.01, two-tailed).11 Thus, it
appears that our manipulation of CSR performance successfully elicited affect in the expected
directions. Further, similar to previous studies examining the use of affect as information (e.g.,
Kadous 2001), we do not expect our assessment manipulation to alter the degree to which
participants experience affect, but rather the way in which affect is interpreted and used in
subsequent judgments. As expected, we do not observe a significant CSR performance by
assessment interaction for our affect factor (p 0.32, untabulated).

9
We measure each participants price profile as opposed to asking for a single price at which they would be
willing to invest in order to better control for participant-specific determinants of willingness-to-pay for firms
with positive or negative CSR performance. Specifically, by using a repeated-measures design we are able to
reduce participant-specific variation and increase the power of our tests (Stevens 1996; Kutner, Nachtsheim,
Neter, and Li 2005).
10
We purposely elicited these measures as post-task questions instead of eliciting them immediately after
presenting CSR performance information. We did so because the affect-as-information theory underlying our
hypothesis predicts that calling attention to CSR performance-related affect would reduce its unintended
influence on subsequent judgments, which would undermine our Explicit Assessment manipulation by
effectively prompting all participants to assess CSR performance.
11
To ensure that our results were not driven by affect toward the firms financial performance, we used similar
questions to elicit participants affective reactions to the firms financial performance. Tests of these measures
reveal no significant differences between any of our experimental conditions (all p-values . 0.10).

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284 Elliott, Jackson, Peecher, and White

TABLE 1
Affect Scores

Panel A: Descriptive StatisticsAffect Score Means [Standard Deviation]

CSR Performance
Condition n Negative n Neutral n Positive
No Explicit Assessment 16 !0.88 20 0.17 16 1.01
[0.51] [0.44] [0.48]
Explicit Assessment 18 !1.18 NA 17 0.93
[0.40] [0.41]
Column Means 34 !1.04 NA 33 0.97
[0.47] [0.44]

Panel B: Affect Measure Means [Standard Deviation]

NegativeNo Negative Neutral Positive Positive
Assessment Assessment No Assessment No Assessment Assessment
Measure (n 16) (n 18) (n 20) (n 16) (n 17)
Happy (social) !1.90 !2.17 0.52 2.08 1.94
[0.89] [0.71] [0.80] [0.99] [0.96]
Angry (social) 0.74 1.06 !1.49 !2.68 !2.38
[1.68] [1.35] [1.52] [0.79] [0.67]
Disappointed (social) 0.98 1.72 !0.81 !2.36 !2.41
[1.47] [1.18] [1.50] [1.40] [0.80]
Pleased (social) !1.65 !2.00 0.57 1.74 1.83
[1.04] [1.28] [0.92] [1.47] [1.04]
Happy (environmental) !0.96 !2.17 0.23 2.03 1.85
[1.71] [0.86] [1.28] [1.11] [1.03]
Angry (environmental) 0.72 1.36 !1.07 !2.61 !2.08
[1.59] [1.14] [1.39] [0.88] [0.97]
Disappointed (environmental) 1.39 1.82 !0.54 !2.44 !2.37
[1.27] [0.94] [1.34] [1.02] [0.82]
Pleased (environmental) !1.72 !2.22 0.18 2.00 1.91
[0.70] [0.88] [1.07] [1.08] [0.85]
Factor analysis: One factor explains 84.6% of variance in responses (eigenvalue 6.77)

To ensure that our positive and negative CSR performance measures elicited affect in our participants, we included post-
task questions that asked about the extent to which they were happy, angry, disappointed, and pleased with the
firms environmental and social performance. To create a single measure (the affect score in Panel A) of participants
affective reactions to the firms CSR performance, we perform a factor analysis on responses to these eight questions.

Finally, because of the active nature of our assessment manipulation, we did not ask a specific
manipulation check question; however, all Explicit Assessment condition participants except one
responded to questions eliciting evaluations of the firms CSR performance. Results reported below
are inferentially identical if we classify the one participant who failed to respond to these questions
as a No Explicit Assessment condition participant.

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TABLE 2
Descriptive Statistics and Test of Hypothesis
Panel A: Descriptive StatisticsFundamental Value per Share Mean [Standard Deviation]
CSR Performance
Condition n Negative n Neutral n Positive
No Explicit Assessment 16 $19.14 20 $20.72 16 $25.92
[$4.25] [$2.66] [$10.80]
Explicit Assessment 18 $21.12 17 $20.82
[$5.15] [$3.77]

Panel B: ANOVA Model of Fundamental Value per Share (Excluding Control Condition)
Source of Variation SS df MS F-stat p-value
CSR performance 175.40 1 175.40 4.10 0.02a
Explicit assessment condition 40.68 1 40.68 0.95 0.33b
CSR performance 3 Explicit assessment 209.49 1 209.49 4.89 0.02a
Error 2696.54 63 42.80

Panel C: Follow-Up Tests of Simple Effects

Source of Variation df F-stat p-value
c
Effect of CSR performance given no Explicit Assessment 1 5.47 0.02a
Effect of CSR performance given Explicit Assessment 1 0.04 0.85b
Effect of Explicit Assessment given positive CSR performance 1 3.20c 0.05a
Effect of Explicit Assessment given negative CSR performance 1 1.47 0.12a

a
Reported p-values are one-tailed equivalents, given our directional predictions.
b
Reported p-values are two-tailed.
c
Reported F-statistics are adjusted for heterogeneous variances (Welch 1947, 1951). On an unadjusted basis, the simple
effect of CSR performance given no Explicit Assessment is significant at p 0.01, one-tailed (F1,30 5.46), and the
simple effect of Explicit Assessment given positive CSR performance is significant at p 0.04, one-tailed (F1,31
3.37).
Participants estimated fundamental value by providing the following inputs to a residual earnings model template:
earnings forecasts for four subsequent years, cost of capital, and a long-term growth rate for residual earnings. Figure 1,
Panel B provides an illustration of these results.

Test of Our Hypothesis

We hypothesize that when CSR performance is positive (negative), investors who do not
explicitly assess CSR performance will unintentionally estimate a firms fundamental value to be
higher (lower), but that explicit assessment of CSR performance will diminish this unintended
influence on investors fundamental value estimates. Descriptive statistics for participants
fundamental value estimates across our four treatment conditions and the neutral control condition
are tabulated in Panel A of Table 2. To test our hypothesis, we first compare No Explicit
Assessment condition investors estimates of fundamental value when CSR performance is
positive, neutral control, and negative. This comparison tests whether, absent explicit assessment,
CSR performance has the expected influence on investors fundamental value estimates.

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286 Elliott, Jackson, Peecher, and White

Establishing this influence sets the stage for testing whether explicit assessment diminishes the
influence of CSR performance.
An untabulated one-way analysis of variance (ANOVA) reveals significant differences in
fundamental value estimates across positive, neutral, and negative CSR performance conditions
(F2, 49 4.65, p 0.01). Pairwise comparisons show that estimates in the No Explicit Assessment,
positive CSR condition are significantly higher than those in the neutral CSR condition ($25.92 .
$20.72; p 0.04, one-tailed), while those in the No Explicit Assessment, negative CSR condition
are marginally significantly lower ($19.14 , $20.72; p 0.09, one-tailed). Consistent with the
simple main effect implied by our hypothesis, positive (negative) CSR performance significantly
increases (decreases) investors estimates of fundamental value absent an explicit assessment.
Next, as tabulated in Panel B of Table 2, we use a two-way ANOVA to test the predicted
interaction across our treatment conditions. Consistent with our hypothesis, results reveal a
significant CSR Performance 3 Explicit Assessment interaction (p 0.02, one-tailed). This result is
presented graphically in Panel B of Figure 1.12 In further support of our hypothesized interaction,
the negative versus positive CSR performance factor explains 15.4 percent of the variation in No
Explicit Assessment condition investors estimates of fundamental value, but only 0.1 percent of
the same variation for Explicit Assessment condition investors.13,14 Also consistent with affect-as-
information theory, investors affect scores are significantly correlated with estimates of
fundamental value in the No Explicit Assessment conditions (r 0.32; p 0.07, two-tailed), but
not in the Explicit Assessment conditions (r "0.10; p 0.55, two-tailed).
For completeness, simple effects tests in Panel C of Table 2 show that participants who do not
explicitly assess CSR performance estimate fundamental value to be an average of 24.5 percent
higher (9.4 percent lower) than those who do explicitly assess CSR performance when CSR
performance is positive (negative). This difference is statistically significant when CSR
performance is positive ($25.92 . $20.82; p 0.05, one-tailed) and directionally consistent but
not significant at conventional levels when CSR performance is negative ($19.14 , $21.12; p
0.12, one-tailed).15 Further, the average fundamental value estimates of participants who do not

12
The standard deviation of fundamental value estimates in the No Explicit Assessment/positive CSR condition is
10.80, compared to a standard deviation of 4.00 for responses in the other conditions. Although standard
parametric ANOVA is quite robust to violations of homoscedasticity (Hays 1994), we repeat our analysis using
ranked responses as an additional robustness test (for similar approaches, see Kachelmeier and Messier 1990;
Hirst, Jackson, and Koonce 2003). Results are inferentially identical using this nonparametric approach: most
importantly, the CSR performance 3 Explicit Assessment interaction remains significant (F 4.75, p 0.02,
one-tailed).
13
Because investors general political attitudes and attitudes about social and environmental issues might influence
their reactions to CSR performance, we measured these attitudes with post-task questions. Results indicate
responses to each of the questions range across the entire seven-point scale, suggesting a wide range of attitudes.
In addition, all have a median response of 0 (the midpoint of the scale) and a mean response that does not differ
significantly from 0, suggesting that attitudes do not tend toward the extremes. As expected with random
assignment of participants to experimental conditions, responses to these measures do not differ significantly
across conditions (all p-values . 0.10). Further, reported results are inferentially identical when we include these
measures as covariates in our analyses.
14
Additional, untabulated analyses suggest that it is predominantly differences in the numerator, estimates of
future earnings, not the denominator, estimates of discount rates, in the residual earnings model that drive
differences in participants estimates of fundamental value. Specifically, an ANOVA reveals both a significant
main effect of CSR performance (all p-values , 0.05, one-tailed) and a marginally significant CSR Performance
3 Explicit Assessment interaction (all p-values , 0.07, one-tailed) for earnings forecasts in all four years.
15
The weaker simple effect in the negative as compared to the positive condition could be at least partially
explained by the result that affect scores differ significantly by Explicit Assessment condition when CSR
performance is negative ("1.18 , "0.88, t 1.91; p 0.07, two-tailed), but not when it is positive (0.93 1.01,
t 0.51; p 0.62, two-tailed). Thus, in the negative condition, investors have to overcome marginally stronger
negative affective reactions to CSR performance to derive fundamental value estimates that are not influenced by
this affect.

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The Unintended Effect of CSR Performance on Investors Estimates of Fundamental Value 287

explicitly assess CSR performance are 35.4 percent higher when CSR performance is positive than
when it is negative ($25.92 . $19.14; p 0.02, one-tailed), while the "1.4 percent difference
among Explicit Assessment condition investors estimates of fundamental value does not differ
significantly across positive and negative levels of CSR performance ($20.82 $21.12; p 0.85,
two-tailed).
Taken together, these results support our hypothesis, albeit with stronger support evident when
CSR performance is positive. When CSR performance is positive, investors develop significantly
higher estimates of fundamental value when they do not explicitly assess compared to when they do
explicitly assess CSR performance. The result that explicit assessment of CSR performance
diminishes the relation between CSR performance and investors estimates of fundamental value is
consistent with affect-as-information theory and provides evidence that the influence of CSR
performance on fundamental value when investors do not explicitly assess CSR performance is
unintended. Nevertheless, we next provide corroborative evidence of our theory that the effect is
unintended by examining investors awareness of the influence of CSR performance on their
estimates of fundamental value.

Additional Support for Our Theory: Investor Awareness

Our theory and hypothesis suggest that, in the absence of explicit assessment of CSR
performance, the effect of CSR performance on investors estimates of fundamental value is
unintended, which would prevent investors from reacting to CSR performance in the direction and/
or with the magnitude that they believe to be best. As such, theory would also predict that investors
who do not explicitly assess CSR performance have relatively low awareness about how CSR
performance is significantly and directionally influencing their estimates of fundamental value.
To provide corroborating evidence of this low level of awareness, we use a similar approach to
that in Weitz and Wright (1979) by asking investors to retrospectively report how much the CSR
performance dimensions affected their fundamental value estimates. Specifically, we asked all
participants to evaluate the extent to which the firms environmental and social performance
explained their judgmental inputs into the residual earnings model used to generate estimates of
fundamental value. For example, we asked, To what extent did XYZs environmental performance
explain your estimate of XYZs cost of capital? Participants responded on seven-point Likert
scales with endpoints 1 (Not at all) and 7 (Completely), and a midpoint of 4 (Moderately). We
asked similar questions about the extent to which environmental and social performance explained
estimates of future earnings and the long-term growth rate in residual earnings. We average these
responses to develop an awareness score.16 Table 3 presents descriptive statistics for this
awareness score and the six underlying awareness measures. A higher awareness score indicates
stronger investor perceptions that CSR performance consciously influenced their estimates of
fundamental value.
To examine the degree to which No Explicit Assessment participants believed the firms CSR
performance influenced their estimates of fundamental value, we compare their responses to the six
questions described above to the midpoint of 4 (Moderately) on the scale. The responses of
participants who do not explicitly assess CSR performance (averaged across positive and negative
CSR performance conditions) are significantly lower than the midpoint on average and for each of
the six questions individually with a mean of 2.62 and a range from 2.32 to 2.77 (all p-values ,

16
We also perform a factor analysis on responses to these six questions and, as expected, find that a single factor
explains 83.4 percent of the variance in responses (eigenvalue 5.01). The same inferences follow using the
factor score as the measure of awareness. We report findings using the simple average for ease in mapping to the
Likert scales.

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288 Elliott, Jackson, Peecher, and White

TABLE 3
Awareness Scores

Panel A: Descriptive StatisticsAwareness Score Means [Standard Deviation]

CSR Performance
Condition n Negative n Neutral n Positive
No Explicit Assessment 16 2.72 20 2.47 16 2.52
[1.58] [1.37] [1.36]
Explicit assessment 18 3.60 17 3.10
[1.58] [1.42]

Panel B: Awareness Measure Means [Standard Deviation]

Negative Neutral Positive
No Negative No No Positive
Assessment Assessment Assessment Assessment Assessment
Measure (n 16) (n 18) (n 20) (n 16) (n 17)
Earnings forecast (social) 3.14 3.75 2.52 2.69 3.04
[1.75] [1.85] [1.68] [1.47] [1.40]
Cost of capital (social) 2.64 3.44 2.23 2.15 3.14
[1.69] [1.62] [1.40] [1.39] [1.67]
Long-term growth (social) 2.63 3.84 2.53 2.78 2.87
[1.81] [1.82] [1.60] [1.93] [1.38]
Earnings forecast (environmental) 2.89 3.58 2.53 2.64 3.19
[1.68] [1.40] [1.43] [1.64] [1.61]
Cost of capital (environmental) 2.41 3.36 2.32 2.23 3.21
[1.38] [1.57] [1.42] [1.40] [1.58]
Long-term growth (environmental) 2.64 3.64 2.59 2.63 3.12
[1.83] [1.88] [1.46] [1.73] [1.59]

Participants were asked to evaluate the extent to which the firms social and environmental performance explained their
inputs into the residual earnings model used to generate estimates of fundamental value. For example, we asked, To
what extent did XYZs environmental performance explain your estimate of XYZs cost of capital? Participants
responded on seven-point Likert scales with endpoints 1 (Not at all) and 7 (Completely), with the midpoint of each scale
labeled 4 (Moderately). We asked similar questions about the extent to which environmental and social responsibility
performance explained estimates of future earnings and the long-term growth rate in residual earnings. We average these
responses to develop the awareness score tabulated in Panel A.

0.01, two-tailed). So while No Explicit Assessment participants perceive that CSR performance has
less than a moderate influence on their judgments (but greater than no influence at all, which would
correspond to a rating of 1 on our scale), these participants fundamental value estimates are
statistically significantly influenced by CSR performance. Specifically, their fundamental value
estimates are 34.5 percent higher when CSR performance is positive instead of negative. Thus, their
awareness score results corroborate our main findings, and are consistent with our theory with
respect to No Explicit Assessment participants.
For completeness, we also compare the awareness scores of investors who do explicitly assess
CSR performance to the midpoint of the scale. Their awareness scores also are significantly lower
than the midpoint of the scale with a mean of 3.35 and a range from 3.29 to 3.40 (all p-values ,

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The Unintended Effect of CSR Performance on Investors Estimates of Fundamental Value 289

0.05, two-tailed), which reconciles reasonably with a lack of an on average significant simple
effect of CSR performance on these investors fundamental value estimates. Finally, we compare
the awareness scores of investors who do and do not explicitly assess CSR performance, and find
that awareness scores are significantly lower in the No Explicit Assessment conditions than in the
Explicit Assessment conditions (2.62 , 3.35; p 0.04, two-tailed). Thus, although CSR
performance actually has a greater directional influence on investors fundamental value estimates
in the No Explicit Assessment conditions than in the Explicit Assessment conditions, investors in
the No Explicit Assessment conditions believe that CSR performance has a significantly smaller
influence on their estimates of fundamental value. This is again consistent with investors in the No
Explicit Assessment conditions having relatively low awareness about the sizable, directional
influence of CSR performance on their estimates of fundamental value.17
In sum, investors awareness scores provide additional evidence that investors who do not
explicitly assess CSR performance have a relatively low level of awareness about the significant
influence of CSR performance on their fundamental value estimates. The awareness scores,
combined with results from our hypothesis, provide corroborating evidence of theory and suggest
an unintended, causal relation between CSR performance and investors fundamental value
estimates.

VI. SUPPLEMENTAL ANALYSIS: INVESTORS WILLINGNESS-TO-PAY

We have thus far reported findings that support our hypothesis that investors estimates of
fundamental value are unintentionally influenced by their affective reactions to CSR performance
unless they explicitly assess CSR performance. These findings are stronger for positive CSR
performance than for negative CSR performance. In our supplemental analysis, we focus on
whether the stronger effect of positive CSR performance on investors estimates of fundamental
value has practical implications in the sense of significantly influencing investors willing-
ness-to-pay for a companys common stock. In a CSR context, an investors willingness-to-pay for
a firm with positive CSR performance may very well be driven by their estimates of fundamental
value, but could also be driven by an inherent preference for firms with positive CSR performance
or even how they believe others may value a firm with positive CSR performance. For example,
prior research suggests that investors affective reactions (to, e.g., CSR performance) can influence
the maximum price they will pay for a firms stock, independent of their beliefs about fundamental
value (Aspara and Tikkanen 2010). In addition, documenting whether pricing effects are evident
serves as both a test of the practical consequence of, and a robustness check on, our primary
analyses.
A post-test portion of our case materials elicited investors willingness-to-pay by presenting
them with the following: Assume that you have received an inheritance of $10,000 from a distant
relative. Please indicate the maximum price per share at which you would be willing to invest the
following amounts in XYZ stock. To better control for participant-specific variation in prices, we
elicited four prices per participant instead of one, asking for the maximum price they would pay to

17
Although higher awareness of a CSR-fundamental value relation among Explicit Assessment participants may
seem counterintuitive, given that these investors fundamental value estimates did not differ significantly across
CSR performance conditions on average, this result is consistent with Explicit Assessment investors holding
heterogeneous beliefs about the CSR-fundamental value relation. Given the ongoing debate in the popular press,
diverse theoretical perspectives, and mixed archival findings about the relation between CSR performance and
firm value, some investors would likely intend for positive or negative CSR performance to increase their
estimates of fundamental value, while others would intend for it to not change or decrease their estimates of
fundamental value. With such heterogeneous beliefs, a diminished net effect of CSR performance on Explicit
Assessment condition participants estimates of fundamental value would not itself lead one to expect a
diminished awareness score of the effect of CSR performance on firm value.

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290 Elliott, Jackson, Peecher, and White

allocate $10,000, or 100 percent, of your inheritance, $7,500, or 75 percent, of your

inheritance, $5,000 or 50 percent of your inheritance, and $2,500 or 25 percent of your
inheritance to Firm XYZs common stock. This approach also reduces measurement error caused
by forcing participants to use a single price when how much they would pay quite likely decreases
as they allocate larger shares of their inherited wealth to a single firms share of stock. This
repeated-measures approach enables us to remove participant-specific, systematic variation from the
error term of our models, thereby increasing the effective power of our tests without biasing our
alpha levels (e.g., Stevens 1996; Kutner et al. 2005). Using these prices, we create a Percentage of
Inheritance Invested price profile for each participant and estimate a repeated-measures ANOVA
that also includes a between-subjects factor for our experimental conditions that we call CSR
Performance/Assessment. The resulting mixed design enables us to test whether CSR performance
influences the price investors are willing to pay in the absence of explicitly assessing CSR
performance.18
Panel A of Table 4 provides descriptive statistics for participants willingness-to-pay prices in
the positive, neutral, and negative CSR performance conditions. Panel B presents the
repeated-measures ANOVA for positive CSR performance, which tests the difference in
willingness-to-pay profiles across the No Explicit Assessment/Positive CSR, Explicit Assess-
ment/Positive CSR, and neutral (i.e., control) conditions. Figure 2 separately plots investors price
profiles for each of these three conditions.
The price profiles are upward sloping, indicating that investors quite reasonably would pay
more per share to invest smaller portions of their inheritance in one firms stock. This effect
corresponds to the Percentage of Inheritance Invested within-subjects effect in the ANOVA
presented in Panel B of Table 4 (F3, 141 87.67; p , 0.01). The effect of greater relevance for our
theory, however, is the Percentage of Inheritance Invested 3 CSR Performance/Assessment
interaction (F6,141 2.25; p 0.04). This interaction obtains because positive CSR performance
causes investors price profiles to be significantly steeper in the absence of Explicit Assessment,
reflecting the increasingly larger price differentials across assessment conditions going from higher
to lower percentages of inheritance invested (i.e., $0.54 at 100 percent, $1.88 at 75 percent, $2.29 at
50 percent, and $3.43 at 25 percent). This is exactly as we would expect if findings in support of our
hypothesis have implications for the prices investors are willing to pay.19
Panel C of Table 4 presents the repeated-measures ANOVA for negative CSR performance. As
with positive CSR performance, we observe increasing prices as percentage of inheritance increases
(F3,150 55.57; p , 0.01). However, although directionally consistent, we do not observe a
significant Percentage of Inheritance Invested 3 CSR Performance/Assessment interaction (F6,150
0.60; p 0.73), consistent with the weaker effects of negative CSR performance on fundamental
value estimates of investors in No Explicit Assessment conditions.
In addition, collapsing across positive and negative CSR performance, investors affect scores
are significantly correlated with these willingness-to-pay prices for No Explicit Assessment

18
For our supplemental analysis, we exclude two additional participants: one participant whose willingness-to-pay
response was nearly eighty times greater than the average of all other responses and more than eight standard
deviations greater than the mean response, and another participant who did not respond to our willingness-to-pay
measures.
19
To confirm that the increased willingness-to-pay of investors who do not explicitly assess CSR performance is
driven, at least in part, by their unintentionally influenced estimates of fundamental value, we apply the
regression approach to mediation analysis (Baron and Kenny 1986). We find that investors fundamental value
estimates fully mediate the influence of positive CSR performance on the maximum price investors report being
willing to pay. Specifically, when added as a covariate in our repeated measures model of investors willingness-
to-pay, investors estimates of fundamental value are significant both on a between-subjects basis (F1, 46 39.39;
p , 0.01) and on a within-subjects basis (F3, 138 3.26; p 0.02), but the Percentage of Inheritance Invested 3
CSR Performance/Assessment interaction is no longer significant (F6, 138 1.05; p 0.39).

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The Unintended Effect of CSR Performance on Investors Estimates of Fundamental Value 291

TABLE 4
Supplementary Analysis of Prices Investors Are Willing to Pay for Firm XYZ Stock
Panel A: Descriptive StatisticsWillingness-to-Invest Price Means [Standard Deviation]
Percentage of Inheritance Invested in XYZ Stock
CSR Performance/
Assessment Condition n 100% 75% 50% 25% Mean
Positive CSR Performance 16 $14.49 $17.74 $20.43 $23.76 $19.10
No Explicit Assessment [$6.80] [$6.44] [$6.12] [$6.44] [$6.45]
Positive CSR Performance 15 $13.95 $15.86 $18.14 $20.33 $17.07
Explicit Assessment [$6.82] [$6.43] [$6.12] [$6.43] [$6.45]
Neutral CSR Performance 19 $14.19 $16.04 $17.75 $19.71 $16.92
No Explicit Assessment [$6.80] [$6.45] [$6.15] [$6.45] [$6.47]
Negative CSR Performance 16 $10.75 $12.69 $15.05 $18.04 $14.13
No Explicit Assessment [6.61] [$6.63] [$6.35] [$7.14] [$6.51]
Negative CSR Performance 18 $10.68 $12.87 $15.27 $18.35 $14.29
Explicit Assessment [$6.12] [$6.92] [$8.42] [$12.35] [$7.99]

Panel B: Repeated Measures ANOVA Model of Willingness-to-Invest PricePositive CSR

Performance
SS df MS F-stat p-value
Between-Subjects Source of Variation
CSR Performance/Assessment Condition 196.06 2 98.03 0.65 0.53
Error 7105.49 47 151.18
Within-Subjects Source of Variation
Percentage of Inheritance Invested 1355.43 3 451.81 87.67 ,0.01
CSR Performance/Assessment Condition 3 2696.54 6 42.80 2.25 0.04
Percentage of Inheritance Invested
Error 726.73 141 5.15

Panel C: Repeated Measures ANOVA Model of Willingness-to-Invest PriceNegative CSR

Performance
SS df MS F-stat p-value
Between-Subjects Source of Variation
CSR Performance/Assessment Condition 356.95 2 178.47 1.06 0.35
Error 8401.81 50 168.04
Within-Subjects Source of Variation
Percentage of Inheritance Invested 1356.69 3 452.23 55.57 ,0.01
CSR Performance/Assessment Condition 3 29.28 6 4.88 0.60 0.73
Percentage of Inheritance Invested
Error 1220.61 150 8.14
(continued on next page)

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292 Elliott, Jackson, Peecher, and White

TABLE 4 (continued)

Participants were asked to imagine that they had inherited $10,000 from a distant relative and to report the maximum
prices at which they would invest 100 percent, 75 percent, 50 percent, and 25 percent of their inheritance in Firm XYZs
common stock. These percentages are the within-subjects factor in the repeated measures ANOVAs in Panels B and C.
The between-subjects factor in Panel B (Panel C) examines three levels: positive (negative) CSR performance with no
explicit assessment of CSR performance, positive (negative) CSR performance but with explicit assessment of CSR
performance, and neutral CSR performance with no explicit assessment of CSR performance (i.e., control condition).
This design enables us to examine directly not only whether more positive CSR performance increases the price investors
are willing to pay, but also whether explicit assessment of more positive CSR performance mitigates any such increase.
Figure 2 provides an illustration of the results for positive CSR performance.

investors at three of the four investment levels (r 0.26; p 0.15 at 100 percent, r 0.34; p 0.06
at 75 percent, r 0.37; p 0.04 at 50 percent, and r 0.35; p 0.06 at 25 percent; all p-values
two-tailed). By contrast, affect scores are not significantly correlated with willingness-to-pay prices
at any level of investment for investors in Explicit Assessment conditions (r 0.18; p 0.33 at 100
percent, r 0.14; p 0.45 at 75 percent, r 0.11; p 0.55 at 50 percent, and r 0.04; p 0.83 at 25
percent; all p-values two-tailed). These correlations are also consistent with our theory and
analogous to results reported for fundamental value estimates.
Together, our primary and supplemental findings suggest that investors affective reactions to
CSR performance can unintentionally influence investors estimates of fundamental value, and that
these unintentionally influenced estimates explain the bids they are willing to make for a firms
common stock when CSR performance is positive. They also suggest, however, that investors who
explicitly assess CSR performance are less susceptible to forming beliefs about firm value that are
unintentionally influenced by these affective reactions and, in turn, are less susceptible to making
bids for a firms stock that reflect this unintentional influence.

VII. CONCLUSION
We present theory and experimental-empirical evidence suggesting that investors estimates of
fundamental value depend jointly on a firms corporate social responsibility (CSR) performance and
on explicit assessment of such performance during their investment analysis. Overall, our results are
consistent with investors unintentionally using their affective reactions to CSR performance to
derive estimates of fundamental value, and with Explicit Assessment of CSR performance
significantly diminishing this unintended influence.
Supplemental analyses also suggest that the unintentionally influenced fundamental value
estimates of investors who do not explicitly assess CSR performance have consequences for the
price they are willing to pay to invest in a firms common stock. Specifically, investors who do not
explicitly assess CSR performance are also more willing to invest in a firm with positive CSR
performance.
Our theory and findings extend recent archival examinations of the association between CSR
performance and firm value by providing evidence of a causal relation between CSR performance
and investors estimates of fundamental value that reflects an unintended influence of CSR. Our
study also provides evidence of the robustness of affects role in subconsciously influencing
judgments in accounting settings. While prior work examines juror and employee judgments in
contexts unlikely to affect the participants own wealth (e.g., Kadous 2001; Moreno et al. 2002),
our study confirms affects unintended influence and substantial effect size in a context highly
relevant to participants wealthfundamental value estimation. Finally, by separately eliciting
beliefs about firm value and investors willingness-to-pay for a firms stock, we show that positive

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The Unintended Effect of CSR Performance on Investors Estimates of Fundamental Value 293

FIGURE 2
Effect of Positive CSR Performance on Investors Willingness to Invest Inheritance

A post-test question asked investors to assume they had inherited $10,000 and to specify maximum prices at
which they would invest 25 percent, 50 percent, 75 percent, or 100 percent of their inheritance in Firm XYZs
stock (x-axis). The y-axis is willingness-to-invest prices (in $). See Table 4 for additional descriptive and
inferential statistics. The result suggests that positive CSR performance increases investors willingness to
invest their inheritance in Firm XYZ stock unless investors explicitly assess CSR performance.

CSR performance causally increases investors willingness-to-pay via their own unintentionally
influenced fundamental value estimates. If widely sustained across investors, then this ironically
could decrease the firms empirical cost-of-equity capital. In this respect, our study complements
prior archival research that documents an association between enhanced CSR performance/
disclosure and cost of capital at the market level (e.g., Plumlee et al. 2010; Dhaliwal et al. 2011).
Our study also suggests several opportunities for future research. For example, it is possible
that in addition to reducing the unintended, affect-driven effect of CSR performance on
fundamental value estimates, explicitly assessing CSR performance also improves investors
awareness of the effect of CSR performance on their estimates of fundamental value. Improved
awareness and, in turn, better self-insight, would be particularly helpful to investors because there

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294 Elliott, Jackson, Peecher, and White

are different normative perspectives and mixed archival evidence about the conditions under which
better CSR performance increases, does not change, or decreases firms fundamental value (e.g.,
McWilliams and Siegel 2001; Margolis et al. 2009; Matsumura et al. 2011; Dhaliwal et al. 2011;
Plumlee et al. 2010; Izzo and Magnanelli 2012; Moser and Martin 2012). Therefore, it is important
that investors are able to separate their beliefs about firm value from their preference for that firms
CSR performance.
Further, while we investigate the unintended effect of CSR performance on the judgments of
relatively financially savvy graduate business students (as proxies for nonprofessional investors),
future research could consider the effect of CSR performance on customers and other stakeholders.
Also, future research may profitably examine alternative CSR assessment methods as well as
potential costs or other benefits of explicit assessment of CSR performance. More specifically,
future research could examine whether explicit assessment of CSR performance has the same effect
for investors and/or other stakeholders who hold extreme views about CSR and, thus, may have
affective reactions to CSR performance that differ from the graduate business student in our study.
Finally, our results regarding both estimates of fundamental value and willingness-to-pay are driven
primarily by the effects in the positive CSR performance condition. While we did not anticipate the
weak effects in the negative CSR performance condition, as noted earlier, they may be a
consequence of the stronger negative affective reaction to negative CSR performance. Nevertheless,
because there is limited support for our primary prediction and the related theoretical arguments in
the negative CSR performance condition, future research could be valuable in offering additional
insight as to whether our results will generally hold only for cases of positive CSR performance, or
are likely to hold for both cases of positive and negative CSR performance.
In sum, our study demonstrates how, without explicit assessment, investors affective reactions
to CSR performance can unintentionally influence their estimates of fundamental value and, in turn,
influence how much investors are willing to pay for the firms stock. Overall, the theory-consistent
findings herein provide new reason to harken back to Paul Slovics opening quotation in his 1972
thought piece about how psychology theories of human judgment can be applied to help us better
understand investment decision making, quoting from Adam Smiths The Money Game: You
areface ita bunch of emotions, prejudices, and twitches, and this is all very well as long as you
know it . . . If you dont know who you are, this is an expensive place to find out (Slovic 1972,
779).

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Manipulation of CSR Performance
Part 1: Positive CSR Performance
APPENDIX A

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Part 2: Negative CSR Performance

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Part 3: Neutral CSR Performance

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APPENDIX B
Assessment of CSR Performance

(continued on next page)

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APPENDIX B (continued)

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APPENDIX C
Residual Earnings Model Template

* Because XYZ uses clean surplus accounting and pays no dividends, closing book value of equity
is simply equal to the previous years closing book value plus net income for the year.

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