Abnormal CSR and Financial Performance

Figures & data

Figure 1. Overview of our microeconomic model for normal and abnormal CSR. This figure presents an overview of our microeconomic model for normal and abnormal CSR and spans from −33 to +59 – the range of KLD CSR data: A firm that has all concerns in all dimensions and no strengths (−33) vs. a firm that has all strengths in all dimensions and no concerns (+59).

Table 1. Summary of the sample selection procedure.

	Reduction	N
Compustat/CRSP merged sample (1991–2013)		157,771
Firms operating in the financial industry	43,779	113,992
Missing CSR rating data from MSCI ESG STATS	83,519	30,473
Data requirements	665	29,808
Missing values in the CSR equilibrium model	14,188	15,620
CSR equilibrium model sample		15,620
Data requirements and missing values in the main analysis	182	15,438
Abnormal CSR and profitability model sample		15,438

This table presents our sample selection procedure.

Table 2. Descriptive statistics of regression variables.

Variable	Obs.	Mean	S.D.	Min	25%	Median	75%	Max
ADJ_ROAit	15,438	0.108	0.140	−0.248	0.025	0.082	0.157	0.602
ABN_CSRit	15,438	−0.002	1.148	−3.387	−0.512	−0.000	0.434	3.662
NORM_CSRit	15,438	0.469	2.180	−3.710	−0.940	−0.000	1.125	8.297
CSR_SCOREit	15,438	0.231	2.587	−5.000	−1.000	0.000	1.000	10.000
ADJ_ROAit−1	15,438	0.114	0.141	−0.235	0.028	0.086	0.163	0.625
SIZEit	15,438	7.608	1.467	4.713	6.535	7.515	8.568	11.427
GROWTHit	15,438	0.097	0.199	−0.429	0.001	0.078	0.172	0.905
SGAit	15,438	0.251	0.164	0.020	0.122	0.222	0.345	0.768
R&Dit	15,438	0.031	0.048	0.000	0.000	0.005	0.044	0.218
LEVit	15,438	0.201	0.161	0.000	0.049	0.192	0.308	0.639
BTMit	15,438	0.485	0.323	0.048	0.264	0.412	0.618	1.842
DIVit	15,438	0.036	0.066	0.000	0.000	0.012	0.046	0.445
CAPEXit	15,438	0.053	0.049	0.003	0.021	0.038	0.067	0.269
ADVit	15,438	0.015	0.033	0.000	0.000	0.000	0.013	0.189
CASHit	15,438	0.154	0.159	0.001	0.032	0.096	0.228	0.689
KZ-INDEXit	15,438	0.579	1.106	−3.795	0.023	0.637	1.261	2.960
CGOVit	15,438	−0.341	0.693	−2.000	−1.000	0.000	0.000	1.000

This table shows the descriptive statistics for the Abnormal CSR and profitability model. We define all variables in Appendix 1. All variables are winsorized at the 1st and 99th percentile.

Table 3. Pearson correlation table.

		(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	(12)	(13)	(14)	(15)	(16)
(1)	ADJ_ROAit
(2)	ABN_CSRit	0.00
(3)	NORM_CSRit	0.18	0.00
(4)	CSR_SCOREit	0.13	0.40	0.76
(5)	ADJ_ROAit-1	0.77	0.00	0.18	0.13
(6)	SIZEit	0.03	0.00	0.46	0.26	0.02
(7)	GROWTHit	0.13	−0.02	−0.08	−0.05	0.01	−0.03
(8)	SGAit	0.17	0.00	0.16	0.17	0.19	−0.26	−0.03
(9)	R&Dit	0.21	0.00	0.12	0.14	0.22	−0.16	0.03	0.60
(10)	LEVit	−0.15	0.00	0.04	−0.02	−0.14	0.36	−0.05	−0.24	−0.28
(11)	BTMit	−0.32	0.00	−0.19	−0.16	−0.26	−0.06	−0.19	−0.16	−0.15	0.05
(12)	DIVit	0.14	0.01	0.25	0.17	0.13	0.19	−0.11	−0.03	−0.09	0.19	−0.27
(13)	CAPEXit	−0.05	0.00	−0.07	−0.04	−0.05	0.03	0.10	−0.23	−0.17	0.04	−0.04	−0.02
(14)	ADVit	0.00	0.00	0.16	0.11	0.00	−0.03	−0.05	0.21	−0.10	−0.03	−0.09	0.14	0.04
(15)	CASHit	0.16	0.00	0.02	0.06	0.16	−0.32	0.04	0.47	0.50	−0.43	−0.16	−0.13	−0.21	0.02
(16)	KZ-INDEXit	−0.23	0.00	−0.09	−0.09	−0.20	0.19	0.02	−0.16	−0.13	0.64	0.09	−0.37	0.06	−0.08	−0.35
(17)	CGOVit	−0.02	0.02	0.00	0.10	−0.03	−0.20	0.01	−0.05	−0.08	−0.06	0.02	0.02	0.05	0.01	−0.03	−0.09

This table shows the pairwise Pearson correlation table for the Abnormal CSR and Profitability model. Bold indicates significant correlations at the 10% level. We define all variables in Appendix 1. All variables are winsorized at the 1st and 99th percentile.

Table 4. Percentage of significant coefficients from the cross-sectional Poisson regressions (per size deciles and fiscal years) on CSR strength (CSR_Str_it) and concerns (CSR_Con_it).

	(1)		(2)
	CSR_STRit		CSR_CONit
	% pos	% neg	% pos	% neg
SIZEit-1	35.41	0.00	15.05	0.00
ROAit-1	6.77	7.16	1.00	5.35
BTMit-1	2.96	10.55	3.01	0.00
LEVit-1	4.12	14.06	0.94	1.96
DIVit-1	12.11	4.79	4.06	3.05
R&Dit-1	22.86	0.94	2.15	8.97
CAPEXit-1	6.06	3.03	1.91	2.06
ADVit-1	7.07	1.06	1.06	0.00
SGAit-1	7.16	5.61	0.00	11.05
GROWTHit-1	0.00	15.92	1.93	4.08
CASHit-1	6.07	2.95	1.00	5.15
KZ-INDEXit-1	5.95	7.08	1.06	2.02
CGOVit-1	11.65	4.93	2.98	0.88

This table shows the percentage of significantly positive and significantly negative coefficients for CSR strengths, and CSR concerns determinants at the 5% level. The estimates obtained in these Poisson regressions are used to then calculate abnormal CSR (ABN_CSR_it) as the difference between abnormal CSR strength (CSR_Str_it) and abnormal CSR concerns (CSR_Con_it). All variables are as defined in Appendix 1. All variables are winsorized at the 1st and 99th percentile.

Table 5. Results for regressing (abnormal) CSR (NORM_CSR_it; ABN_CSR_it) on financial performance (ADJ_ROA_it).

	(1)	(2)	(3)	(4)	(5)	(6)
	ADJ_ROAit	ADJ_ROAit	ADJ_ROAit	ADJ_ROAit	ADJ_ROAit	ADJ_ROAit
CSR_SCOREit	0.001***	0.000
	(0.000)	(0.000)
NORM_CSRit			0.001***	0.001	0.001***	0.001
			(0.000)	(0.001)	(0.000)	(0.001)
ABN_CSRit					0.000	−0.000
					(0.001)	(0.001)
ABN_CSR^2it			−0.001***	−0.001**	−0.001***	−0.001**
			(0.000)	(0.000)	(0.000)	(0.000)
ADJ_ROAit-1	0.411***	0.244***	0.411***	0.244***	0.411***	0.244***
	(0.013)	(0.013)	(0.013)	(0.013)	(0.013)	(0.013)
SIZEit	0.002***	−0.009***	0.003***	−0.008***	0.003***	−0.008***
	(0.001)	(0.002)	(0.001)	(0.002)	(0.001)	(0.002)
GROWTHit	0.057***	0.040***	0.057***	0.040***	0.057***	0.040***
	(0.005)	(0.005)	(0.005)	(0.005)	(0.005)	(0.005)
SGAit	−0.052***	−0.337***	−0.052***	−0.338***	−0.052***	−0.338***
	(0.008)	(0.030)	(0.008)	(0.030)	(0.008)	(0.030)
R&Dit	−0.112***	−0.233***	−0.114***	−0.235***	−0.114***	−0.235***
	(0.032)	(0.079)	(0.032)	(0.079)	(0.032)	(0.079)
LEVit	−0.018*	−0.032**	−0.018*	−0.033**	−0.018*	−0.033**
	(0.010)	(0.015)	(0.010)	(0.015)	(0.010)	(0.015)
BTMit	−0.056***	−0.034***	−0.056***	−0.034***	−0.056***	−0.034***
	(0.003)	(0.004)	(0.003)	(0.004)	(0.003)	(0.004)
DIVit	−0.032	−0.071*	−0.032	−0.071*	−0.032	−0.071*
	(0.023)	(0.037)	(0.023)	(0.037)	(0.023)	(0.037)
CAPEXit	0.071***	0.160***	0.071***	0.159***	0.071***	0.159***
	(0.018)	(0.031)	(0.018)	(0.031)	(0.018)	(0.031)
ADVit	0.074***	0.089	0.071**	0.087	0.071**	0.087
	(0.029)	(0.069)	(0.029)	(0.069)	(0.029)	(0.069)
CASHit	0.005	0.027**	0.006	0.028**	0.006	0.028**
	(0.008)	(0.012)	(0.008)	(0.012)	(0.008)	(0.012)
KZ-INDEXit	−0.014***	−0.016***	−0.014***	−0.016***	−0.014***	−0.016***
	(0.002)	(0.003)	(0.002)	(0.003)	(0.002)	(0.003)
CGOVit	−0.000	0.001	0.000	0.000	0.000	0.000
	(0.001)	(0.001)	(0.001)	(0.001)	(0.001)	(0.001)
CONSTANT	0.089***	0.257***	0.088***	0.254***	0.088***	0.254***
	(0.007)	(0.018)	(0.007)	(0.018)	(0.007)	(0.018)
N	15,438	15,438	15,438	15,438	15,438	15,438
IND. FE	YES	NO	YES	NO	YES	NO
FIRM FE	NO	YES	NO	YES	NO	YES
ADJ. R^2	0.702	0.729	0.702	0.730	0.702	0.730

This table shows the results of our main regression analyses, which regress financial performance on CSR, normal CSR, and abnormal CSR. We define all variables in Appendix 1. All variables are winsorized at the 1st and 99th percentile. Industry-fixed effects are based on two-digit SIC codes. Standard errors reported in parentheses below the coefficients are clustered at the firm and year level. Asterisks indicate significance levels (*** = 1%; ** = 5%; * = 10%).

Figure 2. Empirical estimation: Non-linear relationship between abnormal CSR and financial performance. This figure shows the graph of the estimated quadratic function between abnormal CSR (x-axis) and industry-adjusted ROA (y-axis). The underlying mathematical equation based on the coefficients for abnormal CSR is: Y = −0.00000171x – 0.000589x². The figure includes the full range of KLD CSR data: a firm that has all concerns in all dimensions and no strengths (−33) vs. a firm that has all strengths in all dimensions and no concerns (+59).

Table 6. 2SLS regression.

	(1)	(2)
	ABN_CSR^2it	ABN_CSR^2it
Panel A: 1st stage – Predicting abnormal CSR with analyst focus on CSR as an instrument
CSR_WCit	1.039***	1.271***
	(0.277)	(0.294)
NORM_CSRit	0.168***	0.132***
	(0.029)	(0.037)
ADJ_ROAit-1	−0.384	−0.386
	(0.261)	(0.316)
SIZEit	0.574***	0.607***
	(0.053)	(0.112)
GROWTHit	−0.299**	−0.198
	(0.134)	(0.143)
SGAit	−0.130	0.403
	(0.372)	(0.662)
R&Dit	−0.222	−3.997**
	(1.106)	(1.941)
LEVit	−0.506	−0.507
	(0.376)	(0.488)
BTMit	0.079	0.078
	(0.104)	(0.124)
DIVit	−0.394	0.070
	(0.751)	(0.981)
CAPEXit	0.606	1.385
	(0.848)	(0.893)
ADVit	−1.295	−1.134
	(1.286)	(2.168)
CASHit	0.167	0.269
	(0.293)	(0.419)
KZ-INDEXit	−0.047	−0.043
	(0.061)	(0.071)
CGOVit	0.049	0.028
	(0.064)	(0.062)
CONSTANT	−2.954***	−3.392***
	(0.414)	(0.857)
N	12,630	12,619
IND. FE	YES	NO
FIRM FE	NO	YES
ADJ. R^2	0.141	0.296
	(3)	(4)
	ADJ_ROAit	ADJ_ROAit
Panel B: 2nd stage regression: Abnormal CSR (instrumented) and ROA
ABN_CSR^2it (instrumented)	−0.043***	−0.033***
	(0.013)	(0.009)
NORM_CSRit	0.008***	0.004**
	(0.003)	(0.002)
ADJ_ROAit-1	0.339***	0.171***
	(0.018)	(0.015)
SIZEit	0.027***	0.015*
	(0.008)	(0.008)
GROWTHit	0.045***	0.028***
	(0.009)	(0.007)
SGAit	−0.068***	−0.365***
	(0.018)	(0.037)
R&Dit	−0.152***	−0.424***
	(0.058)	(0.107)
LEVit	−0.025	−0.025
	(0.021)	(0.023)
BTMit	−0.057***	−0.030***
	(0.006)	(0.006)
DIVit	−0.087*	−0.176***
	(0.045)	(0.053)
CAPEXit	0.082**	0.220***
	(0.042)	(0.044)
ADVit	0.032	0.078
	(0.069)	(0.115)
CASHit	0.011	0.0162
	(0.016)	(0.020)
KZ-INDEXit	−0.021***	−0.027***
	(0.003)	(0.004)
CGOVit	0.002	0.002
	(0.003)	(0.002)
N	12,630	12,619
IND. FE	YES	NO
FIRM FE	NO	YES
Sanderson-Windmeijer multivariate F test of excluded instruments	14.08***	18.63***
	(0.000)	(0.000)
Kleibergen-Paap underidentification test	19.81***	14.78***
	(0.000)	(0.000)
Anderson-Rubin Wald weak-instrument robust test	27.73***	36.00***
	(0.000)	(0.000)

This table shows the results of our instrumental variable regression analyses, which regress financial performance on normal and abnormal CSR. Here, we instrument abnormal CSR in the first stage with CSR_WC_it and use the instrumented fraction of abnormal CSR as our variable of interest in the second stage. CSR_WC_it is defined as the average word count of sustainability-related words per analyst in an earnings conference call within a SIC2 industry-year group. All other variables are as defined in Appendix 1. Industry-fixed effects are based on two-digit SIC codes. Standard errors reported in parentheses below the coefficients are clustered at the firm and year level. All variables are winsorized at the 1st and 99th percentile. Asterisks indicate significance levels (*** = 1%; ** = 5%; * = 10%).

Table A1. Variable definitions.

Variable	Definition
CSR_SCOREit	CSR_STRit – CSR_CONit
CSR_STRit	Total CSR strengths based on five rating categories of MSCI ESG STATS ratings data: community, diversity, employee relations, environment, and product
CSR_CONit	Total CSR concerns based on five rating categories of MSCI ESG STATS ratings data: community, diversity, employee relations, environment, and product
NORM_CSRit	NORM_CSR_STRit – NORM_CSR_CONit
NORM_CSR_STRit	Predicted values retrieved from Equation (1a)
NORM_CSR_CONit	Predicted values retrieved from Equation (1b)
ABN_CSRit	ABN_ CSR_STRit – ABN_CSR_CONit Abnormal CSR performance measured by the difference between the residuals from the cross-sectional regressions (per size deciles and fiscal years) on CSR performance strengths (CSR_Strit) and concerns (CSR_Conit)
ABN_CSR_STRit	CSR_STRit – NORM_CSR_STRit Residuals from the cross-sectional regressions (per size deciles and fiscal years) on CSR performance strengths (CSR_STRit)
ABN_CSR_CONit	CSR_CONit – NORM_CSR_CONit Residuals from the cross-sectional regressions (per size deciles and fiscal years) on CSR performance concerns (CSR_CONit)
ROAit	Income before extraordinary items scaled by total assets
BTMit	Book-to-market ratio measured as book value of equity scaled by market value
LEVit	Sum of long-term debt and debt in current liabilities scaled by total assets
DIVit	Ratio of dividends on common stocks to book value of common equity
CAPEXit	Capital expenditure scaled by total assets
ADVit	Ratio of advertising expenses to total assets
SGAit	Ratio of SG&A expenses to sales
CASHit	Ratio of cash and short-term investments to total assets
KZ-Indexit	Calculated using the procedure presented in Lamont et al. (2001)
CGOV	Sum of corporate governance strengths minus concerns
SIZEit	Natural logarithm of sales
GROWTHit	Ratio of sales to lagged sales minus 1
R&Dit	Ratio of research and development expenses to sales
ADJ_ROAit	Two-digit SIC industry mean-adjusted ROAit, where ROAit is measured as income before extraordinary items, scaled by lagged total assets
CSR_WCit	Instrument variable defined as the average word count of sustainability-related words per analyst in an earnings conference call within a SIC2 industry-year group. CSR-related questions are identified using a ∼400 item list of common CSR terms (e.g., biodiversity, carbon emissions, waste management) based on the GRI standards

Lamont, O., Polk, C., & Saaa-Requejo, J. (2001). Financial constraints and stock returns. Review of Financial Studies, 14(2), 529–554. https://doi.org/10.1093/rfs/14.2.529

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Data Availability Statement

The data that support the findings of this study are available from public sources as described in the manuscript. Restrictions apply to the availability of these data, which were used under license for this study.