Corporate social performance, financial performance and institutional ownership in Canadian firms

Abstract

This study examines the relationship of corporate social performance (CSP) to financial performance (FP) and institutional ownership. We perform our empirical analyses on a large-sample of publicly held Canadian firms and use a novel independent measure of CSP. Based on tests utilizing four years of panel data, we found no significant relationship between a composite measure of firms’ CSP and FP. However, we found significant relationships between individual measures of firms’ CSP regarding environmental and international activities and FP. Our findings indicate a significant relationship between firms’ composite CSP measure and the number of institutions investing in firms’ stock. In addition, we found significant relationships between firms’ CSP ratings regarding their international activities and product quality and the number of institutions investing in firms’ stock. These findings, while subject to the limitations inherent in the use of specific CSP measures, provide mixed support for the business case for CSP.

Keywords:

• Corporate social performance
• Institutional ownership
• Financial performance

Acknowledgements

We acknowledge participants at the 2002 American Accounting Association Professionalism and Ethics Symposium, the University of Central Florida Accounting Research Workshop, the 2002 CSEAR Summer Workshop, the editor, and two anonymous reviewers for their helpful comments.

Notes

1 Michael Jantzi Research Associates Inc. also has a longstanding research partnership with KLD. They exchange research and have collaborated on numerous research projects. Michael Jantzi Research Associates Inc. is also a member of the Sustainable Investment Research International Group, a coalition of ten research organizations devoted to the global advancement of social investment. The CSID ratings of Canadian firms are similar to those found in the KLD for U.S. firms.

2 Although our use of the CSID index is new to CSP research in accounting, the use of third party measures of firm performance is common in empirical accounting research (e.g. bond ratings, financial analyst recommendations, Council on Economic Priority ratings).

3 The term “panel data” refers to the fact that we use a multi-year sample consisting of the same firms each year. Panel data analysis takes into consideration this pattern of multiple observations for each firm. Panel data analysis is an improvement over pooled, cross-sectional analyses that assume that each observation is independent.

4 Waddock and Graves (1994) question the practice of netting a corporation's strengths and weaknesses. To further examine this relationship, panel data models using each dimensions strength and weakness as separate independent variables were run. Consistent with the results in Table 5, the weakness dimensions of environment was marginally significantly related to ROE and ROA (p < .10), the strength dimensions of environment was marginally significantly related to ROA (p < .10) and the weakness dimensions of international was significantly related to ROA (p < .05).

5 Again, to further examine this relationship, panel data models using each dimensions strength and weakness as separate independent variables were analyzed. Consistent with the results in Table 9, the strength dimensions of international (p < .01) and product (p < .05) were significantly related to financial performance.