The Relationship Between Corporate Social Responsibility and Corporate Financial Performance in Korea

ABSTRACT

This study examines the relationships between corporate social responsibility (CSR) and corporate financial performance (CFP) for the period 2004–2010 in Korea. This study performs difference generalized method of moments (GMM) estimation on a dynamic panel model. The results for the entire industry show CSR has a positive effect on CFP in Korea, and the stakeholder theory seems valid. Industry analysis shows different results by each industry’s characteristics. The results also reveal the effect of CSR on CFP did not increase after the global financial crisis. The results suggest companies should improve CFP by taking a strategic approach to CSR.

KEY WORDS:

• corporate social responsibility
• financial performance
• GMM
• financial crisis
• Korea

Acknowledgments

The authors thank Won-Kyu Kim, Jongku Kang, Eun G. Park, and two anonymous referees for very helpful comments and suggestions. Any remaining errors are the authors’ responsibility.

Notes

1. The theme “green growth” became an international agenda as in the Organisation for Economic Co-operation and Development (2009a, 2009b, 2011), United Nations Environment Programme (2008), and World Bank (2012).

2. According to Margolis and Walsh (2003), 109 of 127 studies posit CSR Granger-causes CSP.

3. See Dahlsrud (2008) for an overview of CSR definitions. Dahlsrud (2008) develops five CSR dimensions through a content analysis of existing CSR definitions and concludes that the confusion is not so much about how CSR is defined, as about how CSR is socially constructed in a specific context.

4. The computation expression of ROIC is (NOPAT/IC)$\times$100. The NOPAT is operating profit$\times$(1 – corporate income tax rate). IC is a sum of tangible assets and net working capital, which is input in business activity. IC = total assets – investment asset – accounts payable – long-term trade payable. Thus it is a clearer indicator to study the relationship between CSR and CFP.

5. Other possible corporate size variables include sales and the number of employees as in Hillman and Keim (2001), King and Lenox (2001), Ruf et al. (2001), and Waddock and Graves (1997).

6. The empirical analysis with control variable debt ratio has a similar result.

7. Diagnostic J-statistics show that the instrument variables used for the difference GMM estimation are appropriate for all of the cases in our study.

8. Energy intensive industries refer to industries that consume relatively more energy resources than other industries in the manufacturing sector (Song and Oh 2015, p. 123). Choi and Oh (2014) list pulp and paper, petroleum chemicals, and basic metals and nonferrous metal as energy-intensive industries. Liddle (2012) adds the nonmetallic minerals industry to them.