Corporate social responsibility, location, and corporate financial performance

Abstract

Corporate Social Responsibility (CSR) is considered as a one of the debated topic of the corporate study over the last couple of decades. Corporate adopts this concept to its activities by also focusing on something beyond economic, technical, or legal requirements. Specifically, it expands corporate focus to the societal matter. Substantial studies have endeavored to examine its relation to corporate performance. However, the conclusion has not been drawn unanimously. Supporters have believed that CSR activities turn appreciative result to corporate financial performance, while naysayers have argued that it always comes at the expense. Substantial studies have found that the different corporate emphasis on CSR could be explained by the difference of geographical context. However, the handful empirical study sheds light on the direct linkage between CSR and geography. Besides none of the study tap into the difference of the societies occupying the same country, united under the same federal government. Thus, the primary purpose of this study is to examine the relation between CSR and corporate geographical background. Specifically, there are two research questions 1) Does corporate geography matter for CSR score? and 2) Does geographical proximity affect CSR score? CSR-Corporate location relation can be hypothesized from the evidence that the asymmetric information problem varies across the country and CSR has been proven as an instrument to alleviate this problem by promoting transparency and streamlining information transmission. Thus, the CSR level varies upon corporate location. This study selects samples across the U.S. listed firms during 1995-1997. CSR data are obtained from KLD Research and Analytics, Inc, while corporate location, represented by headquarters, is based on Metropolitan Statistical Area (MSA). To address the 1st question, the joint significance test is used to contemplate whether the explanatory power of an equation reduces significantly when the entire geographical variables are excluded. For the latter question, this study classifies the sample firm based on its distance to the top metropolitans and examines the difference of CSR between “Urban” and “Rural” firms. As a result, the study finds that CSR can be explained by their locations. Rural firms commit greater CSR in order to alleviate their information asymmetric issue. In addition, this study examines these questions for the seven different attributes of CSR, try to incorporate religiosity factors, and address possible causality effect. Based on corporate financial performance (CFP) perspective, this study also uses corporate location variable addressing endogeneity effect of CSR-CFP relation. This study will be beneficial in the several meaningful ways. First, it focuses on the different societies under the same country whiles the previous studies merely on the country level. Second, CSR score can be computed from both “plain-vanilla” and “Shareholder-weighted” techniques to alleviate the “stakeholder misalignment”. Third, Since CSR is hardly measured instantly. Thus, this study will encourage using distinctive corporate location to signify its performance. Lastly, since geographical location is fixed and more likely to be exogenous. Therefore, benefit of CSR to corporate performance is even clearer when corporate location is incorporated as instrumental variable address endogeneity problem.