New research from the Kelley School of Business shows firms that are best-in-class in their industry in terms of corporate social responsibility receive higher valuations in financial markets.
“There is an ongoing debate regarding the relation between corporate social responsibility (CSR) and a firm’s financial performance,” explains Amrou Awaysheh, assistant professor of operations management. “The link between CSR and profitability is muddy: Are companies more profitable because they invest in CSR, or do they invest in CSR because they are more profitable? This underlying tension leaves managers unsure about how much to invest in CSR, and shareholders and potential investors unsure about whether CSR investments create value. Our research gives managers and investors more insight into this relation.”
The team of Kelley School researchers, including Awaysheh, Assistant Professor of Finance Jared Wilson, Professor of Finance Randy Heron and Associate Professor of Finance Tod Perry, analyzed CSR data for thousands of firms over an 11-year period.
They found while “best-in-class” CSR firms (those firms rated in the top 10 percent of their industry) tend to be more profitable, there is no evidence that the relation is causal when controlling for other factors that contribute to profitability.
“The data does not suggest that simply increasing CSR causes greater profitability, but we do find that investors place a higher value on firms that are best-in-class in terms of CSR,” said Wilson.
Wilson points out that the higher valuations “likely reflect the increased emphasis that many investors, including large institutions, place on corporate social responsibility, as more and more include CSR as an important investment screening criteria.”
“The concept of CSR has become more accepted in the financial markets,” said Perry. “In the past, investors may have viewed managers’ decisions to be more socially responsible as a questionable use of funds that belong to shareholders. Our findings show that financial markets do not on balance penalize socially responsible corporate actions. In other words, our results do not suggest that social responsibility has supplanted the principle of shareholder wealth maximization.”
“Managers should always focus on creating value for shareholders,” said Heron. “CSR can coexist with the concept of value maximization as long as companies do not go overboard on CSR and impair the company’s ability to compete successfully in product markets.”
To see the full study, click here.