A good image brings financial rewards, write Steven Cahan, Chen Chen, Lily Chen and Nick (Nhut H. Nguyen

Cahan, Steven

Chen, Chen

Chen, Lily

Nguyen, Nhut H. (Nick)

LSE Research Online

12/15/2015Some firms actively use CSR to improve their image in thepublic mediablogs.lse.ac.uk /businessreview/2015/12/15/some-firms-actively-use-csr-to-improve-their-image-in-the-public-media/The business press is an important information intermediary in capital markets. For example, priorresearch shows that more favorable media coverage can reduce a firm’s cost of capital. This raises the questionwhether firms can influence their media image. In a recent study, we examine whether firms that act more sociallyresponsible receive more favorable media coverage.Our study consists of three parts. In the first part, we examine whether better corporate social responsibility (CSR)performance leads to a more positive media image. In the second part, we consider whether firms actively managetheir CSR to improve their media image. In the third part, we consider whether better CSR performance and a morefavorable media image is associated with positive economic benefits in terms of a lower cost of capital and higherfirm value.To conduct our tests, we develop a measure of media favourability using data from Thomson Reuters NewsAnalytics database. Thomson Reuters analyzes the linguistic content of every news item released by US firms inreal time using a knowledge-driven neural network. The output of this process is three probability scores that reflectthe positive, negative, and neutral tone or sentiment of the news item. To compute a measure of overall mediafavourability for each year, we aggregate the positive sentiment scores from all news items about the firm and wesubtract the aggregated negative sentiment scores. This difference is divided by the total number of news itemsabout the firm in the year so we can compare our measure across firms.To measure CSR performance, we use data from the KLD (now MSCI ESG STATS) database which evaluates firmson multiple dimensions in several CSR areas including community, diversity, employee relations, environment,human rights, and product. Our US-based data cover 2003-2011 and include 12,749 firm-year observations.In our first analysis, we find a positive relation between CSR performance and media favorability, after controlling forother factors such as the firm’s size, returns over assets (ROA), leverage, idiosyncratic risk, and stock performance.In terms of the economic impact, a one standard deviation change in CSR performance is associated with aneight percent increase in the favourability of media coverage.A challenge we face as researchers is being able to show that firms actively manage their CSR performance in orderto improve their media image. In other words, firms might engage in CSR for other reasons (such as altruism) and afavorable media image might be an attractive side-benefit. To examine this issue, we show that firms with poorpublic images, such as tobacco firms, are more likely to engage in CSR to improve their media image. We alsoshow that when market-wide investor sentiment is low, firms are more likely to use CSR to improve their mediaimage to counteract investors’ pessimistic outlook.Finally, firms that actively manage their CSR to improve their media image must obtain economic benefits;otherwise, there would be no incentive to engage in such activity. To examine this, we identify firms that had strongCSR performance and favorable media coverage. We use Tobin’s Q (which reflects the market-to-book ratio) tomeasure firm value and we estimate four measures of firms’ implied cost of capital. Our results indicate significantlyhigher firm value and significantly lower cost of capital for the high CSR performing firms that receive favorablemedia coverage. For example, for a firm at the 75th percentile in terms of CSR performance, a shift from low to highmedia coverage is associated with a 6.8 percent increase in firm value and a 9.4 percent decrease in cost of capital.While there is an extensive literature on CSR performance, we contribute to this literature by documenting apreviously unexplored incentive for engaging in CSR, i.e., active media management. Overall, our results suggest1/2that the media slants their reporting in favor of good CSR firms, giving firms an opportunity to enhance their mediaimage by improving CSR performance.♣♣♣Notes:This article is based on the authors’ paper Corporate social responsibility and media coverage, Journal ofBanking & Finance, Volume 59, October 2015, Pages 409–422.This post gives the views of its authors, not the position of LSE Business Review or the London School ofEconomics.Featured image credit: Tan_Suee_Chieh_launches_OrangeAid, NTUC Income’s new Corporate SocialResponsibility fund. Wikimedia Commons ntucincomeSteven Cahan is a Professor of Financial Accounting at the University of Auckland BusinessSchool. His research interests are in the areas of auditing and financial reporting, and he haspublished over 60 academic research articles. Steven is a Fellow of Chartered AccountantsAustralia New Zealand and is a past Editor of Accounting & Finance and the Pacific AccountingReview. His PhD is from the University of Colorado, Boulder. Chen Chen is a senior lecturer in the Department of Accounting at Monash University. Hisresearch interests are in the areas of financial reporting, auditing, and corporate governance. Hepreviously worked at the University of Auckland Business School after he obtained his PhD fromChinese University of Hong Kong in 2011. His research has been published in numerousacademic journals including The Accounting Review, Journal of Banking and Finance , andJournal of Business Ethics. Lily Chen is a lecturer in Accounting at the University of Auckland Business School. Her PhDwas completed at the University of Auckland in 2012 and was placed on the Dean’s List. Herresearch interests are in the areas of financial reporting and disclosure, financial analysts,corporate governance, and corporate social responsibility. She is the director of BCom (Hons)and MCom programmes in Accounting and Finance. Nick (Nhut H. Nguyen)  is an Associate Professor of Finance at Massey University, Albany. Hisresearch interests cover corporate governance, market microstructure and market liquidity. Hepreviously taught at the University of Auckland Business School where he won the NewResearch Excellence Award in 2012. His research has been published in many internationallyrespected journals including Review of Financial Studies , Journal of Banking and Finance , andJournal of Financial Markets. Copyright © 2015 London School of Economics2/2

Some firms actively use CSR to improve their image in the public media

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