Corporate Social performance and Financial Characteristics

Abstract

Whereas firms traditionally have been evaluated solely on financial criteria, contemporary firms are also evaluated on various non-financial criteria, including Corporate Social Performance (CSP). Such data is useful in the pursuit of evidence of a relationship between CSP and various financial characteristics, including financial performance. Evidence on such relationships is valuable from many perspectives. It is valuable to managers who seek to improve their understanding of the ways in which CSP interacts with firm characteristics, it is valuable to investors who seek to improve their understanding of how CSP relates to financial asset characteristics, and ultimately it is valuable to regulators who seek to improve their understanding of the firms financial incentive to self-regulate on corporate social responsibility issues. This paper presents a cross-sectional analysis comparing environmental, social and corporate governance performance with financial characteristics of 237 Australian firms over the August 1997 to July 2003 period. The analysis allows for some heterogeneity in CSP-financial characteristics relationships related to company size, trading history and industry, which provides valuable additional information on such relationships. Findings indicate that the financial incentive to self-regulate on environmental criteria is weak and contingent on industry. The financial incentive to self-regulate on social criteria is marginally stronger and less contingent on industry. The financial incentive to self-regulate on governance criteria is very strong across the board, though it is particularly strong within the banking, diversified financials, insurance and telecommunications industries. This is indicated both by a significant positive association between governance and financial performance and very strong significant negative association between governance and risk. Acknowledgements: The authors are grateful to Corporate Monitor and the Securities Industry Research Centre of Asia-Pacific (SIRCA) for supplying data and support.Corporate environmental performance, corporate social performance, corporate governance performance