Can Excellence in Corporate Social Performance Improve Investors' Financial Assessments and Credibility of Managers' Forecasts?

• DOI: http://doi.org/10.1111/ajfs.12057
• Author: Doocheol Moon,Andres Guiral,Hyunjung Choi
• Published date: 01 August 2014
• Date: 01 August 2014

Can Excellence in Corporate Social

Performance Improve Investors’ Financial

Assessments and Credibility of Managers’

Forecasts?*

Andres Guiral

School of Business, Yonsei University

Doocheol Moon**

School of Business, Yonsei University

Hyunjung Choi

Yonsei Business Research Institute, Yonsei University

Received 13 November 2013; Accepted 5 March 2014

Abstract

In contrast to the extensive archival research on the relationship between corporate social per-

formance and financial performance, behavioral studies are scarce. We explore whether excel-

lence in corporate social performance affects investors’ judgments of financial assessments (i.e.,

future profitability, liquidity, and financial risk) and credibility of management’s forecasts. We

define “excellence in corporate social performance” as the case of a firm simultaneously showing

high and stable social performance and being provided with professional assurance on social

activity reporting. We design a 2 92 experimental design with two control groups by manipu-

lating corporate social performance (high versus low) and assurance (present versus absent), in

which investors are asked to provide their judgments on the financial status of the firm. Our

results indicate that corporate social performance excellence has an impact on both investors’

financial assessments and their reliance on management-forecasted information. Additional

*Acknowledgements: The authors are grateful to participants at the 36th Annual Congress of

the European Accounting Association, the 28th Accounting Seminar at Yonsei University and

the Accounting Seminar at Nanyang Business School. This work was supported by the

National Research Foundation of Korea Grant funded by the Korean Government (NRF-

2012-S1A3A2-2012S1A3A2033412). Andr

es Guiral acknowledges financial contribution from

the Spanish Ministry of Innovation and Science (research projects SEJ2004-00791ECON,

SEJ2007-62215/ECON/FEDER, SEJ 2006-14021, ECO 2010-17463 ECON-FEDER, ECO2010-

21627).

**Corresponding author: Doocheol Moon, Yonsei University, School of Business, 50 Yonsei-

ro, Seodaemun-gu, Seoul 120-749, Korea. Tel.: +82-2-2123-5458, Fax: +82-2-2123-8639,

email: dmoon@yonsei.ac.kr.

Asia-Pacific Journal of Financial Studies (2014) 43, 530–555 doi:10.1111/ajfs.12057

530 ©2014 Korean Securities Association

analysis shows that corporate social performance excellence is perceived as having a significantly

higher impact on investors’ financial assessments and their credibility of managers’ forecasts in

comparison with temporary corporate social performance. Therefore, we find support for the

argument that only the combination of superior and stable corporate social performance and

reliable corporate social responsibility disclosure pays off.

Keywords Assurance services; Corporate social performance; Corporate social responsibility;

Forecasts; Investors

JEL Classification: M14, M40, M41

1. Introduction

The link between corporate social performance (CSP) and corporate financial per-

formance has been intensely examined by the accounting, finance, strategic, market-

ing, and related business ethics fields. Different theories suggest that corporate

social responsibility (CSR)

1

activities can contribute to improve the relationship of

the company with stakeholders, influencing financial performance positively (Free-

man, 1984; McWilliams and Siegel, 2001; Orlitzky et al., 2003; McWilliams et al.,

2006).

2

However, in spite of substantial previous archival research on the topic,

results assessing the relationship between CSP and financial performance are far

from being consistent (Peloza, 2006, 2009; Hull and Rothenberg, 2008; Orlitzky,

2008). While there appears to be empirical support for the view that CSP is posi-

tively related to financial performance, a large number of studies find mixed and

even negative evidence of this link.

3

Therefore, results from archival research seem

to suggest that CSP can add value to the firm only under certain conditions (Bar-

nett and Salomon, 2006, 2012; Servaes and Tamayo, 2013).

In contrast to the extensive archival research, behavioral studies on the CSP–finan-

cial performance link are scarce. Indeed, there is a need for further behavioral research

in order to answer unresolved CSR questions and complement archival research find-

ings (Moser and Martin, 2012). In this regard, it is argued that behavioral research

can help improve our understanding of the motivations for, and consequences of,

1

While the term CSR refers to the firm’s involvement in social and environmental activities,

CSP refers to the degree of achievement of social and environmental goals as perceived by

external stakeholders. CSP is usually measured and provided by independent third parties

such as KLD Research and Analytics, Fortune MAC or SiriPro.

2

The stakeholder theory, transaction cost economics, and the resource-based view are the most

salient theories suggesting a positive impact of CSR on financial performance.

3

For example, Margolis and Walsh (2003) report that in their review of the 109 published

archival articles, only 54 studies document a positive impact of CSR efforts on financial per-

formance, while seven studies show a negative relation. More recently, some studies argue

that CSR may even contribute to improve the financial performance of firms involved in

controversial business, such as tobacco, alcohol, nuclear power, military weapons, etc. (Cai

et al., 2012; Blanco et al., 2013).

Excellence in CSP

©2014 Korean Securities Association 531