Corporate Social Responsibility, Product Strategy, and Firm Value

• Date: 01 April 2020
• Author: Eunho Cho,Albert Tsang
• DOI: http://doi.org/10.1111/ajfs.12291
• Published date: 01 April 2020

Corporate Social Responsibility, Product

Strategy, and Firm Value

Eunho Cho*

Accounting and Finance Department, North Carolina A&T State University, United States

Albert Tsang

School of Accounting and Finance, Hong Kong Polytechnic University, Hong Kong

Received 30 July 2019; Received in current form (1

st

revision) 30 January 2020; Accepted 10 February 2020

Abstract

This study examines the role of a firm’s product strategy on the relationship between corpo-

rate social responsibility (CSR) and firm value. Using a sample of 1287 firm-year observa-

tions of Korean listed manufacturing firms from 2005 to 2016, we find that a firm’s product

differentiation strategies strengthen the association between CSR and firm value, whereas

cost-leadership strategies weaken such a relationship. Our findings demonstrate the impor-

tance of attaining a strategic fit between CSR activities and product strategies, and highlight

the importance of considering a firm’s product strategy when evaluating a firm’s CSR invest-

ment.

Keywords Corporate social responsibility; Cost leadership; Differentiation; Firm value; Strate-

gic fit

JEL Classification: D64, G32, M14

1. Introduction

In recent decades, managers have placed increasing importance on their firms ’ cor-

porate social responsibility (CSR) activities (Porter and Kramer, 2006). In the 2013

Accenture CEO survey on sustainability, approximately 93% of the CEO respon-

dents stated that CSR activities were a crucial strategy for a firm’s success, and

approximately 95% of the Global 250 firms indicated that they published CSR

reports (Accenture, 2014). Given the perceived importance of CSR, numerous stud-

ies have explored whether CSR is related to financial performance. However, the

empirical results are somewhat mixed (Cochran and Wood, 1984; Akpinar et al.,

2008; Hull and Rothenberg, 2008; Aguinis and Glavas, 2012). To clarify the rela-

tionship between CSR and financial performance, researchers have called for studies

*Corresponding author: Accounting and Finance Department, North Carolina A&T State

University, 1601 East Market Street, Greensboro, NC 27411, United States. Tel: +1-336-285-

3357, email: echo@ncat.edu.

Asia-Pacific Journal of Financial Studies (2020) 49, 272–298 doi:10.1111/ajfs.12291

272 ©2020 Korean Securities Association

of possible omitted contingency factors (Ullmann, 1985; Orlitzky et al., 2003; Luo

and Bhattacharya, 2006).

CSR activities are also a popular means of achieving product differentiation

(Porter, 1991; Siegel and Vitaliano, 2007; Boehe and Cruz, 2010). Thus, based on

the strategic fit perspective of configuration theory (Vorhies and Morgan, 2003; Kat-

sikeas et al., 2006), we argue and predict that a proper strategic fit or strategic alli-

ance between a firm’s product differentiation and CSR strategies will enhance the

relationship between CSR and firm value. Accordingly, the objective of this study is

to examine whether and how a firm’s product strategy (i.e., differentiation or cost

leadership) moderates the relationship between CSR and firm value.

Following the literature, we measure product strategy using the selling, general,

and administration (SGA) expenses divided by total sales, SGA/SALES (Berman

et al., 1999; Seifert et al., 2004; Balsam et al., 2011), sales over the cost of goods

sold (COGS), SALES/COGS (Balsam et al., 2011), and industry-adjusted relative

gross margin (David et al., 2002). A higher (lower) ratio is more likely to be related

to a differentiation (cost leadership) strategy (Banker et al., 2014; Robinson et al.,

2015). We use Korea Economic Justice Institute (KEJI) CSR scores, which are

widely used in the literature (e.g., Choi et al., 2010; Oh et al., 2011; Choi et al.,

2013; Cho and Chun, 2016), to measure CSR performance. Following prior studies

(Dowell et al., 2000; Servaes and Tamayo, 2013; Ba~

nos-Caballero et al., 2014), we

use market performance measures such as Tobin’s Q(TOBINQ) to measure firm

value.

Our sample comprises 1287 firm-year observations for Korean-listed manufac-

turing companies with KEJI CSR scores from 2005 to 2016. Consistent with our

prediction, we find that a firm’s product differentiation (cost leadership) strategy

strengthens (weakens) the relationship between CSR and firm value. Thus, our

study adds to the literature by providing empirical evidence to support the argu-

ment that a firm’s product strategy can play an important moderating role in the

relationship between CSR and firm value. That is, our finding suggests that the

proper integration of CSR into an organization’s strategy can contribute to enhanc-

ing the efficient allocation of its resources to maximize shareholders’ wealth. Given

that studies have mostly overlooked the concept of strategic fit when investigating

the link between CSR and firm value, this evidence provides a new perspective on

the CSR–firm value relationship.

The literature documents that nation-level institutional factors (such as culture

and investor protection) have significant effects on the shaping of firms’ CSR prac-

tices and their perceived value to investors (Van der Laan Smith et al., 2005; Burritt

et al., 2010; Van der Laan Smith et al., 2010; Ioannou and Serafeim, 2012; Boubakri

et al., 2016; Cahan et al., 2016; El Ghoul et al., 2017). We were interested to note

that the characteristics of the CSR activities of Korean firms differ somewhat from

those of firms in Western and other Asian countries (Welford, 2005; Witt and Red-

ding, 2012). For example, Dhaliwal et al. (2012) report that Korea and the United

States rank 25th and 23rd, respectively, among the 31 countries included in their

CSR, Product Strategy, Firm Value

©2020 Korean Securities Association 273