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European Business Review
Corporate social responsibility and economic performance in the top British companies: are they linked?
George Balabanis Hugh C. Phillips Jonathan Lyall
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In the modern commercial era, companies and

their managers are subjected to well publicised pressure to play an increasingly active
role in society so called Corporate social
responsibility. It has been argued that an
element in this development is simply enlightened self-interest in that social responsibility
enhances corporate image and financial performance. To date the evidence to support
this thesis derives from North America. Outside this continent evidence for any relationship is sparse. This study investigates the
claims that social responsibility and economic
performance are linked and attempts to test
the relationship within a UK context.
This study will initially attempt to define
the concept of corporate social responsibility
and to examine its guiding principles. Subsequently, the available empirical research into
the link between corporate social responsibility and economic performance will be evaluated and research hypotheses will be formulated. Finally, the research method, measures
used, findings and conclusions will be presented.
Corporate social
responsibility and
economic performance
in the top British
companies: are they
linked?
George Balabanis
Hugh C. Phillips and
Jonathan Lyall
The authors
George Balabanis is a Lecturer at the European Business
Management School, University of Wales Swansea,
Swansea, UK.
Hugh C. Phillips and Jonathan Lyall are at the Leicester
Business School, DeMontfort University, Leicester, UK.
Abstract
This paper investigates the relationship between corporate
social responsibility (CSR) and the economic performance
of corporations. It first examines the theories that suggest
a relationship between the two. To test these theories,
measures of CSR performance and disclosure developed by
the New Consumer Group were analysed against the
(past, concurrent and subsequent to CSR performance
period) economic performance of 56 large UK companies.
Economic performance included: financial (return on
capital employed, return on equity and gross profit to sales
ratios); and capital market performance (systematic risk
and excess market valuation). The results supported the
conclusion that (past, concurrent and subsequent) economic performance is related to both CSR performance
and disclosure. However, the relationships were weak and
lacked an overall consistency. For example, past economic
performance was found to partly explain variations in
firms involvement in philanthropic activities. CSR disclosure was affected (positively) by both a firms CSR performance and its concurrent financial performance. Involvement in environmental protection activities was found to
be negatively correlated with subsequent financial
performance. Whereas, a firms policies regarding
womens positions seem to be more rewarding in terms of
positive capital market responses (performance) in the
subsequent period. Donations to the Conservative Party
were found not to be related to companies (past, concurrent or subsequent) financial and/or capital performance.
Definitions
Corporate social responsibility (CSR) has
recently been the subject of increased academic attention. While social responsibility has
figured in commercial life over the centuries,
in the modern era increasing pressure has
been placed on corporations to play a more
explicit role in the welfare of society. Although
the topic rose to prominence in the 1970s
(Carroll, 1979; Wartick and Cochran, 1985),
the first publication specifically on the field
dates back to 1953, with Bowens Social
responsibilities of the businessman. In this
work Bowen argues that industry has an
obligation to pursue those policies, to make
those decisions, or to follow those lines of
actions which are desirable in terms of the
objectives and values of society (Bowen,
1953, p. 6). Epstein (1987), however, argues
that the concept of specific business ethics can
be traced further back to certain academics
and businessmen in the nineteenth century
who promulgated the belief that private
business is a public trust.
Bowen (1953) sets the scene in this field by
suggesting that the concept of specifically
corporate social responsibility emphasises
that:
businesses exist at the pleasure of society
and that their behaviour and methods of

Volume 98 Number 1 1998 pp. 2544
MCB University Press ISSN 0955-534X
25
Corporate social responsibility and economic performance
George Balabanis, Hugh C. Phillips and Jonathan Lyall
Volume 98 Number 1 1998 2544
enough to allow departures from this narrow

path.
Social responsibility is also seen as a consequence of and an obligation following from
the unprecedented increase of firms social
power (as tax payers, recruiters, etc.) (Davis,
1975). Failure to balance social power with
social responsibility may ultimately result in
the loss of this power and a subsequent
decline of the firm (Davis, 1975).
Another school of thought sees social
responsibility as a contractual obligation firms
have towards society (Donaldson, 1983). It is
society in the first place that has permitted
firms to use both natural and human
resources and has given them the right to
perform their productive functions and to
attain their power status (Donaldson, 1983).
As a result, society has an implicit social
contract with the firm. Thus, in return for the
right to exploit resources in the production
process, society has a claim on the firm and
the right to control it. The specifics of this
contract may change as social conditions
change but this contract in general always
remains the basis of the legitimacy of the
demand for or assertion of the need for CSR
(Epstein, 1987).
A growing number of scholars take the
view that firms can no longer be seen purely as
private institutions but as social institutions
instead (Frederick et al., 1992; Freeman,
1984; Lodge, 1977). The benefits flowing
from firms need to be shared collectively. This
thesis is similar to the stakeholders model
(Freeman, 1984) and claims that a firm is
responsible not only to its shareholders
(owners) but to all stakeholders (consumers,
employees, creditors, etc.) whose contribution
is necessary for a firms success. Thus, CSR
means that a corporation should be held
accountable for any of its actions that affect
people, communities and the environment in
which those people or communities live
(Frederick et al., 1992).
Carroll (1979) suggests that CSR is
defined as the economic, legal, ethical and
discretionary demands that society places on
business. Similarly, Zanies conceptualised
CSR as the degree of fit between societys
expectations of business and the ethics of
business. He argues that CSR is really nothing
more than another layer of managerial
responsibility resulting from the evolution of
capitalism. An interesting twist to the argument is provided by Tuzzolino and Armandi
(1981) who provide a motivational theory of
operation must fall within the guidelines

set by society; and
businesses act as moral agents within
society.
Wood (1991) expanded these ideas, encapsulating them into three driving principles of
social responsibility, which are that:
(1) business is a social institution and thus
obliged to use its power responsibly;
(2) businesses are responsible for the outcomes relating to their areas of involvement with society; and
(3) individual managers are moral agents
who are obliged to exercise discretion in
their decision making.
In general, the social responsibilities of a firm
seem to arise from the intersection (and
compatibility) of the political and cultural
systems with the economic system (Jones,
1983). However, Friedman (1970) argued
that the successful functioning of our society
depends on the role specialisation of its institutions (or systems). According to him the
corporation is an economic institution and
thus should specialise in the economic sphere;
socially responsible behaviour will be rectified
by the market through profits. In Friedmans
(1970) view business has only one social
responsibility and that is to maximise the
profits of its owners (to protect their property
rights). Organisations are seen purely as legal
entities incapable of value decisions. A manager who uses a firms resources for non-profit
social purposes is thought to be diverting
economic efficiency and levying an illegal
tax on the organisation. Opponents (Frederick et al., 1992) of this view, challenge the very
foundations of Friedmans thesis the economic model. They claim that the economic
model and role specialisation of institutions
(or systems) are not working as suggested.
This comes as a result of the rise of oligopolies
in certain sectors; the separation of ownership
and management; governments involvement
in the economy and conversely industrys
involvement in the political process through
lobbying. In addition, if corporations do not
adopt social responsibility, government
with its potential for inefficiency and insensitive bureaucratic methods may be forced to
step in. With respect to Friedmans argument
that the legal conception of corporations
articles and memorandums of associations
limits a firms involvement solely to economic
roles, it can be claimed that they are broad
26
organisational social response based on

Maslows hierarchy of needs. CSR is the
fulfilment of a firms internal and external
self-actualisation needs which are located on
the top of their organisational needs pyramid.
According to this view, firms adopt CSR after
they have satisfied three earlier layers of needs
(which include: physiological or survival
needs fulfilled by corporate profits; safety
needs such as dividend policy, conglomeration and competitive position; and affiliative
needs such as participation in trade association, lobby groups, etc.). Epstein (1987)
attempted to differentiate business ethics
and CSR and to incorporate them into a
strategic process. According to him business
ethics refer to issues and dilemmas related to
the morality of organisational actions or
decisions. CSR focuses more on the consequences of organisational actions. He defined
CSR as the discernment of issues, expectations and claims on business organisations
regarding the consequences of policies and
behaviour on internal and external stakeholders (Epstein 1987, p. 101). Angelidis and
Ibrahim (1993) defined CSR as corporate
social actions whose purpose is to satisfy
social needs. They developed an equilibrium
theory based on social demand and supply,
identifying a set of factors that affects them
(social supply and demand).
Thus, opinions differ in terms of the basis
or scope of CSR and even the very definition
of the term. As a consequence different
aspects of a firms operations can be seen to
come under its sway depending on the
stance one adopts. As has been shown, what
can be conceived as social responsibility can
range from simply maximisation of profits, to
satisfaction of stakeholders social needs, or
fulfilment of social contractual obligations,
fulfilment of a firms needs, achievement of a
social equilibrium, etc. depending on the
stance taken.
While academic debate abounds at the
theoretical level, at the operational level
insights are more sparse. Schwarts and Dahl
observed that socially acceptable behaviour of
North American firms at the time of writing
the 1970s included:
disclosure of information to shareholders;
disclosure of the board of directors;
monopolistic behaviour (predatory pricing,
etc.);
equality of treatment for minorities;
profit sharing;
environmental protection;
ethics in advertising; and

social impact of technology.
However, according to Vyarkarnam (1992),
many of these have now been regulated by
statute. Present day concerns have changed
focus. He found that current CSR concerns,
which are in substance the same for both
North American and the UK firms, encompass such areas as:
environmental protection (e.g. reduction of
emissions and waste and the recycling of
materials);
philanthropy (donating to charities, etc.);
involvement in social causes (involving
anything from human rights to AIDS
education);
urban investment (working with local
government to regenerate small businesses
and the inner city environment generally);
and
employee schemes (higher standards of
occupational health and safety, good standard of staff treatment, job-sharing, flexitime, etc.).
The relationship between corporate

social responsibility and economic
performance
Commentators have argued both for and
against the view that corporate social responsibility is enlightened economic self-interest.
The controversy at the theoretical level will be
considered here, while the empirical evidence
for and against will be presented later. Similarly, in order to clarify what is a complex and
at times convoluted debate, the discussion will
be divided into the relationships suggested
with:
concurrent and subsequent (to CSR)
economic performance; and
past economic performance.
Relationship with concurrent and
subsequent (to CSR) economic
performance
Those who have theorised that a negative
relation exists between social responsibility
and economic performance have argued that a
high investment in social responsibility results
in additional costs. According to McGuire et
al. (1988, p. 855) the added costs may result
from actions such as making extensive charitable contributions, promoting community
development plans, maintaining plants in
economically depressed locations and
27
establishing environmental protection procedures. These costs might put a firm at an

economic disadvantage compared to other,
less socially responsible, firms.
In contrast, others have argued the case for
a positive association. McGuire et al. (1988)
cite the argument that a firm perceived as high
in social responsibility may face relatively
fewer labour problems or perhaps customers
may be more favourably disposed to its products. Alternatively, CSR activities might
improve a firms reputation and relationship
with bankers, investors and government
officials. Improved relationships with them
may well be translated to economic benefits.
According to Spicer (1978a,b), Rosen et al.
(1991), Graves and Waddock (1994) and
Pava and Krausz (1996), a firms CSR behaviour seems to be a factor that influences banks
and other institutional investors investment
decisions. Thus, a high CSR profile may
improve a firms access to sources of capital.
Modern corporate stakeholder theory
(Cornell and Shapiro, 1987; Freeman, 1984;
Jones, 1995; McGuire et al., 1988) can also
explain part of the CSR/economic performance relationship. According to stakeholder
theory the value of a firm is related to the cost
of both explicit claims and implicit
claims on a firms resources. Claimants
include not only the legal owners of the firm
but other constituencies such as lenders,
employees, consumers, banks, government,
etc. Stakeholders who have explicit claims on
the corporation include besides its owners
lenders, employees, government, etc. In
addition, there are others with whom the firm
has made implicit contracts, which could
include the quality of service and CSR.
According to McGuire et al. (1988), if the
firm does not honour these implicit contracts,
then it is argued that the parties to these
contracts may attempt to transform them
from implicit to explicit agreements. The
latter may be more costly for the firms
involved. According to Freeman (1984) and
McGuire et al. (1988) the implications of the
conversion of implicit to explicit contracts may have broader effects than the direct
costs resulting from the forced change in its
behaviour (e.g. cost of installment of gas
emission control equipment). For example,
socially irresponsible actions in one area (e.g.
gas emissions) may spill-over and affect the
corporate image in other areas as well (e.g.
unregulated issues on labour relationships).
This could in turn result in other implicit
stakeholders (e.g. trade unions) striving to

make their claims explicit. Thus, firms with
an image of high CSR may find that they face
both fewer and lower-cost explicit claims than
those with a less enlightened stance.
Thus, from a theoretical perspective, arguments can and have been made both for and
against a positive relationship between social
responsibility and concurrent or subsequent
(to CSR) economic performance.
Relationship with past economic
performance
According to Parert and Eibert (1975), Ullmann (1985) and Roberts (1992), if corporate social responsibility is viewed as a significant cost, firms with relatively high past financial performance may be more willing to
absorb these costs in the future. It is also
expected that poor performers would seek
more immediate results and consequently
they may prefer short-term and high-yield
investments to the uncertain and in general
longer-term CSR investments. A similar view
is that policies and expenditures in discretionary areas such as social programmes may
be especially sensitive to the existence of
slack resources in the firm (McGuire et al.,
1988). Ullmann (1985) argued that corporations must reach an acceptable level of economic performance before devoting company
resources to meet social demands. This is
supported by the assertion that corporations
with strong prior economic performance
appear to be more likely to have high current
levels of social disclosure. Ullmann (1985)
also suggested that companies with less stable
stock market patterns would be relatively less
likely to commit resources to social activities.
Prior empirical research

Empirical research into the effects of corporate responsibility has produced mixed
results. Some studies have suggested a positive relation, whereas others have concluded
that the effects are negative or inconsequential. For example, Belkaoui (1976) investigated the information content of pollution control disclosures. His results suggested a positive relationship between economic performance and social responsibility, at least in this
area. Other studies produced results consistent with the notion that corporate social
responsibility activities impact on the financial
markets (Anderson and Frankle, 1980; Shane
and Spicer, 1983; Spicer, 1978a,b).
28
However, certain studies have replicated

earlier research and found conflicting results.
Frankle and Anderson (1978) rejected Belkaouis (1976) interpretation and argued that
non-disclosing firms had consistently performed better in the market. In a similar
manner, Chen and Metcalf (1980) disagreed
with Spicers (1978a,b) conclusions, arguing
that his results were driven by spurious correlations. In response Spicer (1980) stated that
Chen and Metcalf (1980) misinterpreted the
purpose of his study, emphasising that associations not causal relationships were being
investigated.
Ingram (1978) concluded that the information content of social responsibility disclosures was conditional on the market segment
with which a firm is identified. Alexander and
Bulcholz (1978) and Abbott and Monsen
(1979) found no significant relationship
between a corporations level of social responsibility activities and stock market performance. In addition, Chugh (1978), Trotman
and Bradley (1981) and Mahapatra (1984)
concluded that corporate social responsibility
activities may lead to increased systematic
risk.
Cochran and Wood (1984) used corporate
social responsibility rankings developed by
Moskowitz (1972) to test the relationship
between corporate social responsibility activities and firms performance. After controlling
for industry classification and corporate age, a
weak positive association between corporate
social responsibility activities and economic
performance was found. Mills and Gardner
(1984) concluded in their analysis of the
relationship between social disclosure and
economic performance, that companies are
more likely to disclose social responsibility
expenditures when their financial statements
indicate favourable economic performance.
One drawback of the above empirical
studies is that they failed to distinguish
between past, concurrent and subsequent to
CSR economic performance, and thus to
make possible reliable inferences about direction of causation. In most of the previous
studies, economic performance covered a
(commonly five year) period surrounding
the CSR performance and/or social disclosure
periods. Routinely, the CSR performance
and/or social disclosure periods were the midpoints of that period. However, in Mahapatra
(1984) and Mills and Gardiner (1984) studies, economic performance periods were
concurrent to the CSR performance period.
Only Shane and Spicer (1983) looked at

economic performance subsequent to CSR
disclosure period, finding a positive association.
Practically, McGuire et al. (1988) were the
first to break this tradition and to separate
economic performance into past, concurrent
and subsequent to CSR performance. They
used Fortune magazines ratings of corporate
reputations to analyse the relationship
between perceived corporate social responsibility and economic performance. Prior economic performance of the firms, as measured
by both stock market returns and accounting
based measures, were found to be more closely related to corporate social responsibility
than was subsequent economic performance.
McGuire et al. (1988) suggested that economic performance may be a variable influencing
social responsibility activities.
Thus, the empirical research into the
relationship between corporate social responsibility and economic performance is confusing and far from conclusive. According to
Ullmann (1985) this may be attributed to the
use of varying and questionable measures of
CSR, differences in the research methodologies and the financial performance measures
used. To overcome these limitations, this
study will use a more comprehensive measurement of CSR performance (admittedly
within the context of the UK social and business environment), a combination of economic performance measures and including the
necessary intervening variables in the research
design.
Research methodology
The objective of the current study is to test
the hypothesis that there is a relationship
between CSR and economic performance of
firms in terms of their:
contemporaneous or subsequent economic
performance; and
past economic performance.
As mentioned earlier, prior research has
focused on the North American experience,
whereas this study focuses on corporations
that operate in the UK environment. In total
56 firms were included in the study. The main
criteria for their selection were quotation on
the London Stock Exchange and the availability of CSR ratings by the New Consumer
Group (NCG) a UK public-interest
research organisation (Adams et al., 1991).
29
multi-wave mail survey directed to companies

(for details of the questionnaire see Adams et
al., 1991, pp. 531-58). Apart from the questionnaire, additional information for each
company came from several (internal) informants (for each firm) who were contacted by
NCG. As the authors emphasise, in some
cases they had to get information (for a single
company) from 20 different informants. This
effort resulted in the development of company
CSR profiles which were sent to the firms for
comment and refinement. It seems that
Adams et al. (1991, p. 531) took all reasonable precautions to minimise bias and systematic error in their measurement. The laborious triangulation of both information sources
and data collection methods, and the use of
multi-dimensional measurements of CSR,
seem to have significantly decreased the possibility of both the validity and reliability problems in their ratings. In addition, measurement limitations of prior studies such as: use
of only one dimension (pollution proxies,
etc.), reliance on a single information source
(e.g. annual reports) or a single data collection method (panel of experts, content analysis, etc.) have been addressed and avoided.
Each company was rated on 13 different
aspects related to CSR (listed below). The last
five categories, in the list, apply only to a small
number of industries or sectors. Therefore,
they were not incorporated into the current
study (i.e. only the first eight were used).
The 13 ratings produced by NCG were:
(1) CSR disclosure. Disclosure was assessed
on whether the company completed the
questionnaires sent by NCG and the
Council of Economic Priorities, the
information provided by the company
over and above its annual report, the
extent to which the company went
beyond minimum statutory disclosure
requirements and the comments provided on the first version of NCG CSR
profiles. Similar to other studies in this
area, content analysis that included the
quantity (the number of pages) and
quality of information related to CSR in
their annual reports was also used
(Adams et al., 1991, p. 58). (A five point
scale was produced: 2 = well below
average; 1 = below average; 0 = average;
1 = above average; 2 = well above average.)
(2) The extent to which a company encourages the advancement of women. This
rating was based on extent to which a
company provides maternity leave,
The study covered more than 20 industry

sectors, though there was a deliberate limitation in terms of industry coverage. The main
focus of the NCG organisation is the consumer sector. Sectors such as financial services and media related products were not
included due to the difficulties associated in
the assessment of CSR performance (Adams
et al., 1991, p. 55).
Measurement of corporate social
responsibility
Previous studies in this area have primarily
used three criteria to measure corporate social
responsibility (McGuire et al., 1988):
expert evaluations;
content analysis of annual reports and
other corporate documents; and
performance in controlling pollution as a
proxy measure.
Each of these measures is subject to limitations. The validity of independent experts
ratings rests on the expertise of the assessors
and the accuracy of the information available
to them. Commonly used expert-based rankings in the US studies are the Council of
Concerned Businessmen Index and Business
and Societys rankings (Moskowitz, 1972,
1975). The latter ones are based on the
authors (Moskowitz) own evaluations and a
panel of businessmen and MBA students
evaluations. The informational value of annual
reports and other public corporate documents
as a source of hard data can be queried, being
the product of the companys public relations
programme. The pollution control proxy
measure is limited in value to those industries
where pollution is a significant issue.
In this study, as has already been mentioned, (confined by a general absence of
relevant UK sources) the ratings of corporate
social responsibility were obtained from the
publication Changing Corporate Values (Adams
et al., 1991), produced by the New Consumer
Group (NCG). The assessment of companies
in the NCG book covers the years 1988 and
1989. Evidence for the validity of the ratings
comes from the number and diversity of
sources used to produce a relatively comprehensive index of CSR performance. The
sources include: commercial cutting services,
trade associations, trade unions, business
directories and databases, research and public
relations firms and national and international
public interest groups. The ratings were
complemented by primary data collected via a
30
career breaks, crche facilities and job

share schemes. Other factors taken into
account were: the recruitment, training
and promotion of women and the proportion of women at different levels of
management especially at senior management level. (Four point scale: 1 =
below average, 0 = average, 1 = above
average, 2 = well above average.)
(3) The extent to which a company encourages the placement and advancement of
ethnic minorities. This rating was based
on the existence of well-designed ethnic
monitoring and equal opportunities
policies, membership of the Fullemploy organisation, specific initiatives
and the number of ethnic minorities
found at senior managerial positions.
Fullemploy is a UK, London-based
organisation founded in the 1970s which
aims to help ethnic minorities, especially
young blacks, in career advancement.
(Three point scale 1 = below average,
0 = average, 1 = above average.)
(4) Philanthropy or charitable giving and
involvement to community projects. As
well as charitable donations as a proportion of pre-tax profits, this rating included factors such as secondment of staff,
gifts in kind and facilities provided to
staff to engage in charitable activities. In
addition, membership of Business in
the community and Per cent club
were also taken into account. Business
in the community is a partnership of
250 companies and 30 (governmental,
trade unions and/or voluntary) organisations. Its main aim is to promote community action by the private sector.
Similarly Per cent club is another UK
organisation that promotes charitable
donations. To qualify for membership a
firm should contribute more than 0.5 per
cent of its pre-tax profits to the community. (Three point scale 1 = below average 0 = average, 1 = above average.)
(5) Environmental action refers to initiatives
the company is undertaking to reduce its
environmental impact or improve its
environmental protection performance.
In addition, whether or not a firm has a
written environmental policy and/or an
environmental office/officer was taken
into account. (Three point scale: 0 =
none, 1 = some environmental action, 2
= concerted environmental action.)
(6) Whether the company has made a donation to the British political parties in the
1986-1990 period. As none of the examined firms has donated to the Labour or
other parties, only donations to the
Conservative Party were examined. (A
yes/no scale was used.) Information on
the size of donations provided was not
complete for all firms and thus not
usable.
(7) Subscription to the Economic League, a
blacklisting organisation that sells
information to employers on individuals
regarded as potential subversives. (A
yes/no scale was used.)
(8) The extent to which the companys
activities have a significant effect on the
environment. This was more of an industry-based classification of a firms impact
on the environment, disregarding the
firm-specific efforts to alleviate it. A four
point scale was used, where: 3 = industries with major environmental impact
(chemical, oil and mining industries), 2
= industries with significant environmental impact (clothing, pesticides, electrical
goods, pharmaceuticals, agricultural
goods and car manufacturing firms), 1 =
industries with above average impact
(tobacco, fast food, soft drinks and
brewing companies), and 0 = industries
with average impact (all the other industries and sectors). As this rating refers to
the industrys rather than actual firms
activities, it was used in the research as
intervening or classificatory variable
rather than a measure of CSR.
(9) Respect for life (animal cruelty) refers to
animal testing, conditions under which
animals are reared for food, fishing
techniques used and genetic engineering.
As ratings were available for only half of
the sampled firms, this index was excluded from the study.
(10) Respect for people refers to a companys
involvement in the manufacturing and
sales of alcohol and tobacco products as
well as gambling. As this indicator is
confined to specific businesses (e.g.
brewery and tobacco industries), it was
excluded from the study.
(11) Doing business with oppressive
regimes. The degree (depth) of a firms
business involvement with South Africa
was used as a proxy. However, this measure could not be used across the whole
range of firms. Some of them had already
31
significant investments in South Africa

before its international condemnation
and thus divestment could have been
more difficult for them. In addition, if
this indicator was used as a CSR measure, those firms who by chance or
choice do not trade internationally would
be appear misleadingly to be gratuitously
credited with social responsibility.
(12) Production and/or sales of military
equipment. As this rating was only relevant to defence related industries, it
could not be applied to any representative sample of firms.
(13) Business relationships with the least
developed countries. In this instance,
NCG rated firms on the basis of their
depth of business involvement with third
world countries, disregarding their
nature and thereby whether their actions
could be regarded as socially responsible
or not.
performance is captured mainly by the following four indicators: womens position, ethnic
minorities position, philanthropy and environmental actions. The content of these
indicators covers all the CSR dimensions of
the modern firms as identified by Vyarkarnam
(1992); Trotman and Bradley (1981); Anderson and Frankle (1980) and Abbott and
Monsen (1979) . Donations to the Conservative Party and participation in the Economic
League due to their dichotomous nature will
be used as complementary measures. Finally,
the effect on the environment rating, as mentioned earlier, is used as an intervening variable.
Periods of analysis
The set of corporate social responsibility
measures available related to the period 19881989. Based on the above period of time,
economic performance data were divided into
three periods: 1984-1987 (pre-assessment
period); 1988-1989 (concurrent period); and
1990-1994 (post-assessment period). Economic performance measures were averaged
for each period. However, information on
donations to the Conservative Party and
subscription to the Economic League are
related to the 1986-1990 period (this was to
cover party donations during the 1987 election period). Therefore, these are related to
economic performance data for the periods:
1984-1985 (pre-assessment period); 19861990 (concurrent period); and 1991-1994
(post-assessment period).
For more information on what factors were

included to produce the ratings of each category see Adams et al. (1991, pp. 5-54).
A further advantage of the CSR measurement used is that it provides different ratings
for CSR performance and disclosure. As
NCG did not rely exclusively on information
(disclosed or) emanating from firms themselves to assess CSR performance, a differentiation between CSR disclosure and CSR
performance is operationally possible. Ullmann (1985) emphasised that a mistake
common to studies of this kind is that
researchers do not differentiate between the
two. There is an obvious and important difference between what companies do and what
they say they do (or did). Firms have a variety
of reasons to misrepresent or even conceal
their actual CSR performance. In particular,
there is a tendency to overstate their CSR
performance in order to create a positive
impression as a part of their PR efforts.
Inversely, according to Ullmann (1985), firms
with poor CSR record (or with high CSR
expenses) tend to under-report this information. This is because some of the CSR activities might be at the expense of other investments which were more profitable and closer
to shareholders interests. Thus, an interference between CSR disclosure and CSR performance seems to exist and needs to be
checked.
In this study, CSR disclosure is measured
by the first dimension in the list. CSR
Measures of economic performance and

hypotheses
This study followed the precedent of most of
the previous studies on the topic and used
accounting data to measure financial performance and capital market data to measure
systematic risk and excess market valuation
(capital market performance). For the purpose of this study, the term economic performance will be used to describe both financial
and capital market performance. The data
were obtained from the Datastream on-line
database. The variables used were:
(1) three accounting based measures (Return
on Capital Employed, ROCE; Return on
Equity, ROE; and the ratio of gross profit
to sales, GPS); and
(2) two capital market based (Excess market
valuation, EMV and Beta a measure of a
firms systematic risk).
32
The ratios of return on capital employed and

the return on equity measure the relative
efficiency of asset utilisation. A major strength
of the ROCE ratio is that it is free from the
effects of bias that can result from differences
in capital structure between firms. However,
both ROCE and ROE can be distorted by the
effect of inflation on the book value of the
assets. For example, two firms may have
identical physical assets that they purchased at
different times. If so, the book value of these
assets, in all likelihood, will be different,
reflecting the effect of inflation on nominal
asset prices. The third accounting-based
measure to be used is the gross profit to sales
ratio. Its main advantage is that it is free from
leverage differences but it is handicapped in
the sense that it is subject to inflation distortions and, unlike the other measures, fails to
capture the relative effectiveness of the use of
assets. All three measures will be used in a
complementary fashion so as to compensate
for their disadvantages.
As sustained growth in financial performance is a primary goal for most managers,
trends in accounting-based measures are
frequently used in evaluating the performance
of management. Given that in periods of low
profitability economic demands may have
priority over discretionary social responsibility expenditures, satisfactory financial performance may have a definite influence on the
level of support top corporate decision makers
can commit to future social responsibility
activities (Ullmann, 1985). Based on this
argument, it can be suggested that a positive
association should exist between past financial
performance and the level of CSR performance (Cornell and Shapiro, 1987; McGuire
et al., 1988).
H1a: The higher the level of past financial
performance, the higher the level of
CSR performance.
empirical work can be used to support the

argument that CSR can have either a negative
or a positive impact on financial performance.
The main arguments for a positive relationship are that CSR is an indicator of managements ability to deal effectively and proactively with stakeholders demands (and/or
possible threats which if they materialised
would have an adverse impact on firms future
FP). Satisfying stakeholders explicit and
implicit demands, gaining their support
and/or averting potential threats is thought to
improve firms FP. CSRs impact on FP is
realised by either: increasing employee productivity and morale or reduction of potential
labour problems; gaining consumers goodwill and support for its products; stopping
possible actions by lobby groups against the
firm and the resulting bad publicity; preventing government officials imposing costly
regulation; and/or facilitating the flow of
capital to the firm by improving its standing
with bankers and investors (McGuire et al.,
1988; Spicer, 1978a,b).
H2a: The higher the level of a firms CSR
performance, the higher its concurrent
and subsequent financial performance.
Communication or disclosure of CSR performance information to stakeholders is necessary for these effects to take place and for
stakeholders to fully appreciate a firms social
contribution. Conversely, withholding of CSR
information and secrecy may cultivate suspicion and/or distrust to stakeholders which can
be translated to lower financial performance.
Put formally as a hypothesis this is:
H2b: The higher the level of a firms CSR
disclosure, the higher its concurrent and
subsequent financial performance.
The argument against this view is that CSR
consumes resources and can be costly, putting
the firm at an economic disadvantage compared to its competitors. CSR activities such
as charitable donations, support to community
projects, installation of environmental protection equipment, etc. can be seen as carrying a
significant cost element. Also, emphasis on
CSR may distract resources from more economically profitable uses (e.g. investing in
South Africa, before its democratisation) and
reduce a firms range of strategic alternatives.
Based on the above, hypothesis H3 is formulated:
H3: The higher the level of a firms involvement in costly CSR activities, the lower
Conversely, in cases of low financial performance, firms may be less inclined to disclose
information on expenditures for CSR activities,
as it might seem to be difficult to justify this
redirection of profits towards CSR activities
to shareholders (Ullmann, 1985). Thus:
H1b: The higher the level of past financial
performance, the higher the level of
CSR disclosure.
As has been mentioned earlier, literature on
the effects of CSR on (concurrent and subsequent) financial performance (FP) is inconclusive. Both theoretical argument and prior
33
Similarly, firms with stable market performance would feel less tempted to conceal
information about investments in CSR activities from their shareholders and investors,
even if these activities were not evidently
profit-generating or economically justified.
Thus:
H4b: The lower a firms past systematic risk or
beta, the higher its CSR disclosure.
its concurrent and subsequent financial

performance.
Information on the exact costs of each CSR
performance variable and disclosure is not
available. In addition, one has to recognise the
difficulty of estimating and attributing costs to
each of the CSR activities. However, based on
the information available from NCG, philanthropy and environmental action seem to be
comparatively more costly than the other CSR
activities examined in this study. CSR performance in hypothesis H2a includes both costly
and other CSR performance indicators. The
conflict between hypotheses H2a and H3 with
reference to the direction of relationship of
the cost-adding CSR activities, is a reflection
of their contradictory theoretical underpinnings (Ullmann, 1985).
Accounting-based measures are not free of
limitations. They tap only historical aspects of
a companys financial performance. They can
also be subject to managerial manipulation
and differences in accounting procedures
make comparability across firms and studies
problematic (McGuire et al., 1986). To overcome these difficulties, two stock-marketbased measures of performance were also
used. Ullmann (1985) argues that these are
more appropriate to studies of this type, as
they capture investors evaluation of a firm.
Given this debate about the proper measure
of a companys financial performance, the use
of capital-market performance measures
along with financial performance measures
compensates for any possible measurement
weaknesses. The capital-market measures
used were beta (a measure of a firms systematic risk) and excess market valuation.
Systematic risk (beta) is defined as the
covariance between returns on a risky asset
(e.g. a corporations common stock) and
market portfolio, divided by the variance of
the market portfolio (Copeland and Weston,
1983). Corporations that have low measures
of systematic risk are expected to have higher
levels of CSR activities. Corporations with
low systematic risk have a more stable pattern
of stock market returns. Given that such
economic considerations are central to corporate decision makers, stable market performance should enhance their discretion to
commit resources in CSR activities in the
subsequent periods (Roberts, 1992).
H4a: The lower a firms past systematic risk or
beta, the higher its CSR performance.
Research also suggests that CSR activities

may improve a firms access to capital and
increase employee morale and productivity
(McGuire et al., 1988; Moskowitz, 1972).
Based on this information, market participants may view socially responsible firms as
being better managed and less risky. A high
degree of CSR may also permit a firm to have
lower variance in its economic performance as
a function of more stable relations with the
government and the financial community in
general (McGuire at al., 1988; Spicer,
1978a,b). Compared to other firms, firms
with high CSR may have lower total market
risk as they should be less sensitive to certain
external events, like governmental action in
the field, and thereby have a lower liability.
However, it can be argued that the impact of
CSR on a firms systematic risk may be minimal. Most events affecting one firms commitment to social responsibility do not systematically affect all other firms in the marketplace
(Cornell and Shapiro, 1987). Based on this
argument firms with high CSR performance
are postulated to exhibit more stable market
performance patterns (lower betas).
H5a: The higher a firms level of CSR performance, the lower the concurrent and/or
subsequent systematic risk or beta.
The same arguments as above hold for the
relationship between disclosure and beta.
Disclosure of social responsibility activities is
expected to have similar results as in many
cases it is used to improve market evaluations
(Ullmann, 1985). Thus,
H5b: The higher a firms level of CSR disclosure, the lower the concurrent and/or
subsequent systematic risk or beta.
Excess market valuation (EMV) is defined as
the difference between total firm market value
and the book value of assets divided by sales.
This measure captures the value premiums
or discounts accorded by the market to various companies(Cochran and Wood, 1984, p.
50). If corporate social responsibility creates
positive or negative market expectations about
34
the firms prospects, then it will be related to a

high or low excess value. However, a limitation of this measure is that it is subject to
inflation distortion of asset values. Similar to
beta, this measure is a reflection of market
evaluation for a firm and its activities. The
arguments put forward for the relation
between systematic risk and CSR apply to
EMV as well, as the underlying logic is the
same. Favourable past market responses, as
manifested in high EMV, will relieve some of
the pressure on corporate decision makers to
invest solely in activities that evidently generate profits in shorter periods of time than CSR
investments. Thus,
H6a: The higher a firms past EMV the higher
its CSR performance.
affect each other, their effects on each other

will be isolated and controlled. An additional
control was on the carry-over effects of economic performance from one period to the
next. Links 13 and 14 depict these relationships. It was important to isolate these effects
to control for the possibility of spurious relationships resulting from this link.
A firms size and industry classification are
commonly used as control variables in studies
of this type. However, as firms in the sample
are dispersed over more than 20 (2-digit SIC
coded) industries and given the small size of
the sample, it was difficult to statistically
control for such effects. To overcome this
problem given this constraint, the NCG
classification of industries in terms of their
impact on the environment was used instead.
Industries with a significant and probably
more visible impact on the physical environment are less likely to avoid the attention and
scrutiny of the public. Thus, it is reasonable to
assume that firms in these sectors will feel
more pressure to improve their CSR standing.
In addition, visibility of their damage to the
environment may affect negatively stakeholders behaviour towards the firm and as a
consequence their financial and capitalmarket performance. The relationship of
environmental impact with CSR and economic performance is depicted with links 9, 10, 11
and 12 in Figure 1.
Past empirical research has shown that a
firms size affects economic performance and
Similarly, decision makers under such circumstances (of favourable EMV) will be less
inhibited to disclose information about potentially non-economically justifiable and costly
CSR activities to their investors and shareholders. Thus,
H6b: The higher a firms past EMV the higher
its CSR disclosure.
The same factors affecting the beta CSR
performance/disclosure relationship (i.e.
improved access to capital, higher employee
morale and productivity and more stable
relationships with government and financial
institutions) influence positively the capital
markets reactions to firms investing in CSR
activities. As a result such firms are postulated
to exhibit higher EMVs in the concurrent and
subsequent periods. Thus,
H7a: The higher a firms level of CSR performance, the lower the concurrent and/or
subsequent EMV.
H7b: The higher a firms level of CSR disclosure, the lower the concurrent and/or
subsequent EMV.
Figure 1 The nexus of relationships between economic performance, CSR

disclosure and CSR performance
CSR Disclosure
(1)
Past
financial
performance (2)
Controlling for spurious relationships

Before testing the hypothesis, it is necessary to
control for intervening variables which might
produce spurious relationships and/or
obscure any key effects. The nexus of the
postulated relationships between the main
and intervening variables is given in Figure 1.
The main focus of the study is on link 2
(hypotheses H1a, H1b, H4a, H4b, H6a and
H6b), and links 3 and 4 (hypotheses H2a,
H2b, H3, H5a, H5b, H7a and H7b).
Another link of interest is link 1, that
depicts the relationship between CSR performance and disclosure. As these variables
CSR Performance
womens
position
ethnic
minority
(13)
philanthropy
environmental
action
(3)
(14)
Concurrent
financial
performance
(6)
(9)
(5)
(11)
(7)
Firms Size
35
(10)
Environmental
impact of
industry
Subsequent
financial
(4) performance
(8)
(12)
CSR performance and disclosure (Chen and

Metcalf, 1980; Spicer, 1978b). According to
Ullmann (1985, p. 548) larger companies are
subject to more public scrutiny and are more
likely to have the necessary financial, managerial and technical know-how to undertake
costly CSR activities than their smaller counterparts. An additional or alternative argument is that larger companies, being significant taxpayers and employers, have a higher
bargaining power that allows them to obtain
concessions from legislators and/or enforcement agencies regarding the imposition of and
compliance to CSR standards. A firms size
then might influence both voluntary and
mandatory requirements for CSR behaviour.
As a firms size is also postulated to affect both
economic performance (links 6, 7 and 8 in
Figure 1) and CSR (link 5 in Figure 1) it
needs to be controlled. Turnover was used to
measure a firms size.
T-test analyses failed to uncover any statistically significant (p 0.05) differences

between Conservative Party donors and nondonors, in terms of CSR disclosure or any of
the CSR performance variables. However, the
same was not true for membership of the
Economic League. While the sample was
small, a t-test showed that members of the EL
rated significantly (at p 0.05) lower than EL
non-members in both womens position
(mean difference = 0.583, at p 0.025) and
ethnic minorities position (mean difference
= 0.354, at p = 0.035) in their organisation.
ANOVA was also used to check for joint
effects (of Conservative Party donation and
EL membership) on CSR performance and
disclosure. No such effects were identified at p
0.05.
The relationship between firms size,
environmental impact of industry,
corporate social responsibility
performance and disclosure
As can be seen in Table I, the two control
variables, firms size and environmental
impact, are inter-correlated. This can be
explained by the fact that the industries with
significant environmental impact (chemicals,
mineral extraction, etc.) all require a high
level of investment and generally are large in
size. Firms size also was found to be significantly (at p 0.001) correlated to disclosure
and two CSR performance measures, philanthropy and environmental action (see Table I).
Surprisingly, correlation analysis shows
that environmental impact of a firms industry
is not statistically related to the firms activities to alleviate it (i.e. the environmental
action measure). One would have expected
that firms in industries with higher levels of
environmental damage would be more oriented
towards activities designed to alleviate this,
than companies in other sectors, apparently,
this was not so.
T-test analysis also showed that membership of the Economic League and donations
to the Conservative Party are not statistically
related either to the firms size or the environmental impact of the industry. Similarly,
either environmental impact or firms size was
found to be statistically correlated (at p
0.05) to any of the economic performance
measures employed in all three periods of
analysis.
Findings
Interrelationships among corporate
social responsibility measures
Principal component analysis (roots criterion)
of the four CSR performance variables (environmental action, womens position, ethnic
minorities position and philanthropy) identified one factor (explaining 42.3 per cent of the
total variance). That confirms the unidimensionality of all four variables which seem to be
manifestations of the same underlying factor,
that is CSR performance as defined here.
Factor scores will be used as a proxy of the
overall CSR performance which will be examined together with the four CSR performance
variables.
Examining the relationship between disclosure and CSR performance (link 1 in Figure
1), regression analysis showed a quite strong
relationship. In particular, CSR performance
variables can explain 36 per cent (R2 = 0.363)
of CSR disclosure. As expected, firms with
good performance in terms of CSR are more
inclined to disclose more.
Twenty-one out of the 56 (37.5 per cent)
sampled firms had donated to the Conservative Party, whereas only eight (14.3 per cent)
were members of the Economic League (EL),
of which only four were contributors to the
Conservative Party as well. A chi square test
showed that contributions to the Conservative
Party were not statistically related to EL
membership.
36
Table I (Two-tail) correlation between CSR disclosures, CSR performance, environmental impact and firms size
1
1
2
3
4
5
6
Disclosure
Womens position
Ethnic minorities position
Philanthropy
Environmental action
CSR performance
(factor scores)
7 Impact on the environment
8 Firms size
0.512**1
0.283*2 0.264*4
0.178
0.188
0.105
0.464**1 0.404**5 0.134
0.111
0.237
0.476**1
0.230
0.579**1 0.773**1 0.520**1 0.534**1 0.732**1

0.240
0.155
0.139
0.127
0.228
0.343*3 0.084
0.089
0.318*6 0.354**7
Note:
N = 56, *p 0.05, **p 0.01, [1p = 0.000, 2p = 0.034, 3p = 0.012, 4p = 0.049, 5p = 0.002, 6p = 0.018, 7p = 0.008]
1984-1986 (pre-recession) period was 16.11
(standard deviation: 8.18) whereas during the
1987-1994 (recession) period it was 20.82
(standard deviation: 13.08) higher than that
of the pre-recession period. No other statistically significant differences were identified. It
seems that recession had no statistically identifiable effects on the economic performance
indicators of the sampled firms.
Relationships between past, concurrent

and subsequent economic performance
and the impact of recession
Before we embark on to examining the impact
of CSR on financial and capital-market performance, it might be useful to examine how
financial performance measures are interrelated at different periods under study. As
expected, correlation analysis showed that
economic performance is positively related to
the next period of time performance.
As financial and capital-market performance were found to be strongly inter-correlated, principal component analysis (PCA)
was used to identify the underlying factors.
PCA (roots criterion) extracted a single factor
for each set of variables for the past, concurrent and subsequent periods of study. Factor
scores were used as overall measures of a
firms financial and capital market performance respectively.
The fluctuation of the financial and capitalmarket performance of the sampled firms
during the 1984-1994 period was also examined, so as to assess the impact of the business
cycle (recession). Figure 2 illustrates the
changes in the annual average (arithmetic
mean) of all economic ( financial and capitalmarket) performance variables during this
period. As can be seen, there is no clear pattern of a cyclical movement for any of the
measures. In order to statistically assess the
impact of recession in the British economy
during the period 1987-1994, pairwise t-test
analysis was used to check for any significant
(at p 0.05) differences between the 19841986 (pre-recession period) and 1987-1994
(recession period). Only one statistically
significant difference (p 0.02) was detected
in regard to the return on equity (ROE) measures. Surprisingly, the average ROE in the
The relationship between past economic

performance, CSR performance and
disclosure
Table II displays the (two-tail) semi-partial
correlation matrix of CSR disclosure, CSR
performance and past economic performance
measures. Possible effects resulting from a
firms size and its industry environmental
impact (links 5 and 11 in Figure 1) were
controlled for (partialled out). Similarly
disclosures effects on CSR performance (link
1, in Figure 1) and vice versa were partialled
out. In both instances, the unstandardised
regression residuals of the main variable
against the control ones were used. Philanthropy was found to be positively related to
both excess market valuation and gross profit
to sales ratio. It seems that firms with higher
pre-tax (gross) profits and gains in market
value feel more comfortable in investing in
community projects and charitable donations.
This partly supports hypotheses H1a and H6a.
However, findings (in Table II) do not support hypotheses H4a and H4b (relationship
between beta and CSR performance and
disclosure, respectively).
Of interest was the relation of past financial
performance and donations to the Conservative Party and Economic League. Logistic
regression analysis was used to identify a
potential relationship. Forward stepwise
37
performance fail to predict the probability of a

company donating to the Conservative Party
or being a member of the Economic League.
Similarly, t-test analysis confirmed that there
were no significant differences in any of the
past economic performance indicators
between contributors and non-contributors to
the Conservative Party and members or nonmembers of the EL, respectively.
Figure 2 Average (mean) performance of sampled firms in the period

1984-1994
25
20
The relationship between CSR

performance and concurrent and
subsequent economic performance
Semi-partial correlation analysis similar to the
one used earlier (see Table III) revealed only
one statistically significant relationship
between contemporaneous economic performance and CSR disclosure. Gross profit to
sales ratio was found to be positively related to
CSR disclosure (at p 0.004). The controls
applied in this case included: firms size,
environmental impact and past economic
performance (links 7, 10 and 13 in Figure 1).
The interaction effects between CSR performance and CSR disclosure were also partialled out of each other. No other statistically
significant relationships (at p 0.05) were
identified.
In addition, hierarchical regression analysis
(see Table IV) was used to confirm and assess
the CSR performance and disclosure (after
controlling for firms size and environmental
impact) effects on concurrent economic
performance (free of the effects of past economic performance). Variables entered the
regression equation at three consecutive steps.
At the first step the control variables, firms
size and environmental impact, at the second
step CSR disclosure and at the third step the
four CSR performance indicators were
entered. At each step changes between the
15
10
0
84
85
86
87
88
89
90
91
92
93
94
Key
Return on Equity
Beta-systematic risk
ROCE
Excess Market valuation
Gross Profit to sales
variable selection and the likelihood-ratio test

were used to select the predictor variables for
the regression equations (at p 0.05). Firms
size and industrys environmental impact
were also included in the equation as control
variables. None of the past economic performance or control variables entered any of the
regression equations. Thus it would seem,
that past financial and capital-market
Table II (Two-tail) semi-partial correlation analysis between past economic performance and social corporate responsibility controlling for firms size and
industrys environmental impact
Beta systematic risk

Excess market value
Capital market performance (factor)
Gross profit to sales ratio
Return on capital employed
Return to equity
Financial performance (factor)
Women
positiona
Ethnic
minoritya
Philanthropya
0.022
0.231
0.130
0.022
0.190
0.088
0.111
0.067
0.187
0.074
0.250
0.079
0.086
0.151
0.003
0.332*1
0.209
0.384*2
0.176
0.145
0.260
Environmental
CSR
actiona
performancea Disclosureb
0.007
0.155
0.092
0.164
0.174
0.278
0.137
Note:
N = 56, *p 0.05; a: variables controlled for disclosure; b: controlled for CSR performance [1p = 0.031, 2p = 0.012]
38
0.009
0.246
0.159
0.037
0.215
0.206
0.166
0.017
0.109
0.057
0.149
0.184
0.128
0.181
consecutive R2s (R2s) were estimated. R2s

together with standardised regression coefficients (betas) were used to check the size of
the independent variables effects on the
concurrent economic performance. Variance
inflation factors and condition indices detected no collinearity effects among the independent variables. The condition index for the
lowest eigenvalue was 5.08, well below the
conventional standard (10). As can be seen in
Table IV, the analysis confirms the semipartial correlation analysis results. CSR disclosure was found to explain around 5 per
cent of the variance in the concurrent GPS
ratio (R22 = 0.05). This provides partial
support for hypothesis H2b. However,
hypotheses H2a and H3 were not supported
by the findings.
In order to check the interactive (joint)
effect of disclosure and CSR performance on
concurrent economic performance, moderated (or multiplicative) multiple regression

analysis is used. In this analysis an additional
multiplicative term (disclosure CSR performance) is created to encompass the interaction effect. The formed regression equation is
as follows:
Concurrent economic performance = a +
b1 disclosure + b2 CSR performance +
b3 (disclosure CSR performance).
where: a is the intercept (constant) and b1, b2
and b3 the regression coefficients.
Past economic performance, firms size
and environmental impact effects were all
partialled out from each of the concurrent
economic performance measures used. Standardised scores of disclosure were formed
before the formation of the multiplicative
term so as to be measured in the same units as
Table III (Two-tail) semi-partial correlation analysis between concurrent economic performance and social corporate responsibility controlling for firms size,
industrys environmental impact and past economic performance
Beta systematic risk

Excess market value
Capital market performance (factor)
Gross profit to sales ratio
Return on capital employed
Return to equity
Financial performance (factor)
Women
positiona
Ethnic
minoritya
Philanthropya
0.066
0.034
0.063
0.318
0.242
0.134
0.007
0.045
0.045
0.023
0.054
0.121
0.099
0.156
0.026
0.026
0.040
0.169
0.107
0.020
0.044
Environmental
CSR
actiona
0.070
0.070
0.124
0.318
0.210
0.009
0.068
0.079
0.012
0.055
0.263
0.135
0.099
0.039
0.039
0.213
0.1814
0.340**1
0.104
0.130
0.045
Note:
N = 56, **p 0.01; a: variables controlled for disclosure; b: controlled for CSR performance [1p = 0.004]
Table IV Hierarchical regression analysis of concurrent economic performance against disclosure and CSR performance
Independent
variables
Size of the firm
Environmental impact
R12
Disclosure
R22
Women position
Ethnic minority
Philanthropy
R32
Final R2
Systematic
risk, betaa
EMVa
0.064
0.3681
0.073
0.012
0.002
0.229
0.154
0.076
0.173
0.045
0.120
0.275
0.035
0.109
0.245
0.058
0.061
0.045
0.022
0.002
0.003
0.170
Dependent variables (concurrent period)

Market
GPS
responsibilitya
ratioa
ROCEa
0.157
0.188
0.073
0.192
0.042
0.212
0.133
0.055
0.091
0.025
0.140
0.4042
0.278
0.100
0.448*3
0.050
0.4134
0.051
0.230
0.039
0.125
0.275*5
Note:
a: past economic performance effects have been partialled out
N = 56, *p 0.05, **p 0.01 [1p = 0.062, 2p = 0.061, 3p = 0.049, 4p = 0.076, 5p = 0.05]
39
0.298
0.017
0.052
0.065
0.001
0.338
0.234
0.150
0.124
0.120
0.173
ROEa
Financial
performancea
0.370
0.082
0.061
0.087
0.040
0.037
0.128
0.104
0.016
0.022
0.123
0.242
0.153
0.041
0.004
0.005
0.040
0.184
0.048
0.029
0.025
0.072
the CSR performance. For parsimony reasons, the overall CSR performance factor
scores for each firm were used instead of the
raw scores for each CSR performance indicator. According to Cohen and Cohen (1983)
the existence of an interaction effect can be
identified by checking for (statistically significant) changes of the R2 (R2) when the multiplicative term enters the equation. Thus, a
two step hierarchical regression analysis was
undertaken, CSR performance and disclosure
enter the equation at the first step and the
multiplicative term at the second. If an interaction effect is present then the difference
between the two R2s values would be statistically significant (p 0.05) (Cohen and
Cohen, 1983). The size of the interaction
effect is determined by the size of the R2.
Following this procedure, an interaction effect
was identified in two instances. First, the
CSR performance disclosure term had a
significant effect on concurrent ROE (controlled for past economic performance, firms
size and environmental impact of industry
effects). The regression equation was as
follows:
Concurrent ROE = 0.42 + 0.40 disclosure 0.023 CSR performance + 0.62
interaction (final R2 = 0.35, R2 = 0.34,
significant at p = 0.001). Second, a similar
effect was revealed for concurrent financial
performance (factor scores) proxy (free of
the intervening variable impact).
equations revealed that, in general, firms that

combine high CSR performance and high
disclosure outperform the ones that combine
low CSR performance and low disclosure (in
terms of contemporaneous ROE and financial
performance factor scores).
In the case of subsequent performance,
some statistically significant relationships
were identified (at p 0.05). In line with the
previous section, a semi-partial correlation
analysis was used (controlling for firms size
and environmental impact of the industry,
links 8 and 12 in Figure 1). Additionally,
possible concurrent economic performance
effects on subsequent economic performance
were partialled out (link 14 in Figure 1).
Results (in Table V) indicate that environmental initiatives are negatively related to a
firms subsequent ROCE, whereas CSR
disclosure was found to be positively related
to subsequent GPS. It seems that costly CSR
activities such as environmental action have a
negative carry-over effect on subsequent
financial performance. However, disclosure
seems to have exactly the opposite results on
subsequent financial performance. This
seems to provide some support for hypothesis
H3. Results also showed (Table V) that
improvements in womens position get
noticed by the capital markets in a favourable
way in the subsequent period. As can be seen
in Table V, capital-market performance factor
scores in the subsequent period were positively related to improvements in womens position.
Hierarchical multiple regression analysis
(the same procedure as before) was employed
again to assess relationships of CSR performance and disclosure with subsequent economic performance (Table VI). The collinearity effects in the equation were very low, the
recorded condition index for the lowest eigenvalue was 5.07. As can be seen in Table VI,
disclosure was found to have a negative effect
on subsequent EMV. However, as R22 shows
the size of this effect is very small, it explains
only 2.1 per cent of the subsequent EMVs
variance. On the contrary, capital markets
seem to be more positively disposed to
improvements in womens position (R23 =
0.153). Unlike capital-market performance,
disclosure seems to have a significant effect on
subsequent financial performance. In particular, disclosure was found to be positively
related to both GPS and financial performance
(factor scores). The changes in R2 values
(R22s) were 0.186 and 0.136 respectively. It
The second equation was:

Concurrent financial performance = 0.32
+ 0.22 disclosure 0.03 CSR performance + 0.47 interaction (final R2 =
0.18, R2 = 0.17 significant at p = 0.006).
Condition indices showed very low collinearity effects (the condition index for the lowest
eigenvalue was 3.4 for both equations). The
size of the interaction effect (R2) in the first
equation is larger than that in the second one.
Jaccard et al.s (1991) instructions for interpretation of equations of this type were followed. Accordingly, both equations showed
that firms that combine high disclosure and
high CSR performance (and firms that combine low disclosure and low CSR
performance) perform better in terms of ROE
(and financial performance in the concurrent
period) than others, namely, firms that combine low CSR performance with high disclosure and the ones with high CSR performance
and low disclosure. Interpretation of the
40
Table V (Two-tail) semi-partial correlation analysis between subsequent economic performance, disclosure and CSR performance controlling for firms size and
industrys environmental impact
Beta systematic riskc

Excess market valuec
Capital market performance (factor)c
Gross profit to sales ratioc
Return on capital employedc
Return to equityc
Financial performance (factor)c
Women
positiona
Ethnic
minoritya
Philanthropya
0.120
0.282
0.315*1
0.054
0.132
0.137
0.110
0.004
0.158
0.124
0.047
0.195
0.234
0.229
0.019
0.0966
0.104
0.144
0.229
0.005
0.151
Environmental
CSR
actiona
0.068
0.069
0.103
0.063
0.342*2
0.036
0.179
0.032
0.1855
0.176
0.123
0.124
0.156
0.016
0.015
0.233
0.206
0.305*3
0.262
0.087
0.2874
Note:
N = 56, *p 0.05; a: variables controlled for disclosure; b: controlled for CSR performance; c: controlled for concurrent economic performance
[1p = 0.037, 2p = 0.023, 3p = 0.044, 4p = 0.059]
seems that disclosure has a favourable effect
on the other stakeholders whose contributions
are necessary for improved financial performance (e.g. employees, customers, etc.) but
to have adverse effects on the capital market
participants.
Hierarchical regression analysis (Table VI)
also confirms the environmental actions
negative relationship with subsequent ROCE.
Overall, CSR performance variables seem to
explain 17.2 per cent (R23 = 0.172) of subsequent ROCE variance. This provides additional support for hypothesis H3.
Moderated or multiplicative multiple
regression analysis (using the same procedure
as in the case of concurrent economic performance) failed to identify the existence of any
significant (disclosure CSR performance)
interaction effects on any of the subsequent

economic performance variables.
The impact of the two dichotomous variables (donations to the Conservative Party
and participation in the Economic League)
and their interaction (joint impact) on both
concurrent and post-assessment period (subsequent) performance were also examined.
Past economic performance carry-over effects
on concurrent economic performance were
partialled out. In a similar manner concurrent
performance effects were partialled out of
subsequent economic performance variables
so as to avoid the possibility of any spurious
relationships.
Analysis of covariance (ANCOVA) was
used to uncover any statistically significant (p
0.05) relationships of the two dichotomous
Table VI Hierarchical regression analysis of subsequent economic performance against disclosure and CSR performance
Independent
variables
Size of the firm
Environmental impact
R12
Disclosure
R22
Women position
Ethnic minority
Philanthropy
R32
Final R2
Systematic
risk, betaa
EMVa
0.004
0.369*1
0.083
0.013
0.001
0.212
0.100
0.069
0.094
0.026
0.110
0.160
0.043
0.132
0.426*2
0.021
0.3763
0.154
0.063
0.192
0.160
0.277*4
Dependent variables (concurrent period)

Market
GPS
responsibilitya
ratioa
ROCEa
0.131
0.194
0.103
0.3725
0.012
0.482*6
0.067
0.011
0.255
0.153
0.2697
0.114
0.183
0.061
0.513*8
0.186
0.111
0.078
0.134
0.003
0.033
0.220
0.159
0.220
0.080
0.3139
0.090
0.205
0.153
0.241
0.390*10
0.172
0.348**11
ROEa
Financial
performancea
0.34812
0.415*13
0.151
0.117
0.055
0.044
0.185
0.006
0.045
0.033
0.239
0.30914
0.348*15
0.122
0.363*16
0.136
0.101
0.134
0.170
0.172
0.061
0.320*17
Note:
a: concurrent economic performance effects have been partialled out
N = 56, *p 0.05, **p 0.01 [1p = 0.045, 2p = 0.031, 3p = 0.052, 4p = 0.049, 5p = 0.059, 6p = 0.014, 7p = 0.059, 8p = 0.012, 9p = 0.088,
10p = 0.014, 11p = 0.009, 12p = 0.077, 13p = 0.019, 14p = 0.098, 15p = 0.037, 16p = 0.049, 17p = 0.025]
41
variables on economic performance. Firms

size and environmental impact were used as
covariates. ANCOVA results showed that
members of the EL have significantly (at p =
0.028) lower subsequent ROCE (controlled
for concurrent economic performance effects)
(mean = 0.49) than non-members (mean =
0.11). However, the size of the effect attributed to (or the variability explained by) EL
membership (partial eta-squared = 0.126)
was relatively small (12.6 per cent). Similarly,
membership of the EL had a significant (at p
0.006) impact on subsequent excess market
valuation. Members of EL displayed a lower
average EMV (mean = 0.72) than nonmembers (mean = 0.14). However, the size of
the EL membership effect on EMV (partial
eta-squared = 0.165) was comparatively
higher than that on ROCE. No significant
differences in the (concurrent and subsequent) economic performance of donors and
non-donors to the Conservative Party were
identified.
A t-test analysis was also performed to
check independently the differences in the
means between donors and non-donors to the
Conservative Party and between subscribers
and non-subscribers to the Economic League.
It was (t-test analysis) also confirmed that
members of the Economic League have a
significantly (at p 0.02) lower EMV (concurrent economic performance effects have been
partialled out) for the subsequent period
1991-1994 (mean = 0.716) compared to
non-members (mean = 0.135). Overall, it
appears that donations to the ruling (Conservative) party have no effect on any of the
concurrent and subsequent economic performance variables. However, membership of
the Economic League has a negative effect on
subsequent ROCE and EMV.
CSR performance with past, concurrent or

subsequent economic performance.
It seems that past financial performance
can explain variation in certain elements of
corporate social responsibility. Specifically,
philanthropic activity seems to be affected by
gross profit to sales ratio and excess market
valuation in the past. This seems to agree to a
certain extent with the findings of McGuire et
al. (1988). Interestingly enough donations to
the Conservative Party or membership of the
Economic League were found not to be particularly related to companys past economic
performance.
However, CSR disclosure was found to be
associated with concurrent financial performance. In particular, gross profit to sales ratio
was found to affect disclosure positively. A
combination of high CSR performance and
high disclosure was also found have positive
effects on firms overall profitability. In contrast, low CSR disclosure combined with
good CSR performance or high CSR disclosure combined with poor CSR performance
were found not to be economically-rewarding
strategies. Even poor CSR performance
accompanied by low level of disclosure was
found to be a better strategy (than the other
combinations) in the short term (concurrent
period). However, this effect seems to fade
away in the longer run (i.e. subsequent periods).
Another important point is the impact of
CSR activities with a significant cost element.
In particular environment care related activities assumed to have a higher cost were
found to be negatively related to subsequent
financial performance (ROCE). On the other
hand less costly CSR activities, like the
enhancement of womens corporate position
were found to have a positive but not instantly
realisable (as it was detected only in the subsequent period) effect on capital markets.
In contrast, the reaction of the capital
markets in the subsequent period to companies with high CSR disclosure was found to be
negative. Paradoxically, CSR disclosure was
found to be more positively received by other
stakeholders responsible for a firms financial
performance (GPS). Again, disclosure effects
seem not to materialise immediately as they
could only be detected in the subsequent
period.
Donations to the Conservative Party were
found to have no effect on any of the concurrent and subsequent economic performance
variables. However, this was not true for
Conclusions
The results of the empirical tests are of interest for a number of reasons. First, the major
theories concerning social responsibility
which had been developed in the North
American context were tested within the
distinct cultural and economic environment
of the UK. Second, a multi-dimensional
measure of social corporate responsibility
performance was used, which allowed for a
more comprehensive measurement to be
undertaken. The results of the empirical
research supported only a few of the postulated relationships between CSR disclosure and
42
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About Emerald www.emeraldinsight.com

In the modern commercial era, companies and

European Business Review

Corporate social responsibility and economic performance

European Business Review

George Balabanis, Hugh C. Phillips and Jonathan Lyall

Volume 98 Number 1 1998 2544

enough to allow departures from this narrow

operation must fall within the guidelines

Corporate social responsibility and economic performance

European Business Review

George Balabanis, Hugh C. Phillips and Jonathan Lyall

Volume 98 Number 1 1998 2544

organisational social response based on

ethics in advertising; and

The relationship between corporate

Corporate social responsibility and economic performance

European Business Review

George Balabanis, Hugh C. Phillips and Jonathan Lyall

Volume 98 Number 1 1998 2544

establishing environmental protection procedures. These costs might put a firm at an

stakeholders (e.g. trade unions) striving to

Prior empirical research

Corporate social responsibility and economic performance

European Business Review

George Balabanis, Hugh C. Phillips and Jonathan Lyall

Volume 98 Number 1 1998 2544

However, certain studies have replicated

Only Shane and Spicer (1983) looked at

Corporate social responsibility and economic performance

European Business Review

George Balabanis, Hugh C. Phillips and Jonathan Lyall

Volume 98 Number 1 1998 2544

multi-wave mail survey directed to companies

The study covered more than 20 industry

Corporate social responsibility and economic performance

European Business Review

George Balabanis, Hugh C. Phillips and Jonathan Lyall

Volume 98 Number 1 1998 2544

career breaks, crche facilities and job

Corporate social responsibility and economic performance

European Business Review

George Balabanis, Hugh C. Phillips and Jonathan Lyall

Volume 98 Number 1 1998 2544

significant investments in South Africa

For more information on what factors were

Measures of economic performance and

Corporate social responsibility and economic performance

European Business Review

George Balabanis, Hugh C. Phillips and Jonathan Lyall

Volume 98 Number 1 1998 2544

The ratios of return on capital employed and

empirical work can be used to support the

Corporate social responsibility and economic performance

European Business Review

George Balabanis, Hugh C. Phillips and Jonathan Lyall

Volume 98 Number 1 1998 2544

its concurrent and subsequent financial

Research also suggests that CSR activities

Corporate social responsibility and economic performance

0.5791 0.7731 0.5201 0.5341 0.732**1