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The field of Corporate Social Responsibility (CSR) has grown exponentially during the last decade. Relationship between Corporate Social Responsibility (CSR) and Financial Performance (FP) has been a very important issue and topic of great interest for researchers since from the origin of business entities. There is a growing perception within the corporate and shareholder communities that companies that perform well in the social, ethical and environment environmental arena also perform well financially. The previous researches concerning the link between corporate social responsibility and financial performance has produced varying results (negative, positive or no relationship). This study, therefore, is conducted with the aim to explore the link between Corporate Social Responsibility (CSR) and Financial Performance (FP) in high technological industry. Valuation multiple method and peer group analysis (comparable analysis) will be applied in this research, and the Samsung Electronics Co. Ltd will be selected as the reference company.
The field of corporate social responsibility has grown exponentially during the last decade. There is no universally accepted definition of Corporate Social Responsibility (CSR). Organizations are now expected to specifically take into account all aspects of organization performance. For example, the organization needs to consider not only financial results but also social and environmental performance. A larger number of organizations, therefore are now engaged in serious efforts to define and integrate CSR into all aspects of their businesses and consider CSR as a part of the core business operations of a company.
Barnett and Salomon (2006) defined financial performance as a general view of a company's revenues, growth and creation of shareholder value. Financial performance is also viewed as a general measure of a company's entire financial conditions over a given period of time, and can be used to compare similar companies across the same industry or to compare industries or sectors in aggregation (Berk & DeMarzo, 2011).
There is no universally accepted definition of corporate social responsibility because reporting of CSR is voluntary and there are no reporting standards that summarize what exactly should be included in the social responsibility of organizations (Deegan, 2004). According to Holme and Watts (1999), corporate social responsibility is defined as " the continuing commitment by business to behave ethically and contribute to economic development, while improving the quality of life of the workforce and their families as of the local community at large". Another definition of CSR has been stated by Carrol (1979) and has been used by many scholars in the field: '' The social responsibility of business embraces the economic, legal, ethical, and discretionary expectations that society has of organizations over a period of time''.
Various definitions of CSR have been stated in the literature, but the major concern is that CSR of a company should foster a serious of voluntary actions to help improve social and environmental conditions. This commendation is confirmed as desirable by recent market research within the legal economic and technical arena, whilst simultaneously creating social and environmental profits together with financial expansions (Carroll, 1979; Campbell, 2007; Mackey et al., 2007; Aguilera et al., 2007).
Overall, CSR is usually viewed as comprehensive set of, legal, ethical, and philanthropic responsibilities expected of it by its stakeholders. CSR activities are integrated into organization operations and usually embrace issues such as workplace, human rights, reputation, business ethics, environmental concerns, market values, and community investment.
Different companies deliver CSR in different ways. The differences are facilitated by factors such as organizational culture, shareholder demands, size of company, and specific industry. Multinational companies, for example have adopted CSR beliefs and strategy from their home countries; and some companies focus on a specific area, whatever is the most important to them -such as: customer satisfaction, workplace, environment, reputation or human rights.
Organizational strategy and good planning that both management and staff are committed to will result in the successful implementation of company CSR. Barnett and Salomon (2006) point out that it is crucial that the CSR strategy is combined with the organization's specific goals, resources and capabilities. Much debate has focused on the outcomes that social responsibility initiatives have generated, and the positive effect on stakeholder relationships which creates benefits and improves performance (Waddock and Graves,1997; Griffin & Mahon,1997; Orlitzky et al., 2003; Wu, 2006). Some organization managers thought such social activities of providing rewards to society are prohibitively costly and impact on the bottom line. Another perspective holds the notion that the expenses of social responsibility activities cannot get a return through improved performance (Vance, 1975; Shane and Spicer, 1983; McGuire et al., 1988).
Although it is true that some aspects of social responsibility might not accrue directly to the bottom line, social responsibility can, however be associated with a series of bottom line benefits (Waddock and Graves, 1997). Many benefits identified: with social responsibility can help increased operational efficiency in daily operations, and improved brand image and company's reputation. An increase can also be seen in: customer satisfaction and loyalty; greater employee commitment; increased return on investment; increased sales, and improved financial performance.
The company can gain benefit from its good reputation by having an increased ability to attract customers and investment. Companies with a strong social responsibility commitment often have an increased ability to attract and to retain good quality employees (Turban & Greening 1997).
These factors may lead to increased sales, reduced turnover and recruitment costs. Firms many argue, will clearly benefit from socially responsible activities in terms of employee morale and productivity (Parket & Eibert, 1975; Soloman & Hansen, 1985; Moskowitz, 1972).
When social responsibility is integrated into the business practices, the relationship between a firm's CSR and its financial performance has been the subject of lively debate (Cochran and Wood, 1984). Over the years, the link between CSR and financial performance has been studied extensively, but outcomes are varied (positive, negative or no relationship).
A diversity of approaches measuring CSR and financial performance, lacks standardization. Many researchers use various methods (such as analysis of documents, case study methodologies and social responsibility indexes) to measure the link between CSR and financial performance. The Valuation Multiples Method, which is used most commonly in the financial literature will be used in this study to identify the relationship between a company's socially responsible conduct and its financial performance.
Unlike other financial models such as discounted dividend, discounted abnormal growth and discounted cash flow methods, the Multiple Valuation Method does not require detailed multi-year forecasts of dividends or free cash flow (Krishna, 2007). Instead, Multiple Valuation Methods require a selection of comparable firms peer group and a multiple or set of multiples for valuation, such as a price-sales ratio (Schreiner and Spremann, 2007). Valuation multiples are useful in comparing similar firms to estimate their value according to their financial characteristics in a single number that can be multiplied by some financial metric (e.g. enterprise value or earnings before interest and taxes).
A company's financial performance can be assessed from its annual financial reports which lists information such as investments, costs, sales, profits, earnings and so on. To link this information with CSR performance, this research will use indexes-ratios that are based in balance sheets to contemplate a firm's value. In terms of this, this research not only considers the enterprise value of a company, but also compares a company with similar companies that may vary in terms of management and financial decision-making which may have influenced CSR performance.
A number of previous researches, which focused on the relationship between CSR and financial performance are discussed in the literature review section, and the main reasons for prompting such research with its consequent revelations, are further discussed and identified. This overview sets the stage for discussion in the following sections.
The research methodology section is dedicated to discuss the research methodologies, which have been used in previous studies, covering the description of the methodology used for this study and the reasons for selecting this methodology, reference company and comparable companies. The analysis section following the description of this study's research methodology, details the information collected from the primary and comparable companies financial and annual reports. All the results are discussed and findings reported in accordance with this study's hypothesis in Results Section. The conclusion section is dedicated to discussion of the results and to set the directions for further research.
At the center of this research is the question of whether or not there is relationship between company's CSR and its financial performance, therefore, the hypotheses are proposed as follows:
Null Hypothesis (H0): there is no relationship between corporate social performance and financial performance.
Alternative hypothesis (H1): there is a positive relationship between corporate social performance and financial performance.
The alternative hypothesis will be accepted if H0 is rejected.
This research will test the following hypotheses: if the companies are being tested to successfully apply CSR activities, it is anticipated that the trend line of NA/EBITA and BV/EBITDA ratios will have a negative rise among the years (2008-2011), which would indicate that, CSR activities, can make a significant contribution towards increasing a company's earnings. Furthermore, this research will examine the relationship between Cost (C) and earnings of company (EBITDA), in order to test whether or not there is a relationship between CSR and financial performance. All data used in this research will be collected from peer companies' financial and annual reports. Furthermore, this research in addition to considering the enterprise value of a company, will also compare a company with similar or comparable companies that vary in terms of management and financial decision-making which has an influence on CSR performance.
1. Relationship between CSR and Financial Performance
Consideration of the impact of corporate social behavior and associated matters is crucial for firms focused on achieving long-term success other market aspects and factors of course have a significant role to pay. (Peinado, 2006). Over the years, there has been a lot of research that has attempted to explore the relationship between a firm's social responsibility and its financial performance. Different methodologies have been used by researchers for measuring corporate social responsibility and financial performance; they have presented a variety of outcomes. Some research has adapted theoretical studies in order to prove that CSR has an impact on the financial performance of a firm (Allouche and Laroche, 2005.) There is a rich literary source of empirical studies exploring the relationship between CSR and financial performance (Bird and Reggiani, 2006; Wu, 2006). The resultant research findings concerning the relationship between corporate social responsibility and financial performance are quite diverse. Some studies found a positive relationship, some found a negative relationship and some found no relationship (Chand, 2006). As many inconsistent results have been found, the relationship between CSR and FP is inconclusive (De Bakker et al., 2005). This link has been studied extensively, but outcomes fail to be consistent. The largest number of studies found a positive relationship between CSR and financial performance.
Positive relationship between CSR and Financial Performance
A positive relationship implies that both CSR and FP move in tandem, which means that high values on CSR are associated with high values on FP and a decrease of CSR is connected with decrease of FP.
In the academic literature there are a number of reasons given for a possible positive relationship between corporate social responsibility and corporate financial performance.
Moskowitz (1972) chose 14 companies which have good social responsibility performance and compared their stock return with the Dow Jones Index. He found that the share returns of these companies had increased at a higher rate than major market index which was regarded as support of his hypothesis that there is a positive relationship between CSR and financial performance.
Alexander and Buchholz (1978) points out that one reason that CSR may be positively correlated to FP comes from the view that if company management acts in a socially responsible manner they are more likely to possess the skills to run a company well, improving its financial performance and making it an attractive investment.
In 1978, Spicer found there is a positive relationship between a firm's profitability and its level of pollution control in the paper and pulp industry. This study concluded that firms with higher level of pollution control might improve the profitability and lower the risk. Furthermore, according to the reputation perspective, Spicer also found a high CSP reputation may improve firms relations with bankers and investors and so that will promote their access to capital.
A high CSR reputation may also attract better employees (Greening and Turban, 2000) or increase current employees' goodwill, which may improve financial outcomes (Davis 1973; McGuire et al. 1988; Waddock and Graves 1997).
Anderson and Frankle (1980) also found a positive relationship between CSR and market value. In this research, a firm's market value has been used for measuring financial performance and its relationship with CSR. This research concluded that firms with reporting CSR might be more attractive to investors than those who did not.
In some school of thoughts, Freeman's (1984) work is considered as the foundation in defining the positive relationship between CSR and FP. He argued from the perspective of the stakeholder theory that responsibility of the organization's management now goes beyond the profitability and they must consider the social affairs in their decisions because the firm's responsibility is not only to satisfy the shareholders but also to consider and satisfy all types of firm's stakeholders. Moreover, Freeman (1994) argued that social performance is necessary to make corporate legality a reality.. Freeman predicted that future research would reveal a continuing positive relationship CSR and FP.
Cochran and Wood (1984) investigated the relationship between CSR and FP by using statistical research tolls. According to this research, it was found that asset age was highly associated with the levels of CSR; moreover, it was also found that there was a positive relationship between CSR and FP after controlling for the age of assets. This research concluded that different variables might be causing different conclusions in different investigations.
Griffin & Mahon (1997) reviewed 51 studies examining the relationship between CSP and FP from the 1970's through the 1990's. This study represented the issue of direction of the relationship between CSP and CFP for the periods. Most of those studies used samples from multiple industriesï¼Œ and Griffin & Mahon (1997) argued that multiple industry studies confuse the relationship between stakeholders and that the appropriate measures of CSR and FP are different. This, because of the nature of stakeholder actions, appears to be an important influence on CSR. Costs and benefits are different among industries, so companies operate in different areas, which might affect their social, environmental and economic performance. This research also concluded that industry itself is an important variable in multiple industry analysis and multiple measures of FP should be used.
Frooman (1997) investigated the relationship between CSP and CFP in the finance literature. Frooman considered event studies looking at acts of social irresponsibility or illegal behaviour. Frooman's findings indicated that socially irresponsible behaviour appears to be negatively correlated with investment performance, which implies that acting socially responsible, observing disciplines and obeying laws is essential to increase shareholders wealth and financial performance.
Waddock and Graves (1997) analyzed a total of 469 S&P 500 companies with regression analysis of the respective components' effects on financial performance. In this study, the CSR is measured by using company ratings from the Kinder, Lydenberg, and Domini (KLD) index, and three accounting measures (return on equity, return on assets, and return on sales) were used for financial performance. The KLD index has been recognized as the best information available for researchers studying CSR in the United States (Hillman & Keim, 2001) and provides an objective, uniform, and systematic assessment of the social behavior of firms (Waddock and Graves, 1994)
According to this research, Waddock and Graves confirmed their hypotheses that there is a positive and significant influence of CSR on financial performance.
More recent research by Ruf et al. (2001) also found that CSR has a positive impact on FP. This research investigated the CSR-FP link from a stakeholder perspective. According to the outcomes of this research, they found a positive relationship between CSR and FP and that FP could be influenced by firm size, industry and prior year's sales. Therefore size, industry and prior year's sales are stated as confounding variables.
Joyner and Payne (2002) found that reporting CSR could have a positive impact on the economic performance. This study, as a result of analysis of the links between the values, ethics and corporate responsibility in two organizations, concluded that values, ethics and behaviours of firm do have an impact upon society. However, there were also limitations in this research in that only two firms were studied in detail, so their conclusions might not be sufficiently evidenced based..
Orlitzky et al. (2003) found there is a positive correlation between CSR and FP through a meta-analysis by reviewing 52 articles during the 1972-1997 time period. Meta-analysis generally refers to the statistical method for combining the findings from independent studies. This study indicates that CSR and FP are positively correlated. CSR can be seen to improve corporate reputation and firms with a high reputation in CSR may attract better and more committed employees and this, as a result can impact on a firm's financial performance. This research offers strong support to the notion of reputation as a mediator. Their conclusion is supported in a similar review by Margolis and Walsh (2003). According to examined 127 empirical studies which deal with the relationship between CSR and FP, Margolis and Walsh found that the majority of investigations suggest CSR and FP are positively correlated, and that only a few demonstrated a negative relationship. However, the results may reflect a degree of inaccuracy due to a range of methodological problems associated with measuring the costs and benefits of CSR. Goll and Rasheed (2004) also suggest a positive correlation between CSR and FP.
Allouche and Laroche (2005) investigated the relationship between CSP and CFP using a meta-analysis with previous studies. Unlike the Orlitzky et al. (2003) study which includes only US studies, this study includes US and other countries studies. In addition this research was based on a larger sample of published studies than Orlizky et al. (2003) research. Alouche and Laroche (2005) used a multiple variable framework and regression analysis when reviewing 82 studies. The results show that CSP has a positive impact on FP. Moreover, they also found explanations for their mixed results and were thus able to reorient their approach for future research.
Luo and Bhattacharya (2006) explored the link between CSR and firm market value by considering customer satisfaction as an important variable. Their findings showed that CSR has a positive impact on firm's market value. They also indicated that it is easier for those firms that had good relations with their employees and possessed a good reputation of CSR in the market, to recruit better employees. This, of course, in turn could increase the productivity of firm with relatively incurring low cost and lead to improved financial performance. This perspective is similar to Spicer's view (1978), mentioned earlier. The conclusions of Luo and Bhattacharya (2006) also show that customer satisfaction plays a significant role in the relationship between CSR and FP and therefore is indicated as a confounding variable.
Peinado-Vara (2006) investigated with two case studies the role of CSR in Latin America, both from the firm's standpoint and from the view of society as a whole. As from the perspective of society, a firms' environmental performance is fundamental for the welfare of communities in Latin America. She found a positive correlation between firm's CSR and its FP. No confounding variables were found in this study.
Scholtens (2008) points that there are various types of CSR issues like environmental issues, relationship with employees, societal welfare, safer products and diversity. He also found that these CSR issues have a positive relationship with FP; however, the intensity of interaction between these CSR issues and FP varies depending on the demands confronting the firm's different stakeholders.
More recently, Wu (2006) investigated the relationship between CSR and FP. This investigation was to look at the role of firm size in association with CSR. The results showed that CSR could positively impact on FP and that the size of firm had no effect on CSR or on FP. He argued that the differences of previous research results were mostly due to the various definitions of CSR construct and measurements. As a result, he suggested that differences in measurement of CR and FP needed to be considered carefully since they could impact on the results of studies.
However, there are also numerous empirical studies that have found no evidence of a positive or a negative link between CSR and FP.
1.2 Negative relationship between CSR and Financial Performance
Contrasting with positive relationship, a negative relationship implies that correlation in opposite direction, which means that if CSR is increase FP is decrease and vice versa.
The perspective of negative correlation between CSP and CFP suggests that the implementation of CSR may create competitive disadvantages to the firm (Aupperle et al., 1985) since other costs may be required. Moreover, when CSR activities are being implemented, increased costs will result in little gain if measured in economic interests. McGuire et al. (1988) point out that the extra costs of carrying out CSR activities would at the expense of the firms' shareholders' personal wealth. In such a situation, CSR might have a negative impact on firm's FP.
The first study to find a negative relationship between CSR and FP might be Vance (1975). Vance refutes previous research by Moskowitz (1972) who found a positive relationship between CSR and FP. Vance extended the time period for analysis form 6 months to 3 years, and found a negative correlation between companies' stock value performance and their ranking with respect to social responsibility. This contradicts Moskowitz (1972). The study looked at share price and he concluded that "companies have more reasons to be socially responsible than only concerned with how it affects the per share value of their common stock (Vance, 1975)".
McGuire et al. (1988) argues that CSR produces higher costs for a firm which may cause lower financial performance. McGuire et al. (1988) considers that only a firm's FP can impact on CSR and CSR couldn't have any influence on the firm's FP. This view is contrary to what most researchers think. They also point that if a firm has spare money is more likely to invest in society and the environment.
Shane and Spicer (1983) investigated the relationship between the level of CSR reporting and FP. They found that high extra costs through stakeholder could result in high risk of investment which could have a negative impact on decision making, public relation, the probability of future costs and revenues. This perspective is in direct contrast to Spicer's (1978) study which found a positive correlation between CSR and FP. Moreover, they also conclude that different measurement of CSR can carry out different outcomes.
More recently, Rapti & Medda (2008) investigated the relationship between CSR and financial performance in aviation industry. They selected Manchester Airport as the reference airport and set a peer group of 10 airports in terms of several characteristics (each airport's number of passengers, number of employees, number of aircraft movements, number of terminals hand runway length). Valuation multiple method was used to evaluate each airport's enterprise value by using NA/EBITA (net value/earnings before interest and taxes), BV/EBITDA (book value/earnings before interest, taxes, depreciation and amortization) and P/E (price and earnings) ratios. These ratios had been used to compare reference airport with peer airports, and the results indicate that there is a negative relationship between CSR and financial performance.
Although numerous studies found positive or negative relationships between CSR and FP, there are still plenty of studies which show that no link between the two.
No relationship between CSR and Financial Performance
Fry and Hock (1976) concluded that neither a positive or negative correlation was identified between CSR and FP. This study focused on a single industry. Empirical analysis of sample companies from the oil industry has been used in this research. The findings show that the level of CSR did not have any influence on the firm's profitability. In addition they also found that firm size is a significant variable that has to be considered, and research in different industries may reveal different outcomes. This research was an extension of earlier study (Griffin and Mahon 1997, Aupperle et al. 1985) on the link between CSR and FP.
Alexander and Buchholz (1978) studied the relationship between the level of CSR and stock market performance, and also stock level risk. They found there to be no significant relationship between social responsibility and stock market performance. Fama (1970) concluded that the reason for this insignificant relationship was because of the market efficiency. He points out that if stock markets are efficient, all new information relevant to the profits outlook of a company is rapidly and accurately incorporated in share prices. Therefore, both social and environmental performance information are irrelevant profits, and having no influence on FP.
The study carried out by Aupperle et al. (1985) made a big contribution to the argument at that time. In order to avoid using weak methodology, to make the result more accurate, Aupperle et al. critically reviewed the previous researches and found that weak methodologies had been applied on the link between CSR and financial performance. Aupperle et al. examined the relationship between CSR and financial performance by using the empirical test of four components of CSR (economic, legal, ethical, and philanthropic aspects) by surveying 241 CEOs of companies listed in Forbes 1981 Annual Directory using 171 statements about CSR. The researchers used both long-term and short-term return on assets to measure financial performance No significant relationship was found between CSR and financial performance, thus suggesting the effect that CSR has on profitability is neutral by reporting CSR profits are neither increased nor decreased (Aupperele et al, 1985). Moreover, this research also states that these four components are not only empirically interrelated, but conceptually independent components of CSR.
McWilliams and Siegel (2000) tested the relationship between CSR and FP with a regression model that used a dummy variable indicating inclusion of a firm in the Domini 400 Social Index (DSI 400) as the measure of social performance. In this study, they used R&D as the main variable for CSR, and an average of annual values for the period 1991-1996 for 524 large US companies had been used in a regression model that included a measure of financial performance as the dependent variable. They found no significant result of R&D on enhancing the firm's financial performance. In order to confirm whether there was relationship between CSR and financial performance, McWilliams & Siegel (2001) carried out another research. This study was based on the supply and demand models of CSR. The conclusions indicate that the cost of CSR programs and later on profit from them offset each other in the market equilibrium. There thus may be no correlation between CSR and FP if this model is appropriately specified.
More recently in a study of CSR and FP Mahoney and Roberts (2007) embraced an empirical analyses based on a large-sample of publicly held Canadian companies with the argument that total asset is "money machine" to generate sales and incomes. Based on tests using four years of panel data they found no significant relationship between a firm's CSR and its FP.
This relationship between CSR and financial performance has been studied extensively, but results fail to be consistent. Davidson and Worrell (1990) point out four reasons for various research findings existing in this field: (1) the use of questionable social responsibility indexes; (2) there is no specific standard to measure CSR; (3) poor measurement of financial performance; and (4) unsuitable sampling techniques.
2. Measurement Strategy
As there are various measurements of CSR and FP that can have an effect on the research outcomes, differences in the measurement must to be considered very carefully when investigating the relationships between the two (Orlitzky et al., 2003; Wu, 2006).
2.1 Measures of Corporate Social Responsibility (CSR)
Determining how social and financial performances are linked is very difficult and has been viewed as a challenging task, because of lack of consensus of measurement methodology. Measuring tangibles is generally easy but measuring virtues or intangibles is difficult. CSR is not a variable and therefore impossible to measure, but it can be transformed into measurable variables. According to this, processes of CSR implementations need some kind of evaluation process that can be measured and reported.
In many cases, different approaches exist, subjective indicators are used, such as a survey of business students (Heinze, 1976), or business faculty members (Moskowitz, 1972), or even the Fortune rankings (McGuire at el., 1988; Akathaporn and McInnes, 1993; Preston and O'Bannon, 1997). Significantly, it is unclear exactly what these indicators measure. In other cases, researchers use the information from official reports such as annual reports to shareholders and CSR reports. Apart from these sources, it is very difficult to find other ways to determine empirically whether the social performance data revealed by firms are under-reported or over-reported. Some other studies use survey instruments (Aupperle, 1991) or behavioral and perceptual measures (Wokutch and McKinney, 1991).
Researchers such as (Waddock & Graves, 1997; Griffin & Mahon, 1997; Wicks et al, 1999; Thorne et al., 2010) use company ratings which from the Kinder, Lydenberg, and Domini (KLD) index measure CSR. The KLD index has been recognized as the best information available for researchers studying CSR in the United States (Hillman & Keim, 2001) and provides an objective, uniform, and systematic assessment of the social behavior of firms (Waddock and Graves, 2004). But KLD index is only related to US listed companies and will not be applicable for this research.
There are five key areas have been identified by Business in the Community (BITC) to measure impact and three levels that can be measure, identifying that firms are at various stages could be replaced in the report into their operation. The five areas are:
marketplace (advertising complaints, customer satisfaction level, social impact of core products/offer);
environment (overall energy consumption, use of recycled material, impact over the supply chain);
workplace (diversity profile, staff turnover, staff satisfaction measure);
community (cash value of company support, project progress measures, impact evaluations of community programme); and
human rights (grievance procedures, proportion of suppliers measured for compliance on human rights).
Griffin and Mahon (1997) point out that it is very important to choose the most appropriate method used to measure CSR, because different methods may show conflicting results. Overall, all these investigations measure CSR across a wide range of measurements by using different variables, such as pollution control, human rights, employee satisfaction, workplace, market position, sustainable investment, customer satisfaction level, impact on the supply chain, community relations and philanthropic programs (Waddock and Graves, 1997). CSR is thus a multifaceted concept because different dimensions are used for its measurement.
2.2 Measure of Financial Performance
Compared with the measuring of CSR, measurement of financial performance is considered a simpler task but it also has specific complications. The main reason is there is little consensus about which measurement approach to apply.
Previous research has identified two approaches to measure a firm's financial performance: market-based measures of financial performance (Orlitzky et al., 2003) and accounting-based measures of financial performance (Wu, 2006). Research shows that there is a difference in the prediction of financial performance between the two approaches. Market-based financial performance measures reflect company performance from a capital markets perspective, and they include ratios or rates of change (such as market return, stock performance, and share price) that incorporate the market value of the company (Orlitzky et al., 2003). Market-based measures rapidly reflect managing actions and changes in the economic value of the organization in an efficient market (Subrahmaniyam, 2009).
Market-based measures have been viewed as the best possible measures of firm's financial performance by some researchers (Moskowitz, 1972; Alexander and Buchholz,1978; Anderson and Frankle, 1980; Davidson and
Worrell, 1990; Luo and Bhattacharya, 2006). Davidson and Worrell (1990) argue that using market-based measurements could make the connection between CSR and shareholders' wealth more direct. Investors are only concerned about accounting-based measurements when they affect shareholders' wealth (Davidson and Worrell, 1990). Aras & Crowther (2009) also suggest that the results measured by this type of measure are less dependent on varying account procedures applied by company and managerial operations.
Accounting-based financial performance measures are those that rely upon financial information reported in balance sheets, cash flows and income statements. Accounting-based measures include profitability measures, cash flow measures, growth measures and asset utilization, such as asset turnover, asset growth and return on asset (Wu, 2006). This is unlike market-based measures, which reflect an organization's market value, the accounting-based measures reflect an organization's internal efficiency, which is effected by the organization's social performance (Beurden & Gossling, 2008)
Aras & Crowther (2009) argued that accounting-based measures only show a firm's historical performance, which could be influenced by the operation of the managers and produces unmatched results with the actual, due to the different accounting procedures applied. Furthermore, Brush et al. (2000) points out that the issues with accounting-based measures do not affect stockholder returns.
However, according to previously reviewed research, Wu (2006) concludes that researchers using market-based measurements report a slighter relationship between CSR and financial performance than researchers using accounting-based measurements. Many researchers have considered accounting-based measurements as a better predictor of social performance and more accurate than market-based measurements (for example: Spicer, 1978; Cochran and Wood, 1984; Aupperle et al., 1985; Waddock and Graves, 1997; Wu, 2006).
The reliability of accounting measurements is based on three aspects: representational faithfulness, neutrality, and verifiability. Roger & Rowlands (2007) state that the main advantages of accounting based measurement are relatively simple, easy to calculate and easy to understand.
But beyond that, there are some studies which adopt both of the market-based and accounting-based measurements (McGuire et al., 1988). These two measures have different theoretical implications, and state different perspectives of how to assess a company's financial performance (Hillman and Keim, 2001). Hence, using different measurements complicates the comparison of the outcomes of different researches.
As mentioned before, Griffin and Mahon (1997) has reviewed 51 studies which during the period from 1970's to 1990's; they found 78% of them used samples from multiple industries. This is a significant implication for various research findings existing in this field because different industries have different internal characteristics and external demands that could have effect upon the unique nature of CSR. Different industries face different portfolios of stakeholders with different degrees of activity in different areas (Griffin and Mahon, 1997). Rowley and Berman (2000) also suggest that CSR research should be carefully defined in different industry.
The second issue that Griffin and Mahon (1997) commend is that multiple measures of FP should be used. Many previous investigations used only one measure of FP.
For this literature overview about CSR and financial performance, a lot of factors that influence the relationship between CSR and financial performance have been identified. Apart from the measurements of CSR and financial performance, Beurden and Gollsing (2008) identified two essential moderating variables that have caused conflicting results: one is the industry in which a company operates and another is the size of the company.
The previous empirical researches also show that industry is an important variable in CSR researches. Fry and Hock (1976) state that the relationship between CSR and financial performance may be different in different industrial contexts. Furthermore, Rowley and Berman (2000) also suggest that CSR research should be carefully defined in operational terms to a specific industry or setting. The different conditions across industries could have influence on their implementation of CSR. Because companies operate in different industrial contexts and differ in the way they deal with legal compliance regimes, environment issues, consumers, external pressures and financial concerns, --- these differences could affect the CSR activities the company has undertaken and the financial performance of the firm (Chand, 2006).
Therefore, it is impossible to compare the link between CSR and financial performance of companies in different industrial contexts (Griffin and Mahon 1997). Chand (2006) also suggests that research on the relationship between CSR and financial performance should focus on a single industry, and a research which looks at single industry will have greater validity and accuracy. Thus, this research will explore the relationship between CSR and financial performance of the companies within the same industry (high technology industry).
For this reason it is impossible to compare the relationship between CSR and financial performance of firms indifferent industries together. A paper which looks at comparisons within an industry will have greater internal validity (Chand, 2006). These researchers proposed carrying out empirical research within one industry to avoid conflicting conclusions or by looking at the results of an industry individually rather than collectively.
According to the previous researches (Fry and Hock, 1976; Lerner and Fryxell 1998; and McWilliams & Siegel 2001), company size may also have a significant impact on the outcomes of the correlation between CSR and financial performance. Burke et al. (1986) also points out that company size is an essential moderating variable that have cause conflicting results concerning the relationship between CSR and financial performance, because larger companies have been considered to adopt the CSR mechanisms more commonly.
According to Waddock and Graves (1997) and Itkonen (2003), company size is associated with corporate social performance. They found that bigger companies act in a more socially responsible way than smaller companies. Furthermore, bigger companies can attract more attentions from stakeholders than smaller ones. The study of Orlitzky (2001) shows that company size is associated to company's financial performance since it can impact on the company's economics of scale. Therefore, in order to control this variable, the current research will focus on companies that have similar company size by using comparable analysis.
The divergent nature of the studies have resulted in questions being raised about the methods adopted, the size of samples taken into consideration and the measures that have been used to understand the corporate social responsibility. There has also been doubt whether the researchers have isolated the social performance factor in a proper manner in the studies conducted by them. Questions have also been raised about whether the researchers have properly isolated social performance as a causative factor in their studies. The researchers have also been questioned whether or not they have investigated the relationship of social performance to the economic performance of an organization over a proper time frame to gain relatively conclusive inferences regarding the true nature of the relationship between these variables.
Research is not just a process of collecting information, rather, it is about answering unsolved problems or creating that which does not currently exist (McNeill & Chapman, 2005). Burns (1994) defines research as ' a systematic investigation to find answers to a problem.' According to the definitions of research, research methodology can be defined as the most effective way to approach research questions.
As mentioned in the literature review, there is much research that has attempted to explore the relationship between firm's social responsibility and its financial performance. Different methodologies have been used by researchers for measuring corporate social responsibility and financial performance, and exploring the relationship between them.
In such research, some have adapted theoretical studies in order to prove that CSR has an impact on the financial performance of a firm (Allouche and Laroche, 2005). There is also a rich literature of empirical studies exploring the relationship between CSR and financial performance some of which uses a meta-analysis try to resort previous studies (Aupperle et al., 1985; Orlizky et al., 2003; Allouche and Laroche, 2005; Wu, 2006), some using event study methodology to assess the short-term financial impact when firms engage in either socially responsible or irresponsible acts (Posnikoff, 1997; Wright and Ferris, 1997; McWilliams and Siegel, 1997), others examining the relationship between some measures of long term financial performance, by using accounting based measures of profitability (Cochran & Wood, 1984; Waddock & Graves, 1997). In addition, some research has used the valuation multiples method (Rapti & Medda, 2008).
As discussed above and in the process of reviewing the literature, there are three main research methodologies that have been extensively used in this research area: 1). meta-analysis, which is the most extensively used among all methods (Aupperle et al., 1985; Roman et al., 1999; Orlizky et al., 2003; Allouche and Laroche, 2005; Wu, 2006); 2). panel data analysis, much research has applied this method by using a mass of companies' panel data to explore the sign of the relationship between CSR and financial performance (David Lyon, 2007) ; and 3). valuation multiples method (Rapti & Medda, 2008; Gregory et al., 2011).
As mentioned in the literature review, Beurden and Gollsing (2008) identified two main reasons that would cause conflicting results related to relationship between CSR and financial performance -- one is the industry in which a company operates, and another one is the company size. Meta-analysis is the reviewing of previous research to draw a conclusion; it is difficult to control these two important variables. For panel data analysis, it requires the collection of a mass of companies' panel data, which is very difficult to carry out in this research due to the conditions of limited resources.
The valuation multiple method therefore appears to be most appropriate, and will be applied to explore the relationship between CSR and financial performance. Such a valuation multiple method would also be in line with the explicit need to focus on companies which operate in the same industry and are of similar company size. Moreover, as peer groups consist of companies within the same industry and similar company size, the results of current research would be more reliable. The peer group analysis (comparable analysis) will thus be used in this research.
The current research followed the valuation multiples method which was proposed by Rapti & Medda (2008). Furthermore, since the literature that focuses on CSR and financial performance in the high technology industry is still lacking, this research will concentrate on the high technology industry.
The valuation multiples method is a process used to estimate the value of a company through comparing it with the values of similar companies (Berk & DeMarzo, 2011). This method is used extensively in the financial literature, and has been viewed as the quickest and most user-friendly way to value a company (Bertoneche & Knight, 2001). Moreover, this method when comparing similar or comparable companies can help the user avoid potential inaccuracy (Suozzo et al., 2000). Berk & DeMarzo (2011) also state that using the valuation multiples method is particularly advantageous when it is associated with comparable analysis, because this method represents the total value of the company's underlying business rather than just the value of equity.
In this study, valuation multiples will be applied to explore the relationship between CSR and financial performance. Accounting-based market multiples are the most common method to assess a company's corporate valuation. This methodology has been widely used in financial research (Liu et al., 2001, Fernandez, 2002, Alford, 1992).
Unlike other financial models such as discounted dividend, discounted abnormal growth and discounted cash flow methods, the Multiple Valuation Method does not require detailed multi-year forecasts of dividends or free cash flows (Krishna et al., 2007). Instead, the calculation of this method is based on various figures that have been listed in a company's financial statement such as profit, revenue, EBITDA, EBIT, earnings, cost, total assets and book value of net shareholders' equity (Jeffrey, 2007). The process of valuation using multiples requires the use of the firm's operating and financial information (e.g. profit, cost) in a single number that can be multiplied by some financial metric (e.g. EBITDA, EBIT) to value a company (Alford, 1992). Moreover, the company being evaluated is associated with a peer group of companies which are considered to be comparable (Schreiner and Spremann, 2007).
A company's financial performance can be assessed from its annual reports which are the most widely read corporate documents issued by companies. Deegan and Rankin (1997) state that the information contained in the annual reports has the most impact on readers; and managers of companies generally signal what is important through the annual reports. The annual reports have listed companies with financial information about profit, sales, costs, growth, investments, earnings, etc. Linking this information with CSR performance, this research will use indexes-ratios that are based in balance sheets to contemplate a firm's value (Fernandez, 2002). With reference to this, this research extracting the enterprise value of a company, also comparing a company with similar or comparable companies that vary in terms of management and financial decision-making which have influence on CSR performance.
According to the study the assets of the company are intervened by the CSR activities. The value of the assets along with the productivity generates earnings. The study will show the relationship of the Book Value (BV) and the Net Assets (NA) of a company with the company's earnings. According to Financial Accounting Standards Board (FASB), Book Value means the value of an asset according to its balance sheet; Net Assets is what residual value left for company owners after deduction all liabilities from all assets. In other words, Net Assets is the equity of the owner.
The capital stock and the additional paid-in capital are compromised in the Net Assets of the balance sheet; this represents the money pumped into the company for the organizations shares. The net incomes that are not paid out as dividends as well as retained earnings are included in the Net Assets (Downes and Goodman, 2003). As a result, if there is an activity of CSR, it must be included in the net asset value of the firm. Book Value is the shareholders' equity that is contained in the balance sheet. Book Value (calculated as total assets minus both intangible assets and liabilities) is a superficial view of a company's NA. Book Value does not include intangible assets as well as liabilities in its calculation, the grounds in which the existence contribution of CSR is still not known. The EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) will be put in action to analyze the income of each company. This is the reason why, the following two ratios will be used:
* The calculation for EBITDA is as follows: Net Income - (Interest Expense + Tax Expense + Depreciation Expense + Amortization) = EBITDA
As discussed in literature review, CSR activities are integrated into organization operations and usually embrace issues such as workplace, human rights, reputation, business ethics, environmental concerns, market values, and community investment. In these aspects, a company's net value typically reflects intangibles such as company reputation, trust in management, corporate governance, employees' goodwill etc. (Cramer & Bergmans, 2003). A number of researches (Spicer, 1978; Davis, 1973; McGuire et al. 1988; Waddock and Graves 1997) found that a high reputation might improve financial outcomes due to improve company's relation with bankers and investors, and increase current employees' goodwill. Unlike net assets, book value could reflect a company's tangible assets such as plants, equipment, property etc., which could be related to CSR activities, for instance, preventing waste and emissions, dealing economically with energy and materials and improving the working conditions. According to findings from Peinado-Vara (2006) and Scholtens (2008), these actions could lead to an increase in company's earnings due to improve its reputations, relationship with employees and higher productivity. Thus, if CSR activities could accomplish incomes in the company, the trend line of both NA/EBITDA and BV/EBITDA will have a negative rise among the years.
At the center of this research is the question of whether or not there is relationship between company's CSR and its financial performance, therefore, the objective of the current study is to test the hypothesis as follows: if the companies are being tested to successfully apply CSR activities, it is anticipated that the trend line of NA/EBITA and BV/EBITDA ratios will have a negative rise among the years (2008-2011), which would indicate that, CSR activities, can make a significant contribution towards increasing a company's earnings.
According to Waddock and Graves (1997) and Renneboog et al. (2007), the cost of being socially responsible will impact on company's financial performance. They argue that if CSR program imposes a cost on the company, the cost (for example, reducing pollution by investing equipment) may lower company's competitive due to its competitors decide not to take such cost. On another hand, the relationship might be positive, if the earnings caused by implementing CSR program exceed the costs, due to reducing accident risks and lowering emissions. As a result, it needs to further examine the relationship between Cost (C) and earnings of the firm (EBITDA).
By examining the ratio:
C/ EBITDA (6)
The firm is economically practicable, if this proportion is under 1.0, whilst the companies whose ratio is higher than 1.0 are not. It leads to the conclusion that if a firm bears high costs, it also has numerous incomes duo to investments made in order to engender benefit. This feature is one of the main rule in the CSR practice.
This research will be capable of denoting the direction of the relationship between CSR and financial performance. This thus identifies whether CSR conducts to incomes, or incomes conduct to CSR. Ultimately, it is necessary to emphasize that all of the ratios shown above will be counted per sale. It stabilizes the information by dividing each ratio with retails in order to get over the problem of sale fluctuation.
Identification of Peer Sets
A peer group is a group of companies which are chosen as being appropriately comparable to the company. Generally, these comparable companies share a similar industry, business or have similar financial features with the target company (Corporate Training Group, 2008). The selection of multiples in valuing and companies is made on the basis of the nature of the industry context in which the company operates (Meitner, 2006).
Ernst & Hacker (2012) suggest that from the statistical standpoint the group of peer companies is too small if only one or two comparable companies are used, and that the peer group should be composed of at least five companies. The peer group in this research therefore consists of five companies - Lenovo, Apple, Sony, Samsung and Toshiba.
The fundamental assumption of the multiples valuation is that similar companies or transactions are valued similarly (Ernst & Hacker, 2012). In practice, no two companies are exactly the same, and analysts often identify peer companies according to the following criteria (Corporate Training Group, 2008):
Business environment factors - industry, business model;
Accounting sectors -- accounting structure and standards;
Stowell (2012) states that the more comparable the peer companies are to the company to be valued, the more reliable will be the multiple results of these companies.
In Rapti & Medda's research (2008), a focus was on the aviation industry, and four essential characteristics had been used to identify peer companies. These four characteristics were: number of terminals, runway length, number of employees and number of passengers. They used number of terminals and runway length as indexes of airport's physical dimensions; they used number of employees and number of passengers to represent each airport's sources and income. Furthermore, as discussed in the literature review, the firm size is an important variable which may cause conflicting results. In order to make the research results more accurate, it is important to control this variable. Generally, there are three approaches that have been used most commonly for measuring firm size: (1) the number of people employee (Simerly and Li, 2001); (2) annual sales (More, 2001); and (3) total assets (Fauzi et al., 2004). According to these, the key characteristics that will be used in this research to identify peer companies can be divided into the following categories:
Number of employees
These characteristics are essential for this research to identify a set of peer companies in high technology industry. The service area is indexes of each company's economic scale and physical dimensions whilst the number of employees and sales represent the sources of generated income for a company. R&D is the key feature of this industry and R&D costs are related to sales. High technology companies are generally classified into two main types: one is Broad Groupings (e.g. semiconductor, computers and peripherals, software development, information technology, communications networking) and another one is Internet Groupings (e.g. Internet infrastructure, communication networking, Internet applications infrastructure). This research will focus on Broad Groupings.
This research will select Samsung Electronics Co. Ltd as the reference company for valuation multiples. It is a multinational electronics and information technology company, headquarter located in Suwan, South Korea. It is the lead subsidiary of Samsung Group and has over 200,000 employees, set plants and sales networks in 61 countries all over the world. It is the biggest television and mobile phone manufacturer in the world (Samsung, 2012).
According to Millward Brown (2011) Samsung was in the 67th position and was named one of the most valuable brands in the Top 100" brand list. Samsung had a growth period that was very significant in the year 2009 - 2010. The brand value of the firm which was valued at US$1.1 billion had increased by more than 80% during the time period.
According to the list published by Reputation Institute (2011) Samsung electronics ranked 22nd in the "World's Most Reputable Companies". The ranking of Samsung Electronics remained the same as 2010. However the company jumped from the 75th position in 2009 to the 22nd position in 2010 Samsung electronics also jumped from the 15th position in 2009 in the "50 Most Innovative Companies list which is published by Business week to the 11th position in 2010.
A group of 5 companies as peer sets to Samsung Electronics have been selected, in terms of sales, R&D cost, number of employees and number of plants. The characteristics are illustrated in Table 1. The information of this table is multiple as it combines information from each peer company's financial and annual reports.
Table 1: Characteristics of peer companies £ in millions
Number of Employees
A group of 5 companies have been selected as peer sets to Samsung Electronics, in terms of sales, R&D costs, number of plants, served area and number of employees. These characteristics are stated in Table 1. The information of this table is multiple as it combines information from each peer company's financial and annual reports. The peer group has been set according to these characteristics and all these peer companies are multinational corporations and operate in the high technology industry as the reference company. Peer companies are listed below:
Analysis and Results
Before starting analysis these collected data, it is essential to make sure all the data is in uniform currency unit. Because the companies that have been selected in this research have different home countries, so that the currency they used in their financial reports are different. Samsung Electronic uses South Korean's currency (won); Panasonic, Sony and Toshiba use Japanese currency (yen); and Apple as well as Dell use American currency (dollar). In order to exchange these different currency units to Pound, yearly average exchange rates of each currency into pound have been used.
As stated in the last section, Net Assets (NA) is an accounting measure of the firm's net worth, which states the shareholder's equity. In other words, Net Assets represents the net worth of the enterprise being total assets minus total liabilities. Besides, according to Bertoneche & Knight (2001), Net Assets represents not only the accumulative amount of cash originally paid into the company by shareholders (both capital stock and additional paid-in capital), but also the permanent capital of the company which is not paid out as dividends. If CSR activities exist in a company, these activities should be integrated in the company's net assets (Rapti & Medda, 2008). From the current study's hypothesis, this research expects that the trend line of NA/EBITDA ratio will have a negative slope through the years, which would indicate that, CSR activities, can make contribution on increasing company's earnings.
On the basis of the definition of Net Assets, the formula can be stated as the following:
Net Assets = Total Assets - Total Liabilities.
According to this formula and the data that comes from each selected company's annual and financial reports, each company's net assets (NA) during the period form 2008 to 2011 have been figured out (see Appendix). As mentioned in last section, the EBITDA (Table 2) will be put in an action to analyze the income of each company. The following graphic shows each company's changes in NA/EBITDA ratio during the period from 2008 to 2011.
Figure 1. Samsung Electronics (reference company) and each peer company's NA/EBITDA ratio during the period from 2008 to 2011.
As shown in the above figure, the trend line of NA/EBITDA ratio of peer companies have a slightly positive slope from 2008 to 2009 and significant negative slope starts from 2009, while Samsung Electronic has a slightly fluctuating during 2010-2011 period but it is negativ