ERASMUS UNIVERSITY ROTTERDAM
ERASMUS SCHOOL OF ECONOMICS
SECTION ACCOUNTING, AUDITING AND CONTROL
Master thesis Accounting, Auditing, and Control
THE ASSOCIATION BETWEEN VOLUNTARY CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE
AND FINANCIAL PERFORMANCE IN A DUTCH CONTEXT
Date
Author
Student Number
Thesis Supervisor
: 09-08-2011
: Nienke van Andringa de Kempenaer
: 299549
: Dr. K.E.H. Maas
Preface
This thesis has been written as part of the Master’s program Accounting, Auditing and Control
2010/2011 at the Erasmus School of Economics of the Erasmus University Rotterdam. The main purpose
of this research is to investigate the relationship between CSR disclosures and financial performances of
Dutch companies. Prior to writing this master thesis, I have followed the seminar Advanced Financial
Accounting. In the context of this seminar I have written a paper about the same topic in collaboration
with a fellow student, Bernt van de Loo (student number 294431). Some parts of this thesis are from
that paper.
Before reading this paper, I would like to thank some people who have supported me during the six
years of my study and especially in the last 7 months in which I wrote my thesis. First I would like to
thank my supervisor Dr. Karen Maas for her valuable and helpful comments on my thesis. Thank you for
all the time you had for me. Besides I would also like to thank Ernst & Young for the possibility of writing
my thesis during an internship at their office in Rotterdam. They offered me an inspiring environment
and all the necessary facilities. I’m looking forward to start working for Ernst & Young as a staff auditor
in September 2011.
Furthermore I would like to thank Tim for his patience and all the help, support and pep talks. Last but
certainly not least, I would like to express my sincere gratitude to my parents for making it possible to
study and to do all the other things I like and for supporting and motivating me during all my student
years.
Rotterdam, Augustus 2011
Nienke van Andringa de Kempenaer
Abstract
The growing importance of CSR for organizations and their management raises the question if the
increasing CSR activities also have financial benefits for a company. This master thesis aims to find an
answer to the question whether a relationship exists between the voluntary GRI corporate social
responsibility disclosures and the financial performances of Dutch companies. In this study both
contemporaneous and lead-lag relationships are investigated.
First the different theories which support a possible relationship and prior research are examined. Then
a self-constructed content analysis model was developed based on the GRI reporting guidelines to
measure the quality of CSR disclosures of Dutch companies. Three accounting based measures were
used to measure the financial performances of the sample firms. With these measures and three control
variables for firm size, risk, and industry, the empirical research is conducted on a sample of 24 Dutch
companies that disclose a GRI report.
The results of this study were not able to provide significant evidence for a relationship between the
voluntary GRI corporate social responsibility disclosures and the prior, concurrent, and subsequent
financial performances of Dutch companies.
Table of Contents
Preface
2
Abstract
3
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
7
7
7
8
8
8
9
9
Introduction
Introduction
Objective
Relevance
Research question
Demarcation and attainability
Methodology
Structure
2
2.1
2.2
Disclosure
Introduction
Disclosure
2.2.1
Mandatory disclosure
2.2.2
Voluntary disclosure
2.3
Mandatory versus voluntary disclosures debate
2.4
Conclusion
10
10
10
10
11
12
13
3
3.1
3.2
3.3
3.4
15
15
15
17
18
19
22
24
24
25
26
28
3.5
3.6
3.7
3.8
4
Theoretical background voluntary corporate social responsibility disclosures
Introduction
Content of the term corporate social responsibility
Corporate social responsibility disclosure
Incentives for voluntary corporate social responsibility disclosure
3.4.1
Theoretical motives for voluntary corporate social responsibility disclosure
3.4.2
The business case for CSR disclosure
Identifying relevant stakeholders
Information needs of relevant stakeholders
Corporate social responsibility reporting guidelines and standards
3.7.1
Global Reporting Initiative
Conclusion
Theoretical framework for relationship between corporate social responsibility disclosure and
financial performance
30
4.1
Introduction
30
4.2
Corporate social responsibility disclosure and financial performance
30
4.2.1
Good management theory
30
4.2.2
Slack resources theory
31
4.2.3
Positive synergy theory
31
4.2.4
Supply and demand theory
31
4.2.5
Trade off theory
31
4.2.6
Managerial opportunism theory
32
4.2.7
Negative synergy theory
32
4.3
Conclusion
32
5
5.1
5.2
Prior research
34
Introduction
34
Prior research
34
5.2.1
Cochran and Wood (1984)
34
5.2.2
Aupperle, Carroll and Hatfield (1985)
34
5.2.3
Ullmann (1985)
35
5.2.4
McGuire, Sundgren, and Schneeweis (1988)
36
5.2.5
Waddock and Graves (1997)
36
5.2.6
McWilliams and Siegel (2000)
37
5.2.7
Orlitzky, Schmidt and Rynes (2003)
37
5.2.8
Al Tuwaijri, Christensen and Hughes (2004)
38
5.2.9
Wu (2006)
39
5.2.10
Margolis, Elfenbein and Walsh (2007)
40
5.2.11
Moneva and Ortas (2010)
40
5.2.12
Aras, Aybars and Kutlu (2010)
41
5.2.13
Wood (2010)
41
5.3
Hypotheses development
42
5.3.1
Hypotheses sign of association between CSR disclosure and financial performance
42
5.3.2
Hypotheses causality of relationship between CSR disclosure and financial performance43
5.4
Conclusion
44
6
6.1
6.2
Measurement methods CSR disclosure and financial performance
Introduction
Measurement methods CSR disclosure
6.2.1
Subjective ratings
6.2.2
Disclosure index studies
6.2.3
Content analysis
6.2.4
Readability studies
6.2.5
Linguistic analysis
6.3
Measurement methods financial performance
6.3.1
Content of the term financial performance
6.3.2
Accounting-based performance measures
6.3.3
Market-based performance measures
6.4
Conclusion
46
46
46
46
47
47
48
48
48
48
49
49
49
7
7.1
7.2
7.3
7.4
50
50
50
51
51
51
52
52
53
53
53
54
54
Research Design
Introduction
Measurement method for CSR disclosure
Measurement method for financial performance
Control variables
7.4.1
Firm size
7.4.2
Risk
7.4.3
Industry
7.5
Sample design
7.5.1
Time period
7.5.2
Sample firms
7.6
Methodology
7.6.1
Analyzing variables
7.6.2
7.6.3
7.7
Testing the sign of the relationship between CSR disclosure and financial performance 54
Testing the causality of the relationship between CSR disclosure and financial performance
55
Conclusion
56
8
8.1
8.2
8.3
8.4
Empirical Analysis
Introduction
Descriptive statistics
Correlation analysis
Regression analyses
8.4.1
Multiple regression assumptions
8.4.2
Multiple regression analyses
8.5
Conclusion
58
58
58
60
63
63
64
76
9
9.1
9.2
9.3
9.4
9.5
78
78
79
80
80
80
Conclusion
Summary
Discussion and conclusion hypothesis 1
Discussion and conclusion hypotheses 2a, 2b, and 2c
Conclusion main research question
Limitations and recommendations for future research
References
83
Appendix A
89
Appendix B
92
Appendix C
93
Appendix D
98

Introduction

Introduction
In international debates, corporate social responsibility [CSR] has gained much attention (Aras et al.,
2010, p. 229). Recent examples of this enormous importance of CSR are the BP oil disaster in the Gulf of
Mexico in April 2010 and the environmental problems caused by Shell in Nigeria. These incidents
showed that for its reputation the extent to which an organization deals with its environment and
perform an active role in society is essential.
Today society is paying much more attention to CSR than twenty years ago and its magnitude is still
increasing (Aras et al., 2010, p. 229). The increasing public pressure on companies and their
management to perform an active role in society, the so-called “corporate social responsibility”, could
be a reason for this increasing relevance of CSR to corporations all over the world (Balabanis et al., 1998,
p. 25). When companies integrate social and environmental factors into their global strategic policies
and practices, they qualify as social responsible companies. These firms align the interests of their
shareholders with the social, the community, and the environmental interests of external parties or
stakeholders (Van de Velde et al., 2005, p. 129).
With this growing importance of CSR for organizations and their management, the question rises if these
increasing CSR activities in addition have financial benefits for the firm; does a financial payoff exist
because of increasing CSR activities? If this is true, the firm’s financial performance will display this
financial payoff. Empirical studies focusing on the relationship between CSR and financial performance
can answer this question.
Many studies have already investigated this possible relationship between the corporate social
performance [CSP] and the financial performance of organizations. According to Margolis et al. (2003, p.
273) between 1971 and 2002 one hundred twenty seven studies on this relationship have been
performed. However, no consensus is reached on the question if a relationship exists between CSR and
the financial performance of companies. In addition, the results of these studies are subject to
transience (Ruf et al., 2001, p. 153). Due to changes in economic developments, national or local
security, and expectations of society, the content of the term CSR is changing over time. These changes
could cause different outcomes of the studies over time. Consequently, in evaluating the relationship,
continuous research on this topic will be useful.

Objective
The aim of this research is to study the association between voluntary corporate social responsibility
disclosures and financial performance for Dutch companies. This relationship will be investigated in both
contemporaneous and lead-lag combinations.
As signalled in the introduction, this relationship has been examined many times before but the findings
of these studies are inconclusive. Some studies found a positive relationship, while others found no
relationship or even a negative relationship. Because of the different findings, the assumption exists that
it is interesting to keep investigating the relationship trying to obtain a consensus one time. Thereby,
most of the research on this topic has focused on determining the extent to which CSR affects financial
performance, but not the other way around (Campbell, 2007, p. 946). In this research, also the impact of
financial performance on CSR will be examined. Finally, to the best of my knowledge little scientific
research has conducted on the relationship in the Netherlands, this study intends to cover this gap.
Based on the great interest in the Netherlands for CSR and its implications today, it will be interesting to
investigate the relationship between CSR and the financial performance for the Dutch situation.

Relevance
Implications of this research will provide useful information for managers, community, and investors. In
order to deal with CSR factors in their strategic policies and practices and to assess their contribution to
the success of the firm, managers could use the information in this research. The results of this research
in addition will be interesting for society. When companies want to increase their CSP, they have to act
more in the interest of society, consequently society will benefit from this actions. If this research turns
out to confirm the financial benefits of CSR, companies could increase their level of CSR activities and
disclosures and thereby responding to the interests of society. Finally, because they can introduce the
CSR variable into the assessment criteria for investment decisions the results of this research will be
useful for investors.

Research question
The central research question for this research is
What is the relationship between the voluntary GRI Corporate Social Responsibility disclosures and the
prior, concurrent, and subsequent financial performance of Dutch companies?
To answer the central research question the following sub questions need to be answered. In addition,
these sub questions will function as guideline structuring this research.











What is the content of the term voluntary disclosure?
What is the content of the term CSR?
Which motives exist for CSR disclosures?
Which guidelines and standards for CSR disclosure exist?
Which theories could explain the relationship between CSR and financial performance?
How to measure CSR?
How to measure financial performance?
For which effects does this research need to control?
Does a relationship exist between CSR and financial performance in a Dutch context?
What is the causality of the relationship between CSR and financial performance in a Dutch context?
Demarcation and attainability
For this research only data from Dutch companies which publish a GRI report are used. A sample of a 24
firms is used. The accounting standards used by the sample firms are also taken into account. In order to
be able to compare the financial performances across different organizations, they have to apply the
same accounting standards. All the sample firms apply the rules of IFRS to their financial statements.
The relationship between CSR and financial performance for the selected firms is tested for the years
2007, 2008, and 2009. The year 2010 is not included in this study, because not all the necessary data for
2010 were already available and attainable. To collect the necessary financial data, the financial
database Orbis, available in the library of the Erasmus University, is used. In addition, the CSR data for
2007 - 2009 are obtained from the GRI reports of the sample firms. With these data, a content analysis is
conducted as measurement method for CSR disclosures. Paragraphs 6.2.3 and 7.2 of this research will
explain this content analysis in more detail.

Methodology
Firstly, by executing a literature study, more insight is obtained in the terms CSR and financial
performance and a theoretical background to this research is provided. At the end of this literature
review an overview of prior research about the relationship to be investigated is presented. This
overview of prior research will be presented in a chronologically manner.
Secondly, by analysing the GRI reports of the years 2007, 2008, and 2009, a content analysis is
performed for the measurement of CSR disclosures within the Dutch sample firms. The measures for the
financial performance of the sample firms and the additional control variables are acquired from the
Orbis database in the library of the Erasmus University.
Finally, the empirical part of the thesis is performed with statistical tests after collecting the necessary
data. The sign of the relationship between CSR and financial performance is tested with a Pearson
correlation test. The causality between the two variables is tested by a multiple regression analysis
controlling for several side effects.

Structure
The second chapter will give more insight in the terminology of disclosure, mandatory disclosure, and
voluntary disclosure. This chapter will provide an answer to sub question 1.
Next, chapter 3 will provide a theoretical background about CSR by answering sub questions 2 to 4. It
elaborates on the content of the terms CSR and voluntary CSR disclosure, on the motives for CSR
disclosure, and finally the existing guidelines and standards for CSR reporting.
Chapter 4 provides a theoretical background on the investigated relationship between voluntary CSR
disclosures and financial performance. This chapter answers sub question 5. The theories behind a
possible relationship between CSR and financial performance are discussed in this chapter.
Subsequently, chapter 5 will elaborate on prior studies which have investigated the relationship
between CSR and financial performance. Based on the findings of prior research, several hypotheses will
be stated for this research.
Chapter 6 discusses the different extant measurement methods for CSR disclosure and financial
performance, answering sub questions 6 and 7.
Chapter 7 then will present the research design for this research. It will present the chosen
measurement methods for CSR and financial performance, the variables which will be controlled for
(answering sub question 8), the sample design, and the methodology for the empirical part of this
research.
After executing the empirical research, the results will be presented and analysed in chapter 8, and a
discussion and conclusion follows in chapter 9, answering sub questions 9 and 10. Finally, chapter 10 will
present a summary, the conclusion of the research, its limitations, and recommendations for future
research.
2
Disclosure

Introduction
The aim of this research is to investigate the relationship between voluntary corporate social
responsibility disclosures and financial performance of Dutch stock exchange listed companies. Before
elaborating on the term CSR and CSR disclosures, it is important to understand the content of the term
disclosure. Therefore this chapter elaborates on the meaning of the term disclosure and its two
dimensions; mandatory and voluntary disclosures. The information in this chapter forms a basis for the
remainder of this research.

Disclosure
Companies disclose different kinds of information to assist in the decision making of parties external to
the organization. Different external parties exist, including present and potential investors, customers,
suppliers, lenders, employees, governments, the local community, parties performing a review or
oversight function, and the media (Deegan et al., 2006, p. 32).
Armitage et al. (2008, p. 315) provide the following definition of disclosure: “the provision of information
of all types by a company, both to the public at large and to restricted groups of information users”. They
state that when more and better quality of information is provided, a higher level of disclosure is
implied. This means that disclosure is a matter of degree.
Disclosures can take different forms. Firstly there are regulated financial reports, these include the
financial statements, footnotes, management discussion and analysis, and other regulatory filings.
Secondly some organizations provide voluntary reports, for example management forecasts, internet
sites, press releases, analysts’ presentations and conference calls, and other corporate reports. Finally
disclosures about companies by information intermediaries exist in addition. Examples of these
information intermediaries are financial analysts, industry experts, and the financial press (Healy et al.,
2001, p. 406). These different forms of disclosures clarify that reporting is one form of disclosure. This
research will focus on this way of disclosure because of the better availability of reports than for
example presentations and conference calls.
According to Popa et al. (2008, p. 1407) reporting and disclosure are the most important means for a
firm for the communication with its stakeholders. Also Healy et al. (2001, p. 405) recognize the
importance of financial reporting and disclosure as tools for management to communicate firm
performance and governance to outside investors. In general disclosure consists of two dimensions;
mandatory and voluntary disclosures.

Mandatory disclosure
In most countries disclosures are likely to be heavily regulated, with many accounting standards and
other regulations telling how particular transactions and events need to be recognized, measured and
disclosed (Deegan et al., 2006, p. 32). The users of disclosures are often planning to transfer resources
to a company, therefore it is important that several rules are set up to govern how the information in
those disclosures should be brought together. These rules aim to protect the interests of external
parties, which are not involved in the day-to-day management of an organization.
Although financial reports already exist for hundreds of years, the regulation of disclosures is a
reasonably recent phenomenon. Several events, such as the Wall Street stock market crash of 1929,
have led to the early moves for regulation of disclosures (Deegan et al., 2006, p. 38). Responding to this
crash, the Securities Exchange Commision (SEC) composed the Securities Exchange Act of 1934. This act
required the disclosure of specific financial information for the first time.
Leuz et al. (2000, p. 94) define mandatory disclosure as “a decision by the firm about what it will disclose
before it knows the content of the information (i.e., ex ante)”, whereas Popa et al. (2008, p. 1408)
provide the following definition for mandatory disclosure: “those aspects and information which must be
published as a consequence of the existence of some legal or statutory stipulations, capital markets,
stock-exchanges commissions or accounting authorities regulations”. Mandatory disclosures are thus
disclosures of information that are required to be exposed as a result of regulations.

Voluntary disclosure
Next to the information that companies disclose mandatory due to regulations, some organizations elect
to voluntary disclose additional information to parties outside the organization, information relevant to
the decision needs of those parties (Meek et al., 1995, p. 555). Voluntary disclosures are disclosures of
more information than postulated by national GAAP and other reporting standards (Scott, 2006, p. 97).
Besides this definition, many other definitions are given by different researchers:

The Financial Accounting Standards Board (FASB) defines voluntary disclosure as “disclosures,
primarily outside the financial statements, that are not explicitly required by GAAP or an SEC rule”
(FASB, 2001, p. 5).

Popa et al. (2008, p. 1408) give three definitions for voluntary disclosures: “an additional offer of
information in relation to different national regulations or international referential of business
reporting, that is, something that is not compulsory by the law, but becomes voluntary through the
behaviour regarding publication”, “the excess of information, dependent both on the free choice of
the enterprise leadership and on the regulations in force, the outside pressures of the capital markets,
financial analysts, consulting firm’s et al. and the cultural factors”, and the third definition sounds as
follows “the reporting outside the financial statements, which is not explicitly ruled through norms or
laws”.

Cooke (1989, p. 171) adopted a comprehensive approach to the definition of voluntary disclosures
for a Swedisch context, his definition reads as follows: “those items that are not stipulated by the
Companies Act 1975, The Accounting Act 1976 and by Notices issued by the Accounting Standards
Board (Bökforingsnämnden – BFN)”.

Petersen et al. (2006, p. 130) define voluntary disclosure as the provision of “additional pieces of
information to investors and analysts through the annual report”.

Leuz et al. (2000, p. 94) provide the following definition of voluntary disclosures in contrast to their
definition of mandatory disclosures mentioned in paragraph 2.2.1.: “a decision by the firm made
after it observes the content (i.e., ex post)”.

Armitage et al. (2008, p. 315) define voluntary disclosure as “provision of information beyond the
amount required by law and regulation”.
All these different definitions have one thing in common, the free choice and independency of rules and
regulations of voluntary disclosures. When mandatory disclosures are insufficient, managers elect to
voluntary disclose extra information to communicate their superior knowledge of their company’s
performance to external parties (Healy et al., 2001, p. 420). In other words, if the optimal disclosure
level of a firm is above or equal to the current mandatory disclosure level and due to a new regulation
some value-relevant information is removed from the mandatory disclosures, a company has incentives
to substitute the missing information with voluntary disclosures (Yu, 2011, p. 2). Several theories exist
about these incentives for voluntary disclosures, paragraph 3.4 elaborates on those motives.
According to Meek et al. (1995, p. 557) voluntary disclosures can be classified into three groups –
strategic, financial, and nonfinancial information. They state that the decision relevance of information
differs by type. Strategic and financial types of information are assumed to be decision relevant for
investors, in contrast to nonfinancial information which is decision relevant for a broader group of
stakeholders than only the owners/investors. Nonfinancial information focuses more on a company’s
social accountability. The nonfinancial type of information can be further divided into three subgroups –
industry cohort, corporate governance, and corporate social responsibility (CSR) information (Hoff et al.,
2008, p. 3). Industry cohort information can help investors to build portfolios in order to compare the
relative performance of organizations. Corporate governance information developed into a key focus of
investors and regulators in current years, elaborating on director independence, audit processes, and
executive pay. Finally CSR information is provided because of the material risks for firms corresponding
social and environmental issues (Hoff et al., 2008, p. 4 – 5).
Voluntary disclosures have several benefits for a company. The potential advantages of voluntary
disclosures are an increase of the firm’s credibility, an increase of the shares’ value, an increase of the
potential investors number, an improvement of the access to the capital, an increase of the balance
between the share’s price and the share’s profit, a reduction of the shares’ volatility, an increase of the
shares’ liquidity, an improvement of the relations with the suppliers, and a decrease of the political
interventions to regulate the market. Though, also some limitations exit to voluntary disclosures. The
competitive dynamics of the products and services of a firm can play a restricted role concerning the
voluntary disclosures of a company for example. Another important limitation of voluntary disclosures is
the disclosure cost (Popa et al., 2008, p. 1409). Companies must perform a cost-profit analysis for each
form of information it wants to disclose. As a result of the complex measurement of these profits and
costs and the subjectivity it entails, this is often a difficult matter.
Because companies can freely choose to provide additional information through voluntary disclosures, it
makes sense to assess the credibility of voluntary disclosures. Healy et al. (2001, p. 425) discuss two
mechanisms that can increase the credibility of voluntary disclosures. Firstly, independent external
parties can provide assurance about the quality of voluntary disclosures. Secondly, prior voluntary
disclosures can be compared with required financial reporting afterwards. The latter is mostly the case
for management’s forecasts. In general Healy et al. (2001, p. 426) state that voluntary disclosures are
assumed to contain enough credibility, except for companies which are in a financial distressed
situation.
2.3
Mandatory versus voluntary disclosures debate
The central question in the mandatory versus voluntary disclosure debate is, if all the existing
regulations concerning disclosures are really needed (Deegan et al., 2006, p. 39). In this debate there are
two broad schools of thought, one group argues that regulation is necessary, while others argue that
regulation is not necessary.
The parties that argue that regulation of disclosures is necessary have several reasons for this
statement. Firstly, they argue that various market failures made it necessary to implement a mandatory
disclosure system (Bainbridge, 2000, p. 1024). Bainbridge (2000, p. 1030) discusses that according to
welfare economics four basic sources of market failures can be recognized: producer monopoly, the
good to be produced is a public good, externalities, and informational asymmetry between producer
and consumer. Proponents of a mandatory disclosure system state that the latter three sources can
justify mandatory disclosures.
Secondly, markets for information appear not to be efficient and without regulations a sub-optimal
quantity of information will be generated (Deegan et al., 2006, p. 39). Therefore proponents of
mandatory disclosures assert that information about companies’ financial conditions form a public good
which will be under-obtained without regulation (Dye, 1990, p. 2).
They also argue that companies tend to restrain the disclosure of bad information without disclosure
regulations (Dye, 1990, p. 2). A related argument to this is that investors and other stakeholders need to
be protected from fraudulent firms which may produce misleading information. This fraudulent
information cannot be identified as fraudulent when it is used due to the information asymmetry
between stakeholders and companies (Deegan et al., 2006, p. 39). Finally, supporters of mandatory
disclosures claim that regulation initiates uniform methods which will be adopted by different
companies, leading to increased comparability of disclosures.
On the other hand, also opponents to mandatory disclosure systems bring several arguments why
disclosure regulations are not necessary. They argue that market forces will create optimal levels of
disclosure in a voluntary disclosure system (Bainbridge, 2000, p. 1024). This is the so-called ‘free-market’
approach, if the market is left to operate freely then best quantities of information will be produced
(Deegan et al., 2006, p. 49).
These opponents of regulation also counter by stating that firms have incentives to disclose information
about their activities to distinguish themselves from more poorly managed companies (Dye, 1990, p. 2).
In addition they assert that because capital markets need information, companies which fail to provide
this information will be penalized by the market (Deegan et al., 2006, p. 39).

Conclusion
This chapter elaborated on the content of the term disclosure, its two dimensions voluntary and
mandatory disclosure and the existing debate about mandatory versus voluntary disclosure.
Disclosure can be defined as “the provision of information of all types by a company, both to the public
at large and to restricted groups of information users” Armitage et al. (2008, p. 315). Firms disclose
information to assist external parties in their decision making. Disclosure can take different forms –
regulated financial reports, voluntary disclosure, and disclosures about companies by information
intermediaries. In general disclosure has two dimensions – mandatory and voluntary disclosure.
Mandatory disclosures are disclosures that are required by law and/or regulations. Laws and regulations
for mandatory disclosures were first developed after the Wall Street stock market crash of 1929.
Next to mandatory disclosures, voluntary disclosures exist in addition. Many different definitions of
voluntary disclosure subsist. In general voluntary disclosure can be defined as disclosures which
companies provide voluntary and are not bounded by laws and regulations. Voluntary disclosure entails
several advantages and disadvantages for a company. Prior research divided voluntary disclosure into
three groups – financial, strategic, and nonfinancial information. Subsequently voluntary disclosure of
nonfinancial information can be divided into three groups – industry cohort, governance, and corporate
social responsibility (CSR) information. The latter is the central point of attention of this research. The
next chapter will further elaborate on this specific form of voluntary disclosure.
Finally also the debate of mandatory versus voluntary disclosure is discussed. In this debate two broad
schools of thought can be divided – proponents and opponents of a mandatory disclosure system.
Proponents of mandatory disclosures argue that regulation of information disclosure is necessary. They
have several arguments for this statement, for example various market failures, the inefficiency of
markets for information, and improved comparability of disclosures. Opponents of mandatory
disclosures assert that regulation is not necessary because of a ‘free-market’ approach. They support a
voluntary disclosure system.

Theoretical background voluntary corporate social responsibility
disclosures

Introduction
After discussing the terms disclosure, mandatory disclosure, and voluntary disclosure in chapter 2, this
chapter will provide a theoretical background on the term corporate social responsibility and its
dimensions. Firstly the term itself will be explained using different definitions. Subsequently CSR
disclosures, theoretical motives and indicative incentives from a firm perspective for these disclosures
will be discussed. Thereafter the relevant stakeholders and their information needs are presented. At
the end of this chapter the existing standards and guidelines for CSR disclosures are examined.

Content of the term corporate social responsibility
Corporate Social Responsibility [CSR] is a commonly known expression and is highly ranked on research
and almost all business agendas (Lindgreen et al., 2010, p. 1; Mathis, 2004, p. 2). Other notorious
expressions which attempt to denote more or less the same are ‘sustainability’, ‘corporate
responsibility’, ‘corporate governance’, ‘environmental social governance’, and ‘corporate citizenship’.
For already a long time the role of business in society has been a point of interest for practitioners and
scholars (Salzmann et al., 2005, p. 27). The first publication on the field of CSR dates back to 1953 when
Bowen published his “Social responsibilities of the business man” (Balabanis et al., 1998, p. 25). Bowen
(1953, p. 6) argued that an industry has an obligation to follow those policies, to make those decisions,
or to undertake those actions which are expedient in terms of the goals and values of society.
Although the first publication on the topic dates back to 1953, CSR rose to prominence in the 1970s
(Balabanis et al., 1998, p. 25). With the publication of the report of the Club of Rome in 1972 titled “The
limits to growth”, people became more and more aware of the fact that sooner or later they will come
up against the “limits to growth” if businesses do not change their behaviour or production (Eijk et al.,
2010, p. 5). The world population increases exponential, environmental impact is getting heavier, and
the number of commodities declines. Since the publication of this report of the Club of Rome, firms are
increasingly accounted for their social and environmental impact and the manner in which they handle
this impact. The term CSR was introduced in the 1980s and is nowadays a widely known and accepted
term.
Another term often used is Corporate Social Performance [CSP]. As with CSR, many different definitions
exist for the term CSP. Marom (2006, p. 191) defined CSP as “a way of making CSR applicable and
putting it into practice”. Although researchers try to differentiate CSP from CSR, sometimes CSR is seen
as a component of CSP and sometimes vice versa (Marom, 2006, p. 191; Carroll, 1979, p. 499; Wood,
2010, p. 50), the terms CSR and CSP are often used interchangeably (Margolis et al., 2007, p. 7). For this
research the definition of Marom is used stating that CSP is putting CSR in practice. Van Beurden et al.
(2008, p. 409) state in addition that CSR is impossible to measure because it is not a variable and
because it suggests motivation (Wood, 2010, p. 52). CSP as the operative term, in contrast, can be
converted into measurable variables, though it remains hard to measure.
The key question is what is CSR and what does it include? What is meant by society? Does it refer to the
Netherlands, Europe or the whole world? Previously society could refer to the Netherlands alone, when
production still took place in one plant. But today production usually takes place in different factories in
different countries due to globalisation. A consequence of globalisation is that more and more societies
are involved in a business process. The result is that society refers not any longer to the Netherlands but
to the whole world (Eijk et al., 2010, p. 5).
Researchers do still not agree upon the content of the term CSR after decades of research. Consequently
a lot of different definitions are in use and there is no agreement on what exactly should be included in
the corporate social responsibility of companies (Van Beurden et al., 2008, p. 408). A few examples of
existing definitions of CSR:

Carroll (1979, p. 500) provided the following definition of CSR which is possibly the most commonly
cited definition (Crane et al., 2008, p. 4): “The social responsibility of business encompasses the
economic, legal, ethical, and discretionary expectations that society has of organizations at a given
point in time”.

Another definition of CSR was provided at the World Business Council for Sustainable Development
[WBCSD]: “Corporate social responsibility is 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 well as of the local community and society at large” (Holme et al., 2000, p. 8).

Wood (1991, p. 693) defines CSP as “a business organization’s configurations of principles of social
responsibility, processes of social responsiveness, and policies, programs, and observable outcomes as
they relate to the firm’s societal relationships”. CSR is seen as a component of CSP in this definition.

McWilliams et al. (2001, p. 117) define CSR as “actions that appear to further some social good,
beyond the interests of the firm and that which is required by law”. This definition states that “CSR
means going beyond obeying the law”.

A widespread known approach to CSR is the triple bottom line approach coined by John Elkington in
1997. The triple bottom line focuses on economic prosperity, environmental quality, and social
justice (Elkington, 1997, p. 70). The financial performance of a company is often seen as the
business’s bottom line. The triple bottom line concept of Elkington broadens this single focus on a
single bottom line of financial performance to an assessment of the three bottom lines of economic
prosperity, environmental quality, and social justice. The triple bottom line is also known as the triple
P – people, planet, profit – approach, introduced by Shell in their sustainability report in 2001.
Next to the number of separate definitions of CSR, some research has been conducted on these
definitions trying to find some similarities in the existing definitions. Two examples of this kind of studies
are the study of Alexander Dahlsrud in 2008 and the study of Mathis in 2004. Dahlsrud (2008, p. 1)
developed five dimensions of CSR by conducting a content analysis on the existing definitions. The five
dimensions of CSR provided by Dahlsrud (2008, p. 4) are the environmental dimension referring to the
natural environment, the social dimension saying something about the relationship between business
and society, the economic dimension addressing the socio-economic or financial aspects of CSR, the
stakeholder dimension referring to stakeholders or stakeholder groups, and the voluntariness dimension
describing actions not prescribed by law.
The second paper examining the different definitions of CSR is from Mathis (2008). Mathis (2008, p. 91)
selected a number of definitions of CSR formulated by important public, business, and civil society
organizations. The author analyzed these definitions using some key elements of CSR. The key elements
Mathis identified are a leading role of political authorities, voluntary compliance, all forms of
stakeholder groups, accountability/transparency, ethical behaviour, and commitment to add economic,
social, and environmental value (Mathis, 2008, p. 94). With the findings of this analysis Mathis (2008, p.
102) provides a working definition of recent CSR perceptions of society: “CSR is the voluntary
commitment (within a regulatory/reference framework) by business to add economic, social, and
environmental value to societies at large in a transparent and accountable manner. CSR implies the
recognition that business activities can affect the interests of all normative and derivative stakeholders,
including employees, communities, customers, and the natural environment and, therefore should be
reflected in the company’s policies and actions”.
Crane et al. (2008, p. 5) identified also six core characteristics of CSR: voluntariness, internalizing or
managing externalities, multiple stakeholder orientation, alignment of social and economic
responsibilities, practices and values, and beyond philanthropy. Voluntariness deals with CSR as a
voluntary activity that goes beyond activities required by law. Internalizing or managing externalities
refers to the positive and negative side effects of economic actions beared by others. Those side effects
could be internalized or managed by a company. The focus on a broad range of stakeholders, rather
than a single focus on shareholders, is represented in the key element of a multiple stakeholder
orientation. Alignment of social and economic responsibilities is about the fact that CSR should not
conflict with responsibility, but the social and economic interests should rather be aligned. Practices and
values refer to a philosophy or set of values that support the CSR practices and strategies. The final key
element, beyond philanthropy, states that CSR is not only about humanity and community projects, but
rather about how the complete core business functions of a firm affect society.
Next to Crane et al. (2008), Holme and Watts (2000, p. 10), commissioned by the World Business Council
for Sustainable Development [WBCSD], explicated five key issues of CSR as well. The five key issues they
identified are human rights, employee rights, environmental protection, community involvement, and
supplier relations.
In general we can conclude that CSR is about the social and environmental consequences of a
company’s activities, next to the economic consequences. It is about taking account for people, planet,
and profit. In this research no choice is made for a particular definition, because it is practically
impossible to find a definite answer to the question of the exact content of the term CSR. Instead this
paper will focus on the different key elements of CSR to investigate the relationship between CSR
disclosures and financial performance.

Corporate social responsibility disclosure
As mentioned in chapter 2, in most countries financial accounting disclosures are heavily regulated by
laws and accounting standards. For the disclosure of information about the social and environmental
performance of a company, on the other hand, not many requirements exist. Though, many
organizations voluntarily provide disclosures about the social and environmental effects of their
activities.
Disclosure about this kind of information is often called CSR disclosure, sustainability disclosure, social or
environmental disclosure. All these terms indicate “the provision, to a range of stakeholders, of
information about the performance of an entity with regard to its interaction with its physical and social
environment, inclusive of information about an entity’s support of employees, local and overseas
communities, safety record, and use of natural resources” (Deegan et al., 2006, p. 311). This form of
disclosure is mainly about the accountability and responsibility of businesses.
Transparency is an integral part of CSR, which can be attributed to the social significance of the theme. If
a company longs to be demonstrable corporate social responsible, reliable information is indispensable.
CSR disclosure can be an important tool in providing reliable information (Eijk et al., 2010, p. 21). Next to
transparency, accountability is another important element of CSR disclosure. The central principle of
accountability is that organizations should justify (account for) their actions through the provision of
information to stakeholders and society, for example through CSR disclosures (Swift, 2001, p. 16).
Different stages can be identified in the process of composing CSR disclosures (O’Dwyer, 2005, p. 283).
In broad terms the process consist of four stages, the ‘why-for who-what-how’ stages (Deegan et al.,
2006, p. 313). The why stage denotes the objectives to take on CSR disclosures; the reason why a
company wants to produce a CSR disclosure. These incentives for CSR disclosures will be discussed in the
next paragraph. The second stage, the who stage, is about identifying the stakeholders to whose
information needs the company wants to direct its CSR disclosure. Paragraph 3.5 elaborates on this who
stage. The next broad stage is the what stage, at this point an organization needs to determine the
information needs of the stakeholders identified in the previous stage. These information needs will
clarify what the content should be of the CSR disclosure, which issues the disclosure should address. The
last phase is the how stage, discussed in paragraph 3.6, in which a company actually produces a CSR
disclosure or report. This stage involves rules and regulations about how CSR disclosures should be
composed (Deegan et al., 2006, p. 312-313).
Often the link between CSR disclosure and CSP is implicitly presumed, but some studies have examined
this specific link (Murray, 2010, p. 48). The findings of these studies mainly show a positive link between
social disclosure and CSP, indicating that social disclosure accurately display the CSP of a company.
Besides, many studies investigating the link between CSP and financial performance use social disclosure
as a proxy for CSP (Murray, 2010, p. 48). Though, some studies exist that find a positive relationship
between CSP strengths and social disclosure, but not between CSP weakness and social disclosure
(Dawkins et al., 2008, p. 23). The authors find that companies with lower global CSP ratings showed
disclosure that was related to CSP strengths in order to use positive CSP events to construct an
operational platform for the future. The social disclosure of these companies can emphasize strengths
and repair or improve their reputation (Dawkins et al., 2008, p. 24-25). This research needs to keep
those practices in mind examining the relationship between CSR disclosure and financial performance.
Continuing on the short elaboration about the mandatory versus voluntary disclosure debate presented
in paragraph 2.3, such a debate exists also for CSR disclosure in particular. Over the past decades a trend
emerged which shows an increase in voluntary reporting of environmental and social issues (Perrault
Crawford et al., 2010, p. 512). Together with this tendency, the demand from various stakeholders for
more comprehensive mandatory disclosure on behalf of corporations increased, in an attempt to
standardize the information disclosed and to force greater accountability. However, these regulatory
pressures have some disadvantages. First, more disclosure does not necessarily equal better disclosure,
the increase in disclosure may be in terms of quantity, not quality (Perrault Crawford et al., 2010, p.
517). High quality disclosure is disclosure that is timely, reliable, and relevant (Williams, 2008, p. 252).
Secondly, business responses through disclosure may be made only to recover lost legitimacy as a type
of social justification for a company’s actions. Another argument against mandatory social disclosure is
that organizations already voluntary provide a great deal of the demanded information. Given the large
number of literature and discussions about it, this debate is likely to persist for some time.

Incentives for voluntary corporate social responsibility disclosure
This paragraph discusses the why stage of the social disclosure process which was explained in the
previous paragraph. The why stage refers to the objectives companies have to voluntary disclose
information about their social and environmental performance. Several theories explaining why
organizations choose to provide these disclosures exist, these theories are presented in the first
sub-paragraph. Next, sub-paragraph 3.4.2 elaborates on the business case for CSR concerning the
arguments or motivations of the business community itself.

Theoretical motives for voluntary corporate social responsibility disclosure
3.4.1.1 Positive accounting theory
A theory which seeks to predict and explain the incentives for voluntary corporate social responsibility
disclosure is the Positive Accounting Theory [PAT] of Watts and Zimmerman (1986). This is a positive
theory which is typically based on observation. The PAT has a number of central assumptions, including
the central economics-based assumption of wealth maximization, the semi strong efficient market
hypothesis, and the capital asset market pricing model. Besides these three central assumptions, the
PAT is also based on the agency theory, which will be discussed in the following sub paragraph.
The central economics-based assumption of wealth maximization assumes that all actions of individuals
are driven by self-interest (Deegan et al., 2006, p. 207). Under this assumption all people are
opportunistic and only adopt a particular strategy if this strategy will increase the personal wealth of the
decision making party. This assumption implies that the PAT leaves no room for ideas of loyalty,
morality, social responsibility and the like. As such, corporate social responsible activities and disclosure
about these activities will only take place if it has positive effect on the wealth of the management
involved in the decision making process of the activities.
The next assumption is about the efficient market hypothesis [EMH]. The EMH assumes that capital
markets respond in an efficient and unbiased way to publicly available information (Deegan et al., 2006,
p. 210). The perspective taken is that information from various sources is reflected in the share prices of
companies. Fama et al. (1969, p. 1) state that an efficient market adapts rapidly to new information. The
EMH has three forms, the weak form, the semi-strong form, and the strong form (Watts et al., 1986, p.
19). The weak form assumes that extant stock prices only reflect information about past stock prices and
trading volumes. The strong form assumes that stock prices, generally, reflect all information known to
anyone at that time (including insider information). The PAT is based on the semi-strong form of the
EMH (Healy et al., 2001, p. 419). The semi-strong form assumes that all published information at that
time, is rapidly and fully seized into share prices in an unbiased manner as it is released. It implies that
the market does not ignore any piece of relevant information (Deegan et al., 2006, p. 378 – 379).
The PAT also considers the stock market reactions to accounting information, which are conceptualized
by the capital asset pricing model [CAPM] (Deegan et al., 2006, p. 211). This model distincts normal
expected returns and abnormal unexpected returns on an organization’s securities as a result of the
disclosure of expected or unexpected information. The CAPM states that if new information is useful to
the capital market (meaning that new or unexpected information is disclosed), then stock prices will
change to reflect the new information. Normal expected returns on stock prices occur when no
unexpected information is disclosed. Abnormal unexpected returns on the other hand occur when new
unexpected information is released.
Watts and Zimmerman (1986, 1990) differentiate three key hypotheses to explain and predict which
particular accounting method an organization would choose, e.g. an accounting method to disclose
social and environmental information for this research. These hypotheses are the bonus plan
hypothesis, the debt/equity hypothesis, and the political cost hypothesis.
Bonus plan hypothesis
This hypothesis states that if managers are compensated based on reported income, they will use
accounting methods that increase the reported income and thus their bonus (Watts et al., 1986, p. 208).
This hypothesis is strongly based on the wealth maximization assumption of the PAT. For this research it
could imply that managers choose to voluntary disclose CSR information when this disclosure increases
the financial performance of the company, and thus the bonus of the managers.
Debt/equity hypothesis
This hypothesis states that the larger a firm’s debt/equity ratio, the more likely the manager of the
company is to choose an accounting method that increases the reported income (Watts et al., 1986, p.
216). The reasoning behind this statement is that the higher the debt/equity ratio, the closer a company
is to the limitations in the debt covenants. The tighter the covenant limitations, the greater is the chance
of a covenant violation. Therefore managers will elect income increasing accounting procedures to relax
debt constraints (Watts et al., 1990, p. 139). Applicable to this paper, if CSR appears to have a positive
effect on a firm’s financial performance, managers could elect to voluntary disclose CSR information in
order to relax their debt constraints.
Political cost hypothesis
The final hypothesis asserts that the larger the company, the more likely the manager is to choose an
accounting method that suspends reported income from the current period to future periods (Watts et
al., 1986, p. 235). Larger firms are thus more likely to use accounting procedures that reduce reported
income. This hypothesis is also known as the size hypothesis. Size is a proxy variable for political
attention in this case. Larger firms are more likely to be subject to political scrutiny than smaller firms
are. Therefore managers will adopt accounting methods that reduce reported income, and thereby
reducing the probability that people will state that the firm is exploiting other parties (Deegan et al.,
2006, p. 220). If companies are subject to political scrutiny, managers could choose to disclose CSR
reports in order to manage the stakeholder’s relations. Though, if CSR disclosure appears to increase
firm’s financial performance, according to this hypothesis managers would not elect to disclose CSR
reports because this will increase their income, and thus increase their political scrutiny.
3.4.1.2 Agency theory
As have being said, the PAT is also based on the agency theory. The agency theory provides an essential
explanation of why managers select particular accounting procedures, e.g. CSR disclosure. As the PAT,
agency theory is also based on the assumption that all individuals are driven by self-interest. The agency
theory accepts that transaction costs and information costs exist, these costs are also known as agency
costs (Deegan et al., 2006, p. 213). According to this theory, CSR disclosure takes place as a tool for
companies to minimize their agency costs and to reduce the existing information asymmetries.
Agency theory focuses on the relationship between principals (e.g. shareholders) and agents (e.g.
corporate managers). This relationship is subjected to much uncertainty due to various information
asymmetries. Jensen et al. (1976, p. 308) defined the agency relationship as “a contract under which one
or more (principals) engage another person (the agent) to perform some service on their behalf which
involves delegating some decision-making authority to the agent”.
Because agency theory assumes that principals will presume that the agent (like all individuals) is driven
by self-interest, the principal will expect that the manager will take on self-serving activities that could
be damaging to the economic welfare of the principals, unless the agent is restricted from doing
otherwise (Deegan et al., 2006, p. 214). If any contractual mechanisms to control the opportunistic
actions of the agent are absent, the principal will pay the agent a lower salary to compensate for this
opportunistic behaviour. Because of this reasoning, it is assumed that agents have an incentive to
concern contractual arrangements which seem to be able to diminish their ability to undertake
opportunistic actions. The agents or managers will have an incentive to disclose information to show
that they are not acting in a way that could be damaging to the economic welfare of the principals or
shareholders.
In light of this research, CSR disclosure can be seen as a way to provide information to the stakeholders
(principals) to demonstrate that the company (managers or agents) are not acting in their own interest,
but do take their responsibilities and the demands of the public into account.
3.4.1.3 Legitimacy theory
Another theory which attempts to explain the incentives for a company to voluntary disclose CSR
information, is the legitimacy theory. Legitimacy theory is a ‘systems oriented theory’, this means that a
company is assumed to be influenced by and to have influence on the society in which it operates.
Legitimacy theory is together with stakeholder theory (discussed in the next paragraph) derived from
the broader political economy theory. The political economy theory states that society, politics, and
economics are inseparable, and therefore economic issues cannot meaningfully be examined without
considering the political, social, and institutional cadre in which the economic activity takes place
(Deegan et al., 2006, p. 269).
Legitimacy theory states that companies continually seek to make sure that they are recognized as
operating within the limits and standards of their relevant societies. Companies try to ensure that
external parties see their activities as being ‘legitimate’ (Deegan et al., 2006, p. 271). The limits and
standards of societies are changing over time, therefore companies need to be responsive to the ethical
environment in which they operate.
Woodward et al. (2001, p. 387) assert that organizations operate under a mandate from society,
requiring actions within society’s perceptions and structures, and that such a mandate could be
eliminated when those organizations do not act in what society sees as appropriate behaviour. From this
assertion appears the assumption of legitimacy theory about a ‘social contract’, assuming that there is a
‘social contract’ between a company and the society in which it operates. This contract stands for the
large number of implicit and explicit expectations of society about how a company should perform its
activities (Deegan et al., 2006, p. 271).
For this study the social contract can imply a contractual obligation between a company and society to
be corporate social responsible. This obligation exists because society allows a company to use its
natural and human resources to generate economic goods and services (Balabanis et al., 1998, p. 26).
3.4.1.4 Stakeholder theory
Stakeholder theory is the final theory taken into account in this paper to explain the motives for
voluntary CSR disclosure. Just like legitimacy theory, stakeholder theory is a ‘systems oriented theory’
and is derived from political economy theory. Stakeholder theory is strongly related to legitimacy theory
and both theories show many similarities. In both theories a company is perceived as part of a broader
social system wherein the company affects, and is affected by, other groups (Deegan et al., 2006, p.
285). Though, some differences exist between the two theories. Legitimacy theory focuses on the
expectations of society in general (reflected in the ‘social contract’), while stakeholder theory looks
more at particular groups within society (stakeholder groups). This difference entails that stakeholder
theory assumes more than one ‘social contract’ as a result of different stakeholder groups which have
different perceptions of how an organization should perform its operations.
Central in stakeholder theory is the idea that the success of a company depends on the extent to which
the company is able of managing its relationships with stakeholder groups, such as financers,
shareholders, customers, employees, and communities or societies (Van Beurden et al., 2008, p. 408).
Freeman (1984, p. 46) defines stakeholders as “any group or individual who is affected by or can affect
the achievement of an Organization’s objectives”. Stakeholder theory suggests that an organization must
satisfy not only explicit claims or contracts (e.g. claims from shareholders), but also implicit claims or
contracts (McGuire et al., 1988, p. 854). Explicit contracts legally describe the relationship between a
firm and its stakeholders, while implicit contracts have no legal status and are referred to as
self-enforcing relational contracts (Ruf et al., 2001, p. 145). In other words, stakeholder theory focuses
on the necessity for organizations to take into consideration the needs, the interests, and the influence
of all stakeholders, which influence the organization’s policies and practices.
Stakeholder theory can be divided into two branches, an ethical (or moral) normative branch and a
managerial positive branch. Within the ethical branch of stakeholder theory, issues of stakeholder
power are not directly relevant, but all stakeholders have the right to be treated fairly by a company. In
other words, the responsibilities of an organization to a stakeholder should be determined by the
impact of the organization on the stakeholder, not by the level of economic power of the stakeholder
(Deegan et al., 2006, p. 286). The managerial branch of stakeholder theory, on the other hand, attempts
to explain when managers will be likely to address the expectations of particular stakeholders. This
perspective of stakeholder theory specifically focuses on the different stakeholder groups within society
and how they should best be managed if the company is to continue its operations (Deegan et al., 2006,
p. 289). The expectations of the different stakeholders will influence the operating and disclosure
policies of the organization. According to the managerial branch, a firm will not respond to all
stakeholders similarly, but rather to those that are considered to be most ‘powerful’.
From empirical tests of stakeholder theory appears that levels and types of corporate social disclosures
could be explained by measures of stakeholder power and their related information needs (Deegan et
al., 2006, p. 291). An explanation for this finding is that some stakeholder groups can be more effective
than others in exerting pressure for social responsibility disclosures. In a situation where stakeholders
have conflicting concerns or expectations, companies will choose to provide information of a legitimizing
nature to those stakeholders supposed to be more important for the continuation of the organization,
while attaching little importance to the needs or expectations of less important stakeholders. These
findings of empirical studies suggest that the managerial branch of stakeholder theory could explain why
companies might choose to voluntary disclose CSR information, because this perspective assumes that
managers are more likely to focus on the expectations of powerful stakeholders. CSR disclosure could be
an expectation of those powerful stakeholders.
3.4.2 The business case for CSR disclosure
Next to the theoretical motives for voluntary CSR disclosure also some indicative incentives can be
identified from a more practical point. In the previous sub-paragraphs the theoretical incentives are
presented which could explain the incentives for CSR disclosure. Though, when managers elect to
provide CSR disclosures, most of the time they will not base this decision on such a theory, but rather on
more practical indicative incentives. These incentives, reflected in the arguments or motivations
supporting or documenting why the business community should accept and proceed the CSR ‘cause’, are
also known as the ‘business case’ for CSR (Carroll et al., 2010, p. 86). The business case for CSR is
engaged with the primary question: What do the business community and organizations get out of CSR,
in other words, how do they actually benefit from involving in CSR policies, practices, and activities?
This sub-paragraph elaborates on the business case for CSR (disclosure).
The identifiable incentives for the business community to engage in CSR activities and/or disclosure are
(Carroll et al., 2010; Haigh et al., 2006; Snider et al., 2003; Porter et al., 2006):
 Cost and risk reduction
 Gaining competitive advantage
 Developing reputation and legitimacy/license to operate
 Regulatory pressures
 Impression management
 Moral obligation/appeal
The first incentive for CSR activities is that they will reduce costs and risks to the company. In a survey of
business executives by PriceWaterhouseCoopers mentioned in Fortune (2003), 73% of the respondents
declared that cost savings were one of the main reasons why organizations are becoming more socially
responsible (Carroll et al., 2010, p. 97). Next to people and planet, profit remains an important
precondition for CSR. Participating in CSR activities often means that companies will use less primary
commodities and/or less energy, this will have an impact on the costs of a company (Eijk et al., 2010, p.
8).
The next incentive is increasing the company’s image and thus gaining competitive advantage (Eijk et al.,
2010, p. 13). Companies can increase their competitive advantages with the aid of a differentiation
strategy, they can use CSR activities to set themselves apart from their competitors (Carroll et al., 2010,
p. 98). An example of a differentiation strategy is a cost leadership strategy which focuses on cost and
risk reduction of CSR. CSR practices also increase a company’s competitive advantage by participating in
those CSR activities that meet the identified demands of stakeholders. Consequently stakeholders will
prefer the firm over its competitors particularly because of the company’s involvement in those CSR
activities (Carroll et al, 2010, p. 98 – 99). Global scandals, such as the sweatshops (child labor) of Nike
and the oil leak of the Deep Horizon of BP, illustrate the significant damage to a company’s image that
corporate social irresponsible activities could embrace (Eijk et al., 2010, p. 13 – 14).
Developing reputation and legitimacy is an incentive that is related to the competitive advantage
incentive. This incentive is also known as reputation risk management (Deegan et al., 2006, p. 276),
which respond to the need for companies to be seen to be meeting society’s expectations. Through the
disclosure of a social report, organizations are able to show that their operations are consistent with
social norms and expectations, and hence they are legitimate (Carroll et al., 2010, p. 100). This incentive
is also called a license to operate for business, every company needs implicit or explicit authorization
from governments, communities, and various stakeholders to do business (Porter et al., 2006, p. 80; Eijk
et al., 2010, p. 14).
Next, regulatory pressures could also be an incentive for companies to engage in CSR operations. The
increasing demand of stakeholders for information and the increasing regulation in CSR ensure that
more and more organizations provide CSR disclosures (Eijk et al., 2010, p. 23).
According to Snider et al. (2003, p. 176) CSR disclosure is also a method of self-presentation and
impression management, which could serve as another incentive for companies to participate in CSR
activities. Impression management is performed by organizations to assure that various stakeholders are
satisfied with their social behaviour. Hooghiemstra (2000, p. 55) argues that the increase in CSR
disclosures represent a strategy to adjust the public’s perception about the legitimacy of the
organization. Also in this incentive ‘corporate image’ and ‘corporate identity’ are central. Hooghiemstra
(2000, p. 60) defines impression management as “the conscious or unconscious attempt to control
images that are projected in real or imagined social interactions”. The author emphasizes two aspects
which show why impression management could be important in light of corporate social reporting.
Firstly, CSR disclosure as a form of impression management can contribute to a company’s reputation.
Secondly, by using impression management particularly companies faced with a difficult situation can
successfully handle legitimacy threats that in turn could affect both reputation and stock price.
Independent of the consequences of CSR for a company, another incentive could be just a moral
obligation. This moral appeal argues that organizations have an obligation to be good citizens and to ‘do
the right thing’ (Porter et al., 2006, p. 80). The UPS Europe Business Monitor 2007 illustrates that 38% of
the respondents have the need to give something worthwhile back to society.

Identifying relevant stakeholders
This sub-paragraph will discuss the for who-stage of the CSR disclosure process, in which relevant
stakeholders will be identified whose information needs a CSR report should address – in other words,
at whom the CSR disclosure will be directed. The relevant stakeholders at whom a CSR report will be
directed is directly dependent on the reasons why a company has decided to engage in CSR disclosure in
the first place (the why-stage) (Deegan et al., 2006, p. 335). As mentioned in sub-paragraph 3.4.1.5
stakeholder theory can be divided in an ethical branch and a managerial branch. Ethical or managerial
reasoning for motivating CSR disclosure results in a different group of relevant stakeholders.
Within the managerial branch of stakeholder theory, companies respond mostly to the demands and
interests of the most ‘powerful’ stakeholders, rather than being responsive to all stakeholder groups.
The stakeholder groups which are most powerful vary from organization to organization (Deegan et al.,
2006, p. 335). From a managerial stakeholder perspective, CSR disclosures will address the information
needs and demands of the most powerful stakeholders.
From an ethical stakeholder perspective, on the other hand, companies will respond to a much wider
range of stakeholders with their CSR disclosure. Within this perspective, all humans from current and
future generations upon whom a company’s operations could have an impact, are seen as stakeholders
to whom the firm is accountable (Deegan et al., 2006, p. 337). Though it is impossible for companies to
address the information needs of all those stakeholder groups on which they could potentially have an
impact. Therefore it will always be necessary for an organization to identify a subset from all the
stakeholders who might be impacted by its operations, to whom the organization will direct its CSR
disclosure.
3.6
Information needs of relevant stakeholders
This paragraph discusses the what-stage of the CSR disclosure process in which the information needs of
the relevant stakeholders are determined. Stakeholders demand for social and environmental
information, this demand indicates that stakeholders hold companies responsible and accountable for
some social and environmental issues. The question is for what social and environmental issues the
companies are held responsible and accountable by the different stakeholders. These issues will be
reflected in the CSR disclosures, because these disclosures will respond to the information needs of the
relevant stakeholders.
It is impossible to elaborate on all information needs of all stakeholders of myriad organizations,
because those information needs may vary across all different stakeholders. Therefore the discussion in
this research is restricted to mechanisms which can be used to identify what issues particular
stakeholders will expect to be covered in CSR disclosures.
The mechanisms an organization could use to ascertain the views, needs, and expectations of relevant
stakeholders are for example commercial mass media such as television/radio, newspaper articles, the
Internet, and maybe even annual financial reports. With these mechanisms the more ‘powerful’
stakeholders of the managerial stakeholder perspective will be accessible in developed nations (Deegan
et al., 2006, p. 345). For an ethical point of view, on the other hand, a broader range of stakeholders
needs to be accessed in order to get familiar with their views, needs, and expectations. A variety of
channels of communication can be used by a company to engage in an active dialogue with those
stakeholders. The interactive communication facilities of the Internet are a possible way to examine the
views of anyone around the world regarding the social, environmental, ethical, and economic
responsibilities that should be applied to their organization. Though, because Internet is not available to
all potential stakeholders, this tool needs to be supplemented with other mechanisms such as
face-to-face meetings with various stakeholders, questionnaire surveys, opinion polls, focus groups, and
invitations to write to the organization about particular issues (Deegan et al., 2006, p. 346).
3.7
Corporate social responsibility reporting guidelines and standards
In this paragraph the last phase of the CSR disclosure process is discussed, the how stage. In this phase a
company actually produces a CSR disclosure. The various standards and guidelines concerning the CSR
disclosures are described in this paragraph. As mentioned in chapter 2, CSR disclosure is a form of
voluntary disclosure, therefore a standard (mandatory) CSR disclosure or report does not exist. Each CSR
disclosure is different, because its content depends on the incentives, the relevant stakeholders, and
their information needs, as discussed in the previous paragraphs. Although CSR disclosure is not
mandatory, several standards and guidelines for CSR reporting are developed by different regulators
and institutions.
In October 2004 AccountAbility issued a report for the WBCSD Accountability and Reporting Working
Group, in which the authors provide some background on the different codes, standards, and
frameworks relevant to CSR disclosures. The codes, standards, and frameworks they discussed are
divided into principle-based codes (Global Compact and UN Norms), overarching accounting and
disclosure frameworks (GRI and AA1000 Assurance Standard), specialist standards (SA8000 and
ISO14001), investor-related initiatives (Dow Jones Sustainability Index), and regulatory-related initiatives
(Sarbanes-Oxley) (AccountAbility for the WBCSD Accountability and Reporting Working Group, 2004, p.
4).
Figure 1 shows how these different standards relate to each other, if they are related at all. The figure
illustrates which dimensions of CSR and which process steps each code, standard, or framework covers.
The CSR dimensions are classified according to the triple bottom line of Elkington as presented in
paragraph 3.2, the social/ethical, the environmental, and the financial/economic dimension. By looking
at this figure, the overlap, compatibility, and gaps between the different codes, standards, and
frameworks can be identified at a glance (AccountAbility for the WBCSD Accountability and Reporting
Working Group, 2004, p.6).
This report was issued in 2004. In the years after 2004 developments in CSR guidelines and standards
still take place, like ISO 26000. ISO 26000 was published in 2010 and is an international standard which
provides guidelines for social responsibility, developed by the International Organization for
Standardization [ISO] (http://isotc.iso.org).
Next to the global and US codes, standards, and frameworks mentioned until now, also some guidelines
and standards exist which are specifically developed for the Netherlands. These Dutch codes standards
are article 2:391 paragraph 1 of the Dutch Civil Code (artikel 2:391 lid 1 BW in Dutch) about
non-financial performance indicators, guideline 400 on CSR (richtlijn 400 inzake MVO in Dutch), and the
guide for CSR reporting (handreiking voor Maatschappelijke Verslaggeving in Dutch) (Böhmer et al.,
2010, p. 1089 - 1094).
The Global Reporting Initiative [GRI] is probably the best known CSR disclosure framework (Chen et al.,
2009, p. 301), therefore this initiative is further explained in the following section. The other codes,
standards, and frameworks presented in this paragraph are shortly explained in appendix A.
3.7.1 Global Reporting Initiative
The GRI was developed by the Coalition for Environmentally Responsible Economies [CERES] and the
United Nations Environment Programme [UNEP] in 1997 (Chen et al., 2009, p. 301). The purpose of the
GRI is to develop a generalized set of CSR reporting guidelines which is globally and voluntary applicable
(Böhmer et al., 2010, p. 1093). In March 2011 an update of the third generation of the GRI CSR reporting
guidelines is introduced.
As already mentioned, the GRI framework is probably the best known CSR disclosure framework.
Consequently, the GRI guidelines became actually the global standard concerning CSR reporting. In the
last years the application of the GRI guidelines by organizations that prepared a CSR report has
increased. Figure 2 below illustrates this increased usage of GRI guidelines. The figure shows that in
mid-2006 the number of organizations that referenced GRI in their disclosures achieved approximately
1000 in 65 countries (Brown et al., 2009, p. 573).
The GRI CSR reporting guidelines can be applied by all kinds of organizations, irrespectively the size,
industry, or location of a company (Böhmer et al., 2010, p. 1093). The development of the GRI is
influenced by companies, investors, employees, society, academics, and other stakeholders through a
dialogue process. The GRI reporting framework should serve as a generally accepted system for
reporting on economic, environmental, and social performances of a company (triple bottom line
reporting).
The GRI reporting framework consists of the following elements (Global Reporting Initiative, 2011):

Sustainability reporting guidelines
These guidelines contain principles for the content of a CSR report and for insuring the quality of the
report. The guidelines also include standard elements of the disclosure, consisting performance
indicators and other information. The standard elements that should be included in company CSR
reports are:
 Environmental
 Human Rights
 Labor Practices and Decent Work
 Society
 Product Responsibility
 Economic

Indicator protocols
For all the performance indicators/standard elements of the disclosure, indicator protocols are
included in the framework. These protocols include definitions, guidelines and other information for
the composition of a report.

Sector supplements
These supplements complement the guidelines with interpretations and explanations of the
application of the guidelines for specific industries. The sector supplements also include
industry-specific performance indicators.

Technical protocols
These protocols are developed to assist in case of difficulties in the reporting process. They are used
in combination with the reporting guidelines, indicator protocols, and sector supplements.
3.8
Conclusion
This chapter provided a theoretical background on the term CSR disclosure. It elaborated on the content
of the term CSR and on CSR disclosure and its several dimensions.
CSR is a term which is hard to define, numerous different definitions exist. A few of these definitions are
presented in this chapter. In this research no specific choice is made for one definition of CSR. This
research rather uses the different key elements of CSR to examine the relationship between CSR
disclosure and financial performance. Different key elements of CSR are discussed in paragraph 2 and 7
of this chapter. The six key elements which will be used for this study are those developed by the global
reporting initiative (GRI). These six elements are economics, environment, labour practices and decent
work, human rights, society, and product responsibility.
Then CSR disclosures were examined. CSR disclosures are voluntary disclosures (explained in chapter 2)
about the social and environmental effects of a company’s activities. This form of disclosures is mainly
about transparency and the accountability and responsibility of businesses. CSR disclosures were further
explained by the ‘why-for who-what-how’ stages.
The why-stage refers to the objectives to take on CSR disclosures. These objectives are split into the
theoretical motives and the indicative incentives from a firm perspective (the business case for CSR
disclosure). Several theories form the theoretical motives for CSR disclosure: the Positive Accounting
Theory (PAT), the agency theory, the legitimacy theory, and the stakeholder theory. All these different
theories have in common that they all accentuate that organizations participate in CSR disclosure to
influence the perceptions of society about the organization.
For this research the chosen starting point is the stakeholder theory. According to Marom (2006, p.
191) the concepts of CSR and stakeholder theory are fundamental to the study of business and society.
As discussed in this chapter, the central idea of stakeholder theory is that the success of a company is
dependent of the extent to which a company is competent to manage its relationships with its
stakeholders. For that reason this theory is particularly useful to define the relevant stakeholders to
which CSR disclosure will be directed (the who-stage) and it provides an explanation for the existence of
CSR disclosures in general. The PAT and agency theory are not chosen as base for this research because
of the wealth-maximization assumption. This assumption states that all individuals are driven by
self-interest in all their activities. It leaves no room for loyalty, morality, and social responsibility, which
are the key elements of CSR in my opinion. Although these two theories are not used as basis for this
research, they contain some good aspects, and therefore they are explained in this chapter. The
legitimacy theory shows many similarities with stakeholder theory. The key difference is that legitimacy
theory focuses on the expectations of society in general, whereas stakeholder theory specifically looks
at the stakeholders of the firm. Therefore stakeholder theory is chosen as underlying theory for this
study, because CSR disclosures will be pointed at those stakeholders. It is very hard for a company to
direct its CSR disclosure to the whole society.
Next to these theoretical motives, also indicative incentives from a firm perspective exist. These
incentives are also known as the business case for CSR disclosure. The indicative incentives discussed in
this chapter are cost and risk reduction, gaining competitive advantage, developing reputation and
legitimacy (license to operate), regulatory pressures, impression management, and moral obligation or
appeal.
The who-stage denotes the relevant stakeholders. The stakeholders at whom the CSR disclosure will be
directed depend directly on the reasons why a company wants to engage in CSR disclosure. The next
stage, the what-stage, is about the information needs of the relevant stakeholders according to the CSR
disclosure, about what will be the content of the CSR disclosure. The CSR disclosure will contain
information about the social and environmental issues for which a company is held responsible and
accountable by its stakeholders. Different mechanisms exist to identify what issues stakeholders expect
to be covered in a CSR disclosure, like television, radio, newspaper articles, the Internet, annual financial
reports, and face-to-face meetings for example.
Finally the different standards and guidelines concerning CSR disclosure are discussed in light of the
how-stage, in which a company actually produces a CSR disclosure. The worldwide standards and
guidelines discussed are the Global Compact, the UN Norms, GRI, AA1000 Assurance Standard, SA8000,
ISO 14001, Dow Jones Sustainability Index, SOX and ISO 26000. The specific Dutch standards and
guidelines for CSR disclosure are article 2:391 paragraph 1 of the Dutch Civil Code, guideline 400 on CSR,
and the guide for CSR reporting. Except the GRI, all these standards and guidelines are explained in
Appendix A.
The GRI is discussed in more detail in this chapter because it is probably the best known CSR disclosure
framework. As a result the GRI guidelines became the global standard for CSR reporting and last years
the usage of the GRI guidelines increased exponentially. These guidelines are applicable for all kind of
organizations. The GRI CSR reporting framework consists of the following elements: sustainability
reporting guidelines, indicator protocols, sector supplements, and technical protocols.
With the information from this chapter in mind, this research continues with the theoretical background
of the relationship between CSR disclosure and financial performance in the next chapter. Together with
the prior research in chapter 5, all this information forms the basis of the empirical research of this
study, which is presented in chapter 8. The key elements of CSR are used for the measurement model of
CSR disclosure in paragraph 7.2. The stakeholder theory is the underlying theory for this research, which
explains the objectives of companies to engage in CSR reporting. Finally, the GRI framework will be the
basis of our sample, which is explained in paragraph 7.5.

Theoretical framework for relationship between corporate social
responsibility disclosure and financial performance

Introduction
In this chapter a theoretical background on the relationship between CSR disclosure and financial
performance will be provided. Firstly the content of the term financial performance is shortly explained,
in chapter 6 this discussion is further elaborated. Thereafter, several theories which could explain a
possible relationship between the two variables are presented. These theories are the good
management theory, slack resources theory, positive synergy theory, the supply and demand theory,
trade off theory, managerial opportunism theory, and the negative synergy theory.

Corporate social responsibility disclosure and financial performance
As cited earlier when the business case for CSR disclosure was presented, according to the triple bottom
line of Elkington, next to people and planet, profit remains an important precondition for CSR. Elkington
states that there is no question that some political and social issues can have, or already have had, a
deep impact on the financial bottom line of the triple bottom line concept (Elkington, 1997, p. 71).
As mentioned in chapter 1, for over many decades the study of the relationship between CSR and CFP
has produced various and contradictory results. On various occasions the relationship has been found to
be positive, negative, or neutral, and with different causal directions. To explain these various findings,
several theoretical models on the CSR-CFP relationship have been introduced (Salzmann et al., 2005).
Each of these competing models pretends to explain a different outcome of the CSR – CFP relationship.
By discussing these various theoretical models, this chapter attempts to provide a theoretical framework
on the relationship between CSR disclosure and CFP, which is examined in the remainder of this
research for a Dutch context.

Good management theory
According to the good management theory, also known as the social impact hypothesis, CSR disclosure
has a positive impact on firm financial performance (Preston et al., 1997, p. 421; Waddock et al., 1997,
p. 306; Salzmann et al., 2005, p. 29). This theory is a “social impact” version of the stakeholder theory
which implies a lead-lag relationship between social and financial performance; firstly external
reputation is developed, then financial consequences follow (Preston et al., 1997, p. 421).
The good management theory argues that favourable CSR performance will eventually lead to
favourable financial performance by meeting the needs of different stakeholders (Preston et al., 1997, p.
421). The authors assert that meeting the implicit claims of major stakeholders improves a company’s
reputation in a way that has positive impact on its financial performance; on the contrary, dissatisfying
these groups may have a negative financial impact. For example, good employee (including women and
minorities) relations are expected to increase morale, productivity, and satisfaction (Waddock et al.,
1997, p. 307). Preston et al. (1997, p. 426) provide empirical evidence for this theory.

Slack resources theory
The slack resources theory, also known as the available funds hypothesis, asserts the positive
relationship between CSR and financial performance conversely; a higher level of financial performance
leads to improved social performance (Preston et al., 1997, p. 423; Waddock et al., 1997, p. 306;
Salzmann et al., 2005, p. 29). Again a lead-lag relationship is implied by this theory; firstly financial
performance is improved, then increases social performance follows.
The slack resources theory states that the actual behaviour of organizations depends on the resources
available. For this reason, profitability in one time period may enhance a company’s ability to invest in
discretionary projects, including social performance projects, afterwards (Preston et al., 1997, p. 423).
Better financial performance results in the availability of slack (financial and other) resources which
offer the chance for companies to fund social performance domains, for example employee relations,
community relations, and environment. If these slack resources are available, allocation of them into
social domains would result in better social performance, and thus increasing financial performance
would be a predictor of increasing social performance (Waddock et al., 1997, p. 306). McGuire et al.
(1988) provide empirical evidence for this theory.

Positive synergy theory
The positive synergy theory assumes, as the name says, a positive synergy between CSP and CFP,
implying that the two variables are synergetic (Preston et al., 1997, p. 424), or at least it is not possible
to detect the time-pattern of their interaction from available statistical data. Salzmann et al. (2005, p.
29) call this association a “virtuous circle”, a simultaneous relationship is assumed by combining the
good management theory and the slack resources theory. The research of Pava et al. (1996, p. 338)
supports this positive synergy theory, they found little evidence that firms with high levels of CSR are
inferior investments, and some evidence that these firms can be characterized as superior investments.
CSR firms perform at least as well as other firms (Pava et al., 1996, p. 324). Also the study of Stanwick et
al. (1998, p. 198) supports this theory by finding a positive correlation between CSP and financial
performance over six years.

Supply and demand theory
The supply and demand theory assumes no link between CSR and financial performance (Salzmann et
al., 2005, p. 29). According to this theory companies supply a demanded and unique level of CSR to
maximize their financial performance. McWilliams et al. (2001, p. 117) developed a supply and demand
model of CSR to assess an “ideal” level of CSR. They found that the optimal level of CSR can be
determined through a cost-benefit analysis (McWilliams et al., 2001, p. 125). The authors also assessed
the impact of CSR on financial performance, they assert that in equilibrium there should be no
relationship between these two variables. A company that produces CSR activities will have higher costs
but also higher revenues, while a company that produces no CSR activities will have lower costs but also
lower revenues.

Trade off theory
The trade off theory is based on the traditional view of Friedman (1970, p. 122) that manager’s only
responsibility is to increase their shareholders’ wealth. According to this theory, socially responsible
activities may reduce the capital and other resources of the firm. Therefore these activities generate a
disadvantage compared to other, less social responsible, firms (Preston et al., 1997, p. 421). The theory
is supported by evidence from the research of Vance (1975, p. 21). He investigated the relationship
between CSR activities and stock prices and showed that firms with a high level of CSR have relative
lower stock prices compared to the stock prices of the market average. By increasing the social
performance, companies unnecessarily incur costs and thereby reduce their profitability (Salzmann et
al., 2005, p. 29). This theory thus assumes a negative lead-lag relationship between CSR and CFP, where
CSR activities lead to lower CFP.

Managerial opportunism theory
The managerial opportunism theory is derived from the agency theory, assuming that all individuals are
driven by self-interest. This assumption refers to the opportunistic behaviour of managers, who are
perceived to pursue their own private objectives, to the prejudice of both shareholders and other
stakeholders. The managerial opportunism theory argues that striving for private managerial goals, in
the context of compensation schemes closely related to short-term profit and stock price behaviour,
might lead to a negative association between CFP and CSR (Preston et al., 1997, p. 423).
When financial performance is strong, managers may try to ‘cash in’ by reducing social investments with
the intention of taking advantage of the opportunity to increase their own short-term private gains. On
the other hand, when financial performance declines, managers may try to compensate, and maybe
appear to rationalize, their disappointing results by participating in obvious social activities (Preston et
al., 1997, p. 423 – 424). This theory implies a negative lead-lag relationship between CSR and CFP, where
CFP has a negative impact on CSR and vice versa.

Negative synergy theory
The negative synergy theory is the opposite of the positive synergy theory. This theory assumes, as the
name says, a negative synergy between CSP and CFP, implying that the two variables are synergetic
(Preston et al., 1997, p. 424). This theory indicates a simultaneous relationship by combining the trade
off theory and the managerial opportunism hypothesis (Salzmann et al., 2005, p. 29).

Conclusion
In this chapter a theoretical background of the relationship between CSR (disclosure) and financial
performance is presented. This theoretical background consists of seven theories, each giving another
explanation for the relationship between CSR and financial performance. The seven theories differ on
the direction and the sign of the relationship. Some theories state that CSR affects financial
performance, while others state the opposite or even no specific direction (CSR affects financial
performance and financial performance affects CSR). Thereby the theories also differ on the sign of the
relationship; positive, neutral, or negative. The seven theories and their view of the direction and the
sign of the relationship between CSR and financial performance are summarized in the table below:
Causal
sequence
CSR FP
Postive
Good Management Theory
Sign
Neutral
Supply and Demand
Theory
Negative
Trade Off Theory
FP
CSR
Slack Resources Theory
FP
CSR
Positive Synergy Theory
Managerial Opportunism
Theory
Negative Synergy Theory
Table 1: Different theories to explain the relationship between FP and CSR
The following figure summarizes the information provided in chapter 3 and 4. It illustrates the nexus
between financial performance, CSR disclosure, and CSR performance. It shows that Balabanis et al.
(1998, p. 32) uses four indicators for CSP: women’s position, ethnic minorities’ position, philanthropy,
and environmental actions. The main focus of this study is on the link between past financial
performance and CSR disclosure, the link between concurrent financial performance and CSR disclosure,
and the link between subsequent financial performance and CSR disclosure.
This figure, the theories in this chapter, and the prior research discussed in the following chapter, form
the basis and explanation for the hypotheses in this research. These hypotheses will be presented in
paragraph 5.3 at the end of the following chapter.

Prior research

Introduction
After outlining a theoretical framework in the previous chapter, this chapter will specifically elaborate
on prior research on the relationship between CSR (performance and disclosure) and financial
performance. This overview is presented in a chronological manner. A lot of research has been
conducted on this relationship. We will give an extensive literature review on a number of these studies
and their findings, and we will summarize this in a clear table. This literature review along with the
theoretical background provided in chapters 2, 3, and 4 forms the (theoretical) basis for the empirical
research.

Prior research
5.2.1 Cochran and Wood (1984)
The purpose of this study is to reexamine the relationship between CSR and financial performance by
using a new methodology, a better technique and by controlling specific industry groups (Cochran et al.,
1984, p. 42).
To measure the CSR within the sample firms, Cochran et al. (1984, p. 48) utilize the combined
Moskowitz index. The combined Moskowitz index is a particular reputation index. For the measurement
of financial performance the authors use accounting data (Cochran et al., 1984, p. 48). They used three
accounting return measures, the ratio of operating earnings to assets, the ratio of operating earnings to
sales, and the excess market valuation (Cochran et al., 1984, p. 49).
With these measurement indicators they investigated the relationship between CSR and financial
performance of 61 companies for two five-year periods, 1970-1974 and 1975-1979 using
industry-specific control groups. The correlation between CSR and financial performance is tested by a
regression analysis using dummy variables for industry groups and Moskowitz CSR categories (Cochran
et al., 1984, p. 50-51). After this statistical test, the influences of asset turnover and asset age on the
results are examined using again a regression analysis. Finally they also used a logit analysis to test the
relationship between CSR and financial performance and the influence of the different variables on it.
The findings of this research suggest that within industry groups the financial variable of asset age is
most strongly correlated with CSR. This means that “older” firms seem to participate less in CSR than
“younger” firms. Though, after controlling for asset age there appears to be a weak correlation between
CSR and financial performance.
5.2.2 Aupperle, Carroll and Hatfield (1985)
The primary objective of this research was to develop a tool to measure the extent of orientation
towards social responsibility. This instrument was based upon a framework from prior research (Carroll,
1979) that defines CSR. Related to this objective, another purpose of the study was to use the developed
tool to evaluate how CEOs analyze the social responsibilities of their companies. The final objective was
to investigate the correlation between the extent of orientation towards CSR, measured with the aid of
the developed tool, and profitability (Aupperle et al., 1985, p. 447).
The authors used Caroll’s construct (Carroll, 1979) to measure CSR within a firm. This construct defines
CSR through four components: economic, legal, ethical and discretionary responsibilities. The authors
assessed the extent of orientation of CEOs towards social responsibility by measuring these four
components. They did this by taking a survey of 818 CEOs (listed in Forbes 1981 Annual Directory). From
this survey they could use 241 responses for their research (Aupperle et al., 1985, p. 455 – 456). To
measure the profitability of the companies from the survey, the authors used the indicator return on
assets (ROA). They used both short-term (one year) and long-term (five year) ROA (Aupperle et al., 1985,
p. 458).
A factor analysis was used to determine whether Caroll’s construct was obtained by the survey
responses, and thus to see what the extent of orientation towards CSR of the CEOs was. A factor analysis
reduces a lot of information, or variables, to a simple message with fewer variables, that is easier to
understand (Field, 2009, p. 628). In this paper it was used to reduce the information of the surveys into a
simple message about if the surveyed companies obtained to Caroll’s contructs (the level of CSR of the
companies). Thereupon a factor analysis was used to analyze the relationship between this orientation
and financial performance.
This study did not find any statistically significant relationships between the orientation towards social
responsibility and profitability of the investigated firms. Profitability also appears not to change when
firms use social forecasting compared to when they do use social forecasting (Aupperle et al., 1985, p.
462).
5.2.3 Ullmann (1985)
Ullmann stated that although many researchers have conducted studies on the relationships among
social disclosure, social performance, and economic performance, no clear tendency can be identified
(Ullmann, 1985, p. 540). The main reasons for this inconclusiveness are a lack in theory, inappropriate
definitions of key terms, and insufficiencies in the empirical databases available. The purpose of this
study of Ullmann (1985, p. 554) is to propose a different direction for future research in order to
improve this situation of inconsistencies.
Firstly, Ullmann (1985, p. 541 – 543) discusses a number of previous studies regarding the relationship
between social disclosure and social performance (of 7 studies, 4 studies found no correlation, 2 found a
positive correlation, and 1 found a negative correlation), between social performance and economic
performance (of 13 studies, 8 studies reported a positive correlation, 4 found no correlation, and 1
found a negative correlation), and between social disclosure and economic performance (of 11 studies,
7 reported a positive correlation, 1 found some, positive or negative, correlation, and 3 studies found no
correlation), to illustrate the inconclusiveness of these studies.
Subsequently, a three-dimensional model is introduced which could explain the contradictory results
regarding the relationships among social disclosure and social and economic performance (Ullmann,
1985, p. 552). The three dimensions considered are stakeholder power, strategic posture, and
company’s past and current economic performance. In this context, social performance and social
disclosure can be seen as tools to manage dependence stakeholder relationships. Depending on the
configuration of the three dimensions, a company will apply either social performance or social
disclosure or both procedures simultaneously to manage its relationship with its stakeholders. The three
dimensions and the consequential two types of programs (social performance and social disclosure) can
be combined in a contingency framework, which is shown in appendix B.
The intention of this framework is to recommend a different direction for future research (Ullmann,
1985, p. 554). The author states that two steps are necessary in order to come to more convincing and
consistent results. These two steps are a strategic framework and methodological improvements. The
strategic framework refers to a strategic framework whereby social performance and/or social
disclosure techniques are means for managing social demands. The methodological improvements
denote that for future research additional variables should be included in any attempt to associate
social performance, economic performance, and social disclosure. Some examples of these
methodological improvements are samples including companies with different strategic positions,
longitudinal studies, and making a distinction between mandatory and voluntary social performance and
related disclosures.
5.2.4 McGuire, Sundgren, and Schneeweis (1988)
The major purpose of this study is to analyze two specific aspects of the relationship between CSR and
financial performance of firms. First they use risk measures for the measurement of performance next
to the regular accounting- and stock-based measures. Secondly, they do not only investigate the
relationship between CSR and future financial performance, but also the correlation between prior
financial performance and CSR (McGuire et al., 1988, p. 855). Here we see that McGuire et al. introduces
a time lag in their study, they investigate if the prior financial performance has an effect on the
subsequent CSR reporting instead of looking at this effect in the same year.
For the measurement of CSR data from Fortune magazine’s annual ratings of corporate reputations are
used (McGuire et al., 1988, 860). Financial performance is measured using accounting-based
performance measures, accounting-based risk measures, and stock-market-based performance
measures. Accounting-based performance measures used are return on assets (ROA), total assets, sales
growth, asset growth, and operating income growth. Accounting-based measures of risk used are the
ratio of debt to assets, operating leverage, and the standard deviation of operating income.
Risk-adjusted return and total return are the stock-market-based performance measures that are used
(McGuire et al., 1988, p. 861).
CSR of 131 companies from the Fortune magazine’s annual ratings of corporate reputations is analyzed
for the period 1983-1985. Financial performance measures are obtained for the periods 1977-1981 and
1982-1984 in order to investigate the relationship between CSR and prior and future financial
performance (McGuire, 1988, p. 861-864). Correlation analyses and regression analyses are used to test
for these relationships.
The main result of this study is that CSR is better predicted by prior financial performance than by
subsequent financial performance. The results also show that an important advantage of CSR is a
reduction in firm risk. Finally, accounting-based performance measures seem to be better predictors of
CSR than stock-market-based performance measures.
5.2.5 Waddock and Graves (1997)
This research has the aim to address the link between corporate social performance and financial
performance and to investigate the direction of this causation (Waddock et al., 1997, pp. 311).
In this study the eight corporate social performance attributes, obtained by the firm Kinder, Lydenberg,
Domini (KLD), are used to build an index of corporate social performance (Waddock et al., 1997, p. 307).
The attributes that are used to construct the index are employee relations, product, community
relations, environment, treatment of women and minorities, nuclear power, military contracts, and
South Africa (Waddock et al, 1997, p. 310). Financial performance is measured by return on assets
(ROA), return on equity (ROE), and return on sales (ROS) (Waddock et al., 1997, p. 309).
In this study a sample of 469 firms is used for the period 1989-1990. In order to test the link between
corporate social performance and financial performance and to find the direction of the causality
between these two, a regression analysis is performed. The two hypotheses that are tested are ‘better
financial performance results in improved CSP, ceteris paribus’ and ‘improved CSP leads to better
financial performance, ceteris paribus’ (Waddock et al., 1997, p. 307).
The evidence obtained from this research support both hypotheses. First, corporate social performance
depends on financial performance and the causality between these two has a positive sign. Secondly,
the opposite is also true, financial performance depends on good social performance (Waddock et al.,
1997, p. 313).
5.2.6 McWilliams and Siegel (2000)
With this study the authors want to elaborate on an extant fault in the methodologies of prior research
on the study of the connection between CSR and financial performance. This existing error is the fact
that prior methodologies does not control for investment in R&D, while R&D appears to have a major
influence on financial performance. For example, neither of the studies described before in this
paragraph does control for R&D influences. This research wants to discuss the connection between CSR
and R&D and show how the influence of CSR on financial performance can be best measured
(McWilliams et al., 2000, p. 603).
To measure CSR this study utilizes the Domini 400 Social Index (DSI 400) which is based on the data
obtained by the firm KLD (see Waddock and Graves 1997 above). This index is also constructed by KLD
(McWilliams et al., 2000, p. 607). For the measurement of financial performance measurement
indicators of accounting profits are used (McWilliams et al., 2000, p. 604).
McWilliams et al. (2000, p. 607) use a sample of 524 firms over the period 1991-1996 to test their
hypotheses with a regression analysis. The results show that prior methodologies overestimate the
influence of CSR on financial performance due to omitting a control variable for R&D. The evidence
shows the significance of including control variables for R&D and specific industry factors in a model
which wants to clarify corporate social responsibility performance (McWilliams et al., 2000, p. 607).
5.2.7 Orlitzky, Schmidt and Rynes (2003)
Orlitzky et al. (2003, p. 403) aim to provide rebuttal for the assertion that little general knowledge on
the relation between CSR and financial performance exists. With the help from a meta-analysis they
want to increase the certainty about the association between CSR and financial performance. It is
proven that a meta-analysis is a suitable method in many substantive areas of research where various
studies have presented divergent outcomes and conflicting results. The relationship between CSR and
financial performance is such an area of research. A meta-analysis is a form of research review which
statistically aggregates the results of multiple individual studies (Orlitzky et al., 2003, p. 404).
In the studies used for the meta-analysis generally four measurement methods for CSR are known: (1)
CSP disclosures, (2) CSP reputation ratings, (3) social audits, CSP processes, and observable outcomes,
and (4) managerial CSP principles and values (Orlitzky et al., 2003, p. 408). For the measurement of CFP
market-based measures, accounting-based measures, and perceptual measures are most common
(Orlitzky et al., 2003, p. 420).
A meta-analysis of 52 studies is conducted in this research, this results in a total sample size of 33.878
observations (Orlitzky et al., 2003, p. 403). The following hypotheses are tested (Orlitzky et al., 2003, p.
406-409):
“H1: Corporate social performance and financial performance are generally positively related across a
wide variety of industry and study contexts.
H2: There is bidirectional causality between corporate social performance and financial performance.
H3: CSP is positively correlated with CFP because (a) CSP increases managerial competencies,
contributes to organizational knowledge about the firm’s market, social, political, technological, and
other environments, and thus enhanced organizational efficiency, and (b) CSP helps the firm build a
positive reputation and goodwill with its external stakeholders.
H4a: A large proportion of cross-study variance is due to statistical or methodological artefacts
(sampling error and measurement error).
H4b: Consistent with stakeholder mismatching, after accounting for statistical artefacts, there will still
be differences in the statistical associations between different sub-dimensions of CFP and CSP (after
correct matching).”
The findings of this statistical review show that across studies, there is a positive correlation between
CSP and CFP. It is also confirmed that the relationship between CSR and CFP is simultaneous and
bidirectional. Thirdly, firm reputation seems to be an important moderator of the connection between
CSR and CFP. Finally, the research finds evidence for the fact that stakeholder mismatching, sampling
error, and measurement error in previous studies can explain 15 to 100 percent of the cross-study
variation in several fractions of the CSP-CFP relationship.
5.2.8 Al Tuwaijri, Christensen and Hughes (2004)
Al Tuwaijri et al. (2004, p. 447) aim to provide an integrated analysis of the interrelations among
environmental disclosure, environmental performance, and economic performance. For this research
the authors make use of the conceptual framework first suggested by Ullmann (1985), this study, and
the corresponding framework, is discussed earlier in this chapter. In this study Al Tuwaijri et al. (2004, p.
448) propose a holistic approach to examine jointly the associations among the company’s
environmental performance, environmental disclosure, and economic performance. They implement
Ullmann’s contingency framework by explicitly handling environmental performance, environmental
disclosure, and economic performance as endogenous variables, together determined by the company’s
strategic management process.
The variable Al Tuwaijri et al. (2004, p. 453) use to measure environmental performance is a quantitative
measure, the ratio of toxic waste recycled to total toxic waste generated. For this variable they use a
rule that the higher the ratio of recycled waste to total waste, the better the company’s environmental
performance. To measure environmental disclosure, Al Tuwaijri et al. (2004, p. 454) use a
disclosure-scoring measure derived from content analysis instead of a measure quantifying the level of
environmental disclosure in the annual report, such as number of pages, sentences, or words. Their
disclosure-scoring methodology is based on a content analysis which includes disclosures of four major
environmental indicators: the total amount of toxic waste generated and transferred or recycled,
financial penalties resulting from violations of ten federal environmental laws, Potential Responsible
Party [PRP] description for the cleanup responsibility of dangerous-waste locations, and the occurrence
of reported oil and chemical spills. The authors assign different weights to different disclosure items: 3
points for quantitative disclosures related to the four environmental indicators, 2 points for
non-quantitative but specific information, 1 point for qualitative information, and zero points for no
disclosure of an indicator. The authors scale the total quality score (0 to 12) by the total number of
polluting activities associated with the production process of the firm, the occurrence score (0 to 4).
With this occurrence score they assure that organizations which use production processes that are not
associated with one of the environmental indicators will not be penalized for failing to make
environmental disclosures about that activity. This results in an environmental-disclosure score which
ranges from 0 to 3 (12/4 if all indicators are present and have quantitative related disclosures). Finally,
the economic performance of firms is measured by a market-based measure, an industry-adjusted
annual return (Al Tuwaijri et al., 2004, p. 456).
The sample of this study is based on five criteria, a firm must be listed in the IRRC’s 1994 Environmental
Profiles Directory, must generate at least one pound of toxic waste per $10.000 of revenue, must have
complete financial data reported in Compustat, must have its annual reports available using the
LexisNexis database, and must appear in the Wall Street Journal index. After excluding firms that do not
meet these criteria, the final sample consists of 189 companies. The sample period for this research is
one year, 1994 (Al Tuwaijri et al., 2004, p. 458).
Al Tuwaijri et al. (2004, p. 458-466) firstly provide descriptive statistics for the study’s variables.
Secondly, they continue their analysis using a three-stage least squares [3SLS] simultaneous equation
model. The results of these tests show a positive relation between economic performance and
environmental performance. Thereby a significant relationship is also found between good
environmental performance and more extensive quantifiable disclosure of environmental information
(Al Tuwaijri et al., 2004, p. 466).
5.2.9 Wu (2006)
Wu (2006, p. 163) conducted, like Orlitzky et al. (2003), a meta-analysis of 121 empirical studies to
investigate the relationships among CSP, CFP, and size. This meta-analysis is a response to the
inconsistent linkages among CSP, CFP, and size resulting from prior studies. The main purpose of this
study is to examine whether CSP is related to CFP, whether firm size is related to CFP, and whether firm
size is related to CSP. To this end, meta-analyses are performed to integrate empirical results of previous
researches.
A distinction is made between perceptual based measures and performance based measures of CSP.
Perceptual based measures (such as Fortune rankings and KLD rankings) are related to the financial
information, whereas performance based measures (for examples TRI and corporate philanthropy) do
not correlate with the company’s financial performance. In accordance to CFP measures, a distinction is
made between market-based and accounting-based measures.
Wu (2006, p. 164) used ABI-Inform (a computer search) to find relevant literature for his meta-analysis.
This resulted in a sample of 121 empirical studies. The author found that the measures for CSP used in
these studies are annual report disclosure, pollution ratings, Moskowitz’s ratings, KLD ratings, Fortune
ratings, Business Ethics 100, corporation philantrophy, compliance, and responsive behavior. Wu (2006,
p. 164) subdivides these measures into three dimensions; the first dimension is the extent of corporate
disclosure about matters of social concern, the second dimension are specific corporate social actions
(such as philantrophy, social program, and pollution control), and the third dimension are corporate
reputation ratings (for example KLD, Fortune, Moskowitz, and Business Ethics 100). The CFP measures
are classified into four categories in this study (Wu, 2006, p. 164); profitability measures (ROE, ROS,
return on investment [ROI], earnings per share [EPS], and profit margin), asset utilization measures
(ROA and asset turnover), growth measures (average profitability and average asset utilization), and
market-based measures (stock performance, market return, market to book value). In prior studies size
was measured using number of employees, number of submits, number of clients served, total sales, or
total assets. Wu (2006, p. 165) uses total assets, total sales, and number of employees as measures for
size.
This study provides four major findings (Wu, 2006, p. 168). The analyses show a significant positive
association between CSP and CFP. The study also finds that profitability measures, asset utilization
measures, and growth measures (accounting based measures) are better predictors of CSP than
market-based measures of CFP. Perceptual based measures of CSP appear to report a stronger
association between CSP and CFP than performance based measures. Finally, fortune ratings have
greater effect sizes on financial performance than KLD ratings according to the results of this study.
5.2.10 Margolis, Elfenbein and Walsh (2007)
Margolis et al. (2007, p. 2) examine the link between CSP and CFP by conducting a meta-analysis, as
Orlitzky et al. (2003) and Wu (2006), on prior studies. For this meta-analysis they used a sample of 167
studies. This research is performed for a period of 35 years of research, studies from 1972 until 2007
(Margolis et al., 2007, p. 34).
The different measures for CSP used in prior studies are categorized into nine categories, the first five
categories represent a specific dimension of CSP and the last four categories represent a broad
judgment of CSP (Margolis et al., 2007, p. 10). The nine categories of CSP measures are charitable
contributions, corporate policies, environmental performance, revealed misdeeds, transparency,
self-reported social performance, observers’ perceptions, third party audits, and screened mutual funds
(Margolis et al., 2007, p. 11-12). The measures of CFP are divided into market-based measures (for
example stock returns of market to book value ratio) and accounting-based measures (for example ROA
and ROE).
The results of the meta-analysis overall reveal a mildly positive relationship between CSP and CFP
(Margolis et al., 2007, p. 22). The overall average effect is statistically significant, but on an absolute
basis it is a small effect. Only 2% of the investigated studies reported a significant negative relationship
between CFP and CSP.
5.2.11 Moneva and Ortas (2010)
Moneva et al. (2010, p. 193) want to assess the implication of the relationship between corporate
environmental [CEP] and financial performance [CFP] of European companies. With this study they aim
to show managers how a sufficient management of environmental factors could lead to financial
successes for the organization.
For this research Moneva et al. (2010, p. 196) use a multivariate instead of an univariate approach to
measure CEP and CFP. With this multivariate measuring method they aim to provide a more complete
model than prior studies. Companies’ corporate environmental performance is measured using social
audit proxies in this paper. Under the multivariate approach they focus both on internal management
procedures and final results for the measurement of CEP. The underlying CEP dimensions used to
measure this performance are environmental disclosures (ED), environmental management system
(EMS), programs to reduce environmental impacts (PREI), and energy consumption (EC) (Moneva et al.,
2010, p. 198).
CFP of the sample firms is measured using accounting-based measures instead of market-based
measures. The measurement indicators used are ROA, profit margin, ROE, cash flow, and operating
profits. In order to get a multivariate approach the factors ROA, profit margin, and ROA are together
restructured into relative corporate financial performance (RCFP) and cash flow and operating profits
are restructured into absolute corporate financial performance (ACFP) (Moneva et al., 2010, p. 198-199).
A sample of 230 European companies coming from 18 European countries is analyzed for the period
2004-2007 (Moneva et al., 2010, 196). The empirical part of the study has been conducted with a
multivariate approach using a partial least squares (PLS) model and an exploratory factor analysis. The
results of these statistical tests clarify that companies with a high level of CEP in 2004 accomplished an
adequate degree of CFP in the subsequent years. This finding indicates that firms with a higher level of
CEP will achieve better CFP in following years. Also worth mentioning is the result that the relationship
between CEP and CFP appears to be significant for all the periods that are tested.
5.2.12 Aras, Aybars and Kutlu (2010)
This article evaluates again the relationship between CSR and firm financial performance, but this time
in the case of Turkish companies (Aras et al., 2010, 229).
A content analysis is used for the measurement of CSR. The disclosures associated with CSR are obtained
from the annual reports of the analyzed firms. The following categories were used to categorize the
quantity of CSR: theme (environment, energy, products/consumers, community, and employee health
and safety, employee other, general), evidence (monetary quantification, non-monetary quantification
and declaration), news type (good, bad and neutral news), and amount (number of sentences) (Aras et
al., 2010, p. 234-235).
The financial performance of firms is measured by profitability, using ROA, ROE, and ROS as
measurement indicators (Aras et al., 2010, p. 233). Thereby different control variables were used to
control for company size, risk, and R&D (innovativeness). These control variables are ln of sales, ln of
assets, and ln of market capitalization for company size, the debt to total assets ratio (DTA) for risk, and
the R&D expenditures to net sales ratio for innovativeness (Aras et al., 2010, p. 236-237).
The sample in this study consists of 40 companies listed on the Istanbul Stock Exchange (ISE) 100 and
the research is done for the period 2005-2007 (Aras et al., 2010, 233). The hypotheses tested are (Aras
et al., 2010, p. 234):
H1: Better financial performance results in improved CSR.
H2: Improved CSR leads to better financial performance.
H3: There is a neutral relationship between financial performance and CSR.
The hypotheses are tested by a regression analysis (Aras et al., 2010, p. 238). The results of the
regression analysis only confirm a significant relationship between company size and CSR. No
relationship is found between CSR and financial performance, so H1 and H2 were rejected in this study.
5.2.13 Wood (2010)
The final study reviewed in this chapter is a paper of Wood (2010, p. 50) which aims to review the
literature on CSP measurement methods and puts this literature into a theoretical context. So this study
does not specifically examine the relationship between CSP and CFP, but rather focuses on one aspect of
these studies; the measurement problem for CSP.
The purpose of this study is to show how the different measures (from prior research) themselves fit
into an extensive structural CSP model and to demonstrate the aspects of CSP that relatively (or
completely) have not been investigated, or that have not yet been regarded generally as indicators of
CSP. At last, this paper suggests some overarching conclusions about existing CSP research and
measurement methods which recommend productive suggestions for future research (Wood, 2010, p.
50). To do so, the paper first describes briefly the conceptual history of CSP and then explains CSP as a
set of structural categories which can be identified, described, and measured. Thereafter a short
elaboration on the CSP-FP literature is given, which highlights how much attention has been paid to this
part of the CSP domain. Finally the paper reviews the empirical literature in which some aspect of CSP is
measured (Wood, 2010, p. 50).
The overall conclusion of this paper is that most empirical CSP work focuses on the impact and
outcomes of socially responsible behaviours on the firm itself (FP, reputation, innovation, access to
needed resources), instead of on the stakeholders and societies (Wood, 2010, p. 75). Wood states that
the nature of the CSP construct implies that effects on stakeholders and on society in general are at
least equally important, if not more so. According to Wood (2010, p. 76) the whole idea of CSP is to
determine and assess the consequences of business-society relationships.
Wood therefore
recommends shifting the focus away from how CSP affects the firm, and towards how the firm’s CSP
affects stakeholders and society (Wood, 2010, p. 76). She calls for a temporary ceasefire on CSP-FP
research.
Next to this conclusion, Wood (2010, p. 76) also found two other aspects concerning CSP research.
Firstly, she concludes that a lot more is known about CSP than many researchers imagine, but these
things are just not called CSP. She refers to principles, processes, and consequences to stakeholders of
business activity which are not brought into the CSP fold. Therefore Wood puts forward to breathe new
life into the CSP concept by focusing on principles, processes, and outcomes of business behaviour that
are mainly relevant for stakeholders and society. Secondly, Wood states that many other domains and
disciplines, which are not yet discovered by CSP researchers (like business ethics, philosophy, and
organizational behaviour for example), could contribute to CSP studies (Wood, 2010, p. 76). The author
therefore recommends to incorporate research and thinking in other domains into CSP research.

Hypotheses development
Based on the information in this chapter and chapter 4, different hypotheses can be formulated to test
for, in order to answer the central research question “What is the relationship between the voluntary
GRI Corporate Social Responsibility disclosures and the prior, concurrent, and subsequent financial
performance of Dutch companies?”. According to chapter 4 two types of hypotheses can be stated,
because two different empirical issues exist. The first issue is about the sign of the relationship between
CSR disclosure and financial performance. Both variables can be positively, negatively or neutrally
associated. The hypothesis concerning this direction of the relationship is presented in paragraph 5.3.1.
The other types of hypotheses focus on the causal relationship between CSR disclosure and financial
performance. The question here is if higher financial performance will lead to improved CSR disclosure,
and vice versa. These hypotheses, formulated in paragraph 5.3.2, are based on the different theories
from chapter 4. Figure 3 on page 33 illustrates how both types of hypotheses are related to each other.
5.3.1 Hypotheses sign of association between CSR disclosure and financial performance
As stated above, a distinction can be made among the positively, negatively or neutrally link between
both variables. After the review of relevant prior research on this topic in chapter 5, a positive
relationship between CSR disclosures and financial performance of companies is expected. Also the
stakeholder theory, chosen as a base for this research in chapter 3, does expect a positive association
between the two variables (Waddock et al., 1997, p. 306)
According to the stakeholder theory a distinction can be made between firm’s explicit costs and firm’s
implicit costs to stakeholders. Explicit costs are costs directly affecting a company such as payments or
bad sales results, on the other hand implicit costs are more ‘long term costs’ like low product quality or
environmental costs. There is a tension between both types of costs, because this theory assumes that if
a firm decreases CSR expenditures (reflected in CSR disclosures) to lower implicit costs, explicit costs will
increase as a consequence of for example reputation damage. So vice versa, investing in CSR can result
in a higher financial performance. If a firm pays a lot of attention to employee relations, they could be
rewarded as a ‘best company to work for’, which is a competitive advantage in finding high qualified
employees. In the end these employees could increase firm’s productivity at relatively low costs, just by
paying more attention to employee relations (Moskowitz, 1972, p 72). Therefore investing in CSR could
improve financial performance as a result, which shows the positive association between both variables.
Another theory based on the stakeholder theory is the good management theory. This theory, already
described in paragraph 4.2.1, assumes also that meeting the needs of the main stakeholders will
improve firm’s financial performance (Cornell et al, 1987, p 12). In addition this theory could also be
linked with the transaction cost theory which argues that firms can decrease their costs by introducing
contracts about stakeholders’ demands to satisfy them and to show that the firm wants to cooperate
with the stakeholders (Ruf et al, 2001, p 144). If there are no such contracts, stakeholders will demand
higher compensation for the risk that organizations do not satisfy their demands. Therefore, by investing
in CSR the costs of firms will decrease which leads to higher performance.
According to Preston et al. (1997, p 422) the good management theory is one of the three theories that
explains the positive association between CSR and financial performance. The other two theories are the
slack resource theory and the positive synergy theory. Based on these three theories, already discussed
in paragraph 4.2, and on the prior research in chapter 5, the following hypothesis can be formulated:
H1:
A positive association exists between CSR disclosure and financial performance.
5.3.2 Hypotheses causality of relationship between CSR disclosure and financial
performance
The other type of hypotheses concerns the causal relationship between CSR disclosure and financial
performance. The question here is if higher financial performance will lead to improved CSR disclosure,
or vice versa. Based on the causal sequence (e.g. CSR disclosure leads to financial performance), the
direction of the association (expected to be positive), and the causality theories related to those
dimensions (good management theory, slack resources theory, positive synergy theory), three
hypotheses can be formulated.
CSR disclosure leads to Financial Performance
The good management theory (paragraph 4.2.1) assumes that attention to non-owner stakeholders, like
employees, increases firm’s financial performance (Cornell et al, 1987, p 13). Therefore the following
hypothesis can be formulated:
H2a:
Improved CSR disclosure of a firm will lead to better financial performance.
Financial Performance leads to CSR disclosure
According to the slack resources theory, better CSR and CSR disclosure are the outcome of the
availability of slack (financial and other) resources, because this provides an opportunity for companies
to allocate these resources to CSR investments (Waddock and Graves, 1997, p 306). These slack
resources become available as a result of good financial performance. So with the allocation of the
available slack resources into social performance domains, like environment or employee relations,
more CSR and CSR disclosure is realized. Therefore the third hypothesis concerning causality is:
H2b:
Better financial performance of a firm will lead to improved CSR disclosure.
Financial Performance and CSR disclosure are synergistic
According to the positive synergy theory there is a simultaneous relationship between CSR disclosure
and financial performance. Waddock et al (1997, p 307) described this relationship as a “virtuous circle”.
Based on the assumption of a positive interaction effect between both variables the next hypothesis is
formulated:
H2c:
A positive synergy exists between the CSR disclosure and the financial performance of a firm
By testing these three hypotheses about the causality of the relationship between CSR disclosure and
financial performance, time lags of one or two years can be taken into account, because the sample
firms will be evaluated during three years.

Conclusion
In this chapter firstly 13 prior studies, which examined some aspects of the relationship between CSR,
CSR disclosure and financial performance, were discussed. This literature review shows that prior
researches show inconclusive results, which was already mentioned in the preceding chapters. Though,
6 of the 13 studies show a positive relationship. In Appendix C a summarizing table of these 13 studies
can be found which shows an overview of the purpose, the CSR variable, the CFP variable, the sample
design, the methodology, and the findings of those studies.
After this literature review the four hypotheses for this research are developed, based on the theories
from chapter 4 and the prior research in this chapter. By testing these four hypotheses in chapter 8, an
answer is tried to find on the central research question: “What is the relationship between the voluntary
GRI Corporate Social Responsibility disclosures and the prior, concurrent, and subsequent financial
performance of Dutch companies?”. The hypotheses are divided in one hypothesis about the sign of the
relationship between CSR disclosure and financial performance and three hypotheses about the
causality of the relationship (does CSR disclosure affects financial performance or vice versa?). The sign
is expected to be positive based on the relevant prior research presented in this chapter and on the
stakeholder theory discussed in chapter 3. The three hypotheses about the causality of the relationship
take time lags into account of one and two years.
The following four hypotheses were developed and will be tested and explained in chapter 8:
H1:
A positive association exists between CSR disclosure and financial performance.
H2a:
Improved CSR disclosure of a firm will lead to better financial performance.
H2b:
Better financial performance of a firm will lead to improved CSR disclosure.
H2c: A positive synergy exists between the CSR disclosure and the financial performance of a firm.
The figure below illustrates the four hypotheses of this research;

Measurement methods CSR disclosure and financial
performance

Introduction
In this chapter the different measurement methods for the two main variables in this research are
discussed. First the measurement methods for CSR disclosure are presented, these methods contain
subjective ratings, disclosure index studies, content analysis, readability studies, and linguistic analysis.
Then the several measures for financial performance are considered, which can be divided into
accounting-based measures and market-based measures. The information in this chapter is used for the
research design of the subsequent chapter.

Measurement methods CSR disclosure
According to the paper of Beattie et al. (2004, p. 207), five approaches to the study of the quality of
disclosures (also known as narratives in annual reports) exist. The major distinction made between these
measurement methods is between subjective analysts’ ratings and semi-objective techniques. The
semi-objective techniques are then divided into disclosure index studies (partial content analyses) and
textual analyses. The thematic content analysis, readability studies, and linguistic analysis are forms of
textual analyses (Beattie et al., 2004, p. 208). The next figure summarizes these five approaches to the
measurement of disclosures.

Subjective ratings
The first measurement method reviewed in this chapter is the method of subjective ratings. Many
studies undertaken in the US, on years prior to 1997, make use of analyst scores of disclosure quality
offered by the Association of Investment Management and Research [AIMR] (Beattie et al., 2004, p.
208). These reports of analyst scores provide an overall measure of corporate communications with
investors. Unfortunately the AIMR stopped these disclosure rankings after 1997. Other examples of
subjective ratings, also known as (subjective) reputation indices, are the KLD 400 Social Index, Fortune’s
magazine rankings, the Moskowitz index, and the Business Ethics 100 (Wu, 2006, p. 164).
Subjective ratings measure the informativeness of disclosures (Beattie et al., 2004, p. 208). A
disadvantage of this method is that the ratings are based on analysts’ perceptions of disclosure rather
than on direct measures of actual disclosure (Beattie et al., 2004, p. 210). Other disadvantages are the
lack of clarity as to whether the analysts take the ratings seriously, the vague basis on which firms are
selected for inclusion in the ratings, and the possible biases that analysts bring to ratings.

Disclosure index studies
As mentioned before, disclosure index studies are a more objective measurement method than
subjective ratings. Because of the difficulty of measuring disclosure quality directly, disclosure index
studies presume that the amount of disclosure on specified topics is an alternative measure for
disclosure quality (Beattie et al., 2004, p. 210). Disclosure index studies are a partial form of content
analysis whereby the items to be studied are specified in advance (Beattie et al., 2004, p. 209).
Disclosure index studies can have several characteristics. The examined items of disclosure can be
measured with a binary coding scheme or an ordinal coding scheme. Within a binary coding scheme the
presence or absence of an item is recorded, whereas an ordinal coding scheme (often three levels)
allows for the ‘quality’ of the specific disclosure to be assessed. Within an ordinal coding scheme
quantified disclosure could score 2 points, qualitative disclosures 1 point, and no disclosure 0 points.
Besides the index could be weighted, by giving different weighted scores according to the importance of
each item, or unweighted. The last characteristic of disclosure index studies is that the items could be
nested or unnested, i.e. the items could be grouped into hierarchical categories or not (Beattie et al.,
2004, p. 210).

Content analysis
A thematic content analysis focuses on the content of disclosures and is a well-established method in
the social sciences (Beattie et al., 2004, p. 214). The recording unit for most content analyses is ‘themes’
(these can be longer or shorter than a sentence), the next most common recording unit used is words
(Beattie et al., 2004, p. 212).
Krippendorf (2004, p. 18) defines content analysis as “a research technique for making replicable and
valid inferences from texts (or other meaningful matter) to the contexts of their use”. Weber (1990, p. 7)
states that content analysis is “a set of procedures to make valid inferences from text”. Disclosure index
studies are founded on the general principles of content analysis. A content analysis differs from a
disclosure index study in that this method involves classifying text units into categories (Beattie et al.,
2004, p. 214). In order to be able to draw valid conclusions from a content analysis, it is important that
the classification procedure is reliable (i.e. different researchers should code the text in the same way)
and valid (i.e. the variables derived from the classification procedure must correspond to what the
researcher proposed to represent).
Content analyses have several advantages and disadvantages. The first advantage is that when the
variables to measure are selected, this method is reasonably objective (Cochran et al., 1984, p. 44).
However, the choice of variables to measure is subjective, which is a disadvantage of content analyses.
Secondly, this method allows for larger sample sizes. A disadvantage of this measurement method is
that it only focuses on what firms say they are doing, while this can be different from what they really
doing.

Readability studies
Readability studies are created to quantify the cognitive difficulty of text and use in general a readability
formula such as the Flesch index (Beattie et al., 2004, p. 212). The Flesch index is based on a
combination of sentence length and word syllable count. The computed readability score is compared to
exterior benchmarks to assess the degree of difficulty of the text.
An advantage of readability studies is that they are objective and reliable. Though there are also some
disadvantages to this method. First, measures developed for children’s writings could be unsuitable for
adult, more technical writings. Secondly, by focusing on words and sentences, readability studies ignore
aspects of the text as a whole. At last, this measurement method takes no account of the interests and
motivations of the reader of the disclosures.

Linguistic analysis
The last measurement method for CSR disclosure presented in this chapter is the linguistic analysis, this
is a texture index (Beattie et al., 2004, p. 212). Because this method captures a much richer set of text
characteristics, it is not associated with readability studies. The linguistic analysis is based on the
linguistic theory of narrative communication developed by De Beaugrande and Dressler in 1981 (Beattie
et al., 2004, p. 212).
The linguistic analysis selects six indexials which describe characteristics of the disclosure, namely
topicality, intertextuality, conjunction, connectivity, information category shift, and specificity. Detailed
rules exist for the classification of text units which can be applied to short extracts of disclosures.

Measurement methods financial performance

Content of the term financial performance
Stakeholders look at firm’s financial performance to determine whether it is able to generate profit from
its daily operations (Brealy et al., 2009, p. 79). It is an indicator for the financial condition of an
organization. Besides, organizations and other stakeholders analyze corporate financial performances to
compare a firm with competitors in the same industry. Orlitzky et al. (2003, p. 411) define corporate
financial performance [CFP] as “a company’s financial viability, or the extent to which a company
achieves its economic goals”.
The financial performance of a firm can be calculated by a lot of different ratios. According to Brealy et
al (2009, p. 96) these ratios, describing financial performance, can be divided into different aspects such
as firm’s leverage, firm’s liquidity, firm’s efficiency, firm’s profitability and firm’s market valuation.
Overall measures of firm’s financial performance can be divided into accounting-based performance
measures and market-based performance measures (Margolis et al., 2003, p. 274; Wu, 2006, p. 164).
Each measurement indicator focuses on different aspects of financial performance and each is exposed
to particular biases (Aras et al., 2010, p. 230). This distinction is further elaborated in the next two
paragraphs.

Accounting-based performance measures
Earnings per share [EPS], return on assets [ROA], return on equity [ROE], return on capital employed
[ROCE], ratio of gross profit to sales [GPS], total assets, sales growth, asset growth, and operating
income growth are several examples of accounting-based performance measures (Cochran et al., 1984,
p. 46; Margolis et al., 2007, p. 13; Balabanis et al., 1998, p. 32; McGuire et al., 1988, p. 861).
The disadvantage of accounting-based performance measures is that these ratios only show firms
historical performance and these measures can be manipulated by the managers. Thereby it is not
always possible to compare the ratio’s, because of the use of different accounting procedures (Aras,
2010, p. 230; Balabanis et al., 1998, p. 34). Despite these disadvantages, McGuire et al. (1988, p. 868)
proved that accounting-based performance measures are better predictors of CSR than market-based
performance measures.

Market-based performance measures
The second method to study financial performance is market-based performance measures. The
advantage of this firm’s market valuation is that it also shows companies expected future economic
earnings rather than only past performance. Besides, stock market information is better available than
other financial information (Fiori et al, 2007, p. 6). A disadvantage of these measures is that the
investor’s perception of firm’s performance (stock prices) may not be a good reflection of the company’s
real financial performance. Next to stock prices it is also possible to look at the dividend yield,
market-to-book value ratios, excess market valuation [EMV], and price-to-earnings [P/E] ratios
(Balabanis et al., 1998, p. 32; Margolis et al., 2007, p. 13; Pava et al., 1996, p. 337).
6.4
Conclusion
In this chapter the different measurement methods for the two main variables in this research, CSR
disclosure and financial performance, are discussed. For CSR disclosures five different measurement
methods can be distinguished. These five methods can be divided into subjective and semi-objective
measurement methods. Analysts’ ratings of CSR disclosures are a subjective measurement method for
CSR disclosure. Semi-objective measurement methods for this variable are disclosure index studies,
content analysis, readability studies, and linguistic analysis. These semi-objective measurement methods
have in common that they all look at the text of the disclosures, they are called textual analyses.
The measurement indicators of financial performance can be distinguished into accounting-based
measures and market-based measures. Although a distinction is made between the two types of
financial performance measures, it is also possible to use both performance indicators. For example
McGuire et al. (1988, p. 170) used a traditional market model regression format of monthly security
returns on the market index (S&P 500), but also accounting based measurements like ROA and sales
growth.
The following chapter will elaborate on the research design for this study. In this research design the
measures, chosen from the measurement methods discussed in this chapter, will also be explained.
7
Research Design
7.1
Introduction
This chapter presents the research design which is used in chapter 8 to test the validity of the
hypotheses described in paragraph 5.3. The first two paragraphs specify the measurement methods for
CSR disclosure and financial performance, chosen from the different measurement methods presented
in chapter 6. Subsequently the control variables and the sample will be discussed. After specifying these
elements of the research design, the methodology to test the different hypotheses is presented. At the
end, the limitations regarding the research design of this study are discussed. Finally the conclusion will
give an overview about this chapter and can be used as a road map for the following empirical part of
this research.
7.2
Measurement method for CSR disclosure
A content analysis is the chosen measurement method for CSR disclosures in this research. In paragraph
6.2.3 the content analysis technique was already shortly discussed in general. In this paragraph the
specific measurement model developed for this research will be explained.
The content analysis of this research is based on the GRI sustainability reporting guidelines. As
mentioned in paragraph 3.8, the GRI is the best known CSR disclosure framework and became actually
the global standard concerning CSR reporting. Each year more and more companies follow the GRI
reporting guidelines for their CSR disclosures. Also the GRI guidelines can be applied by all kinds of
organizations, irrespective of their industry. This is a useful feature for this research, because it does not
take one specific industry into account. The quality of CSR disclosures is measured using the
performance indicators of the GRI guidelines, dealing with economic, environmental, and social
performance information of a company. Only the core indicators are used, because these are generally
applicable and are assumed to be material for most companies. Additional indicators on the other hand,
are less generally applicable and are also material for just few (not all) industries. The additional
indicators are therefore excluded from the measurement model in this research. A total of 55 indicators
are analysed in each CSR disclosure to measure the quality of the disclosure.
The scoring system for the different GRI indicators is based on the model of Al Tuwaijri et al. (2004) (see
also paragraph 5.2.8). The greatest weight (+2) is assigned to quantitative disclosures related to the GRI
indicators. A score of (+1) is assigned to qualitative information related to the indicators. Finally, firms
that do not disclose any information for a given indicator receive the lowest score of zero for that
indicator. As Al Tuwaijri et al. (2004, p. 454), the measurement model in this research also ensures that
for example firms which do not use production processes that are associated with one of the indicators
concerning polluting air emissions, are not penalized for not disclosing any information about these
indicators. This adjustment is processed in the model by giving a score for occurrence for each indicator.
If an indicator is applicable for the company, it receives a score of +1 for occurrence, if an indicator is not
applicable (as in the example), it receives a score of 0. The occurrence score forms the denominator and
the quality score forms the nominator of the final score. So when an indicator is not applicable (0) and
therefore is not reported (0), this will not decrease the final score. When an indicator is applicable (1),
but is not reported (0), this will decrease the final score. The total quality score (minimum = 0, maximum
= +110) is summed for the 55 indicators and then divided by the total number of indicators associated
with the firm’s activities, the occurrence score (minimum = 0, maximum = +55). So CSR disclosure scores
(variable ‘CSR’ in paragraph 7.6) range from 0 to +2.
The measurement model for CSR disclosure described in this paragraph is illustrated in Appendix D.
7.3
Measurement method for financial performance
To determine the financial performance three different measurement indicators will be used. All these
indicators are accounting based performance measures because if market based performance measures
would be used the investors sentiment could influence the results. Thereby prior research has shown
that accounting based measures are better predictors of CSR than market based measures (McGuire et
al., 1988, p. 868; Wu, 2006, p. 168).
The three different measurement indicators that will be used are return on assets [ROA], return on
equity [ROE], and return on sales [ROS]. Using these three performance indicators is also supported by
prior literature, see the literature review at paragraph 5.2, where these are frequently used as well.
Besides, the ROA and the ROS are sensitive overall indicators for financial performance, like profitability
(Ruf et al., 2001, p. 147).
The three measurement indicators can be defined as:
ROA =
net income before tax
total assets
ROE =
net income before tax
common stockholders’ equity
ROS =
net income
total sales
.
All necessary information will be gathered from the financial database Orbis.
7.4
Control variables
The choice for the control variables used in this research is based on prior research findings. Prior
research findings confirm that firm size, and risk affect both financial performance and CSR (e.g. Aras et
al, 2010, p. 236; Waddock et al., 1997, p. 308; Moore, 2001, p. 303-304). Each of these components was
operationalized as a control variable in these previous studies.
7.4.1 Firm size
A number of studies have tested or controlled for the influence of firm size on financial performance
and CSP (e.g. Moore, 2001, p. 304; Stanwick et al., 1998, p. 198).
Burke et al. (1986, p. 126) found some evidence suggesting that smaller firms are less likely to openly
show CSR behaviors than larger firms. A possible reason for this increasing CSR behavior as firms are
growing, is the increased attention from stakeholders due to the growth. As a result of this growing
attention firms have to respond more overtly to the demands of stakeholders.
Trotman et al. (1981, p. 360) show also that a significant relationship exists between firm size and social
responsibility disclosures. They found that companies which disclose social responsibility information
are larger than firms that do not disclose that kind of information, and that the amount of information
disclosed is also positively correlated with firm size. They measures firm size by total assets and sales
volume.
The reason Ullmann (1985, p. 548) provided for this significant relationship between firms size and CSR
activities is that larger companies are subject to more public scrutiny and are more likely to have the
necessary financial, managerial, and technical know-how to engage in CSR activities, like abating
emissions for example, than are their smaller equivalents.
The different studies testing and controlling for the impact of firm size on CSP and financial performance
use different measurements for firm size. Trotman et al. (1981, p. 360) employed both sales volume and
total assets, while average turnover was used in the study of Moore (2001, p. 306). Other predictors of
size used in prior researches are ln of sales, log of sales, ln of assets, log of assets, and ln of market
capitalization (Aras et al, 2010; Tsoutsoura, 2004). In this research firm size is also taken into account as
control variable, measured by total assets and total sales.
7.4.2 Risk
Another factor prior studies controlled for is firm risk. The measures used to control for risk are the level
of debt (Tsoutsoura, 2004, p. 12; Waddock et al., 1997, p. 309), the (long term) debt to total assets ratio
(DTA) (Aras et al, 2010, p. 236; Waddock et al., 1997, p. 309), and the debt to equity ratio (Roberts,
1992, p. 603).
For this study it is important to include firm risk as a control variable because several previous studies
found a significant negative correlation between the level of debt (risk) and financial performance (Aras
et al., 2010, p. 236; Perrini et al., 2008, p. 319; Kapopoulos et al., 2007, p. 150). Other articles find also a
negative relationship between firm risk and CSR reporting, firms with lower levels of risk are expected to
have higher levels of CSR disclosures (e.g. Roberts, 1992, p. 604).
An explanation for the negative association between risk and financial performance could be that when
the amount of debt hold by a company increases, the monitoring of that company by private and
governmental creditors will also enhance. This results in a reduced business risk according to the
principal-agent theory (Majumdar et al., 1999, p. 223).
The argument for the negative relationship between risk and CSR reporting is that firms with a lower
level of risk are expected to be more able to participate in social responsible activities as a result of a
stable pattern of stock market returns due to the lower level of risk (Roberts, 1992, p. 604).
Because these studies have shown that firm risk really has any impact on financial performance and CSR
reporting, this research includes this characteristic as a control variable in the empirical tests. The
measure for firm risk used in the empirical part of this research is the debt to total assets ratio [DTA].
7.4.3 Industry
According to the outcomes of prior studies significant differences in CSR exist among different industries
(Cottrill, 1990, p. 727; Holder-Webb et al., 2009, p. 511). These differences are taken into account in this
research by controlling for them using a control variable for industry.
Balabanis et al. (1998, p. 35) came with an explanation for these differences in CSR among different
industries. Industries with a significant and maybe more visible impact on the physical environment are
less expected to avoid the attention and scrutiny of the public. Therefore it is assumed that these kinds
of firms feel more pressure to increase their CSR activities and thereby improve their reputation.
Besides, according to Balabanis et al. (1998, p. 35) the industry in which a company is operating could
also affect its financial performance. They state that the visibility of the “damage” to the environment of
a firm, with significant more impact on the physical environment, could negatively affect the behavior of
stakeholders towards the firm. This negative behavior of stakeholders could then decrease the financial
performance.
Prior studies that controlled for industry used either the 4-digit SIC (Standard Industrial Classification)
Code (Waddock et al., 1997, p. 309; Holder-Webb et al., 2009, 504), or the KLD’s industry categorization
(Ruf et al., 2001, p. 150). In this research different industries are determined by using the main
subdivision of the 4-digit SIC Codes, these different industries will be represented as dummy variables in
the research model. The main subdivision of the 4-digit SIC Codes consists of the following eleven
industries:
 Agricultural Production-Crops
 Mining
 Construction
 Manufacturing
 Transportation, Communications, Electric, Gas, and Sanitary Service
 Wholesale Trade
 Retail Trade
 Finance, Insurance, and Real Estate
 Services
 Public Administration
 Non-classifiable Establishments
7.5
Sample design
7.5.1 Time period
CSR disclosure and financial performance measures of the sample firms will be obtained for the years
2007, 2008, and 2009. The measures will be analyzed for three years because then it will be possible to
take a time lag of one or two years into account. These time lags will be taken into account by testing
hypotheses Hc1 – Hc4. By looking at these time lags it is possible to test whether the effects will become
visible after one year or two years. With Hc5 and Hc6 the contemporaneous relationship is also tested,
which means that CSR disclosure and financial performance affect each other in the same year. So this
research wants to test if a contemporaneous relationship exists and/or a lead-lag association.
7.5.2 Sample firms
The sample is based on the GRI database in which all companies that publish a GRI report (a form of CSR
disclosure) are brought together. From this database all the Dutch companies are selected. The third
requirement is that the firms must have published a GRI report in all three years (2007, 2008, and 2009)
in order to compare the CSR disclosures with the financial performance of the 3 sample period years.
After excluding all the companies from other countries than the Netherlands and the companies without
a GRI report in one or more years of the sample period, 35 companies remain. Of those 35 companies, 2
companies merged with other companies during the 3 sample years, through what they were not
comparable any more. The financial performance data and control variables were obtained from the
database Orbis in the University Library of the Erasmus University. These data were not available for 2 of
the 33 remaining companies, so those 2 companies were also not included in the sample. The final
requirement for the sample was the accounting standards used by the selected companies. Because this
research intends to compare financial performances of different companies, they need to handle the
same accounting standards to be able to compare the performances. This last requirement means an
exclusion of 7 companies which used Dutch GAAP instead of IFRS. After applying all these requirements,
the following sample arises for this research consisting of 24 companies:
Achmea Zorgverzekeringen N.V.
Aegon N.V.
Akzo Nobel N.V.
ASML Holding N.V.
CSM N.V.
Delta Lloyd N.V.
Heineken N.V.
ING Groep N.V.
Koninklijke Ahold N.V.
Koninklijke BAM Groep N.V.
Koninklijke DSM N.V.
Konklijke KPN N.V.
Koninklijke Philips Electronics N.V.
Koninklijke Wessanen N.V.
Nutreco N.V.
N.V. Luchthaven Schiphol
Océ
Rabobank Nederland
Royal Dutch Shell
SBM Offshore N.V.
TNT N.V.
Unilever N.V.
Van Gansenwinkel Group
Wolters Kluwer N.V.
7.6
Methodology
In this paragraph the details of the empirical research are presented which will be conducted in the
following chapter using the variables discussed in the previous paragraphs. The methodology of the
research of the relationship between CSR disclosure and financial performance is divided into three
steps. First I want to get to “know” the data by analyzing them separately, and then it is tested if an
association exists between CSR disclosure and financial performance and after that the sign of this
association for both contemporaneous and lead-lag combinations is tested.
7.6.1 Analyzing variables
The first step in this empirical analysis will be an analysis of the different variables that will be used in
the research model, namely CSR disclosure, financial performance, firm size, firm risk, and industry. By
conducting this analysis the reader will become familiar with the data. It will be possible to analyze the
developments and trends of the data over the three sample years.
An exploratory data analysis is used to describe the data and graphs are used to make them more visible
to the reader. The properties assessed with this analysis are the minimum and maximum value of each
variable, the mean and the standard deviation. These properties will be made visible by displaying the
descriptive statistics of each variable.
7.6.2 Testing the sign of the relationship between CSR disclosure and financial performance
The empirical analysis will continue by looking at the strength and the sign of the relationship between
CSR disclosure and financial performance in order to test the following hypothesis:
H1:
A positive association exists between CSR disclosure and financial performance.
After first looking at a scatterplot of the data about CSR disclosure and financial performance, a
correlation analysis is conducted to measure the direction and strength of the possible linear
relationship between the two variables. A Pearson correlation analysis will be performed in the
statistical program SPSS, because this research contains only continuous variables instead of
dichotomous variables. When dichotomous variables were used, a Spearman´s correlation test had to be
conducted. Pearson’s correlation coefficient r has to lie between -1 and +1. If the correlation
coefficient is +1 this indicates a perfect positive relationship, a coefficient of 0 indicates no linear
relationship at all and a coefficient of -1 indicates a perfect negative relationship.
In this correlation analysis the control variables are not yet included, because it is first explored if any
relationship exists between CSR disclosure and financial performance for the firms in the sample. When
the causality of the relationship is investigated the control variables are taken into account.
7.6.3 Testing the causality of the relationship between CSR disclosure and financial
performance
The correlation analysis described in the prior section is not able to give any indication of the direction
of the causality. It is possible that other measures could affect the results of the relationship and also
the direction of the causality is not clear, in other words, it is not clear whether CSR disclosure affects
financial performance or vice versa. Therefore a multiple regression analysis is carried out to test for this
direction and by taking into account the three control variables it is tried to ban the most important
additional influences on the relationship.
First a multiple regression analysis is conducted with financial performance as the dependent variable,
CSR disclosure as independent variable, and the control variables firm size, firm risk, and industry (also
independent variables). The corresponding regression equations are defined as follows:
FP 2008 = β0 + β1 CSR 2007 + β2 Size 2007 + β3 Risk 2007 + β4 Inddummy + ε
FP 2009 = β0 + β1 CSR 2008 + β2 Size 2008 + β3 Risk 2008 + β4 Inddummy + ε
FP 2009 = β0 + β1 CSR 2007 + β2 Size 2007 + β3 Risk 2007 + β4 Inddummy + ε
Where
FP = Financial Performance measured by ROA, ROE, and ROS
CSR = Corporate Social Responsibility Disclosure, measured by the content analysis of this research
Size = Firm size, measured by total assets and total sales
Risk = Firm risk, measured by debt to total assets ratio
Ind = Industry dummy variable, measured by the main subdivision of the 4-digit SIC codes, consisting of
eleven industries
β = regression coefficients
ε = error term
These first regression equations are used to test for the following hypothesis with the inclusion of time
lags of one and two years:
H2a:
Improved CSR disclosure of a firm will lead to better financial performance.
Secondly a multiple regression analysis will be executed to test the second hypothesis with financial
performance as the independent (explanatory) variable, and CSR disclosure as the dependent (response)
variable. Again our control variables are also included in the model as independent variables and time
lags of one and two years are taken into account. The hypothesis tested with this model is:
H2b:
Better financial performance of a firm will lead to improved CSR disclosure.
The regression equations for these multiple regression analyses are formulated as follows:
CSR 2008 = β0 + β1 FP 2007 + β2 Size 2007 + β3 Risk 2007 + β4 Inddummy + ε
CSR 2009 = β0 + β1 FP 2008 + β2 Size 2008 + β3 Risk 2008 + β4 Inddummy + ε
CSR 2009 = β0 + β1 FP 2007 + β2 Size 2007 + β3 Risk 2007 + β4 Inddummy + ε
Finally this research will test if a simultaneous association between CSR disclosure and financial
performance exists. With this regression analysis we want to test the last hypothesis:
H2c:
A positive synergy exists between the CSR disclosure and the financial performance of a firm.
The following corresponding regression equations for this analysis are defined:
FP 2007 = β0 + β1 CSR 2007 + β2 Size 2007 + β3 Risk 2007 + β4 Inddummy + ε
FP 2008 = β0 + β1 CSR 2008 + β2 Size 2008 + β3 Risk 2008 + β4 Inddummy + ε
FP 2009 = β0 + β1 CSR 2009 + β2 Size 2009 + β3 Risk 2009 + β4 Inddummy + ε
These regression equations are indirectly the same as the equations below. Therefore only the
regression equations above will be used in the analyzes of chapter 8.
CSR 2007 = β0 + β1 FP 2007 + β2 Size 2007 + β3 Risk 2007 + β4 Inddummy + ε
CSR 2008 = β0 + β1 FP 2008 + β2 Size 2008 + β3 Risk 2008 + β4 Inddummy + ε
CSR 2009 = β0 + β1 FP 2009 + β2 Size 2009 + β3 Risk 2009 + β4 Inddummy + ε

Conclusion
In this chapter the methodology for the empirical research, to test for the hypotheses of this study, is
set out. The chosen measurement method for the quality of CSR disclosures is a self-constructed
content analysis. This model is based on the GRI reporting guidelines and can be found in appendix D.
This measurement method is chosen because it is the most objective known method. The financial
performance is measured by three different accounting based measures; return on assets, return on
equity, and return on sales. The market-based performance measures ignored because the investors
sentiment could influence the results in that case. Besides, prior research has shown that accounting
based measures are better predictors for CSR than market based measures.
The control variables used in this research are firm size, risk, and industry. These are measured by
respectively total assets and total sales, debt-to-total assets ratio, and dummy variables of the main
subdivision of the 4-digit SIC codes. Prior research has demonstrated that these three factors could
influence the possible relationship between CSR disclosures and financial performance.
The empirical research will be conducted on a sample of 24 Dutch companies which disclosed a GRI
report in the years 2007, 2008, and 2009. The statistical tests that will be carried out in the next chapter
are a correlation analysis and several multiple regression analyses. Prior to these tests, first the
descriptive statistics will be analysed.
8
Empirical Analysis
8.1
Introduction
This chapter presents the results of the empirical research as developed in chapter 7. At first the
variables are analysed by using descriptive statistics. With these analyses the reader will become
familiar with the data used for this research. In the third paragraph the findings of the correlation
analysis are presented and analysed to see whether there exists an association between CSR disclosure
and financial performance. The final analysis is about the different regression analyses conducted for
this research to investigate the direction of the possible relationship between CSR disclosure and
financial performance. With the help of the findings and the corresponding analyses in this chapter, a
discussion and conclusion on the four hypotheses can be provided in chapter 9.
8.2
Descriptive statistics
In this paragraph the descriptive statistics of each variable are presented. Below the explanation for the
statistical measures in the different tables in this paragraph is provided:
 N:
Number of observations
 Minimum:
The smallest observation
 Maximum:
The highest observation
 Mean:
Arithmetic mean
 Std. Deviation The standard deviation
The CSR disclosure data first will be discussed. As described in paragraph 7.2, the quality of CSR
disclosures is measured by a content analysis based on the indicators of the GRI sustainability reporting
guidelines. The CSR disclosure scores range from 0 to +2. The following table summarizes the descriptive
statistics for this variable:
Table 2: Descriptive Statistics CSR Disclosure
The average CSR disclosure score for 2007 is 1,0025 and for 2009 1,1321. From these statistics it can be
concluded that the average quality of CSR disclosures has increased from 2007 to 2009. This can be
explained by the increasing attention for CSR in society. Furthermore the standard deviation also
increased over the three years. This means that the spread of the CSR disclosure scores increased, and
thus the CSR disclosures differ more across the sample firms in 2009 than in 2007. An explanation for
this phenomenon could be that some companies suffer more from the credit crisis than other
companies, and therefore have little resources for CSR and CSR disclosure than other companies.
Table
3: Descriptive Statistics Financial Performance
In table 3 the descriptive statistics of the continuous variable financial performance, measured by ROA,
ROE, and ROS, are displayed in percentages. All three financial performance measures, average ROA,
average ROE, and average ROS, show a large decrease from 2007 to 2009. This decline can be a result of
the financial crisis of 2008. The financial performances of a lot of companies decreased in these times.
Besides the variable ROE 2007 has a very large standard deviation. This is due to a large outlier (Van
Gansenwinkel Group) concerning ROE of 276,35 million (at the same time the highest observation of this
variable).
The preceding descriptive statistics could indicate a negative relationship between CSR disclosure and
financial performance, because the quality of CSR disclosure has increased over the three sample years,
where the financial performance has decreased. In paragraph 8.3 and 8.4 this relationship is further
examined.
Table 4:
Descriptive Statistics Control Variables
Finally, table 4 shows the descriptive statistics for the control variables firm size, measured by total
assets and total sales, and risk, measured by debt-to-total assets ratio. The descriptive statistics for
these variables show relatively stable results, indicating that the firm size and risk for the sample firms
are not subjected to large fluctuations from 2007 to 2009.
Industry is the third and last control variable in this research. The graph in figure 6 shows the division of
the sample firms over the different industries. From this graph can be concluded that most sample firms
operate in industry D, the manufacturing industry, and zero sample firms operate in the industries A, F,
J, and K, respectively the agricultural production-crops industry, the wholesale trade industry, the public
administration industry, and non-classifiable establishments.
To repeat, the eleven industries corresponding
to the letters A to K:
 Agricultural Production-Crops
 Mining
 Construction
 Manufacturing
 Transportation, Communications,
Electric, Gas, and Sanitary Service
 Wholesale Trade
 Retail Trade
 Finance, Insurance, and Real Estate
 Services
 Public Administration
 Non-classifiable Establishments
Average quality of CSR Disclosures per industry
N Average CSR Disclosure
2007
2008
2009
0
 Agricultural Production-Crops
2
1,09
1,03
1,05
 Mining
1
0,52
0,59
0,63
 Construction
10 0,98
1,02
1,22
 Manufacturing
4
1,02
1,11
1,25
 Transportation, Communications, Electric, Gas, and Sanitary
Service
0
 Wholesale trade
1
0,76
0,83
0,95
 Retail Trade
5
1,15
1,17
1,25
 Finance, Insurance, and Real Estate
1
1,03
1,15
1,20
 Services
0
 Public Administration
0
 Non-classifiable Establishments
Table 5: Average quality of CSR disclosures per industry
Industry
Another step in the exploratory data analysis is the examination of the average quality of CSR
disclosures per industry. Table 5 shows that the CSR disclosures of the finance, insurance, and real
estate industry are of the best quality in all three years. On the other hand, the lowest quality CSR
disclosures are provided by the construction industry. This analysis has to take the small sample size of
this research into account. Because only one company of the sample operates in industry C, the
conclusion that the construction industry’s CSR disclosures have the lowest quality is not generalizable.
8.3
Correlation analysis
In this paragraph the results of the Pearson correlation tests are discussed. Firstly the scatterplots of CSR
disclosure towards the three different measures of financial performance are analysed to explore the
relationship visually and to make a robust estimation of the sign of the relationship. After this
introduction, the detailed output of the Pearson correlation test will be discussed.
With this analysis the first hypothesis of this research is tested:
H1:
A positive association exists between CSR disclosure and financial performance.
Figure 7 to 9 present the different scatterplots. Figure 7 and 9 indicate that there is a weak relationship
between CSR disclosure and ROA, and between CSR disclosure and ROS. This is derived from the result
that the points of these scatterplots are all over the place. In the scatterplot of CSR disclosure and ROE
the points are more clustered around a line, indicating a stronger relationship. Though, the points of this
scatterplot are clustered around an almost horizontal line, which also indicates a neutral correlation.
Thus from the scatterplots it seems that there is no relationship between CSR disclosure and financial
performance. None of the three scatterplots shows an indication for a curvilinear relationship, so it is
appropriate to perform the Pearson correlation test.
The results of the Pearson correlation test are presented in table 6 in a correlation matrix. This
correlation matrix makes it possible to get a rough idea of the relationship between CSR disclosure and
financial performance. From this matrix it can be concluded that no significant correlation exists
between ROA and CSR disclosures and between ROE and CSR disclosures for all three years, at a
significance level of 5%. Next, the correlations between CSR disclosures and ROS are analyzed. The
correlation matrix shows that CSR disclosures are positively correlated to ROS for all possible
combinations. Though, this positive correlation is only significant for the relationship between ROS of
2007 to CSR disclosures in 2007, 2008, and 2009. CSR disclosures of 2007 are positively correlated to
ROS in the same year at a significance interval of 5%, indicated with a correlation coefficient of 0,428.
This means that a higher quality of CSR disclosure in 2007 leaded to a higher return on sales or vice
versa. The strength of this relationship is medium, indicated by the coefficient of 0,428, with +1
indicating a perfect positive relationship. Because of the small sample size in this research, also a
significance level of 10% is taken into account to analyze the results, to see whether more significant
associations arises between CSR disclosures and financial performance. After this adjustment, ROS in
2007 appears to be positively correlated to CSR disclosures in 2008 and 2009 too, denoting time lags of
one and two years. The Pearson correlation coefficient of this relationship is respectively 0,390 and
0,344, so this means there is a small positive relationship in both combinations.
From this analysis it appears that only ROS of 2007 has a significant positive relationship with the CSR
disclosures of 2007, 2008, and 2009. A possible explanation for this finding could be the emergence of
the financial crisis in 2008 and continuing in 2009. The ROS in 2008 and 2009 could be influenced by this
development and show therefore probably no significant results. In the next paragraph this relationship
will be further investigated.
Table 6: Pearson correlation matrix CSR disclosure and financial performance (N=24)
8.4
Regression analyses
The correlation coefficients from the preceding paragraph only give a rough impression of the
relationship between voluntary CSR disclosures and financial performance. In order to test more
sophisticatedly whether voluntary CSR disclosures contribute significantly to the model’s capability to
predict financial performance for Dutch companies, and vice versa, twenty-seven multiple regressions
are executed. These multiple regressions consider lead-lag combinations of one and two years, as well
as contemporaneous associations.
8.4.1 Multiple regression assumptions
Multiple regressions make a number of assumptions about the data that are used. Before the multiple
regressions can be performed, these assumptions have to be met. In this sub-paragraph the
assumptions of multiple regressions are discussed and are applied on the data of this research (Field,
2005, p. 220).

Types of variables
All the independent variables must be quantitative or categorical (with two categories), and the
dependent variable must be quantitative, continuous, and unbounded.
There all independent variables in each regression are quantitative or categorical (industry
dummies), and all dependent variables in each regression are quantitative, continuous, and
unbounded, it can be concluded that this assumption is met.

Non-zero variance
The independent variables in a multiple regression model must have some variation in their values,
they cannot have a variance of zero. A variance of zero is the same as a standard deviation of zero.
In the discussion of the descriptive statistics in paragraph 8.2, it became clear that the data of this
research do not have a variance of zero.

Multicollinearity
The first assumption is about multicollinearity. This assumption is about the relationship between the
independent variables. When the correlation between these variables is high (a Pearson correlation
efficient of 0,9 and above), multicollinearity exists. A multiple regression model assumes that no
multicollinearity between the independent variables exists.
Before running the multiple regressions, Pearson correlation matrixes of all the variables are
examined to test for this assumption. None of the correlation coefficients in these matrixes is 0,9 or
above, therefore the assumption of no multicollinearity is met for this research.

Homoscedasticity
Homoscedasticity means that at each level of the independent variable, the variance of the residual
terms should be constant. The residual terms are the differences between the predicted value of the
model and the value of the observations. In other words, the residuals should have the same
variance for each level of the dependent variables.
To test for this assumption the scatterplots of the regression standardized residuals towards the
regression standardized predicted values are analysed. For the data of this research these
scatterplots show sometimes some horn-shaped distribution, but are enough randomly spread
around the horizontal baseline to assume a constant variance of the residual terms. The horn-shaped
distributions could be explained by the small sample size of this research. When the sample would be
greater, the sooner the variance of the residuals would be constant.

Independent errors
The residual terms of each observation should be uncorrelated, or independent. This assumption can
be tested with a Durbin-Watson test. This test looks for serial correlations between errors. The test
statistic can vary between 0 and 4, where a value of 2 means that the residuals are uncorrelated.
Values above 2 indicate a negative correlation and values below 2 indicate a positive correlation. The
rule of thumb used says that values below 1 or above 3 should be a cause for concern.
After running the Durbin Watson tests for each regression analysis of this research, it can be
concluded that each test statistic of this test lies between 1 and 3. Therefore the assumption of
independent errors is met.

Normally distributed errors
According to this assumption all residuals in the model have to be random, normally distributed
variables with a mean of 0. This indicates that the differences between the model and the observed
data are mostly zero or very close to zero.
To test for this assumption the normal P-P plots and the residual statistics are examined. From the
residual statistics can be concluded that for every regression analysis in this research the mean of the
residuals is zero, indicating normally distributed errors. The normal P-P plots imply that all point lie
on a reasonably straight diagonal line from the left bottom to the right top. Some little deviations
from this line can be seen. A cause for these deviations could be the small sample size. Larger sample
sizes (and thus more observations) will automatically lead to a better normal distribution of the
residuals. The deviations do not cause serious concerns for this assumption though. The assumption
of normally distributed errors is met.

Independence
This assumption states that all values of the outcome variables must be independent. Each value has
to come from a separate entity. This assumption is also met for this research, because each value of
the outcome variables comes from a different company.

Linearity
According to this final assumption, the mean values of the outcome variable for each increase of the
predictors lie along a straight line, indicating a linear relationship.
To see whether this assumption is met, the scatterplots of the residuals and the predicted values are
analysed. None of these scatterplots show a clear pattern, which implies that the assumption is met.
All points lie more or less equally spread around the horizontal baseline of the plots.
Again, when the sample size would be greater, it can be assumed that the points would be more
centred around the horizontal baseline, denoting a stronger linear relationship.
8.4.2 Multiple regression analyses
In this paragraph the results of the 27 multiple regression analyses are discussed. In table 7 to 15 the
estimated unstandardized regression coefficients, the R squares and the significance levels of the
multiple regression models are provided.
8.4.2.1 Hypothesis 2a
In this section the results of the multiple regression analyses according to hypothesis 2a are presented
and discussed.
H2a:
Improved CSR disclosure of a firm will lead to better financial performance.
As mentioned before, this hypothesis is tested with time lags of one and two years. First the results of a
time lag of one year are discussed, these results are summarized in table 7 and 8.
First a time lag of one year between 2007 and 2008 is taken into account in table 7. The R Square asserts
how much of the variance in the financial performances (measured with ROA, ROE, and ROS) is
explained by the model (which includes CSR disclosure, size, risk, and industry) (Pallant, 2007, p. 158).
When ROA is used as dependent variable, the value is 0,409. This means that the model explains 40,9%
of the variance in ROA. When ROE or ROS are used as dependent variables on the other hand, the R
Square values are respectively 0,321 and 0,255. So the model explains 32,1% of the variances in ROE and
25,5% in ROS. From these results it can be concluded that the model gives a better explanation for the
variances in return on assets than for return on equity or return on sales.
The corresponding significance levels in table 7 show a value of 55,9%, 77,7%, and 89,7% for the three
regression models. All three percentages exceed the significance level of 10%. This means that the
regression models overall do not predict the financial performances very well. Therefore hypothesis 2a
should be rejected for a time lag of one year between 2007 and 2008, at a 90% confidence interval. This
implies that the effect of CSR disclosures on financial performances after one year is not significant.
The coefficients of CSR disclosures in the equations with ROA, ROE, and ROS of 2008 as dependent
variables are respectively 0,467, 19,561, and 1,984. This indicates a positive relationship between CSR
disclosures and financial performances after one year. However, this effect is not significant as
mentioned above. From table 7 also appears that none of the control variables seems to have a
significant effect on financial performances at a 90% confidence interval.
Industry functions as the reference category for the dummy variables of the different industries. The
other industries therefore have to be interpreted with respect to this reference category, industry D in
this research. In this model, none of the industries has a significant effect on financial performances
though. Therefore these variables are not further analysed here.
Dependent variable
ROA 2008
ROE 2008
B (SE)
Beta
B (SE)
Beta
Constant
Independent variable
CSR disclosure 2007
Control variables
Total Assets 2007
Total Sales 2007
Debt-to-Assets ratio 2007
Industry B
Industry C
Industry E
Industry G
Industry H
Industry I
R Square
Sig. Model
3,625
(9,228)
0,467
(6,523)
-1,079E-6
(0,000)
5,772E-5
(0,000)
0,001
(0,098)
0,597
(6,014)
-0,727
(7,266)
-0,005
(3,882)
1,600
(6,577)
-4,561
(5,345)
1,659
(6,598)
0,409
0,559
0,20
-0,54
0,481
0,004
0,029
-0,026
0,000
0,057
-0,328
0,059
-7,637
(34,143)
19,561
(24,134)
-6,400E-6
(0,000)
8,886E-5
(0,000)
-0,21
(0,363)
6,952
(22,250)
28,272
(26,883)
5,586
(14,362)
12,951
(24,332)
-12,773
(19,774)
16,113
(24,412)
0,321
0,777
0,239
-0,092
0,215
-0,020
0,099
0,290
0,107
0,133
-0,266
0,165
ROS 2008
B (SE)
Beta
14,830
(17,789)
1,984
(12,575)
5,638E-6
(0,000)
2,938E-6
(0,000)
-0,218
(0,189)
4,336
(11,593)
5,622
(14,007)
5,854
(7,483)
3,194
(12,678)
-1,779
(10,303)
11,452
(12,719)
0,255
0,897
0,049
0,164
0,014
-0,436
0,124
0,116
0,225
0,066
-0,74
0,236
* = unstandardized coefficient is significant at the p < 0,10
** = unstandardized coefficient is significant at the p < 0,05
*** = unstandardized coefficient is significant at the p < 0,001
Table 7: Multiple regression analysis results hypothesis 2a with a time lag of 1 year (2007-2008)
In table 8 the results of the analysis with a time lag of 1 year between 2008 and 2009 are displayed. The
values of the R squares are 0,191, 0,096, and 0,085 for the regression models with respectively ROA,
ROE, and ROA as dependent variable. This means that this model explains 19,1% of the variances in
ROA, 9,6% of the variances in ROE and 8,5% of the variances in ROS. These results show that this model
again is a better explanation for the variances in ROA than in ROE or ROS.
From the significance levels in table 8 the values of 96,5%, 99,8%, and 99,9% can be read. These values
exceed the significance level of 10% away. Consequently hypothesis 2a is also rejected for the time lag
of one year between 2008 and 2009 at a confidence interval of 90%. This again shows that CSR
disclosures have an insignificant effect on financial performances.
From table 8 the coefficients of CSR disclosures in these three regression equations can be read:
-5,281, -6,837, and 1,504. These values denote a negative effect of CSR disclosures in 2008 on ROA and
ROE in 2009, but a positive effect of CSR disclosures on ROS in 2009. Again these effects are not
significant, therefore these results are not generalizable for the entire population of Dutch companies.
Also the control variables appear to have no significant effect on the financial performances.
Dependent variable
ROA 2009
ROE 2009
B (SE)
Beta
B (SE)
Beta
Constant
Independent variable
CSR disclosure 2008
Control variables
Total Assets 2008
Total Sales 2008
Debt-to-Assets ratio 2008
Industry B
Industry C
Industry E
Industry G
Industry H
Industry I
R Square
Sig. Model
12,285
(11,076)
-5,281
(6,339)
-1,069E-6
(0,000)
1,273E-5
(0,000)
-0,075
(0,136)
1,983
(6,626)
-3,495
(7,959)
0,606
(4,185)
3,978
(6,791)
2,519
(5,907)
1,589
(7,110)
0,191
0,965
-0,248
-0,059
0,158
-0,236
0,106
-0,135
0,044
0,154
0,198
0,061
41,966
(72,844)
-6,837
(41,688)
-4,943E-6
(0,000)
2,270E-5
(0,000)
-0,520
(0,897)
8,877
(43,597)
1,351
(52,344)
-8,751
(27,524)
15,934
(44,665)
21,000
(38,845)
15,433
(46,757)
0,096
0,998
-0,052
-0,044
0,045
-0,263
0,076
0,008
-0,101
0,099
0,265
0,096
ROS 2009
B (SE)
Beta
11,481
(21,462)
1,504
(12,282)
2,117E-6
(0,000)
-9,094E-7
(0,000)
-0,176
(0,264)
5,759
(12,839)
2,407
(15,422)
3,717
(8,109)
2,454
(13,159)
2,266
(11,445)
4,042
(13,776)
0,085
0,999
0,039
0,065
-0,006
-0,305
0,169
0,051
0,147
0,052
0,098
0,086
* = unstandardized coefficient is significant at the p < 0,10
** = unstandardized coefficient is significant at the p < 0,05
*** = unstandardized coefficient is significant at the p < 0,001
Table 8: Multiple regression analysis results hypothesis 2a with a time lag of 1 year (2008-2009)
Secondly a time lag of two years between 2007 and 2009 for the effect of CSR disclosures on financial
performances is examined. The results of the three regression analyses related to this examination are
summarized in table 9. Again first the R Square is analysed. When ROA of 2009 is used as the dependent
variable, the value of the R square is 0,186. In other words, the model explains 18,6% of the variances in
return on assets. With ROE or ROS as dependent variables, the values are 0,207 and 0,145. So the model
explains 20,7% of the variances in ROE and 14,5% of the variances in ROS. Unlike the previous six
regressions, the model explains the variances in ROE better than in ROA and ROS for a time lag of two
years.
Next the significance of the complete model is examined by reading the ANOVA tables. In these tables
the significance levels of 96,9%, 95,3%, and 98,9% can be found. These percentages exceed the
significance level of 10%. As a result hypothesis 2a is also rejected in case of a time lag of 2 years. This
means that CSR disclosures do not have a significant effect on the financial performances after two
years.
The coefficients of CSR disclosures in the three regression models with a time lag of 2 years can be read
from table 9. These indicate that CSR disclosures in 2007 had a negative effect on return on assets in
2009 and a positive effect on the return on equity and returns on sales in 2009. Since these effects are
not significant, they are not generalizable for the complete population. The same holds for the control
variables in the model.
Dependent variable
ROA 2009
ROE 2009
B (SE)
Beta
B (SE)
Beta
Constant
Independent variable
CSR disclosure 2007
Control variables
Total Assets 2007
Total Sales 2007
Debt-to-Assets ratio 2007
Industry B
Industry C
Industry E
Industry G
Industry H
Industry I
R Square
Sig. Model
10,723
(9,911)
-4,491
(7,006)
-1,454E-6
(0,000)
2,354E-5
(0,000)
-0,073
(0,105)
1,799
(6,459)
-3,082
(7,804)
0,632
(4,169)
4,648
(7,063)
2,880
(5,740)
1,517
(7,086)
0,186
0,969
-0,207
-0,079
0,215
-0,275
0,096
-0,119
0,046
0,180
0,226
0,059
33,963
(60,832)
17,688
(43,000)
-9,030E-6
(0,000)
1,543E-5
(0,000)
-0,857
(0,646)
10,218
(39,643)
24,238
(47,897)
-2,868
(25,589)
33,209
(43,353)
33,553
(35,231)
23,449
(43,494)
0,207
0,953
0,131
-0,079
0,023
-0,518
0,088
0,151
-0,033
0,206
0,424
0,146
ROS 2009
B (SE)
Beta
10,886
(18,495)
3,557
(13,074)
1,010E-6
(0,000)
-5,085E-7
(0,000)
-0,216
(0,196)
5,590
(12,053)
5,148
(14,563)
4,392
(7,780)
5,734
(13,181)
4,652
(10,712)
5,750
(13,224)
0,145
0,989
0,090
0,030
-0,003
-0,446
0,164
0,109
0,195
0,122
0,201
0,122
* = unstandardized coefficient is significant at the p < 0,10
** = unstandardized coefficient is significant at the p < 0,05
*** = unstandardized coefficient is significant at the p < 0,001
Table 9: Multiple regression analysis results hypothesis 2a with a time lag of 2 years (2007-2009)
8.4.2.2 Hypothesis 2b
In this section the results of the multiple regression analyses according to hypothesis 2b are presented
and discussed.
H2b:
Better financial performance of a firm will lead to improved CSR disclosure.
Also this hypothesis is tested with time lags of one and two years. First the results with a time lag of one
year (table 10 and 11) are discussed, followed by an analysis of the results with a time lag of two years
(table 12).
First the time lag of one year between 2007 and 2008 is examined using table 10 below. The R Square
value of the model with financial performance measured by ROA is 0,392, indicating that 39,2% of the
variances in CSR disclosures are explained by return on assets. The R Square of the model with financial
performance measured by ROE is 0,377. This means that for this model 37,7% of the variances in CSR
disclosures is explained by the return on equity of the previous year. The R Square of the third
regression model is 0,372, stating an explanatory power of 37,2% of return on equity for the variances in
CSR disclosures the next year. The three R Squares indicate that the variances in CSR disclosures are best
explained by the model with return on assets as the independent variable.
Subsequently the significance levels of the three models are evaluated. In table 10 the significance levels
of 60,5%, 64,3%, and 65,5% can be found. All three exceed the significance level of 10%. Therefore
hypothesis 2b should be rejected for a time lag of one year between 2007 and 2008 at a 90% confidence
interval. This means that the effect of financial performances on CSR disclosures after one year is not
significant.
According to the regression coefficients of ROA (0,008) and ROE (0,001), there is a really marginal
positive effect of these two financial performance measures on the CSR disclosures in the following
year. The return on sales (coefficient 0,000) even has a zero effect on the CSR disclosures in the next
year. Nonetheless, these effects are all insignificant and thus not generalizable for the population. Also
the three control variables do not have any significant effect in the three models.
Dependent variable
CSR 2008
CSR 2008
B (SE)
Beta
B (SE)
Beta
Constant
Independent variable
Control variables
ROE 2007
1,207***
(0,305)
0,008
(0,012)
-
ROS 2007
-
ROA 2007
Total Assets 2007
Total Sales 2007
Debt-to-Assets ratio 2007
Industry B
Industry C
Industry E
Industry G
Industry H
Industry I
2,147E-7
(0,000)
-1,622E-7
(0,000)
-0,005
(0,004)
-0,14
(0,262)
-0,272
(0,299)
0,170
(0,167)
-0,086
(0,282)
0,284
(0,231)
0,144
0,214
0,249
-0,032
-0,369
-0,016
-0,224
0,261
-0,071
0,476
0,119
1,680***
(0,519)
-
CSR 2008
B (SE)
Beta
1,313***
(0,325)
-
0,001
(0,002)
-
0,114
2,175E-7
(0,000)
1,410E-7
(0,000)
-0,007
(0,006)
-0,310
(0,340)
-0,539
(0,313)
-0,302
(0,270)
-0,146
(0,302)
-0,380
(0,323)
-0,55
0,252
0,027
-0,538
-0,353
-0,445
-0,615
-0,225
-0,313
-0,045
0,000
(0,007)
2,088E-7
(0,000)
2,236E-7
(0,000)
-0,005
(0,005)
-0,015
(0,268)
-0,262
(0,308)
0,175
(0,182)
-0,099
(0,286)
0,251
(0,269)
0,248
0,015
0,242
0,043
-0,435
-0,017
-0,216
0,268
-0,081
0,421
0,204
(0,334)
0,392
0,605
R Square
Sig. Model
(0,352)
0,377
0,643
(0,354)
0,372
0,655
* = unstandardized coefficient is significant at the p < 0,10
** = unstandardized coefficient is significant at the p < 0,05
*** = unstandardized coefficient is significant at the p < 0,001
Table 10: Multiple regression analysis results hypothesis 2b with a time lag of 1 year (2007-2008)
In table 11 the results of the analysis with a time lag of 1 year between 2008 and 2009 are presented.
The R Square values are 0,312, 0,340, and 0,354 related to the regression models with respectively ROA,
ROE, and ROS, as independent financial performance variables. From these values can be concluded that
the model with ROS as independent variable explains the variances in next year’s CSR disclosures the
best. This finding is contrary to the findings of the regression models with a time lag of one year
between 2007 and 2008, where the model with ROA as independent variable had the best explanatory
power.
From table 11 the significance levels of the models, 79,6%, 73,5%, and 70,2%, can be read. These values
all exceed the significance level of 10%. Therefore hypothesis 2b is also rejected for the time lag of one
year between 2008 and 2009 at a confidence interval of 90%. This means again that financial
performances measured by ROA, ROE, and ROS, do not have a significant effect on next year’s CSR
disclosures.
From table 11 the coefficients of ROA, ROE, and ROS in these three regression equations can be read:
0,002, 0,003, 0,007. This shows that ROA, ROE, and ROS have a marginal positive effect on CSR
disclosures the next year. The same was found in the previous three regression models. Since none of
these effects are significant, they are not genuine. Also the control variables in these models appear not
to have a significant effect on CSR disclosures.
Dependent variable
CSR 2009
CSR 2009
B (SE)
Beta
B (SE)
Beta
Constant
Independent variable
Control variables
ROE 2008
1,181**
(0,421)
0,002
(0,014)
-
ROS 2008
-
ROA 2008
Total Assets 2008
Total Sales 2008
Debt-to-Assets ratio 2008
Industry B
Industry C
1,498E-8
(0,000)
6,210E-7
(0,000)
-0,001
(0,006)
-0,165
(0,299)
-0,433
0,035
0,017
0,159
-0,095
-0,182
-0,344
1,153***
(0,379)
-
CSR 2009
B (SE)
Beta
1,003**
(0,428)
-
0,003
(0,003)
-
0,198
1,634E-8
(0,000)
4,965E-7
(0,000)
-0,001
(0,006)
-0,183
(0,293)
-0,487
0,019
0,127
-0,086
-0,201
-0,387
0,007
(0,007)
-4,041E-8
(0,000)
7,560E-7
(0,000)
0,001
(0,007)
-0,208
(0,293)
-0,492
0,253
-0,046
0,193
0,069
-0,229
-0,390
Industry E
Industry G
Industry H
Industry I
R Square
Sig. Model
(0,343)
0,160
(0,187)
-0,162
(0,303)
0,193
(0,263)
0,122
(0,321)
0,312
0,796
0,238
-0,128
0,311
0,097
(0,343)
0,143
(0,184)
-0,182
(0,296)
0,213
(0,259)
0,080
(0,316)
0,340
0,735
0,212
-0,145
0,343
0,063
* = unstandardized coefficient is significant at the p < 0,10
** = unstandardized coefficient is significant at the p < 0,05
*** = unstandardized coefficient is significant at the p < 0,001
Table 11: Multiple regression analysis results hypothesis 2b with a time lag of 1 year (2008-2009)
Next a time lag of two years between 2007 and 2009 for the effect of financial performances on CSR
disclosures is analyzed. The results of the three related regression analyses are summarized in table 12.
The R Square is first examined. When ROA of 2007 is used as independent variable, the value of R
square 0,433. In other words, that model explains 43,4 % of the variances in CSR disclosures. With ROE
or ROS as independent variables, the values are0,378 and 0,379. This means that the model with ROE as
financial performance measure explains 37,8% of the variances in CSR disclosures and the model with
ROS as financial performance measure 37,9%. From these values can be concluded that the model with
ROA as independent variable explains the variances in CSR disclosures of two years later the best.
Table 12 shows that the three models have a significance level of 49,3%, 64,0%, and 63,9%. These values
exceed the significance level of 10%. As a result hypothesis 2b also has to be rejected in case of a time
lag of two years. This means that the financial performances (ROA, ROE, and ROS) of 2007 do not have a
significant effect on the CSR disclosures in 2009.
The coefficients of ROA, ROE, and ROS in the three regression models with a time lag of two years can
be read from table 12. The ROA (0,15) and ROS (0,002) coefficients show a negligible positive effect on
CSR disclosures. The ROE coefficient on the other hand shows a marginal negative effect on CSR
disclosures. These effects are, just as the effects of the different control variables, not significant and
therefore cannot be assumed as genuine.
(0,337)
0,112
(0,188)
-0,167
(0,291)
0,173
(0,256)
0,037
(0,322)
0,354
0,702
0,166
-0,133
0,280
0,029
Dependent variable
CSR 2009
CSR 2009
B (SE)
Beta
B (SE)
Beta
Constant
Independent variable
Control variables
ROE 2007
1,167***
(0,306)
0,15
(0,013)
-
ROS 2007
-
ROA 2007
Total Assets 2007
Total Sales 2007
Debt-to-Assets ratio 2007
Industry B
Industry C
Industry E
Industry G
Industry H
Industry I
R Square
Sig. Model
2,483E-8
(0,000)
1,928E-7
(0,000)
-0,003
(0,004)
-0,147
(0,262)
-0,344
(0,299)
0,211
(0,168)
-0,62
(0,283)
0,366
(0,232)
0,007
(0,335)
0,433
0,493
0,375
0,028
0,036
-0,257
-0,162
-0,273
0,312
-0,049
0,592
0,006
1,592**
(0,538)
-
CSR 2009
B (SE)
1,307***
(0,336)
-
-0,001
(0,002)
-
-0,111
2,492E-8
(0,000)
9,634E-7
(0,000)
-0,004
(0,006)
-0,424
(0,352)
-0,616*
(0,325)
-0,272
(0,280)
-0,025
(0,313)
-0,378
(0,335)
-0,050
(0,365)
0,378
0,640
0,028
0,180
-0,300
-0,465
-0,489
-0,532
-0,037
-0,300
-0,039
0,002
(0,007)
-2,771E-8
(0,000)
9,244E-7
(0,000)
-0,004
(0,005)
-0,157
(0,277)
-0,341
(0,318)
0,202
(0,188)
-0,088
(0,295)
0,271
(,277)
0,144
(,366)
0,379
0,639
* = unstandardized coefficient is significant at the p < 0,10
** = unstandardized coefficient is significant at the p < 0,05
*** = unstandardized coefficient is significant at the p < 0,001
Table 12: Multiple regression analysis results hypothesis 2b with a time lag of 2 years (2007-2009)
8.4.2.3 Hypothesis 2c
In this final section with regression analyses, the results of the multiple regression analyses according to
hypothesis 2c are presented and analyzed.
H2c:
Beta
A positive synergy exists between the CSR disclosure and the financial performance of a firm.
The contemporaneous relationships related to this hypothesis are firstly discussed for 2007, then for
2008, and finally for 2009. In table 13 the results for 2007 are summarized. The R square values are
0,635 for the model with ROA as dependent variable, 0,632 for the model with ROE as dependent
variable, and 0,627 for the model with ROS as dependent variable. This denotes that the model explains
63,5% of the variances in ROA, 63,2% of the variances in ROE, and 62,7% of the variances in ROS. From
0,116
-0,031
0,173
-0,320
-0,172
-0,271
0,300
-0,070
0,438
0,114
these results it can be concluded that the model with CSR disclosures as independent variable explains
approximately the same percentage of variances in the three measures of financial performance. The
variance in return on assets is best explained by the model.
The significance levels of the complete models show the values of respectively 8,5%, 8,8%, and 9,4%.
The significance levels of the three models remain below the significance level of 10%. This implies that
these three regression models overall predict the financial performances in the same year significantly
well.
The coefficients of CSR disclosures in table 13 show the values of 8,543 (ROA), -33,391 (ROE), and 6,397
(ROS). This is an indication of a strongly negative relationship between ROE and CSR disclosures in the
same year, but a positive relationship between CSR disclosures and ROA and ROS in the same year.
However, when looking at the corresponding significance levels in table 13, it is concluded that these
relationships are not significant, and thus not generalizable. Attention needs to be paid to industry I in
the regression model with ROA as the dependent variable. Industry I, the services industry, appears to
have a significant strongly positive effect on the return on assets, at a confidence level of 95%. This
result proposes that the ROA of companies within the services industry is relatively better than for
companies within the other industries. In the model with ROE as the dependent variable, risk seems to
have a significant positive effect on ROE at a confidence level of 95% and industry H (finance, insurance,
and real estate industry) has a strongly negative effect at a confidence level of 90%. This means that
firms with higher levels of risk realize a better ROE, this contradicts the expectations from paragraph
7.4.2. Furthermore this also means that companies within the finance, insurance, and real estate
industry have relatively worse levels of ROE than firms in other industries. In the final model of the
contemporaneous relationship in 2007, four significant effects can be found. Firm size, measured by
total assets, has a significant small positive effect on ROS at a confidence level of 90%. This means that
bigger companies own relatively more assets than smaller companies, this result supports the
expectations from paragraph 7.4.1. Risk on the other hand, has a significant negative effect on ROS at a
confidence level of 95%. This finding implies that companies with higher risk obtain a lower ROS. This
result supports the expectations. Finally industry H and I both have a strongly positive effect in this
model, at a confidence level of respectively 90% and 95%. This is to say that the ROS of the companies
within industry H and I is relatively better than for the companies within the other industries. The other
results of the relationships between the control variables and ROA, ROE, and ROS are not significant.
While the significance level of the complete model is below the required value of 10%, no significant
relation between CSR disclosures and financial performances is found. Therefore hypothesis 2c still has
to be rejected. This results in the conclusion that no significant positive synergy exists between CSR
disclosures and financial performances. The low significance levels of the models are mainly explained
by the effects of the control variables size, risk, and industry.
Dependent variable
ROA 2007
ROE 2007
B (SE)
Beta
B (SE)
Beta
Constant
Independent variable
CSR disclosure 2007
Control variables
Total Assets 2007
Total Sales 2007
Debt-to-Assets ratio 2007
Industry B
Industry C
Industry E
Industry G
Industry H
Industry I
R Square
Sig. Model
4,763
(8,271)
8,534
(5,847)
-1,776E-6
(0,000)
3,967E-5
(0,000)
-0,094
(0,088)
0,103
(5,390)
4,682
(6,512)
0,167
(3,479)
0,026
(5,895)
-4,819
(4,790)
12,947**
(5,914)
0,635
0,085
0,315
-0,078
0,290
-0,285
0,004
0,145
0,010
0,001
-0,304
0,402
-70,122
(69,087)
-33,391
(48,836)
4,031E-6
(0,000)
0,000
(0,000)
2,169**
(0,734)
-12,238
(45,023)
-57,078
(54,397)
44,840
(29,062)
-47,082
(49,236)
-82,080*
(40,012)
21,855
(49,396)
0,632
0,088
-0,148
0,021
0,159
0,786
-0,063
-0,213
0,312
-0,176
-0,622
0,081
ROS 2007
B (SE)
Beta
23,413
(16,590)
6,397
(11,727)
2,252E-5*
(0,000)
-2,293E-5
(0,000)
-0,382**
(0,176)
4,794
(10,812)
10,896
(13,063)
9,345
(6,979)
2,582
(11,823)
19,165*
(9,608)
29,493**
(11,862)
0,627
0,094
0,119
0,495
-0,085
-0,581
0,104
0,170
0,272
0,040
0,609
0,461
* = unstandardized coefficient is significant at the p < 0,10
** = unstandardized coefficient is significant at the p < 0,05
*** = unstandardized coefficient is significant at the p < 0,001
Table 13: Multiple regression analysis results hypothesis 2c for a contemporaneous relationship in
2007
In table 14 the results for the contemporaneous relationships in 2008 are showed. From this table the R
square values of 0,454, 0,286, and 0,350 are derived. That is to say that the model explains 45,4% of the
variances in ROA, 28,6% of the variances in ROE, and 35% of the variances in ROS in 2008. Again the
model explains the variances in ROA better than in ROE and ROS.
The significance levels of the three models for 2008 all exceed the significance level of 10%. The
corresponding values are 43,7%, 84,7%, and 71,1%. Hence hypothesis 2c is rejected after testing the
contemporaneous relationship in 2008 at a confidence interval of 90%. This is to say that no significant
positive synergy exists between financial performance and CSR disclosures.
The CSR disclosures’ coefficients are -0,987, -2,201, and 3,484 for the multiple regressions with
respectively ROA, ROE, and ROS as dependent variables. This indicates a negative synergistic
relationship between CSR disclosures and ROA and ROE, and a positive synergistic relationship between
CSR disclosures and ROS. However, these effects are not significant. Only in the model with return on
sales as the measure for financial performance, one control variable appears to have a significant effect.
The debt-to-assets ratio of 2008, the measure for risk, has a significant negative effect on ROS at a
confidence level of 90%. This indicates that firms with higher levels of risk will achieve a worse ROS, this
supports the expectations from paragraph 4.7.2.
Dependent variable
ROA 2008
ROE 2008
B (SE)
Beta
B (SE)
Beta
Constant
Independent variable
CSR disclosure 2008
Control variables
Total Assets 2008
Total Sales 2008
Debt-to-Assets ratio 2008
Industry B
Industry C
Industry E
Industry G
Industry H
Industry I
R Square
Sig. Model
14,035
(9,944)
-0,987
(5,691)
8,153E-7
(0,000)
3,295E-5
(0,000)
-0,144
(0,122)
2,295
(5,949)
2,619
(7,146)
1,930
(3,757)
2,662
(6,097)
-0,264
(5,303)
4,268
(6,383)
0,454
0,437
-0,042
0,041
0,375
-0,416
0,112
0,093
0,127
0,094
-0,019
0,151
21,369
(39,273)
-2,201
(22,476)
2,685E-7
(0,000)
6,901E-5
(0,000)
-0,145
(0,484)
8,193
(23,495)
21,825
(28,221)
8,212
(14,839)
9,313
(24,081)
-7,819
(20,943)
19,545
(25,208)
0,286
0,847
-0,027
0,004
0,228
-0,121
0,116
0,224
0,157
0,095
-0,163
0,200
ROS 2008
B (SE)
26,280
(18,642)
3,484
(10,669)
7,9041E-6
(0,000)
-1,378E-5
(0,000)
-0,415*
(0,230)
7,275
(11,153)
10,883
(13,396)
7,429
(7,044)
2,137
(11,431)
2,442
(9,941)
13,471
(11,966)
0,350
0,711
* = unstandardized coefficient is significant at the p < 0,10
** = unstandardized coefficient is significant at the p < 0,05
*** = unstandardized coefficient is significant at the p < 0,001
Table 14: Multiple regression analysis results hypothesis 2c for a contemporaneous relationship in
2008
Finally the last three multiple regression models of this research are analysed. These last three
regression analyses concern the contemporaneous relationship between CSR disclosures and financial
performances in 2009. The results of these regression models are presented in table 15. The R squares
of these three models have values of 0,334, 0,258, and 0,256. The variances in ROA will be explained by
the model for 33,4%, where the variances in ROE and ROS are inly explained for 25,8% and 25,6%. Also
for the year 2009, the model explains the variances in ROA better than those in ROE and ROS.
The significance levels of the three models are in succession 74,9%, 89,3%, and 89,7%. Anew these
values exceed the significance level of 10%, so hypothesis 2c will be rejected again at a confidence level
of 90%. This means that no significant positive energy exists between CSR disclosures and financial
performances.
Beta
0,087
0,235
-0,091
-0,697
0,207
0,224
0,285
0,044
0,102
0,277
The coefficients corresponding to the variable ´CSR disclosure 2009´ have a value of -0,751 when ROA is
taken as the dependent variable, 31,642 when ROE is the dependent variable, and 10,537 for ROS as
dependent variable. Since these effects are not significant, this is not an indication of a negative
influence of CSR disclosures on ROA or a positive influence of CSR disclosures on ROE or ROS. Risk
however does have a significant, but marginal, negative influence in the model where financial
performance is measures by ROA. The other results of the relationships between the control variables
and ROA, ROE, and ROS are not significant.
Dependent variable
ROA 2009
ROE 2009
B (SE)
Beta
B (SE)
Beta
Constant
Independent variable
CSR disclosure 2009
Control variables
Total Assets 2009
Total Sales 2009
Debt-to-Assets ratio 2009
Industry B
Industry C
Industry E
Industry G
Industry H
Industry I
R Square
Sig. Model
15,371
(9,032)
-0,751
(5,617)
-1,039E-6
(0,000)
2,091E-5
(0,000)
-0,206*
(0,108)
1,366
(5,861)
2,109
(7,253)
2,383
(3,825)
4,605
(6,158)
5,795
(5,011)
3,521
(6,358)
0,334
0,749
-0,037
-0,052
0,152
-0,683
0,073
0,082
0,172
0,178
0,455
0,136
35,533
(59,307)
31,642
(36,886)
8,216E-8
(0,000)
-6,898E-6
(0,000)
-1,123
(0,711)
10,549
(38,487)
36,393
(47,627)
-3,992
(25,118)
21,673
(40,437)
31,414
(32,904)
23,116
(41,751)
0,258
0,893
0,248
0,001
-0,008
-0,599
0,091
0,226
-0,046
0,135
0,397
0,144
ROS 2009
B (SE)
10,662
(17,390)
10,537
(10,816)
6,232E-6
(0,000)
-1,381E-5
(0,000)
-0,334
(0,208)
5,899
(11,285)
11,278
(13,965)
4,976
(7,365)
3,640
(11,857)
4,062
(9,648)
6,305
(12,242)
0,256
0,897
* = unstandardized coefficient is significant at the p < 0,10
** = unstandardized coefficient is significant at the p < 0,05
*** = unstandardized coefficient is significant at the p < 0,001
Table 15: Multiple regression analysis results hypothesis 2c for a contemporaneous relationship in
2009
8.5
Conclusion
In this chapter the results of the empirical research were presented and explained. First the descriptive
statistics are analysed. From these statistics is concluded that the average quality of CSR disclosures has
increased from 2007 to 2009. This is probably the result of the increasing attention for CSR in society.
Thereby the CSR disclosures differ more across the sample firms in 2009 than in 2007. The financial crisis
Beta
0,282
0,171
-0,055
-0,609
0,173
0,239
0,197
0,077
0,175
0,134
could be a reason for this phenomenon, because some companies suffer more from this crisis and as a
result have fewer resources to spend on CSR activities and the related disclosures. Furthermore all three
measures for the financial performances of the sample firms show a large decrease from 2007 to 2009.
Again, the financial crisis is probably the reason for this decrease. The descriptive statistics of the firm
size and risk variables show relatively stable results. At last, the descriptive statistics for the industry
dummy variables show that most sample firms operate within the manufacturing industry. Some
industries are not even represented in the sample. This finding should be kept in mind during the
analyses and drawing the conclusions.
Secondly the Pearson correlation test is conducted on the relationship between CSR disclosures and the
three variables of financial performances to get a rough idea of their relationship. From the Pearson
correlation matrix only 3 of the 27 correlations appear to be significant and positive. The respective
correlations are those between the return on sales in the year 2007 with the CSR disclosures in 2007,
2008, and 2009. The other 24 correlations show both positive and negative results, but are all
insignificant.
Thereafter, 27 regression analyses are conducted to test for the causality of the relationship between
CSR disclosures and financial performances. None of these 27 regression models showed a significant
effect of CSR disclosures on financial performances or vice versa. Not with a time lag of 1 or 2 years, and
also not for the contemporaneous relationships. Due to this insignificance it is not possible to draw
genuine conclusions about the relationship between CSR disclosures and financial performances.
Though, in the statistical tests for a contemporaneous relationship some other significant effects stand
out. In the tests for the year 2007 companies operating in the services industry appear to have a relative
higher ROA and ROS than other companies. Companies operating in the finance, insurance, and real
estate industry appear to have a relatively lower ROE, but a higher ROS than other companies in that
year. The tests prove that firms facing higher risk achieve a higher level of ROE and a lower level of ROS.
At last, firms possessing more assets obtain a better ROS than companies with fewer assets. Thereby, in
2008 companies facing higher risk achieve a lower ROS than other companies, and in 2009 those
companies achieve a lower ROA than other companies.
9
Conclusion
9.1
Summary
In this paper the relationship between CSR disclosures and financial performances of Dutch companies
was investigated. Previous studies have examined this relationship, though still no consensus is reached
on this relationship. Besides, very few studies have done this research for Dutch companies. Most
studies focus on the USA or Europe as a whole. At last this research also looks at the effect of financial
performance on CSR disclosures, instead of only investigating the effect of CSR disclosures on financial
performances, and it examines the relationship for both lead-lag and contemporaneous combinations.
Chapter 2 showed that CSR disclosures are a form of voluntary disclosures, which are not bounded by
laws and regulations. Chapter 3 then focused on the content of the term CSR and the incentives of
companies to provide disclosures concerning their CSR activities. Corporate social responsibility is about
the social and environmental consequences of a company’s activities, next to the economic
consequences. CSR disclosures are also known as people, planet, and profit disclosures. The incentives
for this kind of disclosures can be viewed from a theoretical or a more practical perspective. From a
theoretical point of view the positive accounting theory, the agency theory, the legitimacy theory, and
the stakeholder theory can provide theories concerning the incentives of CSR disclosures. Indicative
incentives for CSR disclosures on the other hand are cost and risk reduction, gaining competitive
advantage, developing reputation and legitimacy, regulatory pressures, impression management, and
moral obligations. Although CSR disclosures are voluntary disclosures, and thus not bounded by laws
and regulations, some guidelines and standards exist for these disclosures. One of the most well-known
guidelines is the global reporting initiative (GRI), which provides reporting guidelines. The standard
elements of these reporting guidelines are the environment, human rights, labour practices and decent
work, society, product responsibility, and economics.
Chapter 4 provided 7 theories which could explain a possible relationship between CSR disclosures and
financial performances. The good management theory, slack resources theory, and the positive synergy
theory assume a positive relationship between the two variables. The supply and demand theory states
that there is no relationship between the two. And the trade off theory, the managerial opportunism
theory, and the negative synergy theory adopt a negative relationship between CSR disclosures and
financial performances.
Next, in chapter 5 an overview is given of 13 prior studies on (parts of) the investigated relationship. This
overview shows that prior research is inconclusive about the relationship. However, 6 of the 13 studies
found a positive relationship. This finding, together with the stakeholder theory from chapter 3, causes
the expectation that the association between CSR disclosures and financial performances will be
positive. Based on this expectation the 4 hypotheses of this research were set up.
Several statistical tests were conducted to find empirical evidence for the details that were discovered in
the preceding literature review. A self-constructed content analysis model was developed to measure
the quality of CSR disclosures. This model is based on the standard elements of the GRI reporting
guidelines. The financial performance of the sample firms is measured by return on assets, return on
equity, and return on sales. All three are accounting-based performance measures. The control variables
which are used in this research are firm size, risk, and industry. The sample consists of 24 Dutch
companies which all disclosed a GRI report during the sample period of 2007 to 2009. With these
variables a Pearson correlation test and 27 multiple regression analyses are performed.
The results of the empirical research did not provide significant evidence for a relationship between the
voluntary GRI corporate social responsibility disclosures and the prior, concurrent, and subsequent
financial performances of Dutch companies. Consequently it is not possible to draw generalizable
conclusions on this relationship. This outcome is consistent with the findings of the studies of Aupperle
et al. (1985) and Aras et al. (2010) which were discussed in chapter 5.
9.2
Discussion and conclusion hypothesis 1
After analysing the results of the Pearson correlation tests, it can be concluded that there is not enough
significant evidence to assume a positive association between CSR disclosures and financial
performances for Dutch companies disclosing a GRI report. The results showed positive and negative
correlations between CSR disclosures and financial performances measured by ROA, ROE, and ROS in
the years 2007, 2008, and 2009, however only 3 of the 27 correlations were significant at a confidence
level of 10%. These significant correlations are related to the positive relationship between CSR
disclosures in all three years with the return on sales in 2007. Based on the overall findings, hypothesis 1
is rejected.
It is interesting to speculate on the reason why no significant relationship is found in this research. But
simultaneously it is difficult to conclude on one specific reason. Prior research, discussed in the first 5
chapters of this paper, suggests that this study is not the first one that was not able to find any
significant relationship between CSR disclosures and financial performance. Previous studies, e.g. Aras et
al. (2010) and Aupperle et al. (1985), did also not show any significant results on this relationship. On the
other hand, the results of this study are inconsistent with the research of Orlitzky et al. (2003) and Ruf et
al. (2001), which did found a positive association between CSR and financial performance. Conversely,
the study of Vance (1975) found a significant negative relationship between CSR and ROE.
Theories that could give an explanation for the insignificant results are the legitimacy theory together
with the related stakeholder theory from chapter 3. The legitimacy theory states that a company
continually seeks to make sure that it is recognized as operating within the limits and standards of their
relevant societies. The company has to engage activities expected by the community in order to remain
‘legitimate’. The stakeholder theory assumes more or less the same, but instead of the expectations of
the society in general, it focuses on the needs of a company’s stakeholders. According to these theories,
CSR and the related CSR disclosures will be necessary for a company to survive, instead of only
generating more profit.
Another possible reason for the insignificant results could be the measurement method for CSR
disclosures. From chapter 3 can be derived that companies do not only disclose information about their
CSR activities in separate (GRI) reports, but through a lot of other channels as well. Examples of these
other channels are internet websites, presentations, conference calls, and press releases. Because the
measurement model of this research only takes the GRI reports into account, the information from the
other channels is overlooked. This other information could have a great influence on the quality of
disclosure and thereby on the results of this research. Unfortunately it is very difficult to include this
kind of information in a measurement model. This research for example considers the years 2007, 2008,
and 2009. But the information companies disclosed on their websites in 2007 are no longer available
these days. Therefore it is not possible to measure these disclosures.
The small sample can also be a hindrance so that no significant results were obtained. In 2007 a small
number of companies already applied the GRI guidelines to their CSR reports. This could be a reason for
the small sample size. Because the sample was based on the GRI, it was not possible to use a bigger
sample. Besides, the data gathering process was already an intensive time consuming process for only
24 companies. Due to lack of resources it was impossible for the researcher to gather a higher amount
of data about the CSR disclosures.
It has to be concluded that the reason why no significant relationship was found is uncertain. Possibly
the question whether or not CSR disclosures are related to financial performance will never be totally
solved.

Discussion and conclusion hypotheses 2a, 2b, and 2c
Based on the findings of the multiple regression analyses in paragraph 8.4.2 there is also not enough
evidence to support a significant positive influence of CSR disclosures on the financial performance of a
company after one or two years, and vice versa. Similarly the results do not prove a significant positive
synergy between both variables. Consequently hypotheses 2a, 2b, and 2c are rejected based on the
research results. Because none of the results were significant, it is not possible to draw any conclusions
about the causality of the relationship between CSR disclosures and financial performance.
It appears that the regression models were also unable to support the notion that any relationship exists
between CSR disclosure and financial performance. The possible reasons for these insignificant results
are similar to those discussed in the previous paragraph.
9.4
Conclusion main research question
In this section the answer to the main research question of this research is presented. Recall from
chapter 1, the central research question reads as follows:
What is the relationship between the voluntary GRI Corporate Social Responsibility disclosures and the
prior, concurrent, and subsequent financial performance of Dutch companies?
This study has been conducted on the Dutch companies which disclose a CSR report based on the GRI
guidelines. The sample consists of 24 companies over a period from 2007 to 2009. The study has taken
time lags of one and two years into account and also considers simultaneous associations. A
self-constructed content analysis based on the GRI reporting guidelines was used to measure CSR
disclosure and ROA, ROE, and ROS were used to measure financial performance. The key elements of
the content analysis are economics, environment, labour practices and decent work, human rights,
society, and product responsibility.
Prior research produced varying results. Although many studies found evidence for a positive or
negative relationship, other studies resulted in no relationship. Based on the results of the conducted
empirical research, the current study was also not able to find any significant relationship between CSR
disclosure and financial performance. The findings did not provide sufficient evidence to assume that
GRI based CSR disclosures of Dutch companies are linked to their financial performances.
9.5
Limitations and recommendations for future research
This research is subject to several limitations regarding the scope of the research, the measurement
method for CSR disclosure, a missing control variable and the small sample size.
Scope of the research
First, although the aim of this research is to focus on the Dutch context, this immediately brings the first
limitation. As a result of this single focus, the results of this study cannot be compared to the results for
other countries without taking the country specific characteristics into account. Future research could
compare the studies of different countries to see which country specific factors could influence the
relationship between CSR disclosure and economic performance.
Secondly, this research is subject to transience. The content of the term CSR can differ over time due to
changes in economic developments, changes in national or local security, and changes in the
expectations of society (Ruf et al., 2001, p. 153). Because of this change in the content of the term CSR,
the relationship between CSR and financial performance could also change over time. As signalled in
chapter 1, CSR is nowadays a much more important topic than twenty years ago. Thereby the time
period of this research covers the financial crisis. Therefore the outcomes of this research will differ
from time periods before or after the crisis. If CSR disclosures will become mandatory in the future this
will affect the quality and quantity of these disclosures. On the other hand this will make the CSR
disclosure much more comparable. So in that respect such a development will be a great opportunity for
future research.
Further this study has used multi-industry data to get a rough idea of the relationship in the Netherlands
in general. Although a control variable for industry was used, a recommendation for future research
could be to conduct this research within specific industries. Every industry has its own unique
characteristics and is subject to different external pressures so that the results of this study may vary
across specific industries. Due to a lack in the availability of enough data per industry, it was not possible
to conduct such research in the context of this thesis.
Measurement method CSR disclosures
Also the measurement method used for CSR disclosures is subject to limitations. Although a content
analysis is one of the most objective measurement methods extant these days, it is still a subjective
form of measurement. The measurement indicators included in the model are subjectively chosen by
the researcher. Other measurement indicators could result in different results for the quality of CSR
disclosures of the same company.
Another limitation of the measurement method of CSR disclosures is that it only considers GRI reports.
Next to these reports companies also disclose a lot of CSR information through other channels like
corporate websites, presentations, and press releases. Because the information disclosed by these other
channels are not included in the measurement model, the actual disclosure quality could differ from the
quality that is measured by the model of this research. Future research could try to take more
information channels into account. Another future research opportunity is to develop a new
measurement method for disclosures which obtains a higher level of objectivity than the existing
methods.
Control variable R&D intensity
A third limitation of this study is the missing control variable for R&D intensity. Based on prior research
findings discussed in chapter 5, the intention was to include R&D intensity in the regression models as a
control variable. Besides the influence of risk levels and different industries on CSR and financial
performance levels, McWilliams et al. (2000, p. 604) discussed that a firm’s rate of investment in R&D is
also an important variable which has to be controlled for in this kind of researches. They state that a
model without a control variable for R&D intensity is misspecified because R&D investments have a
significant impact on financial performance and CSR according to previous studies. The results of several
papers confirm this significant positive correlation between R&D and CSR (Padgett et al., 2010, p. 413).
Padgett et al. (2010, p. 415) came also with a possible explanation for this phenomenon. Investments in
R&D are expected to result in knowledge enhancement, leading to product and process innovation.
These innovations can lead to CSR related processed and products. They give an example of R&D
activities which might improve processes and increase their effectiveness, which can possibly reduce the
amount of energy the firm consumes, leading to additional cost reductions and less pollution. This
example shows the positive effect R&D investments could have on CSR performance levels.
During the data collection, it became clear that there are not enough data available for the R&D
expenditures to net sales ratios of the 24 sample firms. The R&D data were only available for 7 of the 24
companies. That is the reason why this variable was not included in the model. A recommendation for
future research is therefore to add this variable to the model, because it is expected that this will
influence the results.
Sample size
The final limitation is the small size of the sample which is used. Only 24 companies are investigated.
The small sample size is probably one of the main reasons why this research did not find any significant
results. This small size is due to the small number of companies that already set up a GRI report since
2007. However these numbers are increasing as can be seen in figure 2 in paragraph 3.7.1. Hence it will
be possible for future research to use bigger samples when investigating the relationship for only Dutch
companies.
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Appendix A
In this appendix the different codes, standards and guidelines for CSR disclosure from paragraph 3.7 are
shortly explained.
Global Compact
The Global Compact was issued in July 2000 by the United Nations. The global compact is a strategic
policy initiative for businesses that are committed to aligning their activities and strategies with ten
commonly accepted principles in the areas of human rights, labor, environment and anti-corruption
(www.unglobalcompact.org). It is a purely voluntary initiative to create a more sustainable and
complete global economy by promoting a more useful relationship between business and societies
(AccountAbility for the WBCSD Accountability and Reporting Working Group, 2004, p. 7 – 11).
UN Norms
The UN Human Right Norms are a restatement of existing internationally recognized standards of
human rights that are proposed as new obligations for business. These norms were presented for the
first time in April 2004. The purpose of these norms is to present a single document in which all the
existing international human rights principles and standards applicable to business are collected. At the
moment the UN Norms are not binding, though it is expected that these Norms will form the basis for a
binding document in the future (AccountAbility for the WBCSD Accountability and Reporting Working
Group, 2004, p. 12 – 15).
OECD Guidelines for MNE’s
The Organization concerning Economic Co-operation and Development [OECD] Guidelines for
Multinational Enterprises [MNE’s] are the closest thing existing to a comprehensive global corporate
code of conduct. They have emerged as one of the most complete benchmarks for codes on CSR. It is an
important reference point of international norms for several companies. The guidelines are not binding,
but some governments are promoting them. The purpose of these guidelines are to help MNE’s operate
harmoniously with government policies and with societal expectations. They contain voluntary
principles and standards for responsible business conduct in areas like human rights, disclosure of
information, anti-corruption, taxation, labor relations, environment, and consumer protection
(AccountAbility for the WBCSD Accountability and Reporting Working Group, 2004, p. 16 – 19).
SA8000
The SA8000 is the first worldwide certification system for supply chain labor standards. It is a voluntary
standard, derived from ILO conventions and the UN’s Universal Declaration of Human Rights and the
Concention of Rights of the Child. The aim of this standard is to propose an international voluntary
consensus-based workplace standard for retailers, brand companies, suppliers, and other organizations
to maintain righteous and respectable working conditions throughout the supply chain. Companies can
choose to be certified corresponding to their compliance with SA8000.
ISO 14001
ISO 14001 is one of the most widely accepted standards about corporate responsibility. It is developed
in 1996 by the International Organization for Standardization [ISO]. The standard was created as a
response to the need for firms to improve their environmental performance, increase the use of
pollution prevention, and improve compliance. An organization could obtain a certification of its
environmental management system if it is in compliance with the ISO 14001 requirements
(AccountAbility for the WBCSD Accountability and Reporting Working Group, 2004, p. 34 – 37).
Dow Jones Sustainability Index
The Dow Jones Sustainability Index was the first index which tries to evaluate the ability of organizations
to create long-term shareholder value by embracing chances and managing risks resulting from
economic, environmental, and social developments. This index was issued in 1999 as the first equity
benchmark to follow the financial performance of sustainability leaders on a global scale. The
methodology of this index is to use a set of predefined criteria and weightings to assess the
opportunities and risks resulting from economic, environmental, and social developments for the
companies of the index (AccountAbility for the WBCSD Accountability and Reporting Working Group,
2004, p. 38 – 41).
Sarbanes-Oxley Act
The Sarbanes-Oxley Act [SOX] was established in 2002 as a response to the Enron and WorldCom
financial scandals, The aim of this Act is to establish mandatory and statutory regulatory requirements
on public companies and their auditors concerning corporate governance and accounting procedures
with the purpose of protecting investors. All Us-listed public companies and their auditors (foreign or
domestic) are obliged to comply to the SOX (AccountAbility for the WBCSD Accountability and Reporting
Working Group, 2004, p. 42 – 44).
AA1000 Assurance Standard
The AA1000 Assurance Standard is part of the AA1000 Series which are continually under development
by AccountAbility, an international, not-for-profit, membership-based professional institute founded in
London in 1996. The AA1000 Assurance Standard is the first assurance standard which includes the full
range of an organization’s disclosure and performance. The purpose of this standard is to promote
accountability for sustainable development with the aim to protect the quality of sustainability
accounting, auditing, and reporting. This standard is also a purely voluntary initiative (AccountAbility for
the WBCSD Accountability and Reporting Working Group, 2004, p. 25 – 28).
ISO 26000 Guidance on Social Responsibility
ISO 26000 Guidance on Social Responsibility is developed by the International Organization for
Standardization [ISO] and was published in 2010. This standard provides guidelines for social
responsibility and is voluntary to use. It does not include requirements and is thus not a certification
standard (http://isotc.iso.org). ISO 26000 is an international guideline for CSR, a tool for organizations to
implement CSR. ISO 26000 helps organizations to determine what CSR means for their corporation and
it assists by structural introducing CSR (http://www.mvonederland.nl).
Article 2:391 paragraph 1 of the Dutch Civil Code
Article 2:391 is the elaboration of the modernization directive 2003/51/EC from the European
Commission [EC]. With this modernization guideline the EC introduced an obligation with respect to the
transparency of CSR in annual reports. The minimum requirements for the content of annual reports are
expanded by providing a specification of the required fidelity of the annual report. An annual report
have to give a fair view of the position, development, and results of a company. In order to provide this
fair view the information in the annual report may not only consist of financial aspects of the company’s
operations. When it is appropriate, also an analysis of environmental, social and other aspects relevant
for the position, development, and/or results of the company must be provided. This modernization
guideline is implemented in the Netherlands in 2005 by article 2:391 paragraph 1 of the Dutch Civil
Code. This is the core article for annual reports within the Dutch civil law (Böhmer et al., 2010, p. 1089).
Guideline 400 on CSR
The Dutch guideline 400 on CSR provides guidelines for CSR reporting within annual reports. This
guideline corresponds to article 2:391 of the Dutch Civil Code explained above. It leaves room for
interpretation of CSR reporting, so the guideline is not binding, but consists more of recommendations
about CSR reporting (Böhmer et al., 2010, p. 1090).
Guide for CSR reporting
The Dutch guide for CSR reporting was published in 2003 by the Dutch Council for Annual Reporting
(Raad voor de Jaarverslaggeving [RJ] in Dutch). This guide contains guidelines for the separate CSR
reporting, besides the usual (financial) annual reporting. The guide presents the purpose of CSR
reporting, the information needs of important stakeholders, the quality characteristics and the content
of the separate CSR reports. Also the reporting process and the way of publication are shortly explained
(Böhmer et al., 2010, p. 1091).
Appendix B
Below the contingency framework of Ullmann (1985, p. 553) is showed in which the three dimensions
stakeholder power, strategic posture, and economic performance are combined with the resulting two
types of programs: social performance and social disclosure. This framework is discussed in paragraph
5.2.3.
Appendix C
Summarizing table of prior research.
Appendix D
This appendix shows the content analysis model used to measure the quality of CSR disclosure.