Forthcoming, Management Science

The Impact of Corporate Social Responsibility on Firm Value: The Role

of Customer Awareness
Henri Servaes
London Business School
and
Ane Tamayo
London School of Economics

July 2012

___________________
We are grateful to Bruno Cassiman, Paul Coombes, Julian Franks, Bruce Hardie, Kanishka Misra,
Madan Pilutla, Richard Taffler, Nader Tavassoli, an anonymous associate editor, three
anonymous referees, and seminar participants at London Business School for useful comments
and discussions. We also thank the Centre for Corporate Governance at London Business School
for financial support. Ramin Baghai, Oguzhan Karakas, and Inma Urra provided excellent
research assistance.

Electronic copy available at: http://ssrn.com/abstract=2116265

The Impact of Corporate Social Responsibility on Firm Value: The Role of Customer
Awareness
Abstract
This paper shows that corporate social responsibility (CSR) and firm value are positively related
for firms with high customer awareness, as proxied by advertising expenditures. For firms with
low customer awareness, the relation is either negative or insignificant. In addition, we find that
the effect of awareness on the value-CSR relation is reversed for firms with a poor prior
reputation as corporate citizens. This evidence is consistent with the view that CSR activities can
add value to the firm but only under certain conditions.

Electronic copy available at: http://ssrn.com/abstract=2116265

1.

Introduction
Corporate social responsibility (CSR) has become an integral part of business practice over the

last decade or so. In fact, many corporations dedicate a section of their annual reports and corporate
websites to CSR activities, illustrating the importance they attach to such activities. But do such activities
create value for the firms shareholders or do they focus too much on other stakeholders, thereby lowering
firm value? Despite much research on the topic [see Griffin and Mahon (1997), Orlitzky (2001), Orlitzky,
Schmidt, and Rynes (2003), Margolis and Walsh (2003), and Margolis, Elfenbein and Walsh (2007) for
reviews of the literature], few firm conclusions can be drawn, except that the literature is divided. While
there appears to be more support for the view that CSR activities are positively related to profitability and
firm value, a large number of studies find the opposite relation. As a result, the normative implications of
research on corporate social responsibility are still uncertain.
The relation between CSR activities and firm value is unclear partly because of methodological
concerns [Margolis and Walsh (2001)], and, in particular, model misspecification. Even more important
is, perhaps, the lack of understanding about the channels through which CSR affects firm value. Most
theoretical models assume a direct link between CSR and firm value. In this paper, we propose an indirect
link. In particular, we rely on Barnetts (2007) insight that the impact of CSR on firm value depends on
the ability of CSR to influence stakeholders in the firm. We focus on one of the key stakeholders,
consumers, and suggest that a necessary condition for CSR to modify consumer behavior and, hence,
affect firm value, is consumer awareness of firm CSR activities. Moreover, we argue that consumers are
less likely to respond to CSR activities, even if they are aware of them, if the CSR activities are not
aligned with the firms reputation as a responsible citizen [see also Du, Bhattacharya, and Sen (2010), and
Schuler and Cording (2006)].
In this paper, we revisit the relation between CSR and firm value taking into account the concerns
mentioned above. Using models with firm fixed effects to address model misspecification problems, we
examine whether and under what conditions CSR can add value to the firm. More specifically, we study
whether CSR activities are more value enhancing if they are conducted by firms with more consumer
awareness. Although the relation between CSR and firm value ought not to be confined to the consumer
channel, consumers constitute a natural starting point to uncover such a relation, given that their
purchasing behavior clearly affects a companys financial performance and, ultimately, firm value. We
also investigate whether the impact of awareness is attenuated for firms with a poor prior reputation for
responsible behavior, and contrast the consumer awareness story with an alternative in which CSR is
employed by socially-conscious entrepreneurs who wish to signal product quality.

In our analyses, we employ the KLD Stats database over the period 1991-2005, which covers CSR
activities of a large subset of US companies, and combine it with financial statement data obtained from
Compustat. Our main performance metric is Tobins Q, which is the market value of the firm, divided by
the replacement value of the assets. We start by assessing whether firms with high consumer awareness,
as proxied by advertising spending, can enhance firm value by increasing CSR, and find this to be the
case. CSR activities have a negligible or negative impact on firm value for firms with low advertising
intensity, which suggests that for these firms the costs sometimes outweigh the benefits. Conversely, we
find a positive impact for firms with high advertising intensity. However, we show that the positive
impact of advertising intensity reverses for firms with a poor prior reputation for being responsible
citizens, as measured by Fortunes rating on the list of Americas Most Admired Companies.
Interestingly, we find no evidence of a direct link between CSR and firm value after controlling for
unobservable time-invariant firm characteristics (i.e., in models that employ firm fixed effects).
This article contributes to the debate on the role of CSR in corporate strategy. We show that in
certain circumstances CSR enhances the value of the firm, but in others, it could destroy value, suggesting
that some firms adhere to the shareholder model, while others may consider broader objectives [see Jensen
(2001)]. Our analyses also illustrate the importance of controlling for omitted variables in this type of
studies and highlight the complexity of the mechanism through which CSR affects firm value. By
empirically establishing one condition under which such a relation can be uncovered, our research
validates Schuler and Cordings (2006) and Barnetts (2007) claim that understanding the link between
CSR and value requires models of stakeholder behavior that explain how CSR activities enhance/destroy
value.
The remainder of this paper is organized as follows. In Section 2, we define CSR and briefly
summarize the literature on the impact of CSR activities on firm value; we also discuss various reasons
why advertising spending may enhance/moderate the relation between CSR and firm value. Section 3
describes our data collection procedure and variable construction. Our results are contained in Section 4.
Section 5 concludes the paper, discusses the managerial implications of our findings, and proposes several
avenues for further research.

2.

CSR, Advertising Intensity and Firm Value

2.1.

Defining CSR
Before discussing ways in which CSR activities can enhance firm value, it is important to discuss

those activities that encompass CSR.

Notwithstanding the large literature on the topic, a general

consensus as to what activities are included under the CSR umbrella has not emerged. In fact, Baron
(2001) argues that Corporate Social Responsibility is an ill- and incompletely defined concept (p. 10).
We rely on the broad definition proposed by the World Business Council for Sustainable Development
(WBCSD) (2004) who argues that CSR is the commitment of a business to contribute to sustainable
economic development, working with employees, their families, the local community and society at large
to improve their quality of life. 1
This definition includes the elements that are generally included in empirical work on CSR, such
as the community, the environment, human rights, and the treatment of employees. While some of these
elements relate to social dimensions, others focus on stakeholders (e.g., treatment of employees). As such,
this definition is consistent with Griffin and Mahons (1997) multidimensional notion of CSR and with the
work of Dahlsrud (2008), who reviews various definitions of CSR and finds that the stakeholder and the
social dimensions receive exactly the same attention based on frequency counts in Google searches.
The inclusion of stakeholders within the remit of CSR is, however, not without controversy,
especially given that the boundary between stakeholder management and CSR is not clear cut. For
example, Jensen (2001) argues that anyone who can potentially benefit from its engagement with the firm
is a stakeholder. That would include issues related to human rights, the environment and the community,
elements that others would consider more social. This definition of stakeholder is similar in spirit to
Freemans (1984) definition of a stakeholder as any group or individual who can affect or is affected by
the achievement of an organizations purpose, although Freeman (1984) explicitly considers groups and
individuals that can be negatively affected by the firms actions as well. According to this view all CSR
activities fall under the remit of stakeholder management. On the other hand, Harrison, Bosse, and
Phillips (2010) make a clear distinction between stakeholder orientation versus a focus on social issues,
and consider only the latter activities as CSR.
In sum, while there are some dissenting opinions, much of the literature includes both the social
and stakeholder dimensions in the CSR remit. Thus, consistent with this view and our definition, we
consider both facets of CSR in our work.

2.2.

Customer awareness and CSR

There is a substantial theoretical literature suggesting that CSR activities can enhance profitability

and, hence, the value of the firm. Berman, Wicks, Kotha, and Jones (1999) provide an excellent overview

of the various elements of CSR and the ways in which these activities can increase firm value. 2 The
concern, of course, is that CSR activities are costly and that the costs do not (always) outweigh the
benefits. In fact, empirical studies on the relation between the value of the firm and CSR activities find
mixed results, including an impressive number of studies reporting negative relations [see Griffin and
Mahon (1997) for a differing view see Roman, Hayibor and Agle (1999)].
Our goal is to examine under which circumstances CSR involvement may be beneficial. We
focus on the customer channel and examine the effect of a potential moderating variable, advertising
intensity, on the CSR-firm value relation.

We posit that through advertising a firm reduces the

information gap between itself and its customers, which, in turn, makes it more likely that customers will
find out about the firms CSR involvement, and reward the firm for its CSR efforts.
In developing our prediction that advertising intensity enhances the benefits of CSR, we turn to
the literature in strategy, marketing and business ethics, which has established two facts. First, customers
take into consideration firms CSR activities when making purchase decisions [see, for example, Brown
and Dacin (1997), Creyer and Ross (1997), Sen and Bhattacharya (2001), Bhattacharya and Sen (2004),
and Penn, Schoen, and Berland (2010)]. Some of this research suggests that consumers are willing to pay
a higher price for products of firms with more CSR engagement; other work suggests that, while
consumers are not willing to pay a higher price, they will more likely purchase goods from firms that are
more socially responsible. These findings support Barons (2001) original insight that a practice labelled
as socially responsible increases the demand for its (the firms) product. This strategic CSR is simply a
profit-maximizing strategy motivated by self-interest (p. 9) In this context, CSR is considered a
product attribute, and therefore a strategic investment chosen to maximize firm value. The second fact is
that consumers are often not aware of a firms CSR activities [see, for example, Sen and Bhattacharya
(2001), Bhattacharya and Sen (2004), Pomering and Dolnicar (2009), and Du et al. (2010)].
There is a clear disconnect between these two facts. As articulated by Bhattacharya and Sen
(2004) and Schuler and Cording (2006), the lack of customers awareness about CSR initiatives is a major
limiting factor in their ability to respond to these initiatives. Similarly, McWilliams and Siegel (2001)
argue that potential customers must be fully aware of CSR characteristics for CSR differentiation to be
successful; they also and predict a positive correlation between advertising intensity and the provision of

WBCSD is a CEO-led organization focused on organizing the global business community to create a sustainable
future for business, society and the environment. It has 200 member companies with combined revenues of over $7
trillion and, according to Google Scholar, it has large visibility in academic research (over 45000 citations).
2
See also Bies, Burtunek, Fort, and Zald (2007) and the other articles in the special topic forum on Corporations as
Social Change Agents, published in the Academy of Management Review 32 (2007).

CSR. 3 All of these authors recommend that companies work on increasing CSR awareness levels, if CSR
is to be a profitable strategic investment. 4 This work also suggests that not all firms fully appreciate the
importance of customer awareness when evaluating CSR as a strategic investment.
In this paper, we posit that advertising enhances a firms information environment, thereby
increasing the firms (potential) customers awareness about the firm and likely prompting them to
become further informed about the firm, its products, and practices, including its corporate social
performance. The notion that advertising provides information about the firm goes back to at least to
Nelson (1974) (see also Bagwell (2007) for a review of the literature). More recently, relating advertising
to CSR, McWilliams and Siegel (2000, 2001) suggest that CSR-related advertising and media coverage
may increase consumer awareness of CSR. This, in turn, increases the demand for socially responsible
behavior and the returns to engaging in such behavior. They do not, however, formally model or test this
conjecture.
All these arguments lead to our main prediction that the impact of CSR activities on the value of
the firm will be positively related to advertising intensity. We note that this prediction does not imply that
firms need to advertise their CSR activities (as suggested by McWilliams and Siegel (2000, 2001)); all
that is required is that advertising intensity leads to increased awareness of the firm, including its CSR
activities.
Our prediction differs from the predictions derived from Schuler and Cordings model (2006).
Schuler and Cording (2006) also argue that information intensity is one of the key elements in the CSRvalue relation. Their argument relies on the dissemination of CSR information by the firm or other
parties. This could happen through advertising, but it is likely that most advertising does not directly
speak to the firms CSR activities. Moreover, Schuler and Cordings argument would only apply to firms
with particular CSR strengths; firms with CSR concerns would certainly not include negative information
about their CSR performance in their advertising. Our argument, on the other hand, applies to both
strengths and concerns as firms increase advertising and public awareness, customers are more likely to
find out about all elements of CSR.
Schuler and Cording (2006), develop some predictions regarding the alignment between a firms
CSR information and its prior reputation, which are consistent with our argument. In particular, they
argue that the intensity of positive CSR information is stronger for firms with a good prior reputation than
3

See also Brammer and Millington (2008), who estimate a model of the relation between charitable giving and
advertising intensity (and a number of other variables).
4
As early as 1975, Stone pointed out more generally that in order for markets to exhibit some degree of control
over corporate social performance, information must be available to stakeholders about the firms social practices.

for firms with a poor prior reputation; if there is no congruency between a firms current actions and its
past reputation, customers will not respond positively to the CSR information. This required consistency
is also explored by Barnett (2007), who argues that the response to CSR activities by customers is pathdependent; the same activity may lead to positive returns for one firm, but negative for another depending
on the customers priors about the firms intentions. Du et al. (2010), likewise, conjecture that a good
prior reputation amplifies the positive effect of CSR communication. Thus, we also explore in our
analyses whether a firms prior reputation affects the strength of the impact of advertising on the CSRvalue relation.
In sum, prior literature suggests that CSR is a product attribute valued by consumers, which they
can only appreciate if they are informed about it. Advertising spending increases public awareness about
the firm and prompts customers to become more informed about the firms CSR activities. This increased
scrutiny benefits companies with CSR strengths, but harms companies with CSR concerns. In addition,
customers attach less value to the CSR attribute if the firm has a poor prior reputation. Next, we consider

a different explanation for why advertising may affect the CSR-value relation, and explain how our
tests differentiate between the arguments proposed in this section and the next.

2.3.

CSR as a signal of product quality

Fisman, Heal, and Nair (2008) suggest that CSR activities are more beneficial in more competitive

industries with high advertising intensity. Their implication is derived from a simple model of corporate
philanthropy in which firms use CSR activities as a mechanism to signal product quality. In their model,
all the attributes of product quality are not observable to the customer. Therefore, firms that are purely
profit oriented have an incentive to produce products of lower quality. That is not the case for all firms,
however. In their model, some firms also care about product quality externalities (because the owners of
the firms care about social welfare). Subject to this (self-imposed) constraint on product quality, these
firms also attempt to maximize profits. These firms engage in CSR to signal their orientation towards
higher quality products. Consumers realize that only firms that care about product quality are willing to
invest in CSR activities because profit-oriented firms find these investments too expensive. As a result,
by engaging in CSR, firms are able to identify themselves as having better quality products.
Fisman et al. (2008) argue that such CSR activities are more beneficial in competitive industries
and in industries where there is more opportunity to signal quality. They employ industry advertising
intensity, measured as industry-median advertising to sales, as a proxy for the ability to signal quality.

Empirically, a critical distinction between Fisman et al.s (2008) and our prediction rests on the
measurement of advertising intensity.

According to Fisman et al. (2008) what matters is industry

advertising intensity, while our prediction regarding customer awareness is about firm advertising
intensity. This distinction is important industry advertising in Fisman el al.s model measures signalling
ability, not awareness. Another important distinction is that Fisman et al.s model is about positive CSR
efforts, not about weaknesses, while our argument applies equally to strengths and weaknesses. Thus,
their model predicts a non-linear relation between performance and the CSR-advertising interaction:
positive for CSR strengths, but no relation for CSR weaknesses.
Fisman et al.s (2008) empirical work supports their signalling over the consumer awareness
argument. They find that CSR activities enhance the value of the firm in industries with high advertising
intensity. They also find that the benefits of CSR are more substantial in more competitive industries;
when there is more competition, it is more important to signal product quality. Consistent with Fisman et
al.s (2008) argument, Fernandez-Kranz and Santal (2010) show that firms in more competitive
industries are more likely to engage in CSR, and Siegel and Vitaliano (2007) show that firms selling
experience goods (for which determining product quality is more difficult) have higher CSR involvement.
However, these authors do not study the relation between CSR and firm value. Moreover, the fact that
firms in more competitive industries are more likely to engage in CSR is not inconsistent with the
consumer awareness argument CSR may be a way of product differentiation if CSR itself is considered a
product attribute [see also Baron (2001)].
One limitation of Fisman et al.s (2008) empirical analysis is that they focus only on two CSR
activities: charitable contributions and housing support. Since CSR is multidimensional, it is important to
re-examine the empirical evidence on the signalling and the consumer awareness arguments using a
more comprehensive definition of CSR activities. Furthermore, their empirical analysis does not shed
light on the effect of advertising on the relation between performance and CSR concerns.

3.

Data and Variable Construction

In this study, we combine two databases. To measure CSR activities, we employ the KLD Stats

database constructed by KLD Research & Analytics, Inc. (KLD). KLD is a Boston-based investment
research firm, specializing in tracking firms CSR activities. Since 1991, this firm has gathered data on
various CSR strengths and weaknesses for a large subset of US companies. These data have been
employed in a large number of previous studies [see, for example, Waddock and Graves (1997), Berman

et al. (1999), Johnson and Greening (1999), and Hillman and Keim (2001)]. We employ the KLD data
over the period 1991-2005.
Over time, KLDs coverage has expanded considerably. For the period 1991-2000, the dataset
covers all firms in the S&P500 index and the Domini 400 Social Index. This second index is developed
by KLD to capture the performance of firms that have positive social and environmental records, but that
also meet certain financial standards. 5 For 2001 and 2002, KLD adds firms from the Russell 1000 index
(approximately the largest 1000 companies in the U.S. based on market capitalization) to its coverage, and
for 2003 through 2005, firms from the Russell 2000 (the 2000 companies that follow the Russell 1000 in
market capitalization) are also added.
Given that firms in the Domini 400 Social Index have good CSR records and may have also
performed better, their inclusion in our sample could lead to a selection bias. Therefore, we remove from
our sample those firms that are part of the Domini 400 Social Index but are not included in the S&P500
(1991-2005) or the Russell 1000 (2001-2005) or the Russell 2000 (2003-2005).
KLD divides CSR activities into thirteen categories: community, diversity, employment,
environment, human rights, product, alcohol, gaming, firearms, military, nuclear, tobacco, and corporate
governance. We do not believe that corporate governance should be considered part of CSR. Generally,
corporate governance is about the mechanisms that allow the principals (shareholders) to reward and exert
control on the agents (the managers). For example, in their widely cited survey paper on corporate
governance, Shleifer and Vishny (1997) state: Corporate governance deals with the ways in which
suppliers of finance to corporations assure themselves of getting a return on their investment (p. 737).
CSR, on the other hand, deals with social objectives and stakeholders other than shareholders. Hence, we
leave corporate governance out of our CSR measure. In our primary, conservative measure of CSR, we
also remove the product and industry categories. The product category focuses on issues such as product
quality, safety, and innovation. The inclusion of such a category under the CSR umbrella would indicate
that firms with high quality products are firms with good CSR. This may be casting the net too wide.
Similarly, industry characteristics are not necessarily elements of CSR. However, since firms can elect
not to be involved with certain products, we also present results for a broader measure of CSR that
includes both the industry and product elements of KLD.
For each of the categories considered, KLD Stats contains data on the number of strengths and
concerns. For example, in 2005, there are 7 possible strengths in the community category and 4 possible
concerns. The number of strengths and concerns in each category has evolved over time as KLD refined

the database. For instance, in 1990, there were only 4 possible community strengths as well as 4 concerns.
As a result, it is not possible to directly compare strengths or concerns within a category across years.
However, such a comparison is essential for our work as we are interested in both the time-series and the
cross-sectional dimensions of CSR activities. We therefore scale the strengths and concerns for each firmyear to obtain two indices that range from 0 to 1. To achieve this, we divide the number of strengths
(concerns) for each firm-year within each CSR category by the maximum possible number of strengths
(concerns) in each category-year. We then subtract the concerns index from the strengths index to obtain
a measure of net CSR involvement in each area that ranges from 1 to +1 for each year. 6

To construct

our narrow, more conservative measure of CSR, we combine community, diversity, employees,
environment, and human rights into one overall net CSR measure that ranges from 5 to +5. 7

To

construct our broader measure, we add the product category, and we create a further CSR category called
industry, which is the sum of all industry concerns, divided by six, as there are six possible industry
concerns. Thus, the maximum of our broader measure is 6, while the minimum is 7 (there are no
industry strengths, only concerns).
Accounting data employed to compute performance are obtained from the Compustat database,
which contains financial accounting data for all listed U.S. companies. We merge the Compustat database
with the KLD Stats database to obtain the sample employed in this article. For firms with fiscal year end
in December, we merge the KLD Stats data with financial accounting data for the same year, so that CSR
activities and performance are measured concurrently. For firms with fiscal year end prior to December,
we merge KLD Stats data with Compustat data for the following year to make sure that the CSR data
precede the performance data. As such, we are more certain that causality goes from CSR to performance
and not vice versa.
The number of observations in our sample obtained after merging the Compustat and KLD Stats
databases, and removing firms only contained in the Domini 400 Social Index (but not S&P500 or Russell
1000/2000 firms), remains fairly stable around 400 from 1991 until 2000, and grows substantially to more
than 2000 firms in 2005 as KLD Stats coverage expands.

KLD does not disclose the exact methodology used in the construction of this index.
For example, in 1995, Exxon Mobil has strengths in three areas of the community category out of a maximum of
seven, giving it a strengths score of 0.43 (3/7). In the same year, Exxon Mobil has concerns in two out of four areas
of the community category, giving it a concerns score of 0.50 (2/4). Thus, Exxon Mobils net CSR score in 1995 in
the community area is 0.07 (0.43 0.50).
7
In robustness tests reported in Section 4.4, we show that strengths and weaknesses have no differential impact on
firm valuation, which justifies the computation of a net score.
6

To measure performance, we employ Tobins Q, which is the market value of the firm, divided by
the replacement value of its assets. Q has been used widely in economics, finance, and strategy as a
performance measure [see, for example, Morck, Shleifer, and Vishny (1988) and Waddock and Graves
(1997)]. It captures how much value the firm creates with its asset base. Because value is based on the
present value of future expected cash flows, discounted at the required rate of return, it is already adjusted
for risk. We compute Q as: (book value of assets book value of equity deferred taxes + market value
of equity) / book value of assets. The advantage of using Q over profitability is that profitability is a
short-term measure, while Tobins Q is a long-term measure since it is based on the market value of the
firm. In fact, it is possible that a firm deliberately sacrifices some current profitability to engage in CSR
activities which are in the long-term interest of the firm. However, in our robustness section, we also
present results using profitability as a measure of performance. To avoid problems with outliers, we
winsorize Q at the 1st and 99th percentiles. 8
Panel A of Table 1 contains summary statistics on the measures of CSR employed in our analyses,
as well as Tobins Q, and the control variables employed in our regression models (discussed in Section
4.2). All three measures of CSR actually have a negative score, on average. When all areas of CSR are
combined, the lowest score in the sample is 2.33 (Texaco Corp in 1992) and the highest score is 2.14
(Polaroid in 1995).

Averaged across years, the lowest score is 1.65 (Unisys) and the highest 1.23

(Polaroid) (untabulated). The average firm in our sample has assets of $7.6 billion, and spends 1.32% of
its sales on advertising.
Panel B of Table 1 contains the correlation matrix of our dependent and explanatory variables.
None of the correlations are large, except for the ones between the various CSR measures.

4.

Results

4.1.

Does advertising increase awareness of CSR activities?

Our argument that CSR enhances the value of firms with higher customer awareness about the

firm relies on advertising being a good proxy for awareness. In this section we examine whether this
assumption is justified. To determine whether advertising is related to firm and CSR information, we
select a random subsample of 100 firms from our main sample and search the Factiva database (in
particular, major US news and business publications) for general press mentions and for mentions of CSR
or related activities. We then estimate the following linear regression model:
8

Removing the outliers instead of winsorizing them does not affect our findings. These results are available from
the authors upon request.

10

Number of (CSR) press cites = f (advertising intensity, total assets, year dummies)
We control for firm size because we expect larger firms to receive more press attention. The coefficient
on advertising intensity in the model for all press cites is 3596, with a p-value of 0.00. (These results are
untabulated for the sake of brevity). In the model where we employ CSR press cites, the coefficient on
advertising intensity is 11.15 with a p-value of 0.05.

The effects are even stronger when we lag

advertising by one year; the coefficient on all press cites increases to 7095 (p-value of 0.01) and the
coefficient on CSR press cites increases to 16.7 (p-value of 0.07). These results indicate that firms that
advertise more receive more press coverage, suggesting that advertising enhances awareness about the
company. 9

4.2.

Advertising intensity and the value of CSR activities

In this section, we examine our main hypothesis, which is that awareness, as proxied by

advertising intensity, enhances the impact of CSR on firm value. As we argued previously, customers of
advertising intensive firms are more likely to become aware of the firms CSR activities, and, hence,
respond to them. We estimate panel regressions of Tobins Q as a function of CSR involvement and an
interaction term between the CSR measure and advertising intensity.
Consistent with the literature [see Morck et al. (1988) and McWilliams and Siegel (2000)], we
also include three control variables: size, advertising intensity, and research and development intensity.
Larger firms tend to be older and have lower investment opportunities than younger firms, which will
translate in lower Q ratios. We measure size as the log of the book value of assets. Advertising
expenditures may create brand capital, which will be reflected in the market value of the firm, but not in
its book value.

We compute advertising intensity as advertising expenditures divided by sales.

Advertising expenditures are missing for more than 50% of the firms on Compustat.

Given that

advertising expenditures do not have to be disclosed if they are immaterial, we follow the literature and set
it equal to zero when missing [see, for example, Fee, Hadlock, and Pierce (2009), Hale and Santos
(2009), and Masulis, Wang, and Xie (2009)]. 10 Research and development expenditures are generally not
9

We also verify that the increased awareness due to media attention need not be driven by positive CSR information.
To do this, we estimate separate regressions of CSR media cites on our measure of CSR and CSR media cites on the
absolute value of our CSR measure. While we find no relation between CSR media cites and our measure of CSR,
we find a positive and statistically significant coefficient (1.54, with a p-value of 0.03) for the regression using the
absolute value of our CSR measure. This evidence indicates firms with more CSR strengths, but also those with
more CSR concerns, receive more media attention.
10
As shown later in the paper, our results are robust to different ways of treating observations with missing
advertising expenditures.

11

capitalized on the balance sheet; instead, they are expensed. However, they may create value for the firm,
which will be reflected in a higher Q ratio. We compute R&D intensity as research and development
expenditures divided by sales. To avoid problems with outliers, we winsorize advertising intensity and
R&D intensity at the 99th percentile (the 1st percentile is zero).
We estimate our regression models using OLS. However, since the same firm can enter the
regression multiple times, we cluster the standard errors by firm to address the lack of independence of the
observations [Rogers (1993)]. All standard errors are also corrected for heteroscedasticity [White (1980)]
and all models include year dummies. We employ three measures of CSR: the conservative measure,
which includes 5 KLD categories (community, diversity, employees, environment, human rights); an
expanded measure, which also includes industry concerns; and the broadest measure, which includes
industry concerns and the product category. For each measure, we report two specifications: the first
specification is estimated without firm fixed effects, as in most of the prior literature on CSR; and the
second is estimated with the inclusion of firm fixed effects, which control for time-invariant unobservable
firm characteristics that may drive both valuation and CSR involvement. The omission of such controls
may result in spurious findings and may explain why regression models with different sets of explanatory
variables have yielded contradictory results in prior work.
Our results are reported in Table 2. Two results stand out. First, in the models estimated without
firm fixed effects (models (i) (iii)), we find a positive relation between the CSR measure and firm value.
This finding holds for all measures of CSR and appears to suggest that CSR itself is value creating.
However, in models estimated with firm fixed effects (models (iv) (vi)), evidence of a direct relation
between CSR and value disappears, suggesting that this finding is spurious and that controlling for
unobservable firm characteristics is important in these specifications. In fact, the coefficient on CSR is
negative in all specifications, although not statistically significant.

Second, the interaction between

advertising intensity and the CSR measure is significantly positive. Thus, firms benefit from CSR if they
advertise. Comparing the coefficients on the CSR measure and the interaction indicates that the joint
effect becomes positive for firms with advertising to sales above 0.91% (based on model (iv)), a criterion
met by 28% of the sample firms. 11 The effect of advertising intensity on the CSR-value relation is also
economically significant. For example, based on model (iv), for firms with zero advertising (the median
of the distribution), increasing the CSR measure by one standard deviation (0.38) leads to a decrease in
Tobins Q of 0.03. For firms with advertising expenditure to sales of 3.07% (one standard deviation

12

above the median), the same increase in the CSR measure leads to an increase in Q of 0.06. The overall
effect implies a difference in Q of 0.09, which is substantial given the mean Q ratio of 2.10. 12
One concern with models that include firm fixed effects is that they may lack power to detect a
relation. If most of the variability in the explanatory variables is cross-sectional, while there is little timeseries variation, the inclusion of firm fixed effects essentially removes all the interesting variation that
needs to be explained. Thus, if company CSR activities vary little over time, it may not be surprising that
a firm fixed effects model shows no relation between CSR involvement and value. To address this
concern, we first compute how much time-series variation there is in CSR involvement for the average
firm. That is, for each firm we compute the standard deviation of their CSR involvement over time, and
we then average this measure across firms. The average of these standard deviations is 0.15, and the
median is 0.14. This suggests that there is substantial time-series variability in CSR involvement. The
relevant basis for comparison is the cross-sectional variability in CSR involvement, which, when
computed on an annual basis ranges from 0.30 in 2003 to 0.47 in 1993. Obviously, it is higher than the
average time-series estimate (i.e., there is more variability in CSR involvement across firms than for a
given firm over time), but the relative magnitude suggests that there should be enough power left in the
fixed effects model to pick up a relation if it exists. In addition, we find significant explanatory power in
the fixed effects models with interactions as discussed above, indicating that fixed effects models have
sufficient power to uncover a relation if one exists.
In sum, the findings in this section support our argument that CSR involvement benefits firms
with more customer awareness, as proxied by advertising spending. For firms with low advertising
intensity, the impact of CSR on value is either insignificant or negative.

4.3.

Why does advertising intensity matter?

Our evidence so far is consistent with our interpretation that advertising creates awareness among

buyers about the company and its CSR activities. However, it could also be consistent with the view that
CSR activities are employed as a signal of product quality in advertising intensive industries [see Fisman
et al. (2008)]. In this section, we conduct two tests to distinguish between these two explanations.
First, we include industry-median advertising expenditures (industry is defined at the four-digit
SIC code level) as well as firm advertising expenditures and their interactions with CSR in our basic
11

The coefficient on the CSR score is 0.07, while the coefficient on the interaction between the CSR score and
advertising intensity is 7.70. The break-even value of advertising intensity is therefore computed as 0.07 / 7.70 =
0.91%.

13

regression. Fisman et al. (2008) employ the advertising intensity of an industry as a measure of the ability
to signal. Our argument, on the other hand, relies on firm-level advertising as a proxy for customer
awareness about the firm. The findings are reported in model (i) of Table 3. The coefficient on the
interaction between CSR activities and firm-level advertising expenditures is positive and significant, but
that is not the case for the interaction between CSR and industry-level advertising. When we just include
the industry-advertisingCSR interaction (unreported in the table), we do find it to be significant, but that
can be explained by the omission of the firm-advertisingCSR interaction. Thus, this evidence does not
support the product quality signalling story; rather it is consistent with the awareness argument.
Second, we study whether the effect of CSR activities is stronger in more competitive industries.
According to the product quality signalling argument, there is more need for signalling when there is more
competition. To test this prediction, we compute the Herfindahl index for all firms on Compustat at the
four-digit SIC code level, and interact it with the CSR measure in our value regressions. We report the
results of this model in column (ii) of Table 3. While we continue to find that advertising intensity
interacts positively with the CSR measure, we do not find that industry concentration affects the benefits
of CSR. This evidence does not support the product quality signalling hypothesis. 13
Overall, the evidence in this section suggests that advertising expenditures enhance the impact of
CSR activities on the value of the firm because advertising creates awareness about the company and its
activities, which creates more goodwill on the part of customers. There is no evidence to suggest that
CSR is employed to signal product quality. We do recognize, however, that the product signalling
argument may hold for a subset of firms; if that is the case, the effect is not strong enough to be detected
by our tests.

4.4.

Robustness tests
This section contains the results of a number of additional tests conducted to determine whether

our findings are robust.

Dependent variable
In addition to firm value, prior research has also examined the relation between profitability and
CSR activities. Although profitability is measured over a short period of time, which implies that there is
12

Because we employ a firm fixed effects model, the relative magnitude for each firm depends on the firm-specific
mean Tobins Q, which ranges from 0.81 to 8.79.

14

no one-to-one correspondence between profitability and value, it would be reassuring if our results on
profitability were similar in nature.
We compute three profitability measures: return on assets, return on sales and return on equity.
Return on assets and return on sales are computed by dividing operating income by assets and sales
respectively, while return on equity is computed by dividing net income by shareholders equity. As
before, we include firm fixed effects and year dummies in all models. The results of this analysis are
presented in models (i) through (iii) of Panel A of Table 4. The interaction between the CSR measure and
advertising intensity is positive and significant in all three cases, while the raw CSR measure is either
negative or insignificant.
Next, we study whether the interaction between CSR and advertising intensity also affects sales
growth and find that this is the case (model (iv) of Panel A of Table 4). Moreover, sales growth is
negatively related to CSR for firms with zero advertising intensity. These findings are consistent with the
view that customers are more likely to purchase products of companies that engage in CSR, assuming that
they are aware of it, thereby leading to increased sales growth.
Finally, we specifically study the relation between mark-ups and the CSR-advertising interaction.
If the increased valuation and profitability we document are due to the ability to charge a higher price for a
product, it should show up in mark-ups. We compute the mark-up as the ratio of sales to cost of goods
sold minus 1. The results, reported in model (v) of Panel A of Table 4 indicate that the CSR-advertising
interaction has a positive and significant impact on mark-ups.

CSR measures
First, we examine whether our results are robust to the definition of CSR as discussed in Section
2.1. We subdivide the CSR measure into two components. The first component, which we call third party
CSR, is mainly focused on parties other than direct stakeholders, and includes environment, human rights,
and community. The second component, which we call stakeholder CSR, is more internally focused and
includes diversity and employees. In model (i) of Panel B of Table 4, we show that the interaction
between advertising intensity and both components of CSR is significantly related to firm value. The
effect is larger for stakeholder CSR, but we cannot reject equality of the two coefficients. 14

13

For sake of brevity, we only employ the conservative measure of CSR in the models reported in Table 3 and in
subsequent tests, unless otherwise noted. All our findings go through if we employ the broader measures (including
industry and product) instead.
14
These results continue to hold when we move the community category from third party CSR to stakeholder CSR.

15

Next, we split our measure of CSR up into CSR strengths and CSR concerns, and interact each of
these elements with advertising intensity. According to our argument, both components, when interacted
with advertising, should affect value because advertising raises awareness about all aspects of the firm,
including CSR concerns. One could argue, however, that strengths matter more when capturing the CSR
efforts made by firms than concerns; the latter are unlikely to be due to specific efforts of the firm in the
CSR area, but rather the outcome of other decisions. For example, it is unlikely that a firm with a poor
environmental record has made a concerted CSR effort to obtain such a record. The result of this analysis
is reported in model (ii) of Panel B of Table 4. The regression illustrates that the interactions of
advertising with strengths and concerns have the same effect on firm value. The coefficient on the
strength interaction is 8.56, while the coefficient on the concern interaction is -7.23. We cannot reject
equality of the absolute values of both coefficients (p-value=0.68). 15 This evidence provides further
support for our argument that the increased awareness created by advertising applies to all aspects of CSR,
including the concerns, while it is not consistent with the view that advertising is employed to provide
information about product quality. In unreported tests, we have also interacted industry advertising with
strengths and concerns; these interactions are never significant, suggesting that it is firm-specific
advertising that matters for the value-CSR relation.
A final potential concern is that we do not allow for a sufficient time lag between CSR activities
and our measurement of firm value. To address this problem, we re-estimate our base case model, but lag
our CSR measure (and advertising intensity) by one year. The findings, reported in column (iii) of Panel
B of Table 4, are very similar to those in our base case: CSR activities have no impact on firm value
unless the firm has high advertising intensity. When we include both lagged and contemporaneous
advertising and their interactions with CSR, the interactions are both positive and significant
(untabulated). We have also verified that our results continue to hold if we increase the lag by another
year (untabulated).

Treatment of missing advertising expenditures

In our regression models, we set advertising expenditures equal to zero when missing, consistent
with the prior literature. In Panel C of Table 4, we report the results of two alternative approaches to
determine whether our findings are robust. In the first approach, we remove all observations for which
advertising expenditures are missing, and re-estimate model (iv) of Table 2. These findings are reported
15

Note that when we compute the net measure of CSR, we subtract concerns from strengths. Thus, if both
interactions have the same impact on value, we would expect the coefficient on the concerns interaction to be the

16

in column (i) of Panel C of Table 4. The results are very similar to those in column (iv) of Table 2: CSR
activities are only positively valued by the market if firms are advertising intensive.
In the second robustness check, we set advertising expenditures equal to the industry mean if
missing. Industry is defined at the four-digit SIC code level; if there are no observations at the four-digit
level, we compute the industry average at the three digit level or two digit level. These findings are
reported in column (ii) of Panel C of Table 4. Our findings on the interaction of CSR and advertising
continue to persist; furthermore, in these specifications, the impact of CSR on value for firms with zero
advertising expenditures is significantly negative. These findings indicate that our results do not depend
on the exact treatment of missing advertising expenditures.

Control variables
The last set of robustness checks relates to our choice of control variables.
First, given that book value of assets is employed in the construction of Tobins Q, it is possible
that its inclusion as an explanatory variable in our regression models yields a mechanical relation between
size and value, which may also affect other inferences. In model (i) of Panel D of Table 4, we replace the
log of assets by the log of employees as a size control. Our findings are not affected.
Second, we remove the firm fixed effects and replace those by annual industry dummies using the
48 Fama-French industries to make sure that our results are not due to time-varying industry effects (634
dummies in total).

The impact of the CSR-advertising interaction on value remains positive and

significant (model (ii) of Panel D). Note that in this specification the coefficient on the level of CSR is
also positive and significant. Given that this positive relation disappears in models with firm fixed effects,
this result again confirms that controlling for unobservable firm-specific heterogeneity is important.
Third, we verify that our results are not caused by time-varying omitted variables (as opposed to
time-invariant omitted variables which are captured by firm fixed effects models). In model (iii) of Panel
D of Table 4, we include the four strategy measures proposed by Berman et al. (1999): (i) selling intensity,
computed as general, selling, and administrative expenses divided by sales, (ii) capital expenditures
divided by sales, (iii) efficiency (the lack of), computed as cost of goods sold divided by sales, and (iv)
capital intensity, computed as total assets, divided by the number of employees. We have a smaller
number of observations in these models because the data items required to construct these variables are
not available on Compustat for all the firms in our sample.

negative of the coefficient on the strengths interaction.

17

There is a positive relation between capital spending and firm value, but this may be due to the
fact that more valuable firms have better investment opportunities. There is a negative relation between
selling intensity and firm value, probably because firms with more general, selling, and administrative
expenses are simply less capable. Finally, less efficient firms are valued less. What matters most for the
purpose of this paper is that our findings remain unaltered: there is no association between CSR
involvement and firm value unless the firm has high advertising intensity. 16
Fourth, motivated by Kacperczyks (2009) evidence that CSR activities of firms that enjoy greater
takeover protection enhance firm value, we study whether our findings continue to hold after controlling
for increases in takeover protection. According to Kacperczyk (2009), Delaware firms with a staggered
board enjoyed increased takeover protection after 1996. We include the same measure in our models, and
also interact it with CSR. The inclusion of these variables does not affect the significance of the CSRadvertising interaction (not reported in the table).
Finally, we study whether the impact of advertising on the CSR-value relation is stronger for
consumer-oriented companies, but do not find this to be the case (not reported in the table). However,
given that consumer-oriented firms spend more on advertising (2.49% of sales compared to 0.57% for
non-consumer oriented firms), more consumer-oriented companies are in the range where CSR adds to the
value of the firm (50% of consumer oriented firms versus 14% of non-consumer oriented firms). 17

4.5.

The impact of the firms reputation

In this section, we test whether the impact of awareness/advertising on the CSR-value relation

depends on the firms prior reputation. Schuler and Cording (2006) and Du et al. (2010) make the point
that the image projected through CSR must be aligned with the firms reputation. If this is not the case,
customers may not respond to the CSR effort, even if they know about it. To investigate this conjecture,
we study whether the relation between firm value and the CSR-advertising interaction depends on the
firms prior reputation.
16

In unreported models, we have also included interaction effects between these strategy variables and CSR
involvement. Two of these interactions are significant: CSR activities have a more negative impact on firm value for
less efficient firms and for firms with higher capital intensity. Inclusion of these variables does not affect our main
findings.
17
In unreported models we also verify that our results hold for various subsamples; our findings hold for small and
large firms, for the first and second half of the sample period, and for firms that are in the S&P500 index as well as
firms that are not. The coefficient on the CSR-advertising interaction is larger for smaller firms, consistent with the
notion that advertising increases awareness more for small firms. However, the difference between large and small
firms is not statistically significant. We also study whether the impact of information intensity on the value-CSR
relationship is non-linear, or whether CSR itself enters the model non-linearly [see also Brammer and Millington

18

To proxy for reputation, we employ Fortunes ranking of Americas Most Admired Companies.
Every year, Fortune magazine ranks companies along various criteria ranging from people management to
the quality of management, based on surveys of managers, directors, and analysts in various industries.
The number of firms ranges from 300 to about 600. Firms are ranked and they also receive a score. We
gather these data for our sample period and merge it with the firms in our main sample. 18 The resulting
dataset contains 3,436 observations. As discussed by Brown and Perry (1994) and Roberts and Dowling
(2002), Fortunes reputation scores are related to firm financial performance and it is important to remove
this financial halo effect. To do this, we follow Brown and Perry and estimate a model of reputation
scores as a function of operating return on assets (contemporaneous and lagged one period), industryadjusted market to book (contemporaneous and lagged one period), sales growth, and leverage. 19 We
employ the residual from this model as the clean admired score. 20
To determine whether the CSR/advertisingvalue relation is stronger for more admired
companies, we create a triple interaction term of the CSR measure, advertising intensity, and the residual
admired score and re-estimate our base case regression model. For completeness, we also include the
residual admired score itself, and the interaction between advertising intensity and the residual admired
score.
As pointed out by Jaccard and Turrisi (2003), among others, interpreting triple interactions is very
difficult when the interacted variables themselves can only have positive or negative values. 21
Fortunately, in our setting, that is not the case. Both the CSR measure and advertising expenditures can be
zero, while the residual admired score is centered around zero as it is computed as a regression residual.
The findings are reported in Table 5. In column (i), we employ the conservative measure of CSR,
while in column (ii) we employ the broad measure. The results are striking. The positive coefficient on
the interaction between advertising and CSR persists. This suggests that for a firm with an average
residual admired score of zero, our basic findings go through. The triple interaction term between
advertising, CSR, and the residual admired score is positive and significant, with a coefficient of 5.33 in
(2008)], but do not find this to be the case. Finally, we examine whether the effect of the CSR-advertising
interaction on value differs across the 48 Fama-French industries, but find no evidence that this is the case.
18
The overall score is a combination of scores on eight components, one of which is social responsibility.
Unfortunately, the scores on the individual components are no longer available for our sample, but prior research has
shown that the scores on the individual components are highly correlated [see Brown and Perry (1994)].
19
We only include one lag of profitability and market-to-book as further lags are insignificant. We include no lags
of growth and leverage as these are not statistically significant. Using further lags or no lags, as at as well as using
just a subset of these variables, does not affect our findings.
20
The number of observations employed in this analysis is less than the 3,436 discussed earlier because all the
explanatory variables are not available for all firms in the sample, especially at the start of the sample period.

19

column (i) (p-value=0.03), and 2.83 in column (ii) (p-value=0.09).

These figures indicate that

advertisings impact on the value-CSR relation is stronger for more admired companies, weakens for less
admired companies, and turns negative for the least admired companies. 22 In other words, there has to be
consistency between the firms CSR efforts and its prior reputation if advertising is to enhance the value
of CSR efforts. The level of the residual admired score for which the overall impact turns negative is
1.21 in model (i), computed as the negative of 6.45 (the coefficient on the interaction of CSR and
advertising) divided by 5.33 (the coefficient on the triple interaction); in model (ii) the level where it turns
negative is 1.20. Approximately 10% of all firms fall into this category. The residual admired score
itself is not significant, nor is the interaction between the residual admired score and advertising or CSR.
Overall, these results indicate that for advertising to be effective in enhancing the value of CSR
efforts, consistency is required between these efforts and the firms general corporate reputation. This
supports the predictions of Schuler and Cording (2006) and Du et al. (2010).

5.

Discussion and Conclusion

This paper makes four points. First, CSR activities can enhance firm value for firms with high

public awareness, as proxied by advertising intensity. However, firms with high public awareness are also
penalized more when there are CSR concerns. Second, for firms with low public awareness, the impact of
CSR activities on firm value is either insignificant or negative. Third, advertising has a negative impact
on the CSR-value relation if there is an inconsistency between the firms CSR efforts and the companys
overall reputation. Fourth, after including firm fixed effects there is no direct relation between CSR and
firm value.
Our finding of an interaction between advertising intensity and CSR activities is consistent with
theoretical work suggesting that without awareness customers are unable to reward CSR involvement [Sen
and Bhattacharya (2001), McWilliams and Siegel (2001)]. It is also consistent with the view that CSR
efforts have to be aligned with the firms prior reputation in order to create value as articulated by Schuler
and Cording (2006).
If we assume that the customer channel is one of the main channels through which CSR affects
firm value, then our results offer a number of managerial implications: if a firm engages in CSR, but does
not operate in an advertising-intensive environment, its management should reconsider its CSR efforts, or
21

If this is the case, determining the independent effect of a variable becomes challenging because one has to take
into account all the interactions. Centering the explanatory variables around zero overcomes this problem.
22
We have also verified that high awareness does not enhance value for firms with poor prior reputations and CSR
concerns by estimating separate effects for CSR strengths and concerns.

20

search for opportunities to enhance the benefits of CSR by, for example, disseminating information about
its CSR efforts. This implication is only relevant, of course, if the firm is concerned with maximizing
shareholder wealth rather than other objectives (for example, engaging in CSR could be an objective in
itself). It is entirely possible, however, that firms engage in CSR activities with the goal of enhancing
shareholder wealth, but find it difficult to assess whether these activities actually create value. We believe
that our evidence may help them in making this assessment.
Our evidence also suggests that firms engaging in and publicizing CSR activities can only add
value if these activities and firm reputation are aligned. Hence, firms with poor reputations are unlikely to
reap any immediate benefits (in terms of shareholder value creation) from engaging in CSR. In fact, such
activities may appear disingenuous and may well have the opposite effect.

In the long-run, the

engagement in and dissemination of such activities could create value if they change the customers
perceptions of the firm.
Our findings are also relevant for institutional investors deciding on whether or not to support
CSR initiatives. For example, ISS (Institutional Shareholder Services) provides investors with explicit
guidelines on how to vote on proxy proposals, including those relating to CSR activities (see
www.issgovernance.com/files/ISS2011USPolicySummaryGuidelines20110127.pdf). Our evidence can be
employed to inform these guidelines by taking into account the firms public awareness.
Finally, our study also confirms the view that in order to fully understand under which
circumstances CSR activities enhance firm value, we need to focus on the moderating effects of other
variables on the CSR-firm value relation.
Our findings add to the recent literature on CSR which focuses on better identifying the
mechanisms through which CSR can add value to the firm. One tenet of this literature is that evidence of
a direct relation between CSR and firm value appears to be spurious. Another is that while direct relations
do not survive some specifications, the indirect ones appear to be more robust. For example, Surroca,
Trib and Waddock (2010) find that evidence of a direct relation between financial performance and CSR
disappears after controlling for the firms intangible resources; only an indirect relation emerges through
the effect of CSR on the firms intangibles. Hull and Rothenberg (2008) find that the impact of CSR on
performance is stronger in low-innovation firms and in industries with little differentiation. They still find
a weak positive direct relation between CSR and performance as well, but they do not control for firm
fixed effects in their specifications.
Our work suggests several avenues for future research. The link between CSR activities and
performance through the customer channel is only one way in which CSR may affect firm value. We

21

believe that focusing on other channels would be a fruitful area for future theoretical and empirical
research. The employee channel, in particular, seems to deserve further exploration. For example, to
what extent can CSR activities enhance employee productivity and reduce absenteeism, thereby enhancing
firm value? In which types of organizations is this particularly relevant? Is there a link between the
customer and the employee channel?

This research will also help in validating the managerial

implications we propose.
Our evidence that awareness about the firm is crucial for CSR to add value also suggests that
exploring channels available for dissemination of CSR activities could be an interesting area of research.
In our current work, awareness is just a by-product of firm advertising. However, firms with positive CSR
involvement may wish to actively communicate this information. 23 This conjecture leads to several areas
for further research. For example, which communication channels are more credible and effective? Are
mechanisms employed mainly to disseminate information to shareholders, such as investor relations
departments and annual reports, also useful in providing information about CSR? Given these channels,
are separate CSR reports, which have become more prominent recently, incrementally useful?
A final unexplored avenue is the link between corporate governance and CSR. Our evidence
suggests that firms that are not advertising intensive should either stay away from CSR or find another
way of increasing information about their CSR activities. Why would some firms persist with CSR
activities without publicizing them, thereby incurring the costs of CSR without realizing the benefits?
One possibility is that such firms have poor corporate governance and, as a result, executives are not
focused on maximizing the wealth of shareholders. By focusing on other stakeholders such as the
community or employees, these managers may in fact try to entrench themselves, as suggested by Jensen
(2001). This leads to a large number of interesting questions. For example, do firms for which the impact
of CSR on value is negative have poor corporate governance? What happens to the CSR activities of
these firms after changes in governance? Are managers of firms with high levels of CSR more entrenched
[see, for example, Cheng et al. (2012)]? Studying these questions and, more broadly, the link between
agency problems and CSR would be a fertile area for further work on the topic.

23

See Du et al. (2010) for further research directions on the substance of CSR communication.

22

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25

TABLE 1
Summary statistics
The CSR measure for each element of CSR, except for industry, is computed by taking the number of
strengths and dividing it by the possible maximum, and subtracting the number of concerns, divided by
the possible maximum, implying that the score on each element ranges from -1 to +1. The total is the sum
of all the constituent elements. For industry, we add up the number of industry concerns and divide by its
maximum (6). The conservative measure is computed as the sum of five elements: community, diversity,
employees, environment, and human rights. To obtain the CSR measure including industry, we subtract
the industry score from the conservative measure. To obtain the CSR measure including industry and
product, we add the product score to the CSR measure including industry. Tobins Q is computed as:
(book value of assets book value of equity deferred taxes + market value of equity) / book value of
assets. Advertising intensity is computed as advertising expenses / sales. When advertising expenses are
missing on Compustat, we set it equal to zero. R&D intensity is computed as R&D expenses / sales.
When R&D expenses are missing on Compustat, we set it equal to zero.
Panel A. Summary statistics
Variable
CSR (conservative)
CSR (with industry)
CSR (with industry and product)
Tobins Q
Total assets ($ millions)
Advertising intensity
R&D intensity

Mean

Median

-0.0792
-0.0954
-0.1394
2.10
7609
0.0132
0.0432

0.00
-0.05
-0.1071
1.63
1922
0
0.0187

Standard
Deviation
0.3787
0.3828
0.4739
1.42
25715
0.0307
0.0878

Min

Max

-2.25
-2.25
-2.33
0.69
10
0
0

1.94
1.90
2.14
12.81
750507
0.2861
0.7821

Panel B. Correlation matrix

Variable

Tobins
Q

CSR
(Cons.)

CSR
(w. ind.)

CSR (conservative)
CSR (with industry)
CSR (with industry and product)
Total assets
Advertising intensity
R&D intensity

0.152
0.160
0.161
-0.082
0.145
0.298

0.992
0.913
0.044
0.149
0.041

0.927
0.023
0.143
0.051

CSR (w
ind. and
product)

-0.098
0.109
0.070

Assets

0.018
-0.055

Adv./
sales

-0.0318

26

TABLE 2
Panel regressions of Tobins Q as a function of CSR involvement, and the CSR-advertising interaction
The model is estimated using OLS. The standard errors have been adjusted for heteroscedasticity and for the lack of independence of observations
for the same firm (clustered standard errors). The conservative measure of CSR includes the following five KLD categories: community,
diversity, employees, environment, and human rights. P-values are reported in parentheses. ***, **, and * indicate significance of the coefficient at
the 1%, 5%, and 10% respectively.
CSR measure
(i)
Conservative
Intercept
Log assets
Advertising intensity
R&D intensity
CSR
CSR * Advertising intensity
Year dummies
Firm fixed effects
Adjusted r-squared
N

4.17 (0.00)***
-0.23 (0.00)***
5.83 (0.00)***
3.76 (0.00)***
0.41 (0.00)***
6.19 (0.05)**
Yes
No
0.19
10712

(ii)
Include
industry
concerns
4.15 (0.00)***
-0.22 (0.00)***
6.00 (0.00)***
3.75 (0.00)***
0.39 (0.00)***
6.65 (0.02)**
Yes
No
0.19
10712

(iii)
Include
industry and
product
4.02 (0.00)***
-0.21 (0.00)***
6.59 (0.00)***
3.81 (0.00)***
0.31 (0.00)***
4.25 (0.08)*
Yes
No
0.19
10712

(iv)
Conservative
6.38 (0.00)***
-0.50 (0.00)***
-1.25 (0.46)
-0.64 (0.34)
-0.07 (0.23)
7.70 (0.00)***
Yes
Yes
0.74
10712

(v)
Include
industry
concerns
6.38 (0.00)***
-0.50 (0.00)***
-1.15 (0.49)
-0.62 (0.24)
-0.08 (0.24)
7.42 (0.01)***
Yes
Yes
0.74
10712

(vi)
Include
industry and
product
6.37 (0.00)***
-0.50 (0.00)***
-0.82 (0.59)
-0.63 (0.17)
-0.01 (0.78)
4.94 (0.00)***
Yes
Yes
0.73
10712

27

TABLE 3
Testing explanations for the impact of advertising on the benefits of CSR
Model (i) includes median industry advertising to sales and its interaction with the CSR measure, where
industry is defined at the four-digit SIC code level. Model (ii) includes the Herfindahl index and its
interaction with the CSR measure. The CSR measure employed in this table is the conservative measure
which includes 5 KLD categories (community, diversity, employees, environment, and human rights).
The models are estimated using OLS. The standard errors have been adjusted for heteroscedasticity and
for the lack of independence of observations for the same firm (clustered standard errors). P-values are
reported in parentheses. ***, **, and * indicate significance of the coefficient at the 1%, 5%, and 10%
respectively.

Intercept
Log assets
Advertising intensity
Industry Advertising intensity
Herfindahl index
R&D intensity
CSR
CSR * Advertising intensity
CSR * Industry Advertising intensity
CSR * Herfindahl index
Year dummies
Firm fixed effects
Adjusted r-squared
N

(i)
Controlling for
industry advertising
intensity
6.40 (0.00)***
-0.50 (0.00)***
-0.53 (0.80)
-1.87 (0.37)
-0.64 (0.23)
-0.08 (0.13)
5.81 (0.04)**
3.96 (0.11)
Yes
Yes
0.74
10712

(ii)
Controlling for
competition
6.45 (0.00)***
-0.50 (0.00)***
-1.33 (0.42)
-0.41 (0.14)
-0.65 (0.22)
-0.03 (0.76)
7.66 (0.00)***
-0.20 (0.44)
Yes
Yes
0.74
10712

28

TABLE 4
Robustness test
In Panel A, we employ different measures of performance: (i) operating return on assets, computed as operating income divided by assets; (ii)
operating return on sales, computed as operating income divided by sales; (iii) return on equity, computed as net income divided by shareholders
equity; (iv) sales growth, computed as (salest / salest-1)-1; and (v) mark-up, computed as (sales cost of goods sold) / cost of goods sold. In Panel
B, we employ different measures of CSR: CSR subdivided into third party CSR (community, environment and human rights) and stakeholder CSR
(diversity and employees) (model (i)); CSR strengths and concerns (model (ii)); and lagged CSR (model (iii)). In Panel C, we use different
approaches to deal with missing advertising expenditures: removal of the firm (model (i)); and setting advertising equal to the industry average
(model (ii)). In Panel D, we add various control variables: number of employees to control for size (model (i)); dummies for each industry/year
combination (model (ii)); strategy variables (capital expenditures / sales; capital intensity, computed as total assets / number of employees; selling
intensity, computed as general, selling, and administrative expenses / sales; and efficiency (the lack of), computed as cost of goods sold / sales)
(model (iii)). The CSR measure employed is the conservative CSR measure based on 5 KLD categories (community, diversity, employees,
environment, and human rights). P-values are reported in parentheses. ***, **, and * indicate significance of the coefficient at the 1%, 5%, and 10%
respectively.
Panel A: Different performance measures

Intercept
Log assets
Advertising intensity
R&D intensity
CSR
CSR * Advertising intensity
Year dummies
Firm fixed effects
Adjusted r-squared
N

(i)
Operating Return
on Assets
0.324 (0.00)***
-0.021 (0.00)***
-0.160 (0.11)
-0.257 (0.00)***
-0.005 (0.10)*
0.189 (0.04)**
Yes
Yes
0.76
10712

(ii)
Operating Return
on Sales
0.055 (0.11)
0.018 (0.00)***
-0.280 (0.04)**
-0.281 (0.01)***
-0.002 (0.71)
0.216 (0.02)**
Yes
Yes
0.85
10712

(iii)
Return on Equity
0.300 (0.00)***
-0.021 (0.02)**
0.002 (0.99)
-0.714 (0.00)***
-0.006 (0.46)
0.643 (0.02)**
Yes
Yes
0.52
10712

(iv)
Sales Growth
-0.027 (0.08)*
0.009 (0.00)***
-0.162 (0.01)***
0.010 (0.79)
-0.026 (0.00)***
0.388 (0.01)***
Yes
No
0.03
7717

(v)
Mark-up
0.525 (0.16)
0.060 (0.21)
4.009 (0.02) **
1.354 (0.08) *
0.062 (0.17)
2.643 (0.05) **
Yes
Yes
0.89
10712

29

Panel B: Different measures of CSR

Intercept
Log assets
Advertising intensity
Lagged Advertising intensity
R&D intensity
Third party CSR
Stakeholder CSR
Third party CSR * Advertising intensity
Stakeholder CSR * Advertising intensity
CSR strengths
CSR strengths * Advertising intensity
CSR concerns
CSR concerns * Advertising intensity
Lagged CSR
Lagged CSR * Lagged Advertising intensity
Year dummies
Firm fixed effects
Adjusted r-squared
N

(i)
6.37 (0.00)***
-0.50 (0.00)***
-1.44 (0.38)

(ii)
6.51 (0.00)***
-0.52 (0.00)***
-1.59 (0.36)

-0.62 (0.24)
-0.05 (0.54)
-0.08 (0.28)
4.20 (0.10)*
10.51 (0.00)***

-0.64 (0.23)

(iii)
5.68 (0.00)***
-0.45 (0.00)***
-1.03 (0.58)
-0.89 (0.25)

-0.16 (0.16)
8.56 (0.00)***
0.02 (0.74)
-7.23 (0.01)***
Yes
Yes
0.74
10712

Yes
Yes
0.74
10712

-0.05 (0.49)
7.72 (0.00)***
Yes
Yes
0.76
7802

30

Panel C: Treatment of firms with missing advertising expenditures

Treatment of missing advertising

Intercept
Log assets
Advertising intensity
R&D intensity
CSR
CSR * Advertising intensity
Year dummies
Firm fixed effects
Adjusted r-squared
N

(i)
Removed
6.17 (0.00)***
-0.55 (0.00)***
0.85 (0.71)
-1.98 (0.11)
-0.10 (0.34)
6.88 (0.00)***
Yes
Yes
0.74
4129

(ii)
Industry
6.30 (0.00)***
-0.50 (0.00)***
0.14 (0.89)
-0.63 (0.23)
-0.20 (0.00)***
7.73 (0.00)***
Yes
Yes
0.73
10712

Panel D: Additional control variables

Intercept
Log assets
Log employees
Advertising intensity
R&D intensity
CSR
CSR * Advertising intensity
Capital expenditures / sales
Capital intensity
Selling intensity
Efficiency
Year dummies
Firm fixed effects
Year/industry dummies
Adjusted r-squared
N

(i)
Number of
employees as
control for size
3.15 (0.00)***
-0.29 (0.00)***
-1.05 (0.55)
-0.73 (0.21)
-0.06 (0.26)
7.06 (0.00)***

Yes
Yes
No
0.73
10712

(ii)
Industry/year
dummies

(iii)
Strategy variables
added

3.42 (0.00)***
-0.19 (0.00)***

8.87 (0.00)***
-0.57 (0.00)***

3.33 (0.00)***
1.98 (0.00)***
0.27 (0.00)***
6.74 (0.03)**

-0.63 (0.74)
0.59 (0.57)
-0.01 (0.90)
7.30 (0.00)***
0.68 (0.08)*
-0.00 (0.34)
-3.74 (0.00)***
-3.15 (0.00)***
Yes
Yes
No
0.73
9140

No
No
Yes
0.29
10712

31

TABLE 5
The impact of prior reputation on the relation between firm value and the CSR-advertising
interaction
Admired score is the score received by the firm on the list of Americas Most Admired Companies
published by Fortune magazine. Residual Admired Score is the residual of a regression of the Admired
score on profitability (and its lag), growth, leverage, and the industry-adjusted market-to-book ratio (and
its lag). The conservative CSR measure is based on 5 KLD categories (community, diversity, employees,
environment, and human rights). P-values are in parentheses. ***, **, and * indicate significance of the
coefficient at the 1%, 5%, and 10% respectively.
CSR Measure
(i)
Conservative
Intercept
Log assets
Advertising intensity
R&D intensity
CSR
CSR * Advertising intensity
Residual Admired score
Residual Admired score * Advertising intensity
CSR * Residual Admired score
CSR * Adv. intensity * Res. Admired score
Year dummies
Firm fixed effects
Adjusted r-squared
N

6.93 (0.00)***
-0.52 (0.00)***
1.28 (0.64)
-5.33 (0.13)
-0.02 (0.82)
6.45 (0.03)**
0.06 (0.13)
1.05 (0.38)
-0.12 (0.14)
5.33 (0.03)**
Yes
Yes
0.72
2993

(ii)
Including product
and industry
6.84 (0.00)***
-0.51 (0.00)***
2.16 (0.49)
-5.22 (0.13)
0.02 (0.70)
3.41 (0.10)*
0.05 (0.28)
1.58 (0.24)
-0.09 (0.18)
2.83 (0.09)*
Yes
Yes
0.72
2993

32