CORPORATE

SOCIALRESPONSIBILITY AND FIRM

RISK(CSR Vs. Non CSR Companies:
THEORY AND EMPIRICAL EVIDENCE
AT Thailand SET 100 Listed Firms.
Written by Kamal Saeed
ID : 5719580
Term Project for Econometrics 2.

Professor: Ajarn Wisaroot

Subject: Econometrics 2
Abstract:
This is an empirical study of the relationship between Corporate Social
Responsibility (CSR), financial performance and risk at Thailand Set 100
Listed Firms s. Over all Subjects of this studies is that if improving the
quality of CSR at Thailand SET 100 firms might go a long way towards
improving individual Listed Firm performance and reducing the risk of
systemic problems within the SET 100 LISTED Firms. CSR Vs Non CSR
Companies.
 Chapter 2
Literature Review
The concept of CSR
Defining CSR is not as straightforward as it looks like beforehand, this is
due to the fact that socially responsible behavior may mean different things
in different places to different people and at different times (Campbell,
2007; Frynas & Stephens, 2015). And because of this, the increasing body
of literature related to CSR is facing a problem of definition. However
multiple definitions have been provided, finding one universal definition is
considered difficult (Davis, 1973; Campbell, 2007;

According to Davis (1973), CSR refers to the firms consideration of, and
response to, issues beyond the narrow economic, technical, and legal
requirements of the firm. Davis (1973) argues that it is the firms obligation
to evaluate its decision-making process in such way that the effects of its
decisions on the external social system will accomplish social benefits
along with the traditional economic gains which the firm seeks.
Furthermore, he argues that social responsibility begins where the law
ends. A firm is not being socially responsible if it merely complies with the
minimum requirements of the law, because this is what any good citizen
would do.

Another and a more specific definitions of CSR is one made by Carrol

(Crane, Matten, & Spence, 2008). Carrol (1979) explains business practice
as a pyramid of responsibilities with Economic responsibilities at the
bottom, followed by legal, then ethical, and with philanthropic
Responsibilities at the top. Carrol (1979) argues that CSR is about taking
responsibility for the Pyramids top parts, as well as the economics and
legal responsibilities of the firm. Carrol (1979) significantly points out that
CSR includes philanthropic contributions, however is not limited to it. Carrol
(1999) developed this reasoning and explains that these responsibilities are
less important than the other three categories. This is because firms are
not seen as irresponsible if they do not fulfill these responsibilities. To fulfill
all responsibilities firms should be profitable, while operating within the
boundaries of the law, be ethical, and be a good corporate citizen (Carrol,
1979).

Another very popular definition often used in CSR research is a definition

that includes a Voluntary aspect (Amaeshi & Adi, 2007). McWilliams &
Siegel (2001) describe CSR as actions that appear to further some social
good, beyond the interests of the firm and that which is required by law.
Despite the fact that this definition is often used in CSR literature, this
definition has its drawbacks since it suggests that CSR actions should go
beyond the interest of the firm. It implicitly suggests that actions could not
be in the interest of the firm and the social good at the same time.

A different approach when defining CSR is Campbells approach, since he

focuses on a Minimum level of behavioral standard. Campbell (2007)
argues that, corporations act in a social responsible way if they do two
things. First, they must not knowingly do anything that could harm their
stakeholders, notably, their investors, employees, customers, suppliers, or
the local community within which they operate. Second, if corporations do
cause harm to their stakeholders, they must then rectify it whenever the
harm is discovered and brought to their attention (Campbell, 2007).
However this definition has a different approach than other and focuses on
a minimum level of responsible behavior, it also implies that there are no
benefits for firms that engage social responsible behavior. Campbell (2007)
argues that firms are considered to be social responsible as long as they
do no harm to the world. Therefore this approach might be not fully
comprehensive.

As the field of CSR has evolved, the term CSR has sometimes been
supplemented or Supplanted by other terms (for a review, see Amaeshi &
Adi, 2007), including corporate social performance (CSP) and more
recently, organizational responsibility (Wood, 1991; Aguinis, 2011).
Although theorists attempt to distinguish CSP from CSR, sometimes
subsuming CSP under the umbrella of CSR and sometimes the reverse,
the terms CSR and CSP are often used interchangeably in empirical
studies (Margolis et al., 2007). According to Wood (1991), who elaborates
on the definition of Wartick and Cochran (1985), CSP can be defined as an
organization's configuration of principles of social responsibility, processes
of social responsiveness, and policies, programs, and observable
outcomes as they relate to the firm's societal relationships. In other words
CSP can be seen as a multidimensional construct, which includes the firms
activities to meet the firms economic, legal, ethical and philanthropic
responsibilities (Wood, 1991; Carrol, 1999).

Another and a more recently developed term is organizational responsibility

(Aguinis, 2011). Organizational responsibility refers to context-specific
organizational actions and policies that take into account stakeholders
expectations and the triple bottom line of economic, social, and
environmental performance. It specifically uses the term organizational
instead of the narrower term corporate to emphasize that responsibility
refers to any type of organization and not only large corporations.
According to Enderle (2004) organizational responsibility is not only
possible but also necessary for startups, small, and medium-sized
organizations if they want to be successful in todays globalized and
hypercompetitive economy. Furthermore the broader term responsibility
instead of the narrower phrase social responsibility is used to highlight that
responsibility refers to several types of stakeholders, including employees
and suppliers, and issues that subsume but also go beyond topics
defined as being in the social realm (Aguinis, 2011).

Why do firms engage in CSR?

In the past couple of decades plenty of academics have sought out to
explain the reasons for why companies choose, or should choose to,
engage in CSR activities. In order to explain these reasons, different
theories have been utilized in recent years. While early work on this subject
draws on single theoretical perspectives (Freeman, 1984; Friedman, 1980)
more recent work seems to be explaining CSR behavior using multiple
theories (Mellahi et al., 2016). Over the last two and a half decades, the
theories that have become the most prominent in the literature that explains
CSR behavior are: stakeholder theory, legitimacy theory, resource-based
view (RBV), agency theory and resource dependency theory (RDT)
(Mellahi et al, 2016; Frynas & Yamahaki, 2016).

According to Mellahi et al. (2016) these different theories can be classified

as either related to explaining external drivers of CSR or related to internal
drivers of CSR (see Figure 1). Stakeholder theory, legitimacy theory and
RDT are considered as theories that explain external drivers of CSR since
these theories focus on the nature of relations between the firm and the
environment. RBV and agency theory are considered theories that explain
internal drivers of CSR since these theories focus on the internal dynamics
in addressing social and environmental concerns (Frynas & Yamahaki,
2016; Mellahi et al., 2016).

Theoretical Framework of (Melanhie 2016)

External drivers of CSR

The theories that dominate the theorizing of external drivers of CSR over
the last two and a half decade are stakeholder theory, legitimacy theory,
and resource dependency theory (RDT)(Frynas & Stephens, 2015; Frynas
& Yamahaki, 2016; Mellahi et al., 2016). In this section each of the three
theories will be described, its implication within the CSR context will be
explained, and empirical findings supporting each theory will be presented.

Stakeholder theory
Within the topic of CSR, stakeholder theory asserts that companies have
social responsibilities that require them to consider the interests of all
parties affected by their actions. In contrast to the traditional or shareholder
view of a company, which argues that only the owners or shareholders
interests are important, stakeholder theory argues that management should
not only consider the interests of its shareholders in the decision making
process, but also the interests of other stakeholders (Freeman, 1984). A
firms stakeholders include for example, employees, suppliers, customers,
investors and governments, but can be defined broadly as any group or
individual who can affect or is affected by the achievement of the firms
objectives (Freeman, 1984). According to Clarkson (1995), and Helmig et
al., (2016) stakeholders can be classified into primary and secondary
stakeholder groups. Where primary stakeholders (shareholders and
investors, employees, customers, government) have a direct influence on
the company and are essential for the survival of the company, secondary
stakeholders (media, competition, trade associations) have an indirect
influence on the company and are not essential for the survival of the
company (Clarkson, 1995; Helmig et al., 2016).

Should a company choose to invest in a CSR activity that benefits the local
community or Should it use these resources to pay of their debts? In other
words, should a company prioritize its local community stakeholder or its
creditor stakeholder? Organizations often find themselves Constrained by
limited resources and bounded rationality, and thus tend to prioritize their
stakeholders according to instrumental and/or normative considerations
(Jamali, 2008). Over the years, it has been revealed that power (relates to
the ability of the stakeholder to impose its will on others despite resistance
to do something they would not ordinarily do), legitimacy (relates to the
mandate of the stakeholder and the rights to use power with regard to a
claim made upon the firm), and urgency (the degree to which stakeholder
claims call for immediate attention) are three attributes that play a
prominent role determining stakeholder salience and thus in determining
which stakeholder groups are more important to the firm (Mitchell et al.,
1997; Helmig et al., 2016).

Over the years scholars have advanced stakeholder theory and argued if
stakeholder salience is relevant or not. This resulted in two main
perspectives within the stakeholder theory, that is: the normative and
descriptive perspectives (Frynas & Stephens, 2015). While the normative
perspective assumes that the legitimate interests of all stakeholders should
be taken into account by organizations and thus stakeholder salience is
less relevant, the descriptive perspective assumes that organizations
identify which stakeholder interests are important, and thus stakeholder
salience is directly relevant (Frynas & Stephens, 2015; Frynas & Yamahaki,
2016). In line with the extant CSR literature, this study follows the
descriptive perspective of stakeholder theory since the normative
perspective has little descriptive or explanatory power in a CSR context.
The descriptive perspective in turn can be used in order to explain the
drivers, processes and outcomes of CSR (Frynas & Stephens, 2015;
Frynas & Yamahaki, 2016; Mellahi et al., 2016).

Empirical findings supporting stakeholder theory

Empirical studies have provided rich evidence of the relative impact that
different stakeholders have on CSR strategies and how stakeholder
pressures impact CSR-related activities and decisions. Thijssens et al.
(2015) investigated the extent to which environmental stakeholders power,
urgency, and legitimacy, influence the level of management response to
the demand for environmental information. Using a sample of 199 large
companies, they found that differences in environmental disclosures
between companies are mainly associated with differences between their
environmental stakeholders legitimacy. The effects of power and urgency
are of an indirect nature, as they are mediated by legitimacy. Their work
provides empirical evidence that not only primary stakeholders, but also
secondary stakeholders (environmental stakeholders) are influential with
regards to management decision-making (Thijssens et al., 2015). Ehrgott et
al. (2011) conducted a study on how pressures from customers, the
government, and employees as primary constituencies of the firm
determine the extent to which firms consider social aspects in the selection
of emerging economy.

An important part of stakeholder theory scholarship has been concerned

with the relationship between CSR and corporate financial performance
(CFP). However, as said before, results of this work are still contradictory
and ambiguous (Jia & Zhang, 2014; Mellahi et al., 2016). While some
studies have found a neutral or even negative relationship between CSR
and CFP (Jia & Zhang, 2014; Hoepner et al., 2014), the majority of
stakeholder theory studies point to a positive relationship between CSR
and CFP (Whang & Choi, 2013; Mellahi et al., 2016). In this regard it is
assumed that investors, customers, and other key stakeholders reward
firms that do engage in CSR activities
Legitimacy theory
Legitimacy theory relies on the notion that there is a social contract
between a company and the society in which it operates (Deegan, 2002). It
is derived from the concept of organizational legitimacy, which has been
first defined by Dowling and Pfeffer (1975) as a condition or status, which
exists when an entitys value system is congruent with the value system of
the larger social system of which the entity is a part. When a disparity,
actual or potential, exists between the two value systems, there is a threat
to the entitys legitimacy. Legitimacy theory posits that organizations
continually seek to ensure that they operate within the bounds and norms
of their respective societies (Dowling & Pfeffer, 1975; Deegan, 2002; and
Frynas & Yamahaki, 2016).

Within the legitimacy theory there are two main perspectives, which are:
strategic and institutional (Suchman, 1995; Chan et al., 2014; Panwar et
al., 2014; and Frynas & Yamahaki, 2016). Strategic legitimacy assumes a
degree of managerial control over the legitimation process (Suchman,
1995). It is assumed that managers can adopt strategies to demonstrate to
society that the organization is attempting to comply with societys
expectations. Under this perspective, legitimacy is considered a resource
that is conferred by groups outside the organization (Chan et al., 2014;
Panwar et al., 2014). In contrast to the strategic perspective, the
institutional perspective assumes that legitimacy is acquired by factors
other than a companys qualities or actions (Chan et al., 2014). Under this
perspective, organizations have a limited potential to really manage
legitimacy, since legitimacy judgments also come from culture and the
ideology of evaluators (Chan et al., 2014).

Resource dependency theory

Resource dependence theory (RDT), originated from the work of Pfeffer
and Salancik (1978), suggests that access and control over external
resources are essential elements to organizational success, and therefore,
firms must carefully implement strategies to maintain access to these
resources. Key stakeholders, such as shareholders, employees,
customers, suppliers, and the community, have control over these
resources, and could influence management decisions and gain control
over the firm (Harjoto & Laksmana, 2016). As organizations depend on
many different actors who can put conflicting social demands on the firm
(Oliver, 1991) and a firm cannot satisfy all demands, RDT predicts that a
firm will pay more attention to social actors who control critical resources
(Salancik & Pfeffer 1978; Frynas & Yamahaki, 2016).

The RDT is in line with the stakeholder theory since RDT proposes that
stakeholders ultimately control a firms access to external resources and
firms must manage their relationship with primary and secondary
stakeholders to ensure that such access to resources is maintained
(Roberts, 1992; Helmig et al., 2016). The main difference between the two
theories lies in the assumption and prescription of the theories. While
stakeholder theory prescribes that the firm needs to work with the firms
constituencies on a basis to improve both firm and stakeholder
performance, the RDT, on the other hand, takes a rather more self-
interested position. These assumptions suggest that managers will treat
outside constituencies more self-interestedly (Bear et al., 2010).

Internal drivers of CSR

The theories that theorize the internal drivers of CSR are agency theory,
and the resourcebased view (RBV)(Frynas & Stephens, 2015; Frynas &
Yamahaki, 2016; Mellahi et al., 2016). In this section each theory will be
discussed as well as empirical findings supporting each theory.

Agency theory
The agency theory is directed at the agency relationship, in which one party
(the principal) delegates work to another party (the agent) (Eisenhardt,
1989). In a business, the principals are considered to be the shareholders,
which are the owners of the firm. The managers from the firm are
considered to be the agents, which are supposed to act in accordance to
the principals goals. The agency theory is concerned with the fact that
agents may behave and act in accordance with their own personal goals
rather than with those of the principal (Oh et al., 2011; Hamidu et al., 2015).
This theory is concerned with two problems that often occur in the agency
relation. The first is the agency problem that arises when the desires or
goals of the principal and agent conflict with each other. The second
problem is that it can be difficult or expensive for the principal to verify of
what the agent is actually doing (Eisenhardt, 1989).

With reference to CSR, Friedman (1970) was one of the first who argued
that engaging in CSR activities is self-serving behavior of managers
(agents) whose pursuit of social and Environmental objectives ultimately
hurts shareholders (principals) by generating lower profits. He argued that
firms should have just one responsibility, which is profit maximization.
Firms should only use resources and engage in activities to increase
profits, while operating within the boundaries of law and regulation
(Friedman, 1970).

While many studies have continued on this reasoning and investigated

CSR as a threat that raises potential conflicts of interest (Barnea & Rubin,
2010; Faleye & Trahan, 2011), other agency studies viewed CSR as
beneficial to financial and non-financial performance (Bear et al., 2010; Oh
et al., 2011). Either way, agency theory seems to provide an explanation of
why companies engage in CSR activities, while others do not.

Resource-based view
The resource-based view (RBV), as introduced by Wernerfelt (1984) and
refined by Barney (1991), presumes that firms are bundles of
heterogeneous resources and capabilities that are imperfectly mobile
across firms. Barney (1991) argues that resources should have the so-
called VRIN characteristics. That is resources should be valuable, rare,
inimitable and non-substitutable, in order to form a potential source for
sustainable competitive advantage (Barney, 1991; Huang et al., 2015). In
other words, unique resources are said to lead to firm heterogeneity, and
firm heterogeneity can then lead to sustained competitive advantage. Firms
that ultimately possess a sustainable competitive advantage should be able
to outperform other firms and will in return earn superior returns
(McWilliams & Siegel, 2010).

Engaging in CSR activities can help firms to create VRIN resources in

order to provide internal and external benefits (McWilliams & Siegel, 2010;
Frynas & Stephens, 2015; Mellahi et al., 2016). Investments in socially
responsible activities may have internal benefits by helping a firm to
develop new resources and capabilities which are related namely to know-
how and corporate culture.

In effect, investing in social responsibility activities has important

consequences on the creation or depletion of fundamental intangible
resources, namely those associated with employees (Branco & Rodrigues,
2006). The external benefits of CSR are related to its effect on corporate
reputation. Corporate reputation can be understood as a fundamental
intangible resource, which can be created or depleted as a consequence of
the decisions to engage or not in social responsibility activities. Firms
with good social responsibility reputation may improve relations with
external actors (Chen et al. 2006; Loureno et al. 2014). They may also
attract better employees or increase current employees motivation, morale,
commitment and loyalty to the firm (Branco & Rodrigues, 2006). These
internal And external benefits will help firms to differentiate themselves
from its competitors and ultimately will help firms to create a sustainable
competitive advantage over their competitors. It is argued that achieving a
sustainable competitive advantage could be a factor that drives
corporations to engage in
CSR activities.

Background Research on Firm Risk

One of our main contributions is the development of a theory to study the

relation between CSR and firm risk when firms respond to consumers
preferences and to put the analysis into an industry equilibrium framework.
We are a part of an established literature that asserts that firms engage in
profit-maximizing CSR (e.g. McWilliams and Siegel, 2001).2 One argument
in favor of this approach is that the pursuit of CSR is generally highly
publicized, which in the presence of an active market for corporate control
can only be rationalized if CSR is in the best interest of the firm and its
shareholders. Further, we draw from the research that argues that CSR is a
product differentiation strategy (see Navarro, 1988, Webb, 1996, Bagnoli
and Watts, 2003, and Siegel and Vitalino, 2007). Direct evidence is
observed in the ability of firms to sell more or at higher prices to their
consumers those products that have CSR features (e.g., Creyer and Ross,
1997; Auger et al., 2003; Pelsmacker et al., 2005; Elfenbein and McManus,
2010; Elfenbein et al., 2012; Ailawadi et al., 2014).

Our other main contribution is the empirical evaluation of the CSR-firm risk
relation. While there is a recent empirical literature documenting a negative
association between CSR and firm risk and cost of equity capital (see
Sharfman and Fernando, 2008, El Ghoul) et al., 2011, and Oikonomou et
al., 2012), these papers do not claim a causal relation. We contribute to this
literature by identifying a causal link between CSR and firm systematic risk
using instrumental variables, and by presenting further evidence on the
nature of the relation across industries as predicted by the model.
CSR has received scant attention in the theoretical finance literature. A
notable exception is Heinkel et al. (2001), who assume that some investors
choose not to invest in non-CSR stocks. This market segmentation leads to
higher expected returns and risk for non-CSR stocks, which must be held
by only a fraction of the investors (as in Errunza and Losq, 1985, and
Merton, 1987). Gollier and Pouget (2014) build a model where socially
responsible investors can take over non-CSR companies and create value
by turning those into CSR companies, but oer no prediction for firm
systematic risk. These papers assume that a subset of investors have a
preference for CSR stocks. However, as pointed out by Starks (2009),
investors seem to care more about corporate governance than about CSR,
and as noted above CEOs seem to care more about consumers when they
make their CSR choices. We use the model to make predictions regarding
the role of consumers in affecting the CSR-risk relation across industries
and we test these predictions empirically. We are therefore able to provide
evidence consistent with the main mechanism in the theory.

Our paper is also related to the work on brand assets and firm risk. Rego et
al. (2009) find a negative relation between a firms brand capital and firm
risk. Belo et al. (2014) find that firms with higher investments in brand
capital, measured by advertising expenditures, exhibit lower stock returns.
In our empirical tests, we control for advertising expenditures and conclude
that CSR appears to have an independent role in affecting firm risk.

There is a large empirical literature on the association between CSR and

firm value. Grin and Mahon (1997) survey an earlier literature and
document a positive association between CSR and firm value. Margolis et
al. (2010) review 35 years of evidence and show that there is on average a
small positive effect. Recent evidence include Galema et al. (2008), Gillan
et al. (2010) and Servaes and Tamayo (2013). Krger (2014) finds a
negative effect on stock prices if management is likely to receive private
benefits from CSR adoption, but a positive effect if CSR policies are
adopted to improve relations with stakeholders. Dimson et al. (2014) find
that engagements by institutional investors that lead to changes in firms
CSR policies are followed by positive abnormal returns, especially in
industries that are likely to be consumer-oriented industries. Deng et al.
(2013) show that acquirers with high CSR scores experience higher merger
announcement returns and better post-merger operating performance.
Cheng et al. (2014) provide evidence that CSR activities help relax firms
financing constraints. Consequently, CSR firms have better access to
finance.

While the majority of recent studies has demonstrated clear economic

benefits from CSR, Cheng et al. (2013) and Masulis and Reza (2014)
provide evidence that an increase in effective managerial ownership leads
to a decrease in CSR activities and corporate giving, consistent with the
agency cost view of CSR. Both studies measure the marginal effect of
changing after-tax ownership on CSR and thus do not show that on
average CSR activities destroy value. Interestingly, Ferrell et al. (2014)
show that well governed firms engage more in CSR activities, and that
CSR activities are positively associated with executive pay-performance
sensitivity. The evidence in Ferrell et al. (2014) is difficult to reconcile with
the view that CSR is largely motivated by managers personal benefits.

Risk
Following a stakeholder and RBV perspective, several scholars have
suggested that CSR can help firms to reduce its risks (Godfrey et al., 2009;
Diemont et al., 2016; Harjoto & Laksama, 2016). According to Godfrey et
al. (2009), engaging in CSR activities can result into moral capital to its
stakeholders and subsequently this moral capital or goodwill will act as an
insurance-like protection when negative events occur (Godfrey et al., 2009;
Diemont et al., 2016). For instance, a lawsuit against the firm or the
announcement of a fine received by a government entity can be regarded
as a negative event for a firm. In their study, Godfrey et al. (2009) found
that participation in institutional CSR activities (those aimed at a firms
secondary stakeholders or society at large) provides an insurance-like
benefit, while participation in technical CSRs (those activities targeting a
firms trading partners) yields no such benefits.

The effects of CSR on firm risk may have further implications as Harjoto
and Laksama (2016) examined the relation between CSR and deviations of
optimal risk taking levels. In their study they found that stronger CSR
performance is associated with smaller deviations from optimal risk taking
levels. Furthermore they examined the mechanism through which CSR has
an impact on firm value and found that CSR has an positive indirect impact
on firm value through the impact of CSR on risk taking. In other words CSR
performance is positively associated with firm value because CSR reduces
Excessive risk taking and risk avoidance (Harjoto & Laksama, 2016).
Access to capital
Also a firms ability to access capital could be an effect of CSR. This is
explained to refer to a companys ability to attract investments, which, in
turn, provide the companies with the funds required 21 to operate and
grow, thereby establishing its relationship to financial performance.
According to Baron (2008), investors nowadays have a tendency to invest
their funds in organizations that are showing high CSR ratings. Also Cheng
et al. (2014) argue that firms with better CSR performance face significantly
lower capital constraints. They provided evidence that both better
stakeholder engagement and transparency around CSR performance are
important in reducing capital constraints. Another study conducted by El
Ghoul et al. (2011), found that the mean cost of equity is significantly lower
for firms with high social performance. It is argued that CSR engagement is
likely to benefit the firm by decreasing the cost of equity capital (El Ghoul et
al, 2011).

Further Discussion of CSR and Firm Risk

Discussions on CSR issues have received considerable attention from

academic researchers and practitioners for many decades. At the early
stage, Chamberlain [24] defined CSR as actions that the leadership in
business is expected to undertake in response to a given situation as
matters of right, whether legal or illegal. CSR can only be satisfied by the
performance of obligations to particular individuals and not to society as a
whole. By contrast, Frederick [25] viewed CSR as a requirement for
Business to oversee the operation of an economic system that fulfills the
expectations of the public. The means of production of firms should be
employed in such a way that production and distribution would enhance the
total socioeconomic welfare. However, other scholars defined CSR as a
more integral concept. Carrol [26] described corporate social performance
as the three-dimensional integration of CSR, corporate social
responsiveness, and social issues. The author suggested that CSR should
address the entire range of obligations of business to society and must
encompass the economic, legal, ethical, and discretionary categories of
business performance. Matten and Moon [27] also considered corporate
social performance as a synonym of CSR, corporate social
responsiveness, or any other interaction between business and social
environment.
Benefits of CSR on Performance
With the gradually increasing consciousness about environmental
protection and social responsibility, the problem of whether investment in
CSR results in a competitive advantage for a company has become a
major issue for both academia and practice. Hart [29] proposed a natural
RBV that considers challenges from the environment that will inevitably
compel a company to develop its intangible resources, which will be a
source of competitive advantage. This viewpoint is further emphasized by a
similar proposition advocated by Sharma and Vredenburg [30]. These
standpoints somehow assume
that intellectual capital mediates the relationship between CSR and
financial performance, but it has not been tested empirically. According to
the concepts underlying CSR, a company must provide products and
services that are not harmful to the environment. To produce high-quality
and attractive environmentally friendly products, a company may have no
choice but to adopt a new technology, which may consequently induce
product differentiations and improve financial performance [17,31].
Similarly, a companys internal process may be enhanced as a result of this
improvement activity. For example, one company may need to reduce its
pollution emissions to the environment by saving materials and energy [32].
However, it needs to redesign its production process, and consequently
may enhance production efficiency and reduce production costs [33].
Moreover, CSR can stimulate the accumulation of human capital.
Generally, a company with a high level of CSR tends to be more attractive
to employees and has a low turnover rate of new employees, thus
decreasing the recruitment and employee training costs.

By contrast, based on the viewpoint of stakeholder theory, surviving in a

social environment, obtaining legitimacy, and securing critical resources
require a company to exert considerable effort to build and maintain
relationships with its stakeholders [6]. A good relationship with stakeholders
will positively affect financial performance in the long term [35]. For
example, building a new factory is easier for a company with a good
relationship with stakeholders and acceptance of the community where the
factory is built, reducing the costs as a result of government regulations, or
even attaining tax breaks from the government [36]. A good social agenda
can also build a good reputation, such that it provides a buffer to problems
that are invisible or offers more opportunities for companies with CSR than
companies without CSR
Negative Effects of CSR on Performance
Several scholars suggested that CSR activities have negative effects on
firm performance [38]. They argued that investment in any CSR activity will
incur higher costs, inducing competitive disadvantages for companies in a
competitive market. Therefore, companies with CSR will incur higher costs
and less competitive advantage than those without CSR [3,39]. According
to private costs theory, companies that engage in CSR activities may
benefit some stakeholders. However, the amount spent on those CSR
activities may not be covered by the benefits generated. These CSR
activities even disperse a companys objective from profit maximization,
and thus negatively affect firm financial performance [4042]. Furthermore,
managerial guile theory [39] also states that monitoring the behavior of
managers is difficult for stockholders, particularly in a large company.
Investing in CSR activities is occasionally aimed at the self-interest of
managers. Similar to the viewpoint of private costs theory, the amount
spent on those CSR activities may not be covered by the benefits
generated; consequently, CSR activities will negatively affect firm financial
performance

The International Standards Organization (ISO) has created an

international
standard for the social responsibility of private (corporate) and public sector
organizations. ISO 26000 establishes seven core subjects of social
responsibility,
all of which are parts of most current CSR definitions:
Organizational governance
Community involvement and development
Human rights
Labor practices
The environment
Fair operating practices
Consumer issues
The role of CSR in the economy has long been subject of fierce academic
debates. CSR was first mentioned in academic literature by Bowen in 1950,
as he defined it as lines of philanthropic actions in according with societal
values (Bowen, 1950). This initial philanthropic approach was however
quickly neglected by numerous scholars (Fredrick, 1960; Davis, 1960), and
replaced with the shareholder theory. Proponents of the shareholder theory
argue, that CSR is a waste of valuable firm resources that could otherwise
be deployed into a value-creating context (Friedman, 1962, 1970).
Contrasting to that, Carroll first introduced the concept of firm
responsibilities towards the society in 1979, and thereby initiated the
stakeholder perspective on CSR (Carroll, 1979). He states, that a firms
responsibilities
encompass economic, legal, ethical, discretionary and philanthropic
components. Building on that, Donaldson (Donaldson, 1982; Donaldson
and Dunfee, 1999) developed the concept othe social contract to elucidate
the importance of firm actions aimed at societal goals. He elaborates on a
tacit contract between firm and society, which grants firms certain rights for
certain responsibilities. In reaction to the developments in the academic
literature, Freeman introduces his explicit concept of stakeholder theory in
1984. He first defines a firms stakeholder as any group or individual who
can affect or is affected by the achievement of an organizations purpose
(Freeman, 1984). He then further argues, that it is in a companys strategic
interest to respect the interests of all its stakeholders. As an extension to
the traditional stakeholder theory, instrumental stakeholder theory emerged
in the literature (Berman, 1998). It states, that CSR can assist firms in
gaining stakeholder support and provide them with valuable resources.
Deriving from these argumentations, one can define CSR as a political
economy, including all rights and responsibilities that a society consciously
or unconsciously assigns to the private industry. Due to several global
economic developments, CSR has continued to receive a lot of attention in
the worlds of practitioners and academics in recent years. As the
liberalisation of markets increases, a declining importance of the regulatory
approach can be observed (Van der Steen, 2015). The emergence of
global giants in the business world and along with that, a consolidation of
market share can further be observed. These phenomena merge in the
development of global embedded firms and global value chains (Aguinis &
Glavas, 2013). As the concept of CSR was intangible in its first academic
appearances, the growth of global businesses led to attempts to employ a
more comprehensive view towards CSR. Responsible business activities,
and their display through CSR, have developed to powerful instruments of
corporate action in our days. The vast majority of scholars views them as
very influential and potential value-creating tools for firms, and thereby
closely links CSR and firm performance (Porter & Kramer 2006, 2011; Lev
et al., 2010). CSR can consequently be defined as a firms participation in
social initiatives to interact with a firms environment and take responsibility
for its impact on this environment.

There are several potential reasons why firms engage in CSR. The
maximization of stakeholder value is one potential motive, firms can
thereby use CSR initiatives as a strategic tool to increase interest-
alignment with its stakeholders and thereby eliminate potential sources of
conflict between the firms and its environment. This motive is challenged by
Baumol and Blackman (1991), who point out that firms cant undertake
these stakeholder value maximizing initiatives in a competitive
environment, because CSR initiatives are so resource-intensive that their
execution can threaten a firms survival in a competitive environment.
Another motive for CSR could be the thrive for personal benefits (e.g.
reputation building) by managers at the expense of shareholder value. This
potential entrenchment effect was first introduced by Friedman (1970).

He argued, that managers could view CSR initiatives as a personal tool to

derive personal benefits from corporate resources
and therefore misappropriate shareholder property. Consequently one can
conclude, that more firm engagement in CSR initiatives will result in more
severe agency problems. Fabrizi et al. (2014) support this view as they
show that higher corporate governance will lead to more CSR initiatives in
an effort by the management to extract personal benefits. They further find
that managerial incentives to optimize shareholder value lead to less CSR
initiatives. Cespa and Cestone (2007) further show, that managers use
CSR as a tool to gain and maintain stakeholder support in order to avoid
their own replacement and protect their job.

Efficient corporate governance therefore needs to lower corporate cash

holdings and thereby reduce the potential of managerial entrenchment
through CSR. Firms can further try to reduce information asymmetries
about their business operations and send signals about their
trustworthiness and moral conformity of their operations to their
stakeholders (Bandsuch et al., 2008). Firms in sin-industries (e.g. tobacco,
gambling, military) can use CSR as a tool to cover up their unethical
behavior, this motive is called The most intuitive reason to invest in CSR is
societal pressure towards ethical behavior. This pressure can be exercised
formal (by law), quasi-formal (by lobbyist) or informal (by the civil society).
Strong civil societies are characterized by a high level of social capital in
the society. Strong social capital implies strong norms and values that
enhance collective responses to external influences (Woolcock, 2001).
Stakeholders in these strong social environments expect firms to engage in
socially responsible, societal welfare increasing activities, even if the firm
cant derive any benefits from them and has to bear substantial costs
(Benabou & Tirole, 2010).

Despite their emerge and spread in the globalizing economy, CSR

initiatives are however still viewed critically by some academics who follow
Hendersons argumentation, that CSRs adoption would result in reduced
competition, less economic freedom and thereby undermine the market
economy (Henderson, 2001). He makes this point especially in the context
of developing economies, as he argues that CSR is likely to hold back
economic development there. In his point of view, this negative effect of
CSR occurs due to the suppression of employment opportunities within
developing countries. World Bank statistics further support his critical view
of CSR as they show, that increases in CSR (manifested in higher scores
of the national corporate responsibility index) go along with rising labor
costs per worker (World Bank Group, 2015). Advocates and opponents of
CSR continue to have fierce debate and thereby highlight the importance of
more research in that area (Japhet et al., 2015; Martnez-Ferrero et al.,
2016; Baden & Harwood, 2013).

Overall Literature review has covered background research on Firm risk,

Theory on CSR, ISO standard and Value creation, which will be needed to
conduct research on SET 100 Listed Firms at Thailand. Throughout the
paper this background research will be much needed to study further and
research on Thai 100 listed firms for wither CSR has effect reduces market
beta and systematic risk than non csr firms using equilibrium model.
 Chapter 3
Conceptual Framework

The chapter will guide the way of research will be conducted depends from
other previous research on Value creation and Firm risk, hypothesis will be
developed on Thai 100 Listed Firms, to see which CSR attributes
contributes to Thai listed 100 Firms which has been engaged in CSR at
Thailand. At first a brief description of CSR with hypothesis and
Methodology and Model developed to conduct this empirical research.

During the past century, CSR has been defined in a multitude of ways
(Dahlsrud, 2008). These definitions range from performing standard ethical
practices to enhancing the welfare of society. Some even propose that the
concept of CSR has become void of meaning. Others claim that the varying
definitions of CSR are congruent, with each of the definitions relating to the
effects of a business on its stakeholders. Nevertheless, one of the most
complete and frequently cited definitions comes from Archie Carroll (1979),
a business management professor at the University of Georgia: The social
responsibility of business encompasses the economic, legal, ethical, and
discretionary expectations that society has of organizations at a given point
in time (p. 500). Even though it is popular, Carrolls definition is too broad.
A better definition is posited by the Commission of the European
Communities (2006): [CR] is a concept whereby companies integrate social
and environmental concerns in their business operations and in their
interaction with their stakeholders on a voluntary basis. It is about
enterprises deciding to go beyond minimum legal requirements and
obligations stemming from collective agreements in order to address
societal needs. (p. 2) For the purposes of this thesis, CSR is defined as
corporations engaging in voluntary social efforts that transcend legal
regulations (Davis, 1973; Piacentini, MacFadyen, & Eadie, 2000; Van
Marrewijk, 2003; McWilliams & Siegel, 2001). These voluntary social efforts
include charitable giving, environmental activism, and community service.
Data and Research Design
We take data from Listed firms on Thailand SET 100 Firms, which are
contributing to CSR, from financial reports on each individual
companies we can see some reports being made on CSR from that we
deduce (0,1) for CSR the value is 1 for non CSR the value is 0.
List of Firms are taken from www.SET.Co.Th from there we uses the
financial report also SETSMART Database are being used from year
ending 2012 to 2017, as CSR of Thailand reporting is quite weak but
they have strong activity on CSR and many studies have been
conducted on CSR activity at Thailand. The individual Variable will be
taken as.

Operating Marginal utility

CSR Wage
profits of wealth

3 TheModel

3.1 The model setup

Consider an economy where production, asset allocation, and

consumption decisions are made over two dates, 1 and 2. There is a
representative investor and a continuum of firms with unit mass.

Household sector: The representative investor has preferences

defined over lifetime consumption

The relative risk aversion coincident is Y > 0 and the parameter Y < 1
is the rate of time preference. The expectations operator is denoted
by E [.].

There are two types of goods in the economy. Low elasticity of

substitution goods,
which we associate with goods produced by socially responsible
firms (CSR goods), and high
elasticity of substitution goods, which we associate with other firms
(non-CSR goods).8 We label these using the subscripts G and P,
respectively, for green and polluting. A convenient analytical way to
model divergences in the elasticity of substitution across goods is to
use the Dixit-Stiglitz aggregator,

Accordingly, 0 < j < 1 is the elasticity of substitution within cj = cG,

cP goods. A lower elasticity of substitution implies lower price
elasticity of demand and a more loyal demand. We therefore are
interested in the case G < P . This mathematical formulation of
demand loyalty captures two important dimensions of consumer
behavior: consumers that actively seek out firms they see as being
good at CSR and consumers that respond negatively to businesses
that fall below expected ethical standards (e.g. Creyer, 1997).

The parameter a is the share of expenditure allocated to CSR goods

in the industry and is exogenous. In the context of our representative
agent model, captures the size of the market for CSR goods. The
variable measures the fraction of CSR firms in the economy and will
be determined in equilibrium.

Investor is endowed with stocks and with cash W1 > 0 expressed in

units of the aggregate good, which can be used for consumption and
investment. The investor decides on the date 1 consumption, C1,
stock holdings, Di, and the total amount of lending to firms, B, subject
to the date 1 budget constraint,

and given the stock prices Qi and the interest rate r. The presence of

0 Quid on the left hand side of the budget constraint (2)

indicates, as is usual in models with a representative investor, that
the representative investor is both the seller and the buyer of stocks.
The investor decides on the date 2 consumption of the various goods
ci, subject to the date 2 budget constraint:
In the budget constraint, i is the operating profit generated by firm i and

debt repayment by firm is the net profit, and

in this two-period Model it is also a liquidating dividend. W2 denotes the
consumers wealth at the beginning of date 2, w is the wage rate, L is the
amount of labor in elastically supplied and pi is the price of good i. The
investor behaves competitively and takes prices as given

Production sector: At date 1, firms choose which production technology to

invest in. The decision is based on expected operating profitability and
fixed adoption costs. Each firm is endowed with a technology-adoption cost
invest in the CSR technology or a cost
fP > 0 if it chooses the non-CSR technology. The distribution of costs fGi
across firms is a uniform that takes values between 0 and 1. Firm
i finances fi by raising debt Bi and therefore has zero cash flow at date 1.

Note that a higher cost fGi does not translate into a higher benefit for CSR
firms. Instead, all CSR firms have access to the same elasticity of
substitution, G, independently of their fixed cost of investment. This
assumption captures the idea that CSR adoption is not equally costly to all
firms.9 Technically, it introduces decreasing returns to CSR at the industry
level, which helps in the derivation of equilibrium with interior values for .
At date 2, firm i chooses how much to produce of xi in order to maximize
operating profits. Firms act as monopolistic competitors solving:

subject to the equilibrium inverse demand function pi (xi) as well as the

constant returns to scale production technology,
Production of one unit of output requires AJi units of labor input.A i
measures the sensitivity of firm is labor to the productivity shock A and J i
measures the resource intensity of each technology. We make no
assumption regarding the relative magnitudes of NG and NP and of NG and
NP , though some views of CSR might be associated with the assumptions
that CSR firms foster employee loyalty, i.e., NG < NP, or are more resource
intensive, i.e., NG > NP . The economy is subject to an aggregate
productivity shock, A, realized at date 2 before production takes place. The
productivity shock changes the number of labor units needed
to produce consumption goods. High aggregate productivity is
characterized by low values of A. The productivity shock A is assumed to
have bounded support in the positive real
We start by solving the equilibrium at date 2.
Goods with lower elasticity of substitution j , i.e. goods with more loyal
demand, allow Producers to extract higher profits per unit of revenue, all
else equal. To solve for the equilibrium, Walras law requires that a price
normalization be imposed. We impose that the price of the aggregate
consumption good is time invariant, so its price at date 2 equals the price at
date 1, which is 1. This normalization imposes the following

Implicit constraint on prices pl:

The price normalization implies that W2 = R plcldl = C2, from which we

obtain the usual condition for the marginal utility of date-2 wealth with

constant relative risk aversion preferences . The next

proposition describes the date-2 equilibrium as a function of .
Proposition 1 For any interior value of and any aggregate shock A, a
symmetric date-2 equilibrium exists and is unique with goods prices,
In equilibrium, a higher productivity shock (lower A) increases the demand
for labor and thus also increases the wage rate. The sensitivity of the wage
rate to the productivity shock is given by the weighted average of the
sensitivities, N, where the weights are the expenditure shares. Prices of
goods increase or decrease in response to a productivity shock depending
on which types of goods are more sensitive to the productivity shock, as
given by NG-NP. When NG -NP < 0, the production of non-CSR goods
increases in expansions as unit labor costs decrease more for those firms,
leading to an increase in the relative price

Of CSR goods. The opposite occurs if NG -NP > 0. While the relative price
of CSR goods depends on the sign of NG -NP, operating profits for both
firm types, (Rpie), and the marginal utility of date-2 wealth, , depend only
upon the weighted average of the sensitivities, .
Proposition 2 At an interior equilibrium for , the proportion of CSR firms in
the industry

CSR and RiskinEquilibrium We start by describing the properties of net

profits in response to aggregate shocks. Consider he elasticity of net
profits to the aggregate shock for a generic firm j,

This is a measure of a firms operating leverage. Note that we compute the

elasticity with Respect to A 1 so that a high value of A 1 is associated
with upturns and operating leverage is positive. The sensitivity of firms
profits to aggregate shocks depends on the degree of customer loyalty. To
see this, consider the partial equilibrium eect that increased customer
loyalty(lower j) has on operating leverage holding constant. The partial
derivative of operating leverage with respect to j is positive, implying that
a firm with a more loyal demand (lower I) has profits that are less sensitive
to aggregate shocks. The intuition for the result is that a more loyal demand
generates greater profit margins for the firm, which dilutes the effect of the
fixed adoption costs and lowers the firms operating leverage. This partial
equilibrium Result captures the widely held view that a less price elastic
demand gives the firm the Ability to smooth out aggregate fluctuations
better. The next proposition extends this partial equilibrium result by
considering the equilibrium implications of productivity shocks on the net
profits of CSR and non-CSR firms.

Proposition 3 Define the ratio of net profits evaluated at the marginal

CSR firm:

For a sufficiently small expenditure share in CSR, or as shown in

Proposition 2, for a sufficiently small size of the CSR market, < fP , the
profits of CSR firms are less sensitive to productivity shocks than those of
non-CSR firms. That is, net profits of CSR firms decrease in recessions
(high A) but by less than the profits of non-CSR firms, and as a result
R(pie) increases.
CSR and systematic risk

In this model, the expected excess return is a measure of

systematic risk that is determined by the covariance of the
stock return with the intertemporal marginal rate of
substitution, Cov (m, rj). This covariance depends on how
aggregate productivity affects both variables.

Proposition 4 Firm js equilibrium expected stock return in

excess of the risk free rate is:

The proposition gives an expression for firm js expected

excess return. The first term in the expression is an
operating leverage effect. It amplifies the term Cov (Aj,AM)
that captures how profits co-vary with the stochastic
discount factor. This covariance is negative for any risk
aversion parameter R > 0 and thus E (rj -r) > 0 The partial
derivative of expected excess returns with respect to Rj
describes the impact of changes in demand loyalty.
Holding constant, E (rj -r) increases with Rj . Intuitively,
Increased loyalty (lower Rj) reduces the sensitivity of the
firms net profits to aggregate shocks. Such a firm pays a
relatively higher dividend in states of lower consumption
and high marginal utility and is therefore less risky to a risk
adverse investor and worth more. Thus, the model
translates the view regarding how net profits change over
the business cycle for firms with more loyal demand to a
statement about systematic risk. The more loyal demand,
by increasing firm profits and stock prices, produces a
feedback equilibrium effect via an increase in the
proportion of CSR firms, . The proposition gives a stark
result regarding the equilibrium riskiness of CSR versus
non-CSR firms. We show that the proportion of CSR firms
determines the relative riskiness of CSR versus non-CSR
firms:

infra-marginal CSR firms also have higher prices and lower expected returns than
non-CSR firms.

higher fixed adoption costs, operating leverage and systematic risk than
non-CSR firms. By continuity, infra-marginal firms with fixed costs close to
also have higher expected returns, but there may be firms with low
enough Systematic risk can also
be measured with respect to the market return. Define the value-weighted
market return as

Proposition 5 Consider firm

This proposition
compares the level of systematic risk between CSR and non-CSR firms.
Consider an equilibrium where the fraction of CSR firms is not too large, i.e

(or In such an equilibrium, the marginal CSR firm has lower

Beta than a non-CSR firm.

In
addition, because for any infra-marginal CSR firm
j, then . Therefore, if - fP , then the average CSR
firm has lower market than the average non-CSR firm. Now
consider an equilibrium where the fraction of CSR firms is
suciently large, i.e., > fP . When > fP (or alpha alpha hat),
the marginal CSR firm has higher market than non-CSR firms.
The reason is that when the proportion of CSR firms is larger, the
marginal CSR firm has high fixed adoption costs and high
operating leverage. Hence, high systematic risk. The next
proposition indicates the determinants of changes in systematic
risk for CSR and non-CSR firms. We are not able to derive
general analytical results for firm-level betas but only for average
betas. We therefore construct the weighted average market Beta
of CSR firms,
Straightforward dierentiation of expression (17) yields:

Proposition 6 The weighted average market Beta of CSR firms

decreases with: 1) lower elasticity of substitution in the industry
(decrease in thetaG and thetaP , keeping thetaP-theta G
constant); and, 2) lower expenditure share for CSR goods
(decrease in Beta). Together, Propositions 5 and 6 imply that if
firm-level beta for CSR firms is lower than for non-CSR firms in
two industries, then that dierence is larger in the industry with
lower elasticity of substitution across goods, and in the industry
with a lower expenditure share for CSR goods.

Prediction 1 Firm-level CSR is associated with lower firm-level

systematic risk. We test this prediction using the sign and the
significance of the slope cofficient on a regression of firm-level
systematic risk on the firms CSR attributes. In this regression,
we control for known determinants of systematic risk. In addition,
we control for measures of customer loyalty that relate to
advertising to emphasize that our effect is not driven by
CSR proxying for that.

In next prediction, we emphasize the aspect of the model that

relates to the degree of substitutability across goods, which is
used to construct our model of customer loyalty. The prediction
arises directly from Proposition 6. We use measures of product
and industry differentiation and assume that greater differentiation
is a proxy for lower elasticity of substitution.
Prediction 2 Firm-level CSR is associated with lower firm-level
systematic risk, particularly with greater product differentiation.

The main reason is that consumers are aware of firms supply

chains, which creates an incentive for firms in other industries to
also engage in CSR. That is, consumers demand
better CSR policies from the firms they buy from, from the firms
that supply to these firms, and so on. For example, Fortune
magazine recently quoted Ma Jun, a noted Chinese
environmental activist, about Apples turnaround in their
sustainability policies and their This distinguishing feature of CSR
is likely to be critical to identify its effects vis--vis other
ways that firms use to acquire customer loyalty, such as
advertising efforts motivating key suppliers (Apple does a 180
with suppliers in China, June 2013).

The third main model prediction is also obtained from Proposition

6. Strictly speaking, the proposition says that the CSR-risk
relation is weaker in industries where the expenditure
share of CSR goods is higher. Intuitively, when consumers spend
more on CSR goods, then CSR firms capture a greater share of
the market and have higher profit margins. This in turn leads more
firms to adopt CSR policies, attracting firms with higher adoption
costs. These higher adoption costs increase operating leverage
and systematic risk. This prediction captures the idea of
decreasing returns to CSR. In the absence of an industry panel of
data on CSR expenditure shares,

Prediction 3 Firm-level CSR is associated with lower firm-level

systematic risk, but the effect is weaker in industries with higher
relative market capitalization of CSR firms. The next prediction is
obtained from Proposition 3. This proposition describes how the
ratio of CSR profits to non-CSR profits co-moves with aggregate
productivity shocks, which are the sole driver of business cycle
fluctuations in the model. If CSR firms are less risky than non-
CSR firms, then the model predicts that their net profits do not
increase as much as those of non-CSR firms in economic
upturns. Formally:

Prediction 4 The ratio of CSR firm profits relative to non-CSR firm

profits decreases in business cycle expansions. It is interesting to
contrast this prediction with the prediction from the alternative
view that CSR goods are superior goods. Under this alternative
view, CSR firms profits should co-move more with the business
cycle, increasing at a faster pace with improving economic
conditions than non-CSR firms profits. This would also make
CSR firms riskier.

The last prediction is about the valuations of CSR versus non-

CSR firms. In equilibrium Qp=QG so that firm values are equal for
the marginal CSR firm and all non-CSR firms. Recall that the firm
value for the marginal CSR firm is Because
infra-marginal CSR firms have lower fixed costs of adopting the
CSR technology, the net benefits of CSR adoption are higher for
those firms. Thus the firm values have to be higher
for the infra-marginal firms, i.e.

Prediction 5 Firm-level CSR is associated with higher firm value.

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