Giving CSR a run for its money

Abstract: This paper studies the link between Corporate Social Performance (CSP) and Corporate Financial Performance (CFP). We find no indication of an existing relationship between CSP and accounting/market-based CFP when using an aggregated CSP score, in support of neutrality theory. When expanding our analysis by disaggregating CSP into environmental, social and corporate governance (ESG) domains, we observe that results differ depending on what CSR rater is used to measure CSP. We compare two major CSR raters, MSCI KLD and Thomson Reuters ASSET4, and show that there is moderate convergent validity between the two, which could be a major reason why results in this field have over the past 35 years been heterogeneous. Building on legitimacy theory, our results suggest that companies in polluting industries have more to gain financially from adopting environmental practices than do companies in non-polluting industries. After using numerous econometric techniques to partially account for potential endogeneity, our results do not change significantly.