How does social responsibility attribute to the value of a product or service?

“Corporate social responsibility (CSR) occurs when firms engage in activity that appears to advance social agenda beyond that which is required by law.” (Siegel and Vitaliano, 2007). The importance of CSR has been growing in the last few years. In January of 2018, Larry Fink, the CEO of BlackRock, called for the corporate CEOs to think not just about profits, but also about making a “positive contribution to society”.1 In August of 2019 more than 180 of CEOs pledged that their firms' purpose was no longer to serve their owners alone, but customers, employees, suppliers and communities, too.2

Harjoto and Jo (2011) summarize the existing theories as to why firms undertake CSR and argue that one of the ways firms use CSR is to signal product quality.3 Such signals deal with adverse selection arising from information asymmetry about product quality (Kirmani and Rao, 2000). As a result, while CSR is costly, it has strategic implications and is a source of competitive advantage for companies across different industries (Baron, 2001; McWilliams et al., 2006; Porter and Kramer, 2006). However, the literature on the empirical relationship between CSR and firm value is inconclusive, with many of the studies showing a positive impact of CSR on firm value, but some providing evidence in the opposite direction.4 This relationship may be unclear because of the lack of understanding about the mechanisms through which CSR affects firm value (Servaes and Tamayo, 2013). Several studies argue that there is an indirect link between CSR and firm value (e.g. Servaes and Tamayo, 2013; Saeidi et al., 2015; Galbreath and Shum, 2012). However, the channels through which CSR creates value are still not well understood.

This paper investigates if CSR affects firm value through improving perceived product quality and serving as a product differentiation strategy. More specifically, we investigate whether CSR activities, especially those that are visible to customers, such as environmental and community CSR, have an effect on product market perception, and indirectly on firm value.

A survey by Accenture and United Nations Global Compact finds that 72% of the CEOs consider “brand, trust, and reputation” (2010:14) as the main reasons for undertaking CSR (Flammer, 2013). A survey of executives and investors conducted by the Economist Intelligence Unit in 2005 found that most of them (61%) believe that brand enhancement is the most important business benefit of CSR.5 After reviewing the literature, Kitzmueller and Shimshack (2012) conclude that firms use CSR primarily to differentiate their product and signal its quality. Furthermore, the resource-based view of the firm suggests that companies may engage in CSR to enhance their brand, reputation, and trust (Barney, 1991; Porter, 1991; Porter and Kramer, 2006, Porter and Kramer, 2011).

The literature on the relationship between CSR and firm value usually refers to the stakeholder theory, which predicts that CSR positively impacts shareholders' wealth because focusing on the interests of other stakeholders increases their willingness to support firms' operations. CSR may improve customer perception and satisfaction, and in this way contribute to the enhancement of product market perception. Although the customer channel is not the only possible channel that can explain the relationship between CSR and firm value, customers' perception and behavior clearly affect a company's financial performance and value. We focus on the CSR activities that are most visible to customers, more specifically environmental and community CSR, consistent with findings from previous studies.6

Using a large sample of companies across different industries for the period 2001–2014, we start by providing evidence of the relationship between CSR and product market perception. Previous studies on this relationship are based on small-scale surveys, small samples, or have a limited focus.7 We use a large sample based on a proprietary database of customer brand evaluation. The measures we use rely on a customer survey-based approach and, therefore, reflect the product market perception, in contrast with models based on financial measures or expert evaluation, which do not reflect customers' perception.

We find that CSR positively affects product market perception. This result is economically meaningful: one standard deviation increase in the CSR measure increases the product market perception measure by 10.5%. The impact is significant for both the community and environmental components of CSR. When breaking CSR into strengths and concerns, we find that both community and environmental strengths positively impact product market perception, but the negative impact of concerns is not significant. This result suggests that the strengths components of CSR are more visible. We find that there is no association between most other components of CSR, namely, employee friendliness, diversity, corporate governance, and product market perception. In addition, the positive association between community and environmental CSR is most pronounced for firms with standardized rather than differentiated goods, and for companies in competitive industries. We also find that our results are most pronounced for a more refined measure of perceived product quality.

The results that show a positive association between community and environmental CSR and product market perception are subject to endogeneity concerns. Our results may suffer from reverse causality: it is possible that firms with strong product market perception can afford to spend more on CSR. Another potential issue that could impact our results is the omitted variables bias. We address these issues in several ways. First, we do an instrumental variable analysis using per capita CO2 emissions from fossil fuel combustion and the percentage of population that volunteer for non-profit and community organizations in the state where the firm is headquartered as instruments. Second, we do a quasi-natural experiment to examine the effect of BP Oil Spill on product market perception of firms and find that the impact of environmental and community related CSR activities on product perception is stronger after the spill for energy firms. This result suggests that these activities become more important after public relations shock to the firms in the energy industry. Overall, these analyses suggest that our results are robust to endogeneity concerns.

After showing that CSR is associated with a favorable product market perception, we analyze the indirect link between CSR and firm value, as measured by the Tobin's Q and profit margin. We find that the product market perception is significantly positively related to firm value and profit margins. One standard deviation change in product market perception increases firm value by 5.8%. Mediation analysis suggests that partial mediation occurs when product market perception is included in the Tobin's Q regression together with CSR. These results confirm our prediction that product market perception is a channel through which CSR creates firm value.

Our paper contributes to a growing body of finance literature on CSR (e.g., Ferrell et al., 2016; Kruger, 2015; Mishra, 2017; Erhemjamts et al., 2013; Deng et al., 2013; Fatemi et al., 2015; Renneboog et al., 2008; Liang and Renneboog, 2017; Lins et al., 2017; Giuli and Kostovetsky, 2014; Boone and Uysal, 2018; Adhikari, 2016). It also contributes to a relatively new examination of product market perception (Larkin, 2013; Frieder and Subrahmanyam, 2005). This paper is the first to show the heterogeneous effect of CSR on product market perception for standardized versus differentiated goods industries. This paper is also the first to examine product market perception as a channel through which CSR affects firm value. Thus, we contribute to the literature that suggests that CSR has an indirect effect on firm value (Servaes and Tamayo, 2013; Saeidi et al., 2015; Luo and Bhattacharya, 2006). We also contribute to the large body of literature that finds a positive effect of CSR on firm value, supporting the stakeholder view of the firm (e.g., Orlitzky et al., 2003; Van Beurden and Gössling, 2008; McWilliams et al., 2006).

Our paper is different from previous studies on CSR and customer perception in several ways. We establish a direct relationship between CSR and product market perception. Our results suggest that the impact of CSR on product market perception is more significant for standardized goods and in competitive industries. Servaes and Tamayo (2013) use advertising expenditures as a measure of customer awareness. They argue that advertising creates awareness about CSR among customers and can be a product differentiating strategy that enhances firm value. However, they do not test the direct impact of CSR on product market perception. Furthermore, advertising is not a good proxy for brand value and consumer loyalty (Larkin, 2013, page 235), since it could facilitate competition rather than create barriers to entry, and may be just one of the many tools used in strategic brand management. Our measure, on the other hand, captures the outcome of strategic brand management. Our paper extends the results in Melo and Galan (2011) and Torres et al. (2012), who find that CSR has a positive effect on product market perception. However, both of these papers use a much smaller sample and measures of product market perception that do not reflect customers' brand perception.8 We also contribute to the literature by controlling for endogeneity and examining the effect of CSR in standardized versus differentiated product, as well as competitive industries.

The rest of the paper is organized as follows: Section 2 reviews previous literature; Section 3 describes the data; Section 4 presents and discusses the results of the analysis of the relationship between CSR and product market perception, and the indirect link between CSR and firm value. Section 5 concludes.

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  What is the value of social responsibility?

  Social responsibility benefits society and the environment while lessening negative impacts on them. Companies engaging in social responsibility can do so in a number of ways, including making changes that benefit the environment, engaging in ethical labor practices, promoting volunteering, and philanthropy.

  What is the importance of social responsibility in a business?

  Socially responsible companies cultivate positive brand recognition, increase customer loyalty, and attract top-tier employees. These elements are among the keys to achieving increased profitability and long-term financial success.

  How does corporate social responsibility create value for consumers?

  CSR can provide three forms of value to consumers: emotional, social, and functional. Each of these enhances or diminishes the overall value proposition for consumers. Further, value created by one form of CSR can either enhance or diminish other product attributes.

  How does social responsibility influences buying decisions?

  Supporting issues they care about Many people see their buying decisions as a way to support issues they care about. When companies have values which align with consumers, this creates a sense of community and solidarity around their brand which is more likely to increase brand loyalty.