Value relevance of multifaceted corporate social performance: how do country-specific factors matter?

The study explores the complex and often inconclusive relationship between corporate social performance (CSP) and shareholder value. While stakeholder theory suggests that strong CSP enhances shareholder value by fostering positive relationships with stakeholders and attracting resources, shareholder theory argues that CSP initiatives may divert resources and reduce profitability. Existing literature lacks consensus, with studies yielding conflicting results regarding CSP's impact on value creation, destruction, or irrelevance. This study aims to address this gap by examining the valuation effect of disaggregated CSP dimensions, considering their impact on different stakeholder groups and the moderating role of country-specific factors. The study's significance lies in its potential to provide clarity on how companies can effectively operationalize CSP to create value for shareholders, recognizing the multifaceted nature of CSP and the influence of the national context.

The literature review examines existing research on CSP measurement and shareholder value metrics. Regarding CSP, the review highlights the limitations of aggregate measures, emphasizing the need for a multidimensional approach considering the effects on different stakeholder groups. Studies examining disaggregated CSP dimensions show varying impacts on firm performance and risk, with some dimensions (e.g., community, workforce) showing stronger positive effects than others (e.g., human rights, environment). The literature also discusses various measures of shareholder value, including earnings per share, return on equity, and earnings yield, with earnings yield highlighted as a robust measure for valuation analysis. The value relevance of CSP is a contested area with various explanations proposed for inconsistent findings, including measurement issues, endogeneity, and model misspecifications. Research comparing developed and emerging markets highlights differences in CSP practices and valuation effects, attributed to variations in institutional and cultural contexts.

The study utilizes a sample of 668 public companies in eight Asian-Pacific emerging markets (China, Hong Kong, India, Indonesia, Malaysia, Philippines, Taiwan, and Thailand) over the period 2010-2020. CSP is measured using Refinitiv Eikon's ESG data, encompassing an aggregate social pillar score (SOC) and disaggregated scores for community (SOC1), human rights (SOC2), product responsibility (SOC3), and workforce (SOC4). Shareholder value is proxied by earnings yield (ENY). The study employs two main analytical approaches: 1. **Panel regression analysis:** This examines the relationship between ENY and CSP (both aggregate and disaggregated), controlling for factors like dividend payout ratio, earnings growth rate, risk-free rate, equity risk premium, market capitalization, and debt-to-asset ratio. Firm and year fixed effects are included to account for unobserved heterogeneity and time-varying factors. 2. **Structural Equation Modeling (SEM):** This approach treats CSP as a latent variable measured by SOC1-SOC4, explicitly addressing measurement errors that can bias regression results. SEM is used to analyze the direct effects of CSP dimensions on ENY and the moderating effects of country-specific factors. Country-specific factors (moderators) include income per capita (economic development), the corruption perception index (political system), and humane orientation (culture) from the GLOBE project. Interaction terms between CSP and these moderators are included in the SEM model to test for moderating effects. Importance-performance analysis (IPA) is used to prioritize resource allocation among CSP dimensions based on their importance (standardized factor loadings from SEM) and performance (median category scores).

The key findings are as follows: 1. **Aggregate CSP measure:** Regression analysis shows that the aggregate CSP measure (SOC) does not significantly impact shareholder value, suggesting an aggregation bias that masks heterogeneous effects of individual dimensions. 2. **Disaggregated CSP dimensions:** Regression analysis reveals that only the workforce dimension (SOC4) significantly and positively influences stock value. However, SEM, accounting for measurement error, demonstrates that all CSP dimensions positively and significantly influence shareholder value. 3. **Narrowly vs. broadly focused CSP:** Both regression and SEM analyses reveal that narrowly focused CSP dimensions (community, product responsibility, workforce) have stronger valuation effects than the broadly focused human rights dimension. 4. **Moderating effects of country factors:** SEM results show that the positive relationship between CSP and shareholder value is stronger in countries with higher income per capita (economic development) and lower corruption (political system). Humane orientation (culture) does not significantly moderate this relationship. 5. **Importance-performance analysis (IPA):** IPA suggests prioritizing resource allocation to improve human rights, then community, product responsibility, and lastly workforce, based on their performance-to-importance ratios.

The findings highlight the importance of considering the multifaceted nature of CSP and the context-specific impacts of different dimensions. The initial regression results, showing insignificant effects of aggregate CSP, underscore the limitations of relying on composite measures that may mask the heterogeneous effects of individual dimensions. The SEM analysis, which accounts for measurement error, provides more robust evidence of a positive relationship between CSP and shareholder value. This supports stakeholder theory, suggesting that companies that address the needs of various stakeholder groups can enhance their financial performance. The differential effects of narrowly versus broadly focused CSP dimensions highlight the importance of strategic resource allocation. The moderating role of economic development and corruption underscores the importance of considering national contexts when implementing CSP strategies. The lack of moderating effect of humane orientation suggests that cultural factors may not always significantly influence the relationship between CSP and shareholder value in this specific context.

This study contributes to the literature by demonstrating the importance of a disaggregated approach to examining the value relevance of CSP, using SEM to address measurement error issues and incorporate country-specific factors. The findings provide valuable guidance for managers seeking to enhance shareholder value through CSP, emphasizing the need for a nuanced understanding of the diverse impacts of various dimensions and national contexts. Future research could extend this analysis to include other relevant moderating factors, such as political uncertainty and the degree of multinationality, and explore the environmental and governance dimensions of ESG. Further research could also investigate the role of regulatory stringency in different markets on the relationship between CSP and shareholder value.

The study's focus on Asian-Pacific emerging markets limits the generalizability of findings to other regions. The reliance on Refinitiv Eikon's ESG data may introduce biases associated with the data collection and measurement methodology. The study does not explicitly examine all possible mediating mechanisms through which CSP might influence shareholder value, nor does it consider the potential impact of political uncertainty and firm multinationality. The sample size is reduced when examining the moderating effects of country factors, which may affect statistical power.