Returns on CSR Require Quality and Innovation

Returns on CSR Require Quality and Innovation

Lauren Rakowski May 27, 2011
This study investigates whether CSR improves long-term financial performance by satisfying customers. It finds returns on CSR can be positive or negative depending on a firm’s innovation and product quality. Firms with CSR initiatives have higher financial returns when they produce high quality and innovative products. Yet, in firms that are not innovative, CSR initiatives may actually lower market value. Managers can leverage CSR for higher market returns by aligning strategy with CSR initiatives and maintaining product quality and innovation.

Background

CSR has been shown to benefit firms by increasing customer goodwill and employee commitment. Up to 90 percent of Fortune 500 companies engage in CSR, but the connection between CSR and market value is not well defined. This study looks at how customer satisfaction provides the link between CSR and market value. It also analyzes how innovation and product quality influence this relationship.

Findings

When firms are innovative and have good product quality, CSR improves customer satisfaction, increasing financial returns. A firm’s CSR, coupled with innovation and quality, make customers feel connected to it, which leads to customer loyalty. For a company with a market value of roughly $48 billion, a modest increase in CSR ratings resulted in about $17 million more average profits in subsequent years.

When firms are not innovative, CSR decreases customer satisfaction, hurting financial returns. Market value may fall because customers won’t buy products that cannot keep up with their needs. When firms that are not innovative use resources to engage in CSR (rather than product improvement) customers see these firms as manipulative. Lack of innovation also signals that firms are not competitive, outweighing positive benefits of CSR and leading investors to doubt the firm’s future performance.

Implications for Managers

Implications for Researchers

This study extends previous research by uncovering that customer satisfaction partially mediates the relationship between CSR and improved financial performance. Future can explain why firms with CSR but low innovation have decreased market value. For example, do firms with low corporate abilities invest in less influential CSR initiatives, like cash donations, which reduce customer satisfaction and returns?

Methods

This study used longitudinal data to find the link between CSR and firm market value. Data were taken on Fortune 500 companies from 2001-2004 using COMPUSTAT, FAMA, ACSI, CMR and CRSP. Market value was measured with Tobin’s q and stock returns.
Luo, Xueming, & Bhattacharya, C.B. (2006). Corporate Social Responsibility, Customer Satisfaction, and Market Value. Journal of Marketing, 70(4): 1-18.

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