The Impact of CSR on Firm Value: The Role of Customer Awareness – Summary

Written by: Garima Singh Bhadauria, Aniket Navghare, Neha Ingale, Bhavesh Pandey

One of the articles that our professor of Financial Management ask us to summarize was: ‘The Impact of Corporate Social Responsibility on Firm Value: The Role of Customer Awareness’ it was published online in ‘Articles in Advance’ on January 8, 2013, by Henri Servaes and Ane Tamayo, and summarized by 4 of our classmates of the MBA 2018-2019 generation.

This article intends to address the question – Do CSR activities create value for the firm’s shareholders?  Instead of identifying a direct link between CSR and firm’s value, the authors propose an indirect link.  It suggests that a necessary condition for CSR to modify consumer behavior, and hence to affect the firm’s value, is consumers’ awareness of the firm’s CSR activities, but must important, it intends to find the correlation between CSR and firm’s value with respect to three scenarios – consumers having a high awareness of firm’s CSR activities, consumers having low awareness of firm’s CSR activities and firms with a poor prior reputation amongst consumers.

CSR activities can enhance profitability and hence, value of the firm. However, these activities are costly, and in most cases the cost does not outweigh the benefits. Thus, the focus is on consumers and advertising intensity, as advertising by firm reduces the information gap between itself and the consumer. Through advertising, consumers can find out about firm’s CSR involvement and reward the firm for its CSR efforts. Thus, CSR can be considered as a product attribute and therefore a strategic investment to maximize firm’s value. The intensity of positive CSR information is stronger for firms with a good prior reputation and may be negative for firms with a poor reputation. By engaging in CSR, firms are able to identify themselves as having better quality products as customers realize that only firms that care about product quality are wiling to invest in CSR activities.

To create a sample, Domini 400 Social Index companies have been excluded. KLD divides CSR in 13 categories – community, diversity, employment, environment, human rights, product, alcohol, gaming, firearms, military, nuclear, tobacco, and corporate governance. For this study, corporate governance is not considered as its a mechanism that allows shareholders to exert control on their managers. Also, product and industry categories were removed. For each of the categories considered, KLD Stats contains data about strengths and concerns. The number of strengths and concerns for each category have evolved over time, and therefore, they have been scaled to obtain two indices that range from 0 to 1. To achieve this, the study divided number of strengths/concerns for each firm year within each CSR category by maximum possible number of strengths/concerns in each category year. Then, concerns index was subtracted from strengths index to obtain a measure of net CSR involvement in each area that ranges from -1 to +1 each year. For more conservative measure of CSR, community, diversity, employees, environment, and human rights categories were added into one overall net CSR measure that ranges from -5 to +5. For a broader measure, product and industry categories were added, which made the overall net CSR measure from -7 to +7.

This data was merged with the nonfinancial firms from the Compustat database to arrive at a sample. The number of observations obtained remains at around 400 from year 1991 to 2000, but expands to more than 2000 observations till year 2005. To measure performance, the study employs a parameter ‘Tobin’s q’, which is market value of the firm divided by the replacement value of its assets, and captures how much value a firm creates with its asset base. Tobin’s q as (book value of assets – book value of equity – deferred taxes + market value of equity)/book value of assets. The advantage of using Tobin’s q over profitability is that profitability is a short-term measure, whereas Tobin’s q is a long-term measure because it is based on the market value of the firm, and it can be possible that a firm sacrifices profitability to engage in CSR that are in long-term interest of the firm.

To check whether advertising increases awareness of CSR activities, a random sample of 100 from the main sample was selected and Factiva database was used for mentions of CSR or related activities. The linear regression, number of CSR press sites = f (advertising intensity, total assets, year dummies), is estimated. The study controls for firm size, as larger companies may receive more press cites. The coefficient on advertising intensity in the model for all press cites is 3,596, with a p-value of 0.00. For CSR press cites, the coefficient on advertising intensity is 11.15 with a p-value of 0.05. The effects are even stronger when advertising is lagged by one year; the coefficient on all press cites increases to 7,095 (p-value of 0.01) and the coefficient on CSR press cites increases to 16.7 (p-value of 0.07). These results indicate that firms that advertise more receive more press coverage, suggesting that advertising enhances awareness about the company.

To examine whether awareness proxied by advertising intensity enhances the CSR impact on firm’s value, the study estimates panel regressions of Tobin’s q as a function of CSR involvement and an interaction term between the CSR measure and advertising intensity. Three control variables – size, advertising intensity and R&D intensity were included. Size is the log of the book value of assets, advertising intensity is advertising expenditure divided by sales and R&D intensity is R&D expenditure divided by sales. The study estimates regression models using ordinary least squares (OLS). As the same firm can enter the regression multiple times, study has clustered standard errors by firm to address the lack of independence of the observations. All standard errors are also corrected for heteroscedasticity and all models include year dummies. The study employs three measures of CSR: the conservative measure, which includes five KLD categories (community, diversity, employees, environment, human rights); an expanded measure, which also includes industry concerns; and the broadest measure, which includes industry concerns and the product category. For each measure, two specifications are reported: the first specification is estimated without firm fixed effects, the second specification is estimated with the inclusion of firm fixed effects, which control for time-invariant unobservable firm characteristics that may drive both valuation and CSR involvement.

The study finds a positive correlation between CSR measure and firm value in the models estimated without time-fixed effects. The interaction between advertising intensity and the CSR measure is significantly positive. Thus, firms benefit from CSR if they advertise.

It could be possible that CSR activities are employed as a signal of product quality in advertising intensive industries. The study includes industry-median advertising expenditures as well as firm advertising expenditures. According to the findings, the coefficient of interaction between CSR activities and firm-level advertising expenditure is positive and significant, but that is not the case for the interaction between CSR activities and industry-level advertising expenditures.

In conclusion, the article concludes four points. First, CSR activities can enhance firm value for firms with high public awareness, as proxied by advertising intensity. However, firms with high public awareness are also penalized more when there are CSR concerns. Second, for firms with low public awareness, the impact of CSR activities on firm value is either insignificant or negative. Third, advertising has a negative impact on the CSR– value relation if there is an inconsistency between the firm’s CSR efforts and the company’s overall reputation. Fourth, after including firm fixed effects there is no direct relation between CSR and firm value.

Learnings from the article:

  • CSR should focus on social aspects and stakeholders but not just shareholders.
  • Corporate governance, product and industry category should not find a place in CSR as this will show that firms with high quality of products are good with CSR.
  • The firms who advertise intensely tend to receive more customer awareness than the firms who do not advertise, as it creates awareness among the buyers over the firms CSR activities.
  • Firms prior reputation must be kept in mind before implementing any CSR related investment.

Real world implications:

  • It’s imperative to study the reputation firm has in the market. If the reputation is good, CSR efforts should be put to narrow the gap between the stakeholders and the products delivered by the firm.
  • The CSR acts as a positive catalyst for the firms with good reputation in the market, so customer awareness needs to be created so that the CSR involvement of the company can be rewarded.
  • A practical and viable approach will always be to create transparency by advertise intensely if they are putting investment and time in CSR activities. It’s not impactful for the firm if it is spending on CSR activities without publicizing them, incurring the cost without knowing the benefits.
  • Firms should also be aware of negative impacts of advertising false information as todays consumer and investors are becoming smart about their choices and responsibilities.


Henri Servaes, Ane Tamayo, (2013) The Impact of Corporate Social Responsibility on Firm Value: The Role of Customer Awareness. Management Science 59(5):1045-1061.

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