International Journal of Productivity and Performance Management

Managing corporate performance: Investigating the relationship between corporate

social responsibility and financial performance in emerging markets
Güler Aras Asl# Aybars Ozlem Kutlu
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Managing
Managing corporate performance corporate
Investigating the relationship between performance
corporate social responsibility and financial
performance in emerging markets 229
Güler Aras Received October 2008
Yildiz Technical University, Istanbul, Turkey Revised April 2009
Accepted April 2009
Aslı Aybars
Bahcesehir University, Istanbul, Turkey, and
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Ozlem Kutlu
Yildiz Technical University, Istanbul, Turkey

Abstract
Purpose – Corporate social responsibility is important and fundamental to the sustainable
operations of corporations. Similarly financial performance is undoubtedly fundamental to the
continuing operating of any corporation. This paper aims to investigate the relationship between
corporate social responsibility and firm financial performance.
Design/methodology/approach – The main part of this paper is based upon an exploration of the
relationship between corporate social responsibility and financial performance in developing
countries. The authors do this by investigating the Istanbul Stock Exchange (ISE) 100 index
companies and their social responsibility policy and financial indicators. The relationship between
CSR and financial performance is empirically examined between 2005 and 2007 with different
approaches and measurement methods. The authors show that some causality is related to lagging
between periods for financial performance and CSR. Based upon previous empirical studies, this study
conducts the analysis based on the assumption that there may be a relationship between firm size,
profitability, risk level and CSR.
Findings – In doing this analysis the authors found a relationship between firm size and corporate
social responsibility. However the authors were not able to find any significant relationship between
corporate social responsibility and financial performance/profitability.
Research limitations/implications – The paper has implications in enhancing the understanding
of performance management through understanding the relationship between corporate social
responsibility and financial performance particularly in a developing country, although it is
necessarily limited by the size of the sample.
Originality/value – This paper increases the understanding of the relationship between corporate
social responsibility and financial performance. This research is also the first research that has
examined Turkish companies.
Keywords Corporate social responsibility, Financial performance, Profit, Economic sustainability
Paper type Research paper

Introduction International Journal of Productivity

Corporate social responsibility (CSR) is an important issue in contemporary and Performance Management
Vol. 59 No. 3, 2010
international debates. In the past two decades, CSR appears to have become more pp. 229-254
ubiquitous and perceived as being relevant to corporations all over the world (Aras and q Emerald Group Publishing Limited
1741-0401
Crowther, 2008a). Moreover the link between CSR and business performance has DOI 10.1108/17410401011023573
 IJPPM become largely unquestioned. There have been various studies undertaken to
59,3 investigate this important issue. Consequently much of the previous research
regarding CSR deals with this issue and with the problems in the development of
standards for managing and reporting such indeterminate activity. CSR is problematic
as it is often perceived that there is a dichotomy between CSR activity and financial
performance with one being deleterious to the other and corporations having an
230 imperative to pursue shareholder value. Moreover there is no agreed upon definition of
exactly what constitutes CSR (Ortiz Martinez and Crowther, 2005) and therefore no
agreed upon basis for measuring that activity and relating it to the various dimensions
of corporate performance. Both academics and practitioners point to Howard Bowen’s
Social Responsibilities of the Businessman (Bowen, 1953) as the initial attempt to
thoroughly examine and analyse the relationship between corporations and society (for
example, Carroll, 1979; Preston, 1975; Wartick and Cochran, 1985). Later on during the
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1970s, most of the work conducted by the scholars and practitioners focused on the
application process of CSR in the business and social environment. Fitch (1976) studied
in depth the best procedure for the firm that desires to become socially responsible. In
his work, applied behaviour analysis is used as a method of social problem solution.
Murray (1976) concentrated on the social response process in the commercial banking
industry to explore how the banks respond to different social pressures.
There have been many theoretical and empirical debates about the relationship
between corporate social performance and firm financial performance (see for example,
Aras and Crowther, 2007). The relationship between CSR and financial performance
has been empirically examined by one hundred twenty-seven published studies
between 1972 and 2002 with different measurement methods (Margolis and Walsh,
2003). In these studies basically two types of financial performance measures have
been used in order to investigate the link between different aspects of firm performance
and CSR. The first one is the accounting based financial performance measures but this
method has certain drawbacks. It only shows historical firm performance, can be
affected by the manipulation of the managers and produces incomparable results
between firms because of the different accounting procedures applied. The
characteristics of different sectors and the risks associated with them should also be
taken into consideration when using accounting based measures. To deal with the
stated short comings, stock-market-based measures can be used to analyse firm
financial performance. The benefits associated with this second type of measure are
that they are less dependent on varying accounting measures applied by firms and on
managerial manipulations. This type of measure is also successful at attaining the
companies’ future economic earnings rather than past performance. However, the
shortcoming of this method is that the investors’ perception of the company may not be
enough to gauge firm financial performance (McGuire et al., 1988; Ullmann, 1985).
Some of these studies have indicated a positive relationship between CSR and
financial performance, whereas others have not. One of the studies that investigated
this relationship from the perspective of environmental management practices (EMPs)
is that of Montabon et al. (2007). They conducted an empirical study to investigate the
link between financial performance and EMPs. As a result of the application of content
analysis methodology on a set of 45 corporate reports, they found a positive and
significant relationship between firm performance and the EMPs (Montabon et al.,
 2007). Another study was conducted by Orlitzky et al. (2003) who found a strong Managing
correlation between corporate financial performance and corporate corporate
social/environmental performance. This relationship is more strongly pronounced
for the accounting based measures of performance than the market-based measures of performance
performance (Orlitzky et al., 2003). In the work of Becchetti et al. (2005) covering a
sample of around 1,000 firms in a 13-year interval, it was observed that total sales per
employee were significantly higher while return on equity were significantly lower 231
when large caps or R&D investing firms were not in the sample and returns on capital
invested and on investment were always lower in socially responsible firms. Table I
lists some of the recent studies related to firm performance and CSR.
There is generally expected to be a positive relationship between CSR and financial
performance according to both modern stakeholder theory and agency theory.
Contrarily and probably the most important point is that what the stakeholders are
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concerned about in developing/emerging economies is financial performance. Investors

are easily able to get excess returns in emerging markets so they do not take into
account long-term sustainability and corporate responsibility in these markets. Thus,
it is not possible to find the link between CSR and financial performance. The second
important point is concerned with how CSR and financial performance are measured.
Three methods have mainly been used by prior studies for the measurement of CSR
(McGuire et al., 1988). The first method is the expert evaluation of corporate policies.
The accuracy of this method depends on the access of the investigator to full scope of
activities of the firm and the expertise of the investigator (Abbott and Monsen, 1979).
The second method is the content analysis of annual reports and other corporate
documents. Weber (1990) defines content analysis as “a set of procedures to make valid
inferences from text”. Krippendorff (2004, p. 18) states that “content analysis is a
research technique for making replicable and valid inferences from texts (or other
meaningful matter) to the contexts of their use”. Content analysis has important
advantages when compared to the other methods. The procedure applied in this
method is substantially objective after the variables employed are chosen and also
enables the usage of larger samples. However, this method has some disadvantages.
The subjectivity of the selection of the variables and the possible difference between
what the firms state they are doing in their annual reports and what they are actually
doing are the major drawbacks (Cochran and Wood, 1984). The performance of
companies in controlling pollution as a proxy measure is the third method for the
measurement of CSR (McGuire et al., 1988). Chen and Metcalf (1980) and Spicer (1978)
used pollution control in their studies for the measurement of CSR. However the usage
of pollution control as a proxy measure can bias the results where there are differences
between the industries in terms of pollution; this measure also emphasizes only one
dimension of social responsibility. All of these different measurement methods and
approaches produce different results. The last important point related to CSR and
financial performance measurement concerns data collection and reliability of the
sample. Mostly CSR data relies on company reporting activity that can be manipulated
and/or misreported. So data collection and reliability testing are always problematic in
these studies.
Some studies explore the link between firm size and CSR. However, these studies
produce ambiguous results. Udayasankar (2008) found a U-shaped relationship
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CSR
59,3

232

Table I.
IJPPM

Relationship between
firm performance and
Measures used
Authors Name of article Source Method used Social performance Results

Brine et al. CSR and financial Australian treasury Cross sectional Analysis of ROA, ROE, ROS No significant
(2006) performance in the regression analysis sustainability relationship
Australian context and OLS reports
Ngwakwe Environmental International Journal Multiple regression Field survey of ROTA Positive relationship
(2009) responsibility and firm of Humanities and analysis environmental
performance: evidence Sciences practices
from Nigeria
Mackey CSR and firm Academy of An economic analysis CSR investments Economic value of Conditional relationship
et al. (nd) performance: investor Management Review the firm depending on demand
preferences and and supply
corporate strategies
Fiori et al. CSR and firms SSRN working paper Multiple regression Analysis of CSR Stock price No significant
(2007) performance. An series analysis disclosure reports relationship
analysis of Italian listed
companies
Chatterji How well do social Centre for Responsible Panel data analysis KLD evaluation Company ratings Positive relationship
et al. ratings actually measure Business
(2008) corporate social
responsibility?
Montabon An examination of Journal of Operations Multiple data CSR disclosure ROI, sales growth Positive relationship
et al. corporate reporting, Management analysis, content reports
(2007) environmental analysis
management practices
and firm performance
Orlitzky Corporate social and Organization Studies Correlation and meta CSR disclosure Accounting and Positive relationship
et al. financial performance: a analysis, content reports market based
(2003) meta-analysis analysis measures
 between CSR participation and firm size with very small and very large firms being Managing
equally motivated to engage in CSR with medium-sized firms being the least corporate
motivated. These results caused Udayasankar to conclude that firm characteristics
should also be considered when conducting analysis in the CSR context. Another study performance
performed by Perrini et al. (2007) evidenced that the tendency of large firms to
participate in environmental management practices was larger than those of SMEs.
This study examines and investigates the relationship between CSR and financial 233
performance of corporations in developing countries through an investigation of
Turkish publicly held companies. We try to show that some causality is related to
lagging between periods for financial performance and CSR. This study builds upon
the idea that there may exist a relationship between firm size, profitability, risk level
and CSR. In doing so we show the necessity of understanding the relationship between
performance management and CSR. The paper is therefore developed through an
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explanation and justification of the data collected and analysis undertaken. It continues
with the results and a discussion of their meaning before finishing with a consideration
of the implications.

Methodology
Sample and data collection
The sample employed in this study consists of the companies listed on the Istanbul
Stock Exchange (ISE) 100 for the four consecutive years until 31 December 2006. Thus
the annual reports of 40 companies were selected after removing the companies in the
financial sector and two companies in the automobile sector because of the fact that
their annual reports varied greatly from those of the remaining sample.
One of the essential aspects of CSR and financial performance is the direction of
causality. Waddock and Graves (1997) studied the empirical linkage between financial
and social performance and found out that CSR was positively associated with prior
financial performance. The results were in line with the slack resource theory that
supports that the existence of slack resources resulting from better financial
performance made companies invest in areas that are related to social domains. The
results also supported good management theory that states that good management
practice resulting from engagement in social domains enhances the relationship with
stakeholders causing better financial performance (Freeman, 1984).
The issue of causality has created problems in the studies that investigate topics
related to firm performance. In order not to generate biased results, the direction of the
relationship between the variables that are being analysed has to be determined. Thus,
we took the 2005 and 2007 financial data for the ISE and studied the relationship
between this data and CSR of the companies derived from the 2006 annual reports. We
used the same method as Waddock and Graves (1997) for our analysis.
We used financial data from 2005 for the part of our analysis where CSR is the
dependent variable. For the part of our analysis where financial performance is the
dependent variable, we used profitability (ROE, ROA and ROS) in 2007 as the
dependent variable and 2006 data for CSR and control variables.
In their study, McWilliams and Siegel (2000) posited the argument that studies
analysing the link between CSR and financial performance were mis-specified unless
they controlled for the research and development (R&D) intensity of the firm since it
 IJPPM was a crucial determinant of firm performance. They concluded that CSR had a neutral
59,3 effect on firm performance as measured by profitability when the variable of the
research and development intensity was included in the model. They argued that this
occurred as a result of the high correlation between CSR and R&D. Thus, when R&D
Intensity is introduced as a variable, good management theory will not be supported.
As a result a third hypothesis was introduced as an extension of the work of Waddock
234 and Graves in the light of the criticism of McWilliams and Siegel.
Following these theories, we hypothesize that CSR is both a predictor and
consequence of the financial performance of firms:
H1. Better financial performance results in improved CSR.
H2. Improved CSR leads to better financial performance.
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H3. There is a neutral relationship between financial performance and CSR.

Measuring CSR
This research uses the content analysis method that was first used by Bowman and
Haire (1975). Other studies on social and environmental disclosures also employed this
approach (Abbott and Monsen, 1979; Hughes et al., 2001; Hackston and Milne, 1996;
Ingram, 1978; Anderson and Frankle, 1980). The disclosure related to CSR is derived
from the 2006 annual reports of the 40 companies constituting the sample as is the case
with prior studies (Hackston and Milne, 1996; Hughes et al., 2001; Gray et al., 1995a;
Hall, 2002). The usage of annual reports for the medium of CSR disclosures has been
supported by Hughes et al. (2001) because of their easy reach and the fact that they are
tools that enable companies to communicate with their shareholders. The importance
of a range of measures is emphasized by Joiner et al. (2009) while Garengo and Bernardi
(2007), relate this in particular to SMEs.
The content analysis of social and environmental disclosures consists of two
processes that are the development of a categorization scheme and determination of the
rules to be used as a guide for the decision of what and how to code (Milne and Adler,
1999). The method of categorization used in this study is based on the study of Ng
(1985) who further developed this comprehensive checklist from the work of Ernst and
Ernst (1978). The original checklist together with the modifications of Ng can be seen
in Appendix 3 while the decision rules can be seen in Appendix 4.
The number of the sentences related to the corporate social responsibility disclosed
in the companies’ annual report, is the unit of analysis used in this study to determine
the degree of CSR based on the work of Hackston and Milne (1996). Using sentences as
a medium for the basis of coding is far more reliable than any other unit of analysis
because unreliability is increased when words or areas of a page are used instead
(Milne and Adler, 1999). Ng (1985) used number of words because of his criticism of the
portion of pages that could distort the results because of differences in print, column
and page sizes of the annual reports. However, number of words is also not a precise
measure because of the subjectivity in deciding which individual word is related to
CSR or not (Crowther, 2002). Thus, it can be argued that number of sentences solves the
problem of standardization of words (Hackston and Milne, 1996). The checklist used as
the interrogation instrument is disclosed in Appendix 2. This instrument enables the
 researcher to record the amount of CSR in various categories and has four dimensions Managing
that are listed below (Tables II and III): corporate
(1) Theme: environment, energy, products/consumers, community, and employee performance
health and safety, employee other, general.
(2) Evidence: monetary quantification, non-monetary quantification and
declaration. 235
(3) News type: good, bad and neutral news.
(4) Amount: number of sentences.

The reliability and measurement of content analysis

The problem of reliability exists for content analysis just like any quantitative
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technique. The disagreement between the coders will distort the significance of the
analysis (Janis et al., 1943).
Three types of reliability have been defined by Krippendorff: stability,
reproducibility and accuracy. Stability, which is the weakest form of reliability, is
measured as the degree that a coder reaches the same results while analysing the data
over time. Reproducibility, which is a stronger form of reliability than stability
measures the repeatability of the data by multiple coders. The strongest form of
reliability is named as accuracy and it measures the performance of coding against the

Term Definition

Monetary Financial definition in currency

Non-monetary (quantitative) Disclosure in quantified terms, but not in currency
(i.e. measures of weight, mass, volume or size), can be
in absolute terms or percentages
Declarative If not one of the above
Table II.
Source: Tilt (1998) Definitions of evidence

Term Definition

Neutral news Statement of policy or intent within statutory minimum with no

details of what or how; statement of facts whose credit/discredit to the
company is not obvious – which are unaccompanied by editorialising
Good news Statements beyond the minimum which include (for example) specific
details where these details have a creditable or neutral reflection on the
company; any statements which reflect credit on the company; upbeat
analysis/discussion/statements
Bad news Any statement which reflects/might reflect discredit on the company.
Include, for example, numbers made redundant (if redundancy is
spoken of as a human rather than an economic act), and any increase
in accidents
Table III.
Source: Gray et al. (1995b) Definitions of news type
 IJPPM performance of a method that has been applied by experts and regarded as being
59,3 correct.
In this study, the annual reports were read by two coders who are academicians
familiar with social and environmental disclosure research. In order to capture the
degree of stability of the data, the annual reports that have been read once by a coder
were read a second time after two weeks. It was seen that no significant difference
236 existed between the two readings. To analyse the degree of reproducibility, the two
coders read the annual reports independently applying the same set of dimensions and
decision rules for coding. Again, no significant difference were noted between the two
coders. To achieve accuracy, Hackston and Milne’s coding approach which has been
cited by many academic studies was undertaken.
In this study Krippendorff’s a was calculated to measure the degree of inter-coder
agreement that occurs above chance on the decision of “is this a sentence a social
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disclosure, yes or no?” A pre-testing was conducted on the 10 per cent of the sample
and Krippendorff’s a was measured to be 0.9793 as a result of the reliability tests.
Krippendorff’s a theoretically ranges between the values of þ 1.0 (perfect agreement)
and 2 1.0 (perfect disagreement). The result of 0.9793 shows a considerably high
degree of reliability in this study.

Control variables
Previous studies have employed company size, risk, research and development
intensity as control variables. Different studies used different variables as a proxy for
size. Net log of sales was used in the study of Belkoui and Karpik (1989), while Chen
and Metcalf (1980) employed total assets. Waddock and Graves (1997) used total
assets, total sales and number of employees. Stanwick and Stanwick (1998) used
annual sales of the firm in their study. The study of Orlitzky et al. (2003) summarized
the predictors of size used in prior studies some of which are number of employees,
number of shareholders, Fortune rank, total assets, total sales, owners’ equity, net
worth, lines of business, ln of average revenues and log of sales. Waddock and Graves
(1997) also defined size as a significant variable since the socially responsible
behaviour disclosed by larger firms tend to be more than those disclosed by smaller
firms. In our study, we used three measures to control for size that are ln of sales, ln of
assets and ln of market capitalization.
In order to control for risk, Waddock and Graves (1997) used the long term debt to
total assets ratio of the firm while D’Arcimoles and Trebucq (2002) used the debt to
total capital ratio. In this study, the debt to total assets ratio (DTA) has been used as a
proxy to control for the riskiness of the firm.
In order to control for the financial risk of the company and measure the effect of the
financial policy on performance, this study employs the ratio of debt to total assets
(DTA) as a control variable. Majumdar and Chhibber (1999) indicate that the increase
in the amount of debt that is undertaken by the company results in an enhanced
monitoring of the company by private and governmental creditors. Thus, the business
risk is to be reduced according to the principle agent reasoning. Previous empirical
studies performed by Majumdar and Chhibber (1999), Barbosa and Louri (2005),
Perrini et al. (2008), Kapopoulos and Lazaretou (2007) signal to a significant and
negative relationship between the level of debt and firm performance. As this paper
 investigates the link between CSR and performance, it is crucial to include the level of Managing
debt as a control variable. corporate
As in the work of McWilliams and Siegel (2000) and D’Arcimoles and Trebucq
(2002), the research and development expenditures to net sales ratio is employed in this performance
study to control for the impact of innovative activity on firms’ performance. The
product or process innovations occurring as a result of investments in technical capital
are crucial elements for the firms that engage in CSR. Thus, in our study R&D 237
Intensity has been used as a control variable for the innovativeness of the firm in the
third hypothesis.

Profitability
EPS growth, stock price change, price per share change, ROE, average ROE, P/E ratio,
net income, net profit margin, operating earnings/assets, operating earnings/sales were
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determined as some of the variables of economic performance (Ullmann, 1985).

McGuire et al. (1988) used both accounting and stock-market-based measures. The
accounting based measures employed by these studies were ROA, total assets, sales
growth, asset growth and operating income growth. Profitability was measured by
Hackston and Milne (1996) by average ROE and average ROA. In order to capture
financial performance we used accounting based measures of ROE, ROA and ROS.

Analysis
Table IV depicts the descriptive statistics for social disclosure measures in ISE 100
companies. The issues related to theme, evidence and news type is reported in four
different perspectives, i.e. disclosed sentences as a percentage of all disclosed sentences
shown in the fourth column. Disclosing the figures in terms of percentages makes one
get a clearer understanding of the situation. For example 52.50 per cent of companies
constituting the sample make disclosures in the theme of energy in their annual
reports. However, the theme of energy makes up only 2.41 per cent of all disclosed
sentences that shows that these companies disclose a small amount in this particular
theme.
One, if only focusing on the incidence figures in the second column, might think that
non-monetary and declarative disclosures are almost equally presented. However,
when disclosed sentences as a percentage of all disclosed sentences is considered, it can
easily be seen that declarative disclosures are far more than non-monetary disclosures
with 76.19 and 21.46 per cent respectively. Further analysis reveals that companies
disclose 89 declarative sentences each on average while they disclose 26 non-monetary
sentences.
When news type is considered, it can be seen that companies making disclosures of
good news disclose about 107 sentences each while those disclosing bad news disclose
about 1 sentence each. Meanwhile, the disclosure of neutral news is about 17 sentences
each.
The total number of sentences disclosed by the 40 companies is 4,687, with an
average of 117 sentences. The company making the maximum disclosure disclosed 321
sentences while the one making the minimum disclosure disclosed five sentences.
Table V provides the descriptive statistics for the measures of size, profitability,
risk, R&D Intensity and CSR.
 IJPPM
Disclosing Disclosing Number of
59,3 companies (making companies as a disclosed Disclosed sentences
at least one percentage of total sentences as a percentage of all
disclosure) sample (incidence) (amount) disclosed sentences

Theme
238 Environment 24 60.00 418 8.92
Energy 21 52.50 113 2.41
Product/
consumers 37 92.50 1657 35.35
Community
involvement 31 77.50 840 17.92
Employee
health and
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safety 21 52.50 217 4.63

Employee
other 40 100.00 1350 28.80
General 18 45.00 92 1.96
Total 4687 100.00

Evidence
Monetary 28 70.00 110 2.35
Non-
monetary 38 95.00 1006 21.46
Declarative 40 100.00 3571 76.19
Total 4687 100.00

News
Table IV. Good 38 95.00 4058 86.58
Descriptive statistics for Bad 6 15.00 7 0.15
social disclosure Neutral 36 90.00 622 13.27
measures in ISE 100 Total 4687 100.00

In order to test H1 we employed regression analysis, using CSR as the dependent

variable and financial performance (profitability), indicated by ROE, ROA and ROS as
independent while net log of assets, net log of sales and net log of market capitalization
were used as the control variables for size and debt to total assets was used to control
for risk. In H2, profitability was used as the dependent variable and CSR as the
independent variable, with the same measures employed as control variables. In H3,
R&D intensity was added as an independent variable in order to prevent a possible
flawed relationship between CSR and financial performance. As a result of the lack of
information from two companies in terms of R&D intensity, the third hypothesis was
tested on a total of 38 firms.
The correlation matrices for the variables are given below. Table VI shows the
correlation between 2006 CSR and 2005 financial data. The models employing the data
in this matrix treated CSR as the dependent variable. As can be seen in Table VI, 2006
CSR is positively and significantly correlated at 0.01 level with the control variables for
size which are ln sales05, ln asset05 and ln mcap05. The correlations between the
measures of 2007 profitability (ROA, ROE, ROS) and 2006 CSR and financial controls
 Managing
n Min. Max. Mean SD
corporate
Measures of size
sales2005 40 17.138 23.421 20.462 1.446
performance
asset2005 40 18.550 22.699 20.543 1.249
marcap2005 40 18.342 23.445 20.357 1.196
sales2006 40 17.240 23.724 20.643 1.459 239
asset2006 40 18.769 22.885 20.700 1.252
marcap2006 40 18.321 23.479 20.363 1.210

Measures of profitability
ROE2005 40 20.300 3.738 0.170 0.593
ROA2005 40 20.126 0.258 0.047 0.075
ROS2005 40 20.196 0.368 0.070 0.116
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ROE2007 40 20.980 0.380 0.112 0.229

ROA2007 40 20.130 0.270 0.082 0.098
ROS2007 40 20.120 31.790 0.904 5.011

Measure of risk
DTA05 40 0.060 1.010 0.429 0.220
DTA06 40 0.020 0.910 0.439 0.215
RDINT06 38 0.000 0.050 0.004 0.009 Table V.
CSR2006 40 5.000 321.000 117.175 84.259 Descriptive statistics for
Valid N (listwise) 38 the variables

CSR06 ROA05 ROE05 ROS05 ln sales05 ln asset05 lnmcap05 DTA05

CSR06 1 0.143 20.128 0.082 0.634 * * 0.677 * * 0.665 * * 0.163

ROA05 1 20.015 0.784 * * 0.008 0.018 0.296 2 0.368 *
ROE05 1 0.023 20.089 20.223 20.084 0.394 *
ROS05 1 20.311 20.095 0.192 2 0.374 *
ln sales05 1 0.862 * * 0.698 * * 0.345 *
ln asset05 1 0.864 * * 0.224
ln mcap05 1 0.014
DTA05 1
Table VI.
Notes: *Statistically significant at 5 per cent level; * *Statistically significant at 1 per cent level; This Pearson correlations
table reports the correlations among 2005 financial data and 2006 CSR. The correlations among the matrix for ISE 100
CSR variables and financial data use the sample period, 2005-2006 companies

are shown in Table VII. The models employing the data in this matrix treated financial
performance (profitability) as the dependent variable. In Table VII, it can also be
observed that 2006 CSR is again positively and significantly correlated at 0.01 level
with the control variables for the same year. In Table VIII, R&D intensity is added as a
control variable with the other variables being the same as those in Table VII. In all of
the tables, no significant relationship between CSR and financial performance
measures (ROA, ROE, ROS) can be observed. Furthermore, the negative and
significant relationship between the control variable for risk and financial performance
should be noted in all three tables.
 IJPPM
CSR06 ROA07 ROE07 ROS07 ln sales06 ln asset06 lnmcap06 DTA06
59,3
CSR06 1 0.114 0.077 20.066 0.639 * * 0.653 * * 0.569 * * 0.178
ROA07 1 0.777 * * 0.238 0.014 0.070 0.457 * * 2 0.447 * *
ROE07 1 0.087 0.049 0.071 0.382 * 2 0.349 *
ROS07 1 20.009 20.102 2 0.017 2 0.331 *
240 Lagged ln
sales06 1 0.870 * * 0.662 * * 0.391 *
Lagged ln
asset06 1 0.822 * * 0.304
Lagged ln
mcap06 1 2 0.007
DTA06 1
Table VII.
Notes: * Statistically significant at 5 per cent level; * *Statistically significant at 1 per cent level; This
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Pearson correlation
matrix for ISE 100 table reports the correlations among 2007 profitability, 2006 CSR and 2006 financial controls. The
companies correlations among the CSR variables and financial data use the sample period, 2006-2007

Results
The models, which use CSR as the dependent variable, financial performance as the
independent variable and control for ln mcap05, ln assets05, ln sales05 and DTA05 are
presented in Table IX. All of the three models in Table IX employ CSR as the
dependent variable while the measures of financial performance that are used as
independent variables vary. Note that there is a one-year lag between the measurement
of CSR and the measures of financial performance. In all of the nine models employed
in this study, the method of regression analysis is stepwise. The excluded variables as
a result of this method are shown in each of the models. The method of stepwise
regression is usually applied in order to decide on the best set of explanatory variables
for the regression model. The decision to include or remove a variable is judged by the
probability of F. When there are no more variables to add or drop this method
terminates (Gujarati, 2003).
In order to examine the existence of multicollinearity in the sample, variance
inflation factors (VIF) are calculated and investigated. It has been seen that the degree
of multicollinearity is acceptable which is indicated by the VIF values changing
between 1 and 3. As can be seen in Table IX, each of the three models are significant at
p , 0.001 level. The results reject H1, which states that better financial performance
results in improved CSR. However, the dependent variable, CSR, is related to ln
assets05 at p , 0.001 level for all the models as well. Waddock and Graves (1997)
found a significant and positive relationship between CSR and the measures of
financial performance while D’Arcimoles and Trebucq (2002) failed to find an impact of
financial performance on CSR.
The second hypothesis in this study proposes that improved CSR leads to better
financial performance in line with good management theory (Aras and Crowther, 2008b).
A set of regression analysis was conducted using measures of financial performance
(ROA, ROE, ROS of 2007) as dependent variable with CSR 2006 as the independent
variable, the measures of size and risk related to the year 2006 as control variables. As
can be seen in Table X, the results reject H2 which states that improved CSR leads to
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CSR06 RDINT06 ROA07 ROE07 ROS07 ln sales06 ln asset06 ln cap06 DTA06

CSR06 1 0.098 0.114 0.077 20.066 0.639 * * 0.653 * * 0.569 * * 0.178

RDINT06 1 2 0.077 2 0.066 20.073 20.039 0.085 2 0.002 0.315
ROA07 1 0.777 * * 0.238 0.014 0.070 0.457 * * 2 0.447 * *
ROE07 1 0.087 0.049 0.071 0.382 * 2 0.349 *
ROS07 1 20.009 20.102 2 0.017 2 0.331 *
Lagged ln sales06 1 0.870 * * 0.662 * * 0.391 *
Lagged ln asset06 1 0.822 * * 0.304
Lagged ln mcap06 1 2 0.007
DTA06 1
Notes: *Statistically significant at 5 per cent level; * *Statistically significant at 1 per cent level; This table reports the correlations among 2007
profitability, 2006 CSR, 2006 financial controls and 2006 R&D intensity. The correlations among the CSR variables and financial data use the sample
period, 2006-2007
corporate

Pearson correlation
performance
Managing

companies
matrix for ISE 100
Table VIII.
241
 IJPPM
Independent variable: Independent variable: Independent variable:
59,3 Dependent ROE05 ROA05 ROS05
variable: CSR06 Model 1 Model 2 Model 3

Control variable:
lnmcap05
242 lnassets05 45.671 * 45.671 * 45.671 *
lnsales05
DTA05
R 0.677 0.677 0.677
R2 0.459 0.459 0.459
Adj. R 2 0.444 0.444 0.444
F 32.175 * 32.175 * 32.175 *
Excluded lnsales05, lnmcap05, lnsales05, lnmcap05, lnsales05, lnmcap05,
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Table IX. variables: ROE05, DTA05 ROA05, DTA05 ROS05, DTA05

Regression results for
predictive variables Notes: p , 0.001; This table reports the regression results using 2006 CSR as the dependent variable
(2005-2006) and 2005 financial data as independent variables

Dependent variable: Dependent variable: Dependent variable:

Independent variable: ROE07 ROA07 ROS07
CSR06 Model 1 Model 2 Model 3

Control variable:
lnmcap06 0.188 * 0.100 *
lnassets06 20.137 * * 2 0.074 *
lnsales06 DTA06 27.698 * *
R 0.572 0.704 0.331
R2 0.327 0.496 0.109
Adj. R 2 0.291 0.469 0.086
F 9.003 * * 18.209 * 4.660 * *
Excluded variables CSR06, lnsales06, CSR06, lnsales06, CSR06, lnmcap06, lnassets06,
DTA06 DTA06 lnsales06
Table X.
Regression results for Notes: *p , 0.001; * *p , 0.05; This table reports the regression results using 2007 financial
predictive variables performance (profitability) as dependent variable and 2006 CSR as the key independent variable with
(2006-2007) 2006 financial control variables

better financial performance. However, a positive and significant relationship between

ROE of the year 2007 and ln mcap at the p , 0.001 level can be observed while a negative
and significant relationship between ln assets06 and ROE 2007 exists at the p , 0.05
level. The three models which are employed in this set of regression analysis fail to find a
significant relationship between CSR 2006 and financial performance 2007. In their
studies, Waddock and Graves (1997) found a significant and positive relationship
between ROA, ROS and CSR while D’Arcimoles and Trebucq (2002) found a negative
and significant relationship between CSR and ROE.
Considering the work of McWilliams and Siegel (2000), the exclusion of R&D
intensity as a control variable in H1 and H2 does not create a problem because no link
 can be found between CSR and financial performance. If there were such a relationship, Managing
omitting R&D intensity would overestimate the results because of the positive corporate
correlation that exists between R&D expenditures and CSR. In all of the three models
in the Table XI, no relationship has been found between CSR and the measures of performance
financial performance. Also, the R&D intensity has been found to have no significant
relationship with profitability. D’Arcimoles and Trebucq (2002) detected the existence
of a positive and significant relationship between R&D intensity and financial 243
performance and confirmed the existence of the neutral relationship between CSR and
financial performance.

Summary of the results

In this study we examined the relationship between CSR and financial
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indicators/performance of companies for the years of 2005, 2006 and 2007 in the ISE
National 100 index. We stated three hypotheses. In order to test our H1 we employed
regression analysis, using CSR as the dependent variable and financial performance
(profitability), indicated by ROE, ROA and ROS as independent variables while net log
of assets, net log of sales and net log of market capitalization were used as the control
variables for size and debt to total assets was used to control for risk. In H2,
profitability was used as dependent variable and CSR as the independent variable with
the same measures employed as control variables. In H3, R&D intensity was added as
an independent variable in order to prevent a possible flawed relationship between
CSR and financial performance. H1, which states that “better financial performance
results in improved CSP” is rejected. We were not able to find any significant
relationship between profitability and CSR. The second hypothesis in this study
proposes that improved CSR leads to better financial performance in line with good
management theory. H2 which states that improved CSR leads to better financial
performance is rejected also. However, we found that there is a significant relationship
between company size and CSR. Thus, no link can be found between CSR and financial

Dependent variable: Dependent variable: Dependent variable:

Independent variable: ROE07 ROA07 ROS07
CSR06 RDINT06 Model 1 Model 2 Model 3

Control variable:
lnmcap06 0.196 * 0.105 *
lnassets06 2 0.145 * * 20.078 *
lnsales06 DTA06 2 7.935 * *
R 0.582 0.727 0.336
R2 0.339 0.529 0.113
Adj. R 2 0.301 0.502 0.88
F 8.972 * * 19.660 * 4.568 * *
Excluded variables CSR06, RDINT06, CSR06,RDINT06, CSR06, RDINT06, lnmcap06,
lnsales06, DTA06 lnsales06, DTA06 lnassets06, lnsales06
Note: This table reports the regression results using 2007 financial performance (profitability) as Table XI.
dependent variable and 2006 CSR as the key independent variable together with R&D intensity and Regression results for
2006 financial control variables predictive variables
 IJPPM performance. This is perhaps unsurprising as previous studies have shown mixed
59,3 result. For example, Waddock and Graves (1997) found a significant and positive
relationship between CSR and the measures of financial performance while
D’Arcimoles and Trebucq (2002) failed to find an impact of financial performance on
CSR. Also, the R&D intensity has been found to have no significant relationship with
profitability. Conversely, D’Arcimoles and Trebucq (2002) detected the existence of a
244 positive and significant relationship between R&D intensity and financial performance
and confirmed the existence of the neutral relationship between CSR and financial
performance. The three models employed in this set of regression analyses fail to find a
significant relationship between CSR 2006 and financial performance 2007. Waddock
and Graves (1997) found a significant and positive relationship between ROA, ROS and
CSR while D’Arcimoles and Trebucq (2002) found a negative and significant
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relationship between CSR and ROE.

It is interesting to speculate on the reason why no significant relationship is found
but difficult to determine a reason. It is not related to the fact that the study is
undertaken in a developing country: Aras and Crowther (2009) argue that there is no
difference in characteristics between developed and developing economies. Selection of
variables may be pertinent but the investigation of this would lead to a whole new
research project. We therefore must conclude that the reason is uncertain and that our
results do not contradict some other similar studies.

Conclusion
For many, the relationship between CSR and financial performance is clearly
established. Thus the relationship between CSR and financial performance has been
empirically examined by many studies and there have been many theoretical debates
and discussions concerning the positive relationship between corporate social
performance and firm financial performance. However in our study no link can be
found between CSR and financial performance. We found only a relationship between
firm size and CSR. We tested CSR and financial performance relationship with different
directions which are improved financial performance leads to better CSR, improved
CSR leads to better financial performance and a neutral relationship between the
variables. Thus we try to show that some causality is related to the lagging of periods
between firm size, profitability, risk level and CSR. We were only able to find a
significant relationship between firm size and CSR. This result suggests that CSR is
perhaps not sufficiently related with firm financial and economic performance in
developing countries yet.
Overall, there are a number of reasons why the empirical results of the relationship
between financial performance and CSR are not positive. CSR is still a very broad and
active research topic, not only in emerging market countries, and the strength and
usefulness of many results are still hotly debated. Thus, it is no easy task to
consistently evaluate their significance. Nevertheless it remains clear that the
management of performance must take into account the CSR activities of an
organisation as the sustainability of that performance is dependent upon such CSR
activity.
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 IJPPM Appendix 1
59,3
Name of companies Number of sentences Market capitalisation

Turkcell 210 15,730,000,000

248 Tüpraş 193 6,060,139,800
Anadolu Efes 138 4,938,368,750
Ereğli Demir Celik 115 4,390,848,000
Arçelik 321 3,339,666,000
Migros 233 3,225,686,100
Şişe Cam 118 2,117,500,000
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Adana Çimento (A) 45 1,955,675,155

Petrol Ofisi 274 1,911,921,000
Akçansa 195 1,627,300,078
Hürriyet Gzt. 150 1,558,617,174
Trakya Cam 83 1,143,582,118
Çimsa 277 1,103,880,960
Türk Hava Yollari 201 1,067,500,000
Petkim 150 1,044,225,000
Eczacibaşi Ilaç 93 995,911,200
Aygaz 45 955,029,784
Ülker Gida 131 911,308,860
Aselsan 156 714,492,900
Türk Traktör 77 643,900,000
Vestel 274 585,488,000
Turcas Petrol 82 567,000,000
T.demir Döküm 31 477,000,000
Izmir Demir Çelik 41 457,537,500
Kartonsan 106 422,415,000
Aksa 51 400,400,000
Koza Davetiye 5 372,680,000
Beko Elektronik 152 332,340,000
Park Elek. Madencilik 41 328,800,000
Kardemir (D) 98 286,000,000
Ak Enerji 40 278,348,400
Tat Konserve 31 218,546,208
Netaş Telekom. 24 197,837,640
Boyner Mağazacilik 32 191,505,600
Advansa Sasa 112 179,529,000
Eczacibaşi Yapi 30 177,750,000
Doğan Gazetecilik 194 156,780,000
Goldas Kuyumculuk 101 123,200,000
Table AI. Marmaris Marti 10 118,338,000
List of companies Menderes Tekstil 27 90,500,000
 Appendix 2 Managing
corporate
performance

249
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Figure A1.
Social responsibility
disclosure instrument
 IJPPM Appendix 3. Checklist of categories of social disclosure
The following is a taxonomy of the types of corporate social disclosure that form the substance of
59,3 the content analysis of annual reports. The list is intended to represent an exhaustive itemization
of information with social importance. Adaptations to the original list used by Ng (1985) are
shown in italics.

250 Environment
(1) Environmental pollution:
.
Pollution control in the conduct of the business operations; capital, operating and
research and development expenditures for pollution abatement.
.
Statements indicating that the company’s operations are non-polluting or that they
are in compliance with pollution laws and regulations.
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.
Statements indicating that pollution from operations has been or will be reduced.
.
Prevention or repair of damage to the environment resulting from processing or
natural resources, e.g. land reclamation or reforestation.
. Conservation of natural resources, e.g. recycling glass, metals, oil, water and paper.
.
Using recycled materials.
.
Efficiently using materials resources in the manufacturing process.
.
Supporting anti-litter campaigns.
.
Receiving an award relating to the company’s environmental programmes or policies.
. Preventing waste.
(2) Aesthetics:
.
Designing facilities harmonious with the environment.
.
Contributions in terms of cash or art/sculptures to beautify the environment.
.
Restoring historical buildings/structures.
(3) Other:
.
Undertaking environmental impact studies to monitor the company’s impact on the
environment.
.
Wildlife conservation.
.
Protection of the environment, e.g. pest control.

Energy
.
Conservation of energy in the conduct of business operations.
.
Using energy more efficiently during the manufacturing process.
.
Utilizing waste materials for energy production.
.
Disclosing energy savings resulting from product recycling.
.
Discussing the company’s efforts to reduce energy consumption.
.
Disclosing increased energy efficiency of products.
.
Research aimed at improving energy efficiency of products.
.
Receiving an award for an energy conservation programme.
.
Voicing the company’s concern about the energy shortage.
.
Disclosing the company’s energy policies.
 Employee health and safety Managing
.
Reducing or eliminating pollutants, irritants, or hazards in the work environment. corporate
.
Promoting employee safety and physical or mental health. performance
.
Disclosing accident statistics.
.
Complying with health and safety standards and regulations.
.
Receiving a safety award. 251
.
Establishing a safety department/committee/policy.
.
Conducting research to improve work safety.
.
Providing low cost health care for employees.

Employee other
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(1) Employment of minorities or women:

.
Recruiting or employing racial minorities and/or women.
.
Disclosing percentage or number of minority and/or women employees in the
workforce and/or in the various managerial levels.
.
Establishing goals for minority representation in the workforce.
.
Programme for the advancement or minorities in the workplace.
.
Employment of other special interest groups, e.g. The handicapped, ex-convicts or
former drug addicts.
.
Disclosures about internal advancement statistics.
(2) Employee training:
.
Training employees through in-house programmes.
.
Giving financial assistance to employees in educational institutions or continuing
education courses.
.
Establishment of trainee centres.
(3) Employee assistance/benefits:
.
Providing assistance or guidance to employees who are in the process of retiring or
who have been made redundant.
.
Providing staff accommodation/staff home ownership schemes.
.
Providing recreational activities/facilities.
(4) Employee remuneration:
.
Providing amount and/or percentage figures for salaries, wages, PAYE taxes,
superannuation.
.
Any policies/objectives/reasons for the company’s remuneration package/schemes.
(5) Employee profiles:
. Providing the number of employees in the company and/or at each branch/
subsidiary.
.
Providing the occupations/managerial levels involved.
.
Providing the disposition of staff – where the staff are stationed and the number
involved.
. Providing statistics on the number of staff, the length of service in the company and
their age groups.
 IJPPM .
Providing per employee statistics, e.g. assets per employee and sales per employee.
59,3 . Providing information on the qualifications of employees recruited.
(6) Employee share purchase schemes:
.
Providing information on the existence of or amount and value of shares offered to
employees under a share purchase scheme or pension programme.
.
Providing any other profit sharing schemes.
252
(7) Employee morale:
.
Providing information on the company/management’s relationships with the
employees in an effort to improve job satisfaction and employee motivation.
. Providing information on the stability of the workers’ jobs and the company’s future.
. Providing information on the availability of a separate employee report.
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.
Providing information about any awards for effective communication with
employees.
.
Providing information about communication with employees on management styles
and management programmes which may directly affect the employees.
(8) Industrial relations:
.
Reporting on the company’s relationship with trade unions and/or workers.
.
Reporting on any strikes, industrial actions/activities and the resultant losses in
terms of time and productivity.
.
Providing information on how industrial action was reduced/negotiated.
(9) Other:
.
Improvements to the general working conditions – both in the factories and for the
office staff.
.
Information on the re-organization of the company/discussions/branches which affect
the staff in any way.
.
The closing down of any part of the organization, the resultant redundancies created,
and any relocation/retraining efforts made by the company to retain staff.
.
Information and statistics on employee turnover.
.
Information about support for day-care, maternity and paternity leave.

Products
(1) Product development:
.
Information on developments related to the company’s products, including its
packaging, e.g. making containers reusable.
. The amount/percentage figures of research and development expenditure and/or its
benefits.
.
Information on any research projects set up by the company to improve its product in
any way.
(2) Product safety:
.
Disclosing that products meet applicable safety standards.
.
Making products safer for consumers.
.
Conducting safety research on the company’s products.
 .
Disclosing improved or more sanitary procedures in the processing and preparation Managing
of products.
.
Information on the safety of the firm’s product.
corporate
(3) Product quality:
performance
.
Information on the quality of the firm’s products as reflected in prizes/awards
received.
.
Verifiable information that the quality of the firm’s product has increased (e.g. ISO 253
9000).

Community involvement
.
Donations of cash, products or employee services to support established community
activities, events, organizations, education and the arts.
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.
Summer or part-time employment of students.
.
Sponsoring public health projects.
.
Aiding medical research.
.
Sponsoring educational conferences, seminars or art exhibits.
.
Funding scholarship programmes or activities.
. Other special community related activities, e.g. opening the company’s facilities to the
public.
.
Supporting national pride/government sponsored campaigns.
.
Supporting the development or local industries or community programmes and activities.

Others
(1) Corporate objectives/policies: general disclosure of corporate objectives/policies relating to
the social responsibility of the company to the various segments of society.
(2) Other: disclosing/reporting to groups in society other than shareholders and employees,
e.g. consumers; any other information that relates to the social responsibility of the
company.

Appendix 4. Decision rules for social disclosures

.
Discussion of directors’ activities are not to be included as a discussion on employees.
.
All sponsorship activity is to be included no matter how much it is advertising.
.
All disclosures must be specifically stated, they cannot be implied.
.
Good/neutral/bad classifications to be determined from perspective of the stakeholder
group involved.
.
If any sentence has more than one possible classification, the sentence should be classified
as to the activity most emphasized in the sentence.
. Tables (monetary and non-monetary) which provide information which is on the checklist
should be interpreted as one line equals one sentence and classified accordingly.
.
Innovations in products or services should not be included unless they are beyond what is
necessary to compete in the marketplace or attract business.
.
Any discussion of the pension funds or employee share schemes would be classified as
good news unless it was clearly to the contrary, e.g. that the scheme had been scrapped.
 IJPPM .
Any disclosure which is repeated shall be recorded as a CSD sentence each time it is
discussed.
59,3 .
Discussions relating to the quality of goods and services will not be a CSD unless it
contains notice of a verifiable change in quality, e.g. accreditation to the International
Standards Organisation ISO 9000 quality series standard.

254
About the authors
Güler Aras is Professor of Finance and Accounting at Yildiz Technical University, Istanbul,
Turkey, where she is also Director of the Graduate School. She is also Visiting professor at De
Montfort University, Leicester, UK. Her research is into financial economy and financial markets
with particular emphasis on the relationship between corporate social responsibility,
sustainability and a firm’s financial performance. Güler has published more than 15 books
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and has contributed over 150 articles to academic, business and professional journals and
magazines and to edited book collections. She is a founder and member of various associations
and research centres. She is Vice Chair of the Social Responsibility Research Network; Series
Editor of the Gower Applied Research in Corporate Social Responsibility book series; Associate
Editor of Social Responsibility Journal; and Convenor of the International Conference Series on
Corporate Social Responsibility, now in its ninth year. She has also spoken extensively at
conferences and seminars and has acted as a consultant to a wide range of government and
commercial organisations. Güler Aras is the corresponding author and can be contacted at:
aras@yildiz.edu.tr
Aslı Aybars has been working as a Research Assistant in Bahcesehir University, Istanbul, for
two years. She is a PhD student in the Accounting and Finance programme at Marmara
University.
Özlem Kutlu has been working as a Research Assistant in Yildiz Technical University,
Istanbul for four years. She is a PhD student in the Accounting and Finance programme at
Marmara University.

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