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Data in Search of a Theory: A Critical Examination of the

Relationships Among Social Performance, Social Disclosure, and
Economic Performance of U.S. Firms

Article in Academy of Management Review · July 1985

DOI: 10.5465/AMR.1985.4278989

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e Academy of \ianagement Revieiv, 1985, Vol. 10, No. 3, 540-557. .. j ,;.

Data in Search of a Theory:

A Critical Examination of the Relationships
Among Social Performance, Social
Disclosure, and Economic Performance
of U.S. Firms
ARIEH A. ULLMANN
State University of New York at Binghamton
Inconsistent findings have resulted from studies of the relationships
among social disclosure, social peiformance, and economic perfor-
mance of U.S. corporations. No clear tendency can be detected. The
main reasons for these inconsistencies are: (aj a lack in theory, (b)
inappropriate definition of key terms, and fc) deficiencies in the
empirical data bases currently available. Suggestions are made as to
how this situation can be improved.

Although by no means a new issue (Heald,
1957), the social responsibilities of the corpora-
tion have received increased attention for the last
10 years. The grovirth of the idea of social respon-
sibility is closely linked to society's heightened
sensitivity to the externalities of business activi-
ties—a topic with an equally long tradition in eco-
nomics (Kapp, 1950; Pigou, 1960). The accep-
tance of social responsibilities by the business
community is documented by the number of
Fortune 500 firms disclosing social responsibil-
ity information in their annual reports to share-
holders (Ernst & Ernst, 1978).
Many aspects of the social responsibility issue
have been studied, including its ideological foun-
dations (Bower, 1981; Walters, 1977), its purposes
(Epstein, Flamholtz, & McDonough, 1976), its
management (Arlow & Gannon, 1982), and the
development of valid measures and standards of
social performance for internal management pur-
poses and external disclosure. A sizable number
of empirical studies published during the last 10
Special thanks to Martin Freedman and Susan Harrigan
who made helpful suggestions on earlier drafts of the paper.
Requests for reprints should be sent to Arieh A. UUmann,
School of Management, State University of New York at
Binghamton, Binghamton, NY 13901.
years have focused on the relationships among
corporate social performance, social disclosure,
and economic performance. The studies are re-
ported primarily in the accounting and manage-
ment literature. Not surprisingly, these studies
approach the subject with a variety of methods,
using varying samples and concentrating on dif-
ferent time periods.
Models and Research Orientations
A crucial problem with significant impacts on
subsequent research stages concerns the concep-
tualization and operationalization of key terms.
The central position of "performance" and the
emphasis on different dimensions of performance
in the problem under study indicate an affinity
with "organizational effectiveness," an equally
difficult and complex concept (Connolly, Conlon,
& Deutsch, 1980; Daft, 1983). Yet, with a few
exceptions (Abbott & Monsen, 1979; Aldag &
Bartol, 1978) the literature reviewed in this paper
addresses neither the variety of the underlying
organizational models nor the validity of the mea-
surement procedures used. A closer look at the
criteria used for assessing economic and social
performance as well as social disclosure in the

540
subsequent sections illustrates the literature's
conceptual variety.
Only a few papers have attempted to analyze
the relationships among social disclosure, social
performance, and economic performance within
one single conceptual framework (Freedman &
Jaggi, 1982a), Most of the studies examine only
one or two of these three interactions.
Social Disclosure—Social Performance
Studies of this relationship typically explore
the question of a possible correlation between
the extensiveness of a company's social disclo-
sure and its social performance. In the studies
analyzed here, social performance refers to an
organization's responses to anticipated or exist-
ing social demands (Strand, 1983), Because social
disclosures are much easier to determine, such a
correlation would be helpful to the socially con-
cerned investor. Thus, it is hypothesized that
Hypothesis]: The quantity and quality of a firm's
social disclosure is positively correlated with its
social performance.
Given the hypothetical character of the rela-
tionship between social performance and social
disclosure, social disclosure usually cannot be
substituted for social performance without prior
empirical verification no matter how impressive
the quantity and quality of the disclosed infor-
mation. Identity occurs by definition only when
the related social demand concerns the extent of
a firm's disclosure, such as, for example, pollu-
tion disclosure in lOK reports and annual reports
to shareholders (Cunningham, 1980; Freedman
& Jaggi, 1982b).
Social Performance—^Economic Performance
The relationship between social performance
and economic performance is complex. A posi-
tive correlation could imply that only well-to-do
companies can afford the luxury of above-average
social performance, but it also could indicate that
a company's management is dealing effectively
with the firm's external stakeholders and their
multiple demands. Following Freeman, external
stakeholders are defined as "any group or indi-
vidual [in the company's environment] who can
affect or are affected by the achievement of the
organization's objectives" (Freeman, 1984, p. 46).
541
Given the resources required for attaining high
levels of social performance, some studies posit
a negative correlation between social and eco-
nomic performance. And yet another body of
research takes a middle position by arguing for
an inverted U-shaped correlation, suggesting that
there is an optimal level of social performance
and corresponding resource allocations. This is
thought to exist because economic performance
suffers when too little or too much resources are
allocated toward social performance. Hence, the
three corresponding hypotheses are:
Hypothesis2a: Social performance is positively cor-
related with economic performance.
Hypothesis2b: Social performance is negatively
correlated with economic performance.
Hypothesis2c: Extreme levels of social performance
are associated with low economic performance.
Moreover, any discussion of these performance
relationships should include at least two addi-
tional variables. On the one hand, a company's
economic performance is closely associated with
the risk of its stock measured by the covariance
of the expected return with that of the overall
market. On the other hand, demands for increased
social performance probably are influenced by
the industry and the size of the company. Given
their limited information processing capacities
and the amount of resources available to them,
stakeholders likely will focus their demands on
the most conspicuous industries and firms. This
variable can be accounted for by selecting appro-
priate industries and/or focusing on the largest
firms in a given industry.
Social Disclosure—^Economic Performance
The hypotheses concerning this relationship
can be derived from combining Hypothesis 1 with
Hypothesis 2. However, when economic perfor-
mance is measured by market returns, a prelimi-
nary question deals with the information content
of corporate disclosures for investors. Does the
market react to this information? Do the disclo-
sures contain additional information facilitating
investment decisions? Obviously, companies dis-
closing social responsibility information on a vol-
untary basis are convinced that the value of this
information is not zero. Hence:
Hypothesis3a: Social disclosures reduce investors'
informational uncertainty.
 A second question concerns the direction of
the market's reassessment of a security based on
social disclosures. Naturally, a firm making social
disclosures assumes that the recipients' evalua-
tion of the information will benefit the firm and
that these benefits outweigh the costs of collect-
ing, compiling, and disseminating the informa-
tion. Yet, combining Hypothesis 1 with the three
versions of Hypothesis 2, the following hypothe-
ses are obtained:
Hypothesis3b: Higher levels of social disclosure
are positively correlated with economic perfor-
mance (Hypothesisj &• Hypothesis20"^ Hypothe-
sis3bj.
Hypothesis3c. Higher levels of social disclosure
are negatively correlated with economic perfor-
mance (Hypothesis, 6- Hypothesiszb Hypothe-
Hypothesis3d: Extreme levels of social disclosure
are associated with poor economic performance
(Hypothesis, &• HypothesiS2c ** Hypothesis3j).
Just as in the case of the social performance—
economic performance relationship, the risk of a
stock and the visibility of an industry are likely
to act as intervening variables and, therefore,
should be included in the empirical investigation.
Overview of the Results
Table 1 summarizes the principal findings of
the studies included in this paper regarding the
relationship between (a) social disclosure and
social performance, (b) social performance and
economic performance, and (c) social disclosure
and economic performance of companies.

Table 1
Major Results by Data Basis
•^-^.^.Qata base
Moskowitz BSRl surveys CEP Ernst & Ernst Other
Relationship"*^-......,^^^^
Bowman & Haire, Abbott & Monsen, Freedman & Jaggi, Abbott & Monsen, Fry & Hock,
Social Disclosure
1975: + 1979: + 1982a: 0 1979: + 1976: —
Preston, 1978: 0 Ingram & Frazier, Preston, 1978: 0
1980: 0
Social Performance Wiseman, 1982: 0

Shane & Spicer, Abbott & Monsen, Belkaoui,

1983: + 1979: 0 1976: +
Anderson & Bowman, 1978: +
Frankle, 1980: + Bowman & Haire,
- . , - • , •

Preston, 1978: + 1975: +

Social Disclosure
Freedman & ]aggi.
- 1982a: 0
Ingram, 1978: +
Ingram & Frazier,
Economic 1983: 0 or -
Performance Jaggi & Freedman
(forthcoming):
+ or -

Alexander & Buch- Bowman & Haire, Kedia & Kuntz,

Cochran & Wood,
Social Performance 1984: + holz, 1976: 0 1975: + 1981: 0
Moskowitz, Vance, 1975: - Bragdon & Marlin, Parket & Eilbirt,
1972: + 1972: + 1975: +
Sturdivant & Ginter, Chen & Metcalf,
1977: + 1980: 0
Economic Vance, 1975: - Fogler & Nutt,
Performance 1975: 0
Spicer, 1978a: +
Spicer, 1978b: +

Note. + postive correlation, - negative correlation, 0 no correlation.

542
 As indicated by the rows in Table 1, no clear
tendency can be found. Instead, conflicting re-
sults are reported:
1. Social disclosure—social performance: Of 7
studies, 4 reported no correlation, 2 found posi-
tive correlations, and 1 yielded a negative
correlation.
2. Social performance—economic performance: Of
13 studies, 8 found positive correlations, 4
found no correlation, and 1 reported a nega-
tive correlation.
3. Social disclosure—economic performance: Of
11 studies, 7 found positive correlations, 1
found some (positive or negative) correlation,
and the remaining studies reported no correla-
tions.
The data base used for the studies as summa-
rized by Table 1 reveals that conflicting results
were reported even in cases based on the same
sample of firms. Such confusion perhaps is in-
evitable, given the studies' conflicting hypothe-
ses, as well as differences in the models, methods,
measurements, and time periods considered.
Therefore it is necessary to scrutinize the studies
in detail.
Social Disclosure
and Social Performance
The theoretical foundations pertaining to the
social disclosure—social performance relationship
are relatively weak and indeterminate. In view of
the costs associated with social responsibility
programs, it has been argued that firms systemati-
cally underreport their activities in this area. This
is because such activities come at the expense of
programs that more obviously further the share-
holders' interests; many managers, therefore, are
thought to deem it unwise to report extensively
about social performance.
Social responsibility activities also may be
overstated, however, in order to create an impres-
sion of sensitivity to important nonmarket influ-
ences that may be in the long term interest of the
shareholder (Abbott & Monsen, 1979). Critical
voices also have argued that many social disclo-
sures are nothing but public relations gestures
meant to ward off grassroots attacks by social
activists (Fry & Hock, 1976). Hence, social disclo-
sures may be linked less to performance than to
other variables such as company size, visibility,
and external pressure.
The seven studies focusing on the disclosure—
543
performance relationship are very similar in their
design. All of them rely on content analysis as
the primary methodology to measure the quan-
tity and quality of social disclosure. However,
there are considerable differences in the level of
sophistication in the application of the methodo-
logy. Bowman and Haire (1975) restricted them-
selves to counting the number of lines of prose
devoted to social responsibility issues in annual
reports to shareholders and neglected the quality
aspect of information. The other studies repre-
sent a step forward in that they differentiate
among various levels of information quality, dis-
closure categories, and/or industry differences.
Abbott and Monsen (1979) and Freston (1978)
relied on the content analyses of annual reports
published by Ernst & Ernst. Ingram and Frazier
(1980) standardized the content analysis scores
obtained in order to control for the interindustry
disclosure differences observed by Fry and Hock
(1976) as well as Wiseman (1982). Another prob-
lem relates to the mandate by the SEC that, as of
1973, pollution infonnation—the primary proxy
for social disclosure—be incorporated in lOK
reports (Cunningham, 1980; Freedman & Jaggi,
1982b). Analyzing a sample of annual reports
including fiscal years before and after 1973
(Ingram & Frazier, 1980; Wiseman, 1982) may,
therefore, cause inconsistencies.
Whether or not social disclosure is an accept-
able substitute for social performance, measur-
ing corporate social performance poses consider-
able problems in itself because of this concept's
link with the complicated issue of organizational
effectiveness: "An organization's social perfor-
mance is an indistinguishable component of its
effectiveness" (Strand, 1983, p. 90). Social perfor-
mance refers to the extent to which an organiza-
tion meets the needs, expectations, and demands
of certain external constituencies beyond those
directly linked to the company's products/
markets. In the literature this type of effective-
ness is called participant satisfaction, ecological
model, or external effectiveness domain (Keeley,
1978; Kilmann & Herden, 1976; Miles, 1980).
Measuring social performance in this context
implies: (a) empirically creating a list of all of an
organization's external constituents; (b) measur-
ing constituent satisfaction using different mea-
sures (Scott, 1981, p. 323); and (c) maybe even
developing an overall index that encompasses
these different criteria so that organizations can
be ranked in terms of their overall social perfor-
mance. The task becomes more formidable than
even Cameron's (1981) study of universities
because: (a) many studies investigate companies
operating in different industries and (b) the time
span of the studies occasionally encompasses sev-
eral years, during which the composition of an
organization's external constituents and/or their
demands and criteria of satisfaction may have
changed.
In vievkT of these difficulties it is not surprising
that only a few efforts have been made so far to
measure social performance using a relatively
simple approach. One such approach is the devel-
opment of reputational indexes, which list com-
panies exhibiting especially good or bad social
performance. The first index was developed by
Moskowitz and has been updated by him over
several years (Moskowitz, 1972, 1975). The sec-
ond index is based on two surveys conducted by
Business and Society Review and the National
Affiliation of Concerned Business Students, re-
spectively, among business students and busi-
ness people, in which 50 and 45 leading corpora-
tions, respectively, were rated in terms of social
performance ("Industry Rates Itself," 1972; "How
Business School Students Rate Corporations,"
1972).
Because the two indices do not measure social
performance per se but rather perceived social
performance by individuals who cannot be con-
sidered constituents, it is fair to assume that they
also reflect other, unknown influences. Bowman
and Haire (1975) relied on a sample of Mosko-
witz's list of firms which they compared against
a group of randomly selected equal-sized firms
from the same industry regarding the quantity of
disclosure in annual reports. Preston (1978) com-
pared the list published by Moskowitz against
the disclosure ratings published by Ernst & Ernst.
Abbott and Monsen (1979) correlated social dis-
closure indexes obtained from Ernst & Ernst with
the reputational scale published in Business and
Society Review. Fry and Hock (1976) content-
analyzed annual reports of 135 companies in 15
industries and correlated the social disclosure
scores obtained with another reputational index,
544
the 15 industries' public image, based on busi-
ness students' rankings. However, this study can-
not be fully assessed because it does not ade-
quately describe the research design and method
used.
A second approach relies on the Council on
Economic Priorities' (CEP) pollution performance
rankings, which are based on investigations of
the pollution control records of the largest com-
panies in five highly polluting industries (Council
on Economic Priorities, 1977). These data were
used by several scholars interested in the rela-
tionships among social performance, social dis-
closure, and economic performance. The quality
of the individual CEP reports varies significantly,
however. The reports also consider only one
aspect of social performance, and they assume a
high correlation between pollution performance
and other social performance dimensions.
Thus, the studies using the CEP rankings de
facto analyzed the same sample of firms using
the same method. It is comforting to note that
they arrived at identical conclusions—namely,
that no correlation can be found between social
disclosure and pollution performance. This find-
ing did not change despite the varying level of
sophistication in the analyses. Its validity, how-
ever, is limited by the small sample of firms (40
maximum) and the few industries (4 maximum)
investigated. Also, the use of pollution perfor-
mance and disclosure as proxies for social perfor-
mance and disclosure is questionable: organiza-
tions tend to be selective in choosing their areas
of social performance activities (Holmes, 1977)—
an observation that coincides with findings per-
taining to other organizational effectiveness
studies. Fry and Hock (1976) found that size-
related variables— explaining differences in exter-
nal visibility and availability of slack resources—as
well as the industry and its public image are the
most important variables for explaining the ob-
served differences regarding the quantity of social
disclosures. In particular, the public relations
aspect was highlighted by their finding "that com-
panies in industries with the worst public image
were giving the greatest emphasis to responsive-
ness" (Fry & Hock, 1976, p. 64). By contrast,
Abbott and Monsen reported fairly good correla-
tions between their social disclosure indexes and
reputational scales of firms' social performance—a
result that conflicts with Preston's (1978) find-
ings.
In summary, although the more elaborate stud-
ies tend to converge on the finding that no rela-
tionship exists between social disclosure and per-
formance (Table 2), this conclusion is not well
established given the limitations regarding the
sample size and depth, the weaknesses inherent
in the methods used, and the periods surveyed.
Still, one important conclusion can be derived:
studies of the relationship between social perfor-
mance and economic performance are highly
questionable when social disclosure is used as a
proxy for social perfomiance.
Social Performance
and Economic Performance '•••
As has been indicated, several conflicting
hypotheses have been suggested regarding the
relationship between social performance and eco-
nomic performance (Hypotheses 2a, 2b, and 2c).
Alexander and Buchholz argued that:
socially aware and concerned management will
also possess the requisite skills to run a superior
company in the traditional sense of financial
performance, thus making its firm aa attractive
investment (1978, p. 479).
Consequently, socially responsive firms should
outperform nonresponsive or less responsive ones
in terms of accounting variables. Better economic

Table 2
Social Disclosure and SociaJ Performance

Variables Control for

Study Social disclosure Social performance other variables Sample Result

1. Abbott & Social disclosure Reputational scales None 23 (22) firms

Monsen, scale derived from from Business and Society common to both Weak positive
1979 Ernst & Ernst Review ("How Business samples correlation
Students Rate Corpora-
tions," 1972; "Industry
Rates Itself," 1972)
2. Bowman & % of prose in annual Moskowitz's (1972) reputa- None 14 firms matched
Haire, 1975 reports tional scales, citizenship with random Positive correlation
awards sample same
industry, size
3. Freedraan & Quantity & quality of CEP pollution performance Size 31 firms of CEP
Jaggi, 1982 disclosures in annual index sample (oil, steel, No correlation
reports and lOK paper & pulp,
chemical industry)
A. Fry & Hock, Quantity of disclosure Students' evaluation Size 135 firms in 15 Negative: firms with
1976 in annual reports of industry reputation industries poor image dis-
close more
5. Ingram & Pollution disclosure CEP pollution perfor- None 40 firms of CEP
Frazier, in annual reports mance index sample (oil, steel, No correlation
1980 paper & pulp, el.
utilities]
6. Preston, Social disclosure from Moskowitz (1972) None 41 firms included No correlation
1978 Ernst & Ernst reputational scales in both samples
7. Wiseman, Quantity & quality of CEP pollution None 26 firms of CEP
1982 pollution disclosure performance index sample (oil, steel, No correlation
in annual reports pulp & paper)

545
 V ^
performance also should be reflected in the firm's
stock price and attached systematic risk. The
problems related to this hypothesis center around
other variables that may have to be included or
controlled for, such as social beliefs of the firm's
key decision makers (Sturdivant & Ginter, 1977)
and of investors, visibility of the firm (Arbel &
Strebel, 1982), and investors' ability to interpret
the finn's social performance and to relate it to
their investment decisions. As shown by Hines
(1982), shareholders are heterogeneous and dif-
fer in their expectations of future returns as well
as in their interpretative skills. Thus, "Friedman-
type" investors could view a firm's social perfor-
mance as detrimental or excessive to economic
performance—the only legitimate activity in their
opinion—leading to a negative or inverted U-
shaped correlation between social and economic
performance (Friedman, 1962).
Other measures for assessing social perfor-
mance have been proposed. Parket and Eilbirt
(1975) based their dichotomous ranking on the
response pattern to their social responsibility
survey, reasoning that socially active companies
would be more likely to respond. Kedia and
Kuntz (1981) evaluated the social performance
of their sample of Texas banks based on the
banks' activities in five different areas of social
responsibility that they considered important.
Hence, their approach comes closer to the effec-
tiveness model suggested here. Kedia and Kuntz
did not develop an overall social performance
index, but evaluated the relationship between
economic performance and five types of social
performance. They found that companies are
selective regarding the types of social perfor-
mance they emphasize.
Economic performance is measured by stock
market performance variables or retum ratios cov-
ering different time periods ranging from seven
months to ten years. As indicated in Table 3, the
studies focus on different years, cover varying
time spans, investigate different firm samples,
and use a variety of measures for social and eco-
nomic performance. In view of this it seems con-
venient to structure the discussion following the
social performance measures used.
Reputational Scales
Studies relying on reputational scales differ in
546
their level of refinement and yield conflicting
results at best. Moskowitz (1975) investigated
short term performance and found a positive cor-
relation between social and economic perfor-
mance; but this result was contradicted by Vance
(1975) in his follow-up study covering a 3-year
period. Cochran and Wood (1984) explained that
the contradiction arose because the two studies
failed to adjust for the risk of the firm portfolios
when investigating economic performance under
different economic conditions. The same criti-
cism holds true for a study by Sturdivant and
Ginter (1977), who relied on Moskowitz's list of
firms and who also found a positive correlation
between social and economic performance. In
their study they compared the firms against
industry averages, thereby partially controlling
for industry-specific risk and performance pat-
terns. But, in contrast to Moskowitz and Sturdi-
vant and Ginter on the one hand and Vance on
the other, Alexander and Buchholz (1978) were
unable to detect any significant relationships
when correlating reputational scales with risk-
adjusted economic performance. In their most
recent study, Cochran and Wood (1984) made no
differentiation between social disclosure and
social performance. Their analysis revealed a
positive correlation between social performance,
measured by reputational scales, and two of three
economic performance measures. However, they
found asset age to be the most significant predic-
tor of social performance in that firms with older
assets tended to score significantly lower on the
reputational scale. The authors speculated that
this was because of the costs associated with
upgrading old facilities for purposes such as pol-
lution abatement, and to older firms' relative
inflexibility of management. They were reluctant
to mention another, more obvious reason for their
finding—that maybe the reputational scale is a
poor measure of social performance.
Pollution Performance
Positive correlations between pollution perfor-
mance (as a proxy for social performance) and
economic performance were found by Bragdon
and Marlin (1972) and by Bowman and Haire
(1975) in their follow-up study. These results
were confirmed by Spicer (1978a, 1978b), who
included both accounting and market variables
Table 3
Social Performance and Economic Performance

Variables Control for

Study Social performance Economic performance other variables Sample Result

1. Alexander & Reputational scales Stockholder return Beta 40 firms included No correlation
Bucbholz, from Business and 1970-1974 in both surveys
1978 Society fleview ("How
Business Students Rate
Corporations," 1972;
"Industry Rates Itself,"
1972)
Median ROE 1969-1973 None 15 firms from the U-shaped correlation:
Haire, 1975 performance index paper & pulp middle polluters
industry included outperform best and
in Council on worst
Economic Priori-
ties Survey
3. Bragdon & CEP pollution Average ROE 1965-1970 None 17 firms from the Positive correlation
Marlin, performance index Average ROC 1965-1970 paper & pulp
1972 EPS growth 1965-1970 industry included
in CEP survey
4. Chen & CEP pollution ROE, P/E ratio, total Size 18 firms from the Spurious positive
Metcalf, performance index risk, beU 1968-1973, paper & pulp correlation, size
1980 1969-1971, 1971-1973 industry included explanatory
in CEP survey . variable
5. Cochran & Moskowitz's (1972, Op. Earnings/Sales Asset age 39 (36) firms in Weakened positive
Wood, 1984 1975) reputational Op. Earnings/Assets Asset 29 industries correlation when
scale Excess market valuation turnover compared against controlling for asset
1970-1974, 1975-1979 industry control age
groups
6. Fogler & CEP pollution Normalized P/E ratios None 9 firms from the No correlation
Nutt, 1975 performance index 3/1971-3/1972, mutual paper & pulp •

fund purchase, short run industry included

stock price in CEP survey • • ; . • •

7. Kedia & Existence of social Income before security None 30 commercial Positive with female
Kuntz, responsibility pro- gains/losses, taxes/ banks in Texas promotions.negative
1981 grams,in 5 different total assets with charitable
areas contributions, rest
no correlation

8. Moskowitz, n.a Stock price change None 14 firms Positive correlation

1972 1/1972-7/1972
9. Parket & Existence of social Net income, net profit None 80 Fortune 500 Positive correlation
Eilbirt, responsibility margin, ROE, EPS firms compared for all economic
1975 programs against Fortune performance
500 measures
10. Spicer, CEP pollution ROE, P/E raUo, total None 18 firms from the Moderate positive
1978a performance index risk, beta 1968-1973, paper & pulp correlation for
1969-1971, 1971-1973 industry included 1969-1973, less for
in CEP survey 1971-1973

547
Table 3 (continued)
Variables Control for
Social performance Economic performance other variables Sample Result
Study
CEP pollution Total risk, beta 1968- None Negative correlation
11. Spicer,
1978b performance index 1973 ::;: • . - . ' • • • • • • • / , - ' ' - : • • • • - • • - •
pollution perfor-
mance—risk;
- ' (1) Earnings ' • pollution perfor-
variability. mance increases
(2) Firm size, • explained variance
(3) Leverage, of total risk after
(4) Current ratio (1), (2) and (3), and
of beta after (1), (2)
and (4)
EPS growth 1964-1974 Industry 28 firms of Positive correlation;
12. Sturdivant & Moskowitz's (1972,
dinter, 1977 1975) reputational Moskowitz's list positive correlation
scale between managers'
social values and
economic perfor-
mance
Moskowitz's (1972) Stock price change None 14 firms of Negative correlation
13. Vance,
1975 reputational scale 1972-1975 Moskowitz's list
Reputational scales Price per share change None 45 (50) firms from Negative correlation
from Business and 1974-1975 surveys
Society fleview ("How
Business Students Rate
Corporations," 1972;
"Industry Rates Itself,'
1972)

in measuring economic performance. He found
that better pollution performance was associated
with higher profitability, lower risk, and larger
firm size. These findings, however, conflicted
with those reported by Fogler and Nutt (1975)
and Chen and Metcalf (1980), all of which were
based on the same firm sample of the pulp and
paper industry surveyed by the CEP.
The Spicer-Chen/Metcalf controversy is of par-
ticular interest. In their replication of the Spicer
study, Chen and Metcalf found firm size to explain
both pollution and financial performance. Judg-
ing from their critique of Spicer's study they were
unaware of Spicer's other paper (1978b) pub-
lished in the same year, in which Spicer himself
found size to be of explanatory value:
When the pollution control variable is forced into
the regression there is a sharp decline in the coeffi-
cient and significance of the size variable in the
regression equation. Statistically, this is due to
the fact that these two variables are highly corre-
lated (Spicer, 1978b, p.8O).
Spicer, however, provided another interpreta-
tion of his findings—size-related ability to pur-
chase pollution abatement equipment. Whether
548
or not larger firms display better pollution con-
trol performance is a controversial issue. On the
one hand, larger companies are subject to more
public scrutiny and are more likely to have the
necessary financial, managerial, and technical
know-how for abating emissions than are their
smaller counterparts. Also, economies of scale in
pollution abatement would seem to favor large
emitters. On the other hand, because of their bar-
gaining power as significant taxpayers and em-
ployers, large companies are in a better position
to obtain concessions from legislators and
enforcement agencies that may result in different
compliance standards for large and small pollut-
ers (Downing & Hanf, 1983). In his reply to Chen
and Metcalf, Spicer (1980) did not mention that
he was aware of the importance of firm size.
Other Measures of Social Performance
Parket and Eilbirt (1975) reported a strong posi-
tive correlation between social and economic
performance. However, serious doubts can be
raised regarding the validity of their social perfor-
mance measure. That some Fortune 500 compa-
nies from many different industries happen to
respond to a social responsibility questionnaire
is clearly a poorer measure than others suggested
in the literature, although the likelihood that the
responding companies display higher levels of
social performance cannot be ruled out. Kedia
and Kuntz (1981) found that economic perfor-
mance tended to be positively associated with
one of their five social performance measures and
negatively with a second one; no correlation
could be reported regarding the remaining
measures.
Again, no clear tendency can be discerned. The
more elaborate studies seem to converge towards
rejecting any relationship between social perfor-
mance and economic success, but this is by no
means conclusive.
Social Disclosure
and Economic Performance
As indicated above, a preliminary research
question concerns the information content of
social disclosures to investors; based on the effi-
cient market h5rpothesis, social disclosures would
be reflected in share price changes, provided they
have informational value. If Friedman-style in-
vestors place a negative premium on companies
apparently involved in what they consider waste-
ful voluntary social responsibility activities,
social disclosures could lower the price of a
security. Alternatively, "ethical" investors may
be willing to pay a premium price for shares of a
socially responsive firm, causing the price to go
up. Social disclosures also may improve a
security's risk associated with expensive social
performance improvement programs, potential
fines, or social sanctions.
Although the efficient markets hypothesis is
well researched (Fama, 1976), a few important
questions remain regarding its application to
social disclosures. First, social disclosure deci-
sions could depend on several other variables,
such as firm size, industry and company visibi-
lity, external pressures, and executive values that
have to be controlled for when investigating the
disclosure-performance relationship. Second, it
is not clear whether the models and empirical
findings regarding financial disclosure can be
applied to social disclosures. One would tend to
assume that interpreting this kind of information
549
would be more difficult (Hines, 1982). Third,
implicit in the model is the assumption of a more
or less steady investment activity. Only under
such circumstances will the discontinuous flow
of infonnation coming from company disclosures
in annual reports be immediately integrated into
the stock price.
The content analyses used for determining the
social disclosures vary considerably with regard
to level of refinement. Abbott and Monsen (1979),
Belkaoui (1976), Bowman (1978), Bowman and
Haire (1975), and Fry and Hock (1976) performed
simple, dichotomic analyses; Anderson and
Frankle (1980), Ingram (1978), and Jaggi and
Freedman (forthcoming) differentiate between
various areas of disclosure—for example, commu-
nity related versus minority related, and quality
of disclosure; and financial versus descriptive.
Depending on the research objective, economic
performance is measured by accounting variables,
stock price movements, or monthly returns. The
choice of variable can influence the time period
covered; most studies using accounting variables
focus on medium to long term economic perfor-
mance ranging from 1 to 10 years, whereas mar-
ket reaction studies are more shorf term oriented
with a maximum period of 24 months.
Table 4 indicates that the seven studies using
accounting variables for measuring economic per-
formance tend to converge on a weak positive
correlation between social disclosure and eco-
nomic performance. However, Table 4 also shows
the methodological weaknesses of a majority of
those studies; generally, intervening variables are
not taken into consideration, and if they are,
important information is lacking (Fry & Hock,
1976). These findings conflict, however, with
those of the two more refined analyses. The Freed-
man and Jaggi paper (1982a), however, is restrict-
ed to one category of social disclosure. In view of
Holmes's (1977), Ingram's (1978), and Kedia and
Kuntz's (1981) findings, extrapolations to other
areas of social responsibility are questionable.
The Ingram and Frazier (1983) paper is of par-
ticular importance because it provides an ex-
tended conceptual framework. The authors were
interested in the correlation between the content
of the discretionary section of the annual report
and the firm's economic performance, which they
assume to be influenced by several factors (poli-
Table 4 '«
Social Disclosure and Economic Performance: Accounting Variables

Variables Control for

Social disclosure Economic performance other variables Sample Result
Study

Overall disclosure ROE 1964-1974 Size 450 of 1974 None, for largest
1. Abbott &
score based on Fortune 500 firms slightly
Monsen, 1979
firms positive correla-
Ernst & Ernst
tion

Percent of prose in ROE 1972-1974 None 46 firms from Positive correlation

2. Bowman, 1978
annual reports electronic com-
puting industry
ROE 1969-1973 None 82 firms of food U-shaped correlation
3. Bowman ft Percent of prose in
processing highest ROE for
Haire, 1975 annual reports
industry middle disclosers
None 109 firms of No correlation
4. Freedman & Quality & quantity ROA, ROE, Cash Flow/A,
Jaggi, 1982a of pollution Cash Flow/E, pollution
disclosure in annual EBIT/A, EBIT/E Size intensive Negative correlation
reports lOK 1973-1974 industries
Quantity of Earnings (?) Size, industry 135 firms from Weak positive
5. Fry & Hock,
1976 disclosure in image 15 industries
annual reports
Computerized Factor analysis of 48 Firm size. 79 firms from Weak negative
6 InBTam &
.... u content analysis of accounting ratios stock owner- metals, oil. correlation
Frazier, 1983 annual reports ship distri- chemical
•••if.,;,. ;•;:;.:•/ .-:••'} bution industry
Quantity of 1975 ROE None Fortune 500 firms Weak positive
7. Preston, 1978 correlation
disclosure in 2
years between 1971
and 1975

tical constraints, agency relationships, regulatory one or the other direction.

environment, contractual arrangements). Their
content analysis used a computerized system that
reduced the text to several factors identifying
important themes. Ingram and Frazier found:
Less profitable firms tended to discuss the rea-
sons for their performance in terms of external
causes, whereas more profitable firms referred
more directly to management performance (1983,
p. 57).
Some of the themes identified in this research may
suggest attempts by firms to "rationalize" their
financial performances by reference to events
which could not be anticipated or controlled (1983,
p. 59).
If Ingram and Frazier's findings can be gener-
alized, a negative correlation can be expected
between economic performance and disclosure
of (quasi-) mandated social performance activities.
Given the discrepancies in findings, it seems
premature to decide there is a clear tendency in
The studies using investor reaction as a mea-
sure of economic performance generally display
higher levels of methodological sophistication
(Table 5). With the exception of the first study
(Belkaoui, 1976), intervening variables are taken
into consideration. Jaggi and Freedman (forth-
coming) show, however, that interim disclosure
of financial information—which occurs several
• times a year—acts as a confounding variable that
should be controlled for. Ingram's (1978) find-
ings stressed that the relationship between social
disclosure and economic performance is contin-
gent on many other variables—a result confirmed
by the Ingram and Frazier (1983) study as well as
by that of Trotman and Bradley (1981), which
examined Australian firms. The major flaw in
Ingram's research is that his market segment vari-
ables are inductively created and not based on ex
ante hypotheses. The Shane and Spicer (1983)

550
paper represents a slight variant of the other stud-
ies in that it focuses on the market's reaction to
the puhlication of the CEP studies, which can he
viewed as an audit of the major competitors in
pollution-intensive industries. In summary, given
the ambiguous results, no clear tendency can be
discerned. Hence, the null hypothesis seems to
be the most reasonable position.
A Conceptual Framework
Foundatioiis
The generally ambiguous nature of the results
of the studies surveyed in the previous sections
suggests that the models may be incompletely
specified. Rather than accumulating studies and
trying to control for an increasing numher of
variables, another research direction is advisable.
It is argued here that questions about the exis-
tence and direction of the correlations among the
three concepts are, in fact, pseudo-problems.
Instead, the relationships should he recognized
as indeed amhiguous. What should he looked for
is the missing element that, when included in
the model, would help to explain the varying

Table 5
Social Disclosure and Economic Performance: Market Variables

Variables Control for

Study Social disclosure Economic performance other variables Sample Result

1, Andereon & Overall disclosure Monthly retum diffe- Beta (iso-beta 314 of 1972 Positive correlation
Frankle, 1980 and types of rences 7/1972-6/1973 portfolios) Fortune 500 firms for certain months
disclosure based on for disclosers vs.
Ernst & Ernst nondisclosers:
Beta (iso-beta financial vs.
portfolios) qualitative
EPS disclosers;
continuous vs.
new disclosers
2. Belkaoui, 1976 Pollution disclosure Monthly average None 50 firms with & Positive, yet
in annual reports residuals, 12 months without disclosure temporary
prior & after disclosure in 1976 correlation
3. Ingram, 1978 Various types of Monthly portfolio Earnings, year. 287 of 1970-1976 No correlation
disclosures in returns 9 months prior industry, beta Fortune 500 firms between portfolio
annual reports and 3 months after time means; positive
fiscal year end correlation when
• • • • •market segments
- • • ; =

are considered
4, Jaggi & Pollution disclosure Monthly average Other dis- 109 firms from 4 No correlation
Freedman in annual reports residuals 8 months closure, beta pollution intensive! between disclosers
(forthcoming} and lOK prior/after disclosure industries and nondisclosers;
significant in-
vestor reaction to
disclosed informa-
tion; investors do
not differentiate
between types of
disclosure
5, Shane & CEP pollution Standardized abnormal Cross-sectional 72 of 103 firms Significant net price
Spicer, 1983 performance index mean-adjusted daily correlations from CEP sample decrease 1 & 2 days
return for 6 days around prior to release.
release date of Council largest decrease for
on Economic Priorities worst polluters
study

551
nature of the relationships among social dis-
closure and social and economic performance,
thereby making it possible to forecast the circum-
stances under which correlations and their direc-
tion can he expected. This missing element is
strategy.
A few years ago Bowman and Haire (1975) sug-
gested that strategy should be included as a
variable. Their finding of a U-shaped correlation
between social disclosure and economic per-
formance—although methodologically flawed—
indicates that managers are confronted with a
prohlem when deciding on how to allocate com-
pany resources optimally between various effec-
tiveness dimensions for successfully coping with
the task environment.
Thompson and Pfeffer and Salancik provide
the foundations for the proposed strategic frame-
work. Thompson emphasized that organizations
are selective with regard to the stakeholders they
take into consideration as well as the actions they
undertake to achieve an optimal relationship with
them:
Under norms of rationality complex organizations
are most alert to and emphasize scoring well on
those criteria which are most visible to important
task environment elements (1967, p. 90).
Pfeffer and Salancik suggested that the stake-
holders' importance derives from their power to
control resources required by the organization:
Our position is that organizations survive to the
extent that they are effective. Their effectiveness
derives from the management of demands, partic-
ularly the demands of interest groups upon which
the organizations depend for resources and sup-
port ... The exchanges may involve monetary and
physical resources, infonnation, or social legiti-
macy. Because organizations are not self-contained
or self-sufficient, the environment must be relied
upon to provide support. For continuing to pro-
vide what the organization needs, the external
groups or organizations may demand certain
actions from the organization in return . . , We
would concur that, in general, organizations will
tend to be influenced by those who control the
resources they require (1978, pp. 2, 43-44).
The resource dependence perspective has been
utilized by several scholars in a strategic context—
for example. Miles (1982). Pfeffer and Salancik
also stressed that organizations enjoy a certain
degree of discretion on how to fulfill these exter-
nal demands. As a result, different strategies can
be observed, ranging from avoiding the stake-
552
holders' demands to partial or total fulfillment of
them. In this context, social performance is
viewed as the result of a strategy for dealing with
stakeholder demands. Therefore, unless social
disclosure actually represents an external de-
mand, it is either a supporting strategy connected
with social performance or an alternative strat-
egy for managing stakeholder relations, a per-
spective closely related to the boundary span-
ning concept.
Model
A three-dimensional model is presented here
that can explain the conflicting results regarding
the correlations among social disclosure and
social and economic performance.
As the first dimension, stakeholder power
reflects the theoretical basis of the proposed
framework. For example, when stakeholders con-
trol resources critical to the organization, the com-
pany is likely to respond in a way that satisfies
the demands of the stakeholders. Thus stake-
holder power tends to be positively correlated
with social performance. Conversely, if the power
of stakeholders is low, their demands tend to be
ignored by the focal organization.
As the second dimension, strategic posture
describes the mode of response of an organiza-
tion's key decision makers towards social de-
mands. Many scholars in the area of strategic
management have stressed the importance of val-
ues and attitudes in the strategy formulation pro-
cess (Freeman, 1984; Glueck, 1980), and this is
even more so in the context of responding to
social demands (Carroll, 1981; Sturdivant &
Ginter, 1977). An active posture implies a posi-
tion in which managers seek to influence their
organization's relationship with important stake-
holders in order to achieve optimal levels of
interdependence. Freeman suggests several tech-
niques for monitoring an organization's stake-
holders, and proposes four generic strategies. For-
mulating social responsibility programs as well
as disclosing their existence can he viewed as
part of the strategic arsenal of dealing with one
particular segment of a firm's stakeholders. Cor-
porations displaying a passive posture are nei-
ther involved in continuous monitoring activi-
ties nor deliberately searching for an optimal
stakeholder strategy in terms of type and timing
of program.
As a third dimension, a finn's past and current
economic performance is important in two ways.
First, economic performance determines the
relative weight of a social demand and the atten-
tion it receives from top decision makers. In peri-
ods of low profitability and in situations of high
deht, economic demands will have priority over
social demands. Second, economic performance
influences the financial capability to undertake
costly programs related to social demands.
Viewed in this context, social performance and
disclosure are means to manage dependence
relationships. Depending on the configuration of
the three dimensions, a firm will use either social
performance or social disclosure or both tech-
niques simultaneously to manage its relationship
with its stakeholders. The three dimensions and
the resulting two types of programs can be com-
bined in a framework shown in Table 6. For illus-
trative purposes, only binary variables are used
in the model.
Discussion
The eight situations displayed in Table 6 can
deal with all the correlations found in the litera-
ture. A few examples will help in the table's
interpretation:
Situations 1 and 8 indicate positive correla-
tions for all three investigated relationships.
When stakeholder power is high (low), economic

Table 6
Contingency Framework

Stakeholder Strategic Economic

Situation power posture performance Strategy

1 High Active Good Social performance: high

Social disclosure: high (mandatory and
voluntary)
High Active Poor Social p>erformance: high
Social disclosure: high regarding
mandated matters, low regarding
voluntary matters
Low Active Good Social performance: low
Social disclosure: high regarding . .
mandated matters, low regarding
voluntary matters
Low Active Boor Social performance: low
Social disclosure: low (mandatory and
voluntary)
High Passive Good Social performance: high
Social disclosure: indeterminate
regarding mandatory matters, low
regarding voluntary matters
High Pas8ive Social performance: indeterminate
Social disclosure: indeterminate
regarding mandatory matters, low
regarding voluntary matters
Low Passive Good Social performance: low
Social disclosure: low (mandatory and
voluntary)
Low Passive Poor Social performance: low
Social disclosure: low (mandatory and
voluntary)

553
performance good (poor), and the key decision
makers subscribe to an active (passive) posture, a
strategy of high (low) levels of social performance
and disclosure would be expected.
In situation 1, management's objective is to dis-
play and advertise managerial excellence across
the entire effectiveness spectrum. This rationale
manifests itself on the one hand in good eco-
nomic performance and in social activities going
beyond the legally required or customarily ex-
pected levels of social performance, and on the
other hand in extensive disclosures of these
programs. In such a situation management's fears
that investors will put a negative premium on
social performance is minimal.
In situation 2 the company again exhibits rela-
tively high levels of social performance and social
disclosure—but for different reasons. High stake-
holder power accounts for the high levels of social
performance. High levels of social disclosure per-
tain only to legally mandated matters. The ratio-
nale behind this behavior is that an active posture,
combined with an unfavorable economic situa-
tion, leads to an information strategy that attempts
to rationalize poor economic performance by
reporting extensively on the financial impact of
(excessive) social regulation.
In situations 5 and 6, no clear correlations are
expected. It is assumed that a passive posture in
general results in low levels of social disclosure,
because the firms do not recognize disclosure's
strategic potential and thus tend to report the
legally required minimum. Despite high stake-
holder power, firms displaying a passive posture
may opt for low levels of social performance or
for delaying such programs. In situation 6 this
strategy is reinforced by poor economic per-
formance.
Conclusions
The purpose of this framework is to suggest a
different direction for future research. In order to
arrive at more convincing and consistent results,
two steps are necessary:
Strategic Framework. Several authors have
implicitly or explicitly suggested a strategic
framework whereby social performance programs
are tools for managing social demands. Similarly,
many business people have stated that social
responsibility activities are undertaken on a vol-
554
untary basis to prevent govemment action
(Carroll, 1981).
The same strategic viewpoint also holds true
with regard to social disclosure. There is consid-
erable evidence that annual reports to sharehold-
ers are used to influence the level of external
demands originating from many different con-
stituencies, not just shareholders. Mitnick (1981)
reported two incidents in which the infonnation
content regarding the same social issue varied as
a function of the receiver of the information.
Freedman and Wasley (1983) content-analyzed
the social disclosures found in annual reports to
shareholders and in lOK reports of the largest
100 Fortune 500 firms for 1979-1981 and found
significant differences regarding the disclosures
in areas of public interest. These differences can
be accounted for by the focus of annual reports
on a wide variety of constituencies, whereas the
lOK reports are tailored to the nanower needs of
the SEC and financial analysts.
This broader view of social disclosure also is
supported by findings in related fields. There is
considerable evidence that voluntary financial
disclosure is related to the firm's strategy for
reaching goals such as obtaining additional finan-
cial resources or securing access to financial mar-
kets (Spero, 1979).
Voluntary disclosure of company data also is
discussed in a strategic context with regard to
collective bargaining (Craft, 1981, 1984; Foley &
Maunders, 1979; Maunders & Foley, 1984).
Methodological Improvements. According to
the model proposed here, additional variables
based on a contingency approach should be
included in any attempt to correlate social per-
formance, economic performance, and social
disclosure. For instance, samples should be devel-
oped that include firms with different strategic
postures. Also, longitudinal studies could pro-
vide insights into how strategies change as a func-
tion of shifting stakeholder power or economic
performance. Second, the model suggests that dif-
ferentiation is needed between mandated and vol-
untary social performance activities and related
disclosures. In view of the complexities surround-
ing the measurement of social performance, this,
of course, is a difficult task. Third, considerable
shortcomings exist among social performance
measures. New ideas and approaches are badly
needed. One such innovative study, in which
pollution performance is based on physical pol-
lution data filed with EPA, is currently under-
way {Freedman & Jaggi, 1984).
In conclusion, the situation pertaining to the
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• > < - - • ^ , _ ; : - : . : : : / - : . . . : } . • ? : . . ; - - . i - , ^ . . . . . . •:•:':•-, , - ^ • ••..;• , , ; - . . ^ > r . - . - : r . ; . : - . - .

Arieh A. Ullmann is Associate Professor of Manage-

ment in the School of Management, State University
o/New York at Binghamton.

557
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