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Revisiting the Vexing Question: Does Superior Corporate Social Performance Lead to Improved Financial Performance?

Author

Listed:
  • Darren D. Lee

    (UQ Business School, University of Queensland, Brisbane.)

  • Robert W. Faff

    (Department of Accounting and Finance, Monash University, Melbourne.)

  • Kim Langfield-Smith

    (Department of Accounting and Finance, Monash University, Melbourne.)

Abstract

The empirical evidence documenting the association between a firm's level of corporate social performance (CSP) and corporate financial performance (CFP) remains divided. This paper reinvestigates the CSP/CFP association using a more rigorous methodology whilst taking advantage of a superior measure of CSP. In contrast to the findings of much of the prior research, the market-based tests suggest a negative association between CSP and CFP, while the accounting tests indicate no association exists. We suggest that the negative market CSP/CFP relation should not be interpreted as CSP having no value. Rather, our results may suggest that leading CSP firms trade at a price premium (i.e. returns discount) relative to lagging CSP firms, thereby indicating that financial markets value CSP and are prepared to realise lower returns. For firms, this signals an ability to obtain a lower cost of equity capital when they proactively manage their CSP profiles.

Suggested Citation

  • Darren D. Lee & Robert W. Faff & Kim Langfield-Smith, 2009. "Revisiting the Vexing Question: Does Superior Corporate Social Performance Lead to Improved Financial Performance?," Australian Journal of Management, Australian School of Business, vol. 34(1), pages 21-49, June.
    • Handle: RePEc:sae:ausman:v:34:y:2009:i:1:p:21-49
    DOI: 10.1177/031289620903400103
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