IMPACTS OF CORPORATE SOCIAL RESPONSIBILITY ON THE
FINANCIAL PERFORMANCE OF THE FIRMS BY
NGO THI LINH
ID: E0700042

Graduation Project Submitted to the Department of Business Studies,
HELP University College, in Partial Fulfilment of the Requirements for
the Degree of Bachelor of Business (Accounting) Hons APRIL 2011

DECLARATION

IMPACTS OF CORPORATE SOCIAL RESPONSIBILITY ON THE
FINANCIAL PERFORMANCE OF THE FIRMS

by
NGO THI LINH
April 2011

Supervisor: Dr. PHAM DUC HIEU


1.1 Background of study
1.2 Statement of purpose
1.3 Structure of study

Chapter 2 LITERATURE REVIEW 2
2.1 Definition of CSR
2.1.1 Historical definition of CSR
2.1.2 CSR in the 21
st
Century
2.2 Relevant theory on the relationship of CSR and financial performance
2.2.1 Relevant theory suggest a positive relationship
2.2.2 Relevant theory suggest a negative relationship
2.3 Experiential study of CSR and financial performance
2.4 Relevant literature about benefits and costs of CSR
2.4.1 Economic benefits of CSR
2.4.2 Economic costs of CSR
2.5 CSR and accounting performance
2.5.1 How economic benefits are reflected on accounting earnings
2.5.2 How economic costs are reflected on accounting earnings
2.5.3 Additional accounting issues and implication
2.6 How CSR can reduce the cost of the company
2.6.1 Reduce the financing cost
2.6.2 Reduce the cost of human resourches
2.6.3 Reduce the operating cost
Chapter 3 METHODOLOGY
3.1 Research objective
3.2 Research strategy
3.3 Measurement
3.3.1 Measurement of Corporate Social Performance
Chapter 1: Introduction
1.1 Background of study
Nowadays, the importance of corporate social responsibility (CRS) has been more
considered by firms than ever. Most of the Fortune 1000 companies issue CSR reports,
they not only care for their responsibility but also they consider it as a key to business.
Many firms know that they can get benefits from their social actions. Some of the most
significant advantages of CSR are: improved company image and reputation, raised
ability to draw and keep employees, and potentially decreased regulatory mistake. The
study in economics and direction on the benefits and costs of CSR is growing very fast.
Marketing researches prove that ―70% of European consumers consider important a
firm‘s commitment to CSR when buying a product or service and, moreover, 1 in 5
consumers would be willing to pay more for products that are socially and
environmentally responsible‖. In 2003, many current studies disclosed that ―more than
eight in ten British consumers consider important that a firm shows a high degree of
social responsibility, when making their purchasing decisions‖. Also, most of customers
feel that firms do not pay attention and take action to their environment and social
concern. In a study of Mohr and Webb (2005) about the impact of CSR on price and
consumer responses, the results show that CSR has a positive impact on consumers‘
valuation of a company and on their buying habits. The study also discovers that a low
price does not emerge to recompense for a low level of CSR.
CSR is an important issue which concerns about the ethics, society, natural environment,
employees and also working environment as a whole in which how the firm behave. On
September 13, 1970, in the New York Times, Milton Friedman wrote: ―There is one and
only one social responsibility of business— to use its resources and engage in activities
designed to increase its profits so long as it stays within the rules of the game, which is

tries to analyse the relationship between CSR and accounting performance. This study
also questions how CSR can increase the profit of a company. Furthermore, this study
will examine CSR among two companies in Viet Nam: Vedan and Unilever to see the
outcomes of adopted CSR.
The main question is what is the impact of CSR on the company‘s profitability? This
question is divided into three sub problems which must be answered throughout this
study:
 The economic benefit and cost of CSR.
- Economic benefits of CSR
- Economic costs of CSR
 CRS and accounting performance.
- How economic benefits are reflected in accounting earnings.
- How economic costs are reflected in accounting earnings.
- Additional accounting issues and implications
 How CSR can reduce the costs of a company
 The outcome of CSR adopted in Vedan and Unilever in Vietnam.
1.3 Structure of study
The thesis will be organized as follows: First, the literature review chapter (chapter 2)
will provide a basic understanding of the concept of CSR; the relevant theories describe
the relationship between CSR and financial performance as well as empirical studies of
CSR and financial performance. The relevant theories will be examined in two aspects
of positive and negative relationship. In chapter 2, study also includes the theoretical
framework which answers three problems of this study: benefits and costs of CSR, how
CSR reflects on accounting performance, and how CSR can increase profits (or reduce
the costs) of a firm. This will provide the framework for the subsequent analysis. A
methods chapter (chapter 3) will precede the analysis in chapter 4, in which the
relationship between CSR and financial performance of the firm will be presented and
analyzed according to the literature review. Chapter 4 shall also analysis the outcome of
CSR adopted by Vedan and Unilever in Vietnam. Study will complete with concluding
remarks in chapter 5.

should be: ―An action by a firm, which the firm chooses to take, that substantially affects
an identifiable social takeholder‘s welfare.‖

2.1.1 Historical definition of CSR
Although the name CSR appear to be new to the business world, the concept of CSR has
taken over a number of decades through out many literatures. The fact that the
terminology of CSR has modified over this time, and the meaning attribute to concepts
of CSR will also continue to grow with the development of business, political and social.
Because of the rapid influence of globalization and mass communication, the meaning
and awareness of CSR will not only reflect local situation, but will be also strongly
impacted by global development and changes in international law such as consolidation
of law among countries.
CSR in the 1980s
The 1980s have been knows in which had ―a more responsible approach to corporate
strategy‖. The 1980s also had some famous events such as R Edward Freeman working
on the rising Stakeholder Theory. Freeman observed ―meeting shareholders needs as
only one element in a value-adding process‖, he also defined a variety of stakeholders
who were related to the organization‘s operations. In 1984, the paper of Freeman
continues to be recognized as the ―dominant paradigm‖ in CSR.
According to Carroll, in the 1980s, ―the focus on developing new or refined definitions
of CSR gave way to research on CSR and a splintering of writings into alternative
concepts and themes such as corporate social responsiveness, CSP, public policy,
business ethics, and stakeholder theory/management‖. Carroll also figured out many
studies of other authors such as Tuzzolino and Armandi who ―sought to develop a better
mechanism for assessing CSR by proposing a need-hierarchy framework patterned after
Maslow‘s‖, and Jones who ―posited that CSR ought to be seen not as a set of outcomes
but as a process‖. The authors created a conceptual tool which called organizational
hierarchy to evaluate socially responsible performance of the firm.
One of the most emerged events in the 1980s was the global debate on sustainable
development. The interdependence of protection and development was stated on The

The CSP structure created by Wood and the hierarchy of responsibilities created by
Carroll which has economic responsibilities at the bottom and charity at the top, are
used in many literature such as Windsor (2001). According to Swanson (1995), there
were three key types of incentive for CSR:
i. The practical perspective (an tool to complete performance objectives);
ii. The negative duty approach (force to approve socially responsible initiatives to
propitiate stakeholders); and
iii. The positive duty approach (business self-motivated in spite of social
pressures).
Beside that, Wood also defined three major types of processes which can be used by a
company to apply CSR motivational principles: environmental management, issues
management and stakeholder management. According to Wood in Maignam and Ralston
―Once implemented throughout the organization, these processes help the firm to keep
abreast of and to address successfully, stakeholder demands‖. However, this view of
CSR and the relationship with stakeholders may be simple. In 1990s, this view was
occurring in following years on the debate of the theory of stakeholder. According to
Nahan in Ryan in 2002 discussed whether ―the first priority of a corporation is to its
shareholders‖ or whether policy makers should build up ―a flexible multi stakeholder
approach to promoting CSR‖.
O‘Rourke also explained the group that called primary stakeholder who is the
shareholders as ―the boundary zone of CSR is currently being negotiated‘ with the firms.
O‘Rourke stated that: ―A trend also noteworthy in the late 1990s was that of shareholder
activists linking their environmental or social issue to financial performance and/or risks
faced by the company. By claiming that environmental and social issues have a direct
effect on shareholder value, shareholder activists are moving the rhetoric of their
activism out of the realm of ―ethics‖ or good versus bad behavior, and into that of
traditional issues of profitability, risk and shareholder value‖
The establishment of group BHP Shareholders for Social Responsibility in 1994 which
is the result of shareholder worry about environmental damage made by the firm in
Papua New Guinea is a special example of shareholder activism. This group takes care

exactly the conclusion of Windsor that ―There are fundamental differences of opinions
and values in the global economy‖. The argument of Oketch is that ―there is need to
ensure that the global market operates according to a certain set of rules and institutions
that a majority of people see as being legitimate‖ increase more problems than it
answers.
Follow with the fast moving of global business, many recent literatures are being moved
away from debates in US to other countries in over the world. There are many authors as
Maignan and Ralston stated ―CSR in France, the Netherlands and the UK‖, Aaronson in
UK in 2003, Lucas in Australia, Perroni in Italia have expanded the discussion to across
border. Moreover, they also compared the differences of perspective in different
countries and the function of business in society. In March 2000, the new appointment
of a United Kingdom Minster for CSR has strong influenced on the movement of CSR‘s
debate. Beside that, the establishment of the United Nations Global Compact, Promoting
a European Framework for Corporate Social Responsibility and the European
Commission‘s Green Paper which concern about human right, the environment, society
and labor also have impact on this movement. Many literatures in which the relationship
between government and CSR in has been investigated also reflected those
developments.
2.2 Relevant theory on relationship between CSR and financial
performance
There are many studies figure out the relationship between CSR and financial
performance of the firm that are based on a number of theories relevant to this issue.
Those theories are divided into three aspects: theories suggest the positive relationship,
the other describe this relationship as a negative impact, and beside that some theory
state a neutral relationship between CSR and financial performance. But this study only
focuses on theories which describe the positive and the negative relationship.
2.2.1 Relevant theory suggest the positive relationship
- Stakeholder theory: After publication of A Stakeholder Approach (1984) of Edward
Freeman‘s Strategic Management, stakeholder management, stakeholder theory, and
other variation of stakeholder study have taken a big deal of management research.

2.2.1 Relevant theory suggest the negative relationship
-Trade-off theory assumes a negative relationship between CSR and financial
performance. Stand on Friedman (1970), this theory analysis investment as trade offs
between stakeholders leading toward to tradeoffs between profit maximization and
socially responsive purposes. Therefore, corporate social performance (CSP) might
lower than financial performance of the firms because CSR funds use the resources that
could be used in a more profit-maximizing way.
- Managerial Opportunism Theory Managers may avoid CSR investment that would
improve firm value because of recompense packages linked with short-term company
revenue and stock price behavior. Alternatively, managers may engage in CSR
initiatives or show preference towards certain initiatives to maximize their personal
reputation or utility.
2.3 Experiential studies of CSR and financial performance
According to Margolis and Walsh (2002), there are one hundred twenty-two published
researches from 1971 to 2001 empirically investigated the relationship between
corporate social responsibility and financial performance. Narver is a person who
publish the first his study in 1971.
The first type is using the event study methodology to analysis the short run financial
impact (abnormal returns) in the whether of the firm carry on either socially responsible
or irresponsible action. The outcomes of these studies have been combined. Welch and
Wazzan (1999) discovered that there is no relationship between CSR and financial
performance, while Wright and Ferris (1997) found a negative relationship; Posnikoff
(1997) stated a positive relationship. Studies of McWilliams and Siegel (1997) are in the
same way of inconsistent concerning the relationship between CSR and short run
financial impact.
The second type is the examining of the relation between measurement of corporate
social performance (CSP) and measurement of long term financial performance. This
type uses financial measures or accounting of profitability to study the relation ship
between social responsibility and accounting based performance. The results are also
mixed up. Waddock and Graves (1997) found a major positive relationship between an

companies, analyzing the correlation between their CSR and their stock market
performance. Hopkins stated that ―the public‘s purchasing of shares was still not greatly
affected by the companies‘ level of social responsibility [but]…that CSR standing does
not necessarily badly affect a company‘s share price‖. Certainly, share market price is
only one of various measure of profitability, and the problem of Hopkin‘s study supports
his argument that, ―Definition, measurement and data problems exist for assessing both
social responsibility and financial performance‖.
In other study of McWilliams and Siegel about corporate financial investment in CSR
which is stated that ―there is some level of CSR that will maximize profits while
satisfying the demand for CSR from multiple stakeholders. The ideal level of CSR can
be determined by cost-benefit analyses.‖
In the other term of investment in CSR which uses financial implications, Brammer and
Pavelin defined as ―insurance-motivated social investment‖, a risk-management strategy
focus on decreasing reputation or firm‘s image and financial losses which are caused by
negative stakeholder response to negative events. Brammer and Pavelin showed that
―Social investment, by establishing a positive reputation in the eyes of stakeholder
groups, helps to mitigate the impact of those negative events by reducing the likelihood
that stakeholders attribute blame to the company concerned‖.
2.4 Relevant literature about benefit and cost of CSR.
2.4.1 Economic benefits of CSR.
Based on prior research, there are three major economic benefits to firms engaging in
CSR. Firstly, firms avoid or mitigate impacts to financial performance arising from
negative events and externalities. Environmental economic theory, organizational
legitimacy, political cost theory, and stakeholder management theory all predict CSR
reduces negative effects to economic earnings when corporate goals and
social/environmental goals are not aligned. Williams and Barrett (2000) find that while a
firm‘s reputation is diminished by Occupational Safety and Health Administration
(OSHA) and EPA violations, the extent of the decline is reduced by charitable giving. In
studies involving the Bhopal disaster (Blacconiere and Patten, 1994) and the 3-Mile
Island accident (Bowen, Castanias, and Daley, 1983), there is evidence consistent with a

Secondly, the economic cost of CSR is that they are more probable to engage major
upfront cash outflows. Investing in better monitoring of overseas manufacturing
facilities will involve significant upfront cash outflows when getting started. Investing in
more environmentally friendly PPE will likely require greater upfront costs.
Incorporating social and environmental information into resource allocation decisions
may first require updating accounting information systems to capture the required
information. Putting together the first annual CSR report to stakeholders will likely
involve higher upfront costs relative to the costs of continuing such an activity. The
timing of the cash outflows is more likely to be upfront
2.5 CRS and accounting performance.
2.5.1 How economic benefits are reflected in accounting earnings
This section integrates prior research to delineate specific economic benefits and costs of
CSR. It draws on prior empirical and theoretical research across literature streams and
across disciplines to find commonalities. The goal is to look at the prior literature more
broadly, acknowledging that no one theory adequately describes the underlying
relationship between CSR and financial performance. Delineating economic benefits
allows for integration among theories, providing a more comprehensive understanding
A key purpose of this study is a better understanding of the accounting issues involved
with economic costs and benefits of CSR. Based on prior research, there are three major
economic benefits to engaging in CSR. First, firms avoid or mitigate the economic
impact of negative events and/or externalities. This implies CSR reduces the probability
of compliance and regulatory costs in future periods. In addition, one would expect firms
that are more environmentally responsible to have a lower probability of industrial
accidents. This would reduce the probability of expenses related to remediation,
litigation, etc. They also avoid the lost sales from reputation damage. Ignoring, for the
moment, the costs of being more socially responsible, one would expect higher
accounting earnings for such firms, over time, all other things being equal. Levels of
accounting earnings would be higher. Moreover, Firms that are more socially
responsible engage in behaviors that seek to reduce conflicts and seek to align corporate
and social goals. Less socially responsible firms ignore some environmental and social

and factory overhead relative to a less socially responsible industry peer. These costs
will be matched with the revenues in the period the goods are sold. A more socially
responsible firm may purchase more energy efficient buildings and equipment, or update
facilities to use less energy and water. Many of these costs do fall within capitalization
criteria and the related depreciation expense will be matched with revenues during the
assets‘ useful lives.
2.5.3 Additional accounting issues and implications
CSR not only theoretically affects levels of accounting earnings; it has potential to affect
other aspects of accounting earnings. Each of the three economic benefits (mitigating
negative impacts, creating intangible assets, and increased efficiency) has implications
on future operating cash flows.
The timing of when such benefits will be recognized in accounting earnings, however, is
unclear. Assuming costs are relatively stable after some initial period, it follows that
CSR leads to less volatile earnings. In fact, political cost theory and environmental
economic theory would seem to predict less volatile earnings as the primary economic
benefit with potential to affect levels of earnings as a secondary benefit.
In addition, earnings response coefficients provide another possible means through
which the relationship between CSR and financial performance may be observed.
Earnings response coefficients measure the amount to which a firm‘s stock price reacts
to unexpected earnings. Earnings response coefficients measure the amount to which a
firm‘s stock price reacts to unexpected earnings. Relying on Heal (2005), firms that are
more socially responsible engage in behaviors to reduce conflicts and seek to realign
corporate and social goals. Resources are allocated to addressing operational issues with
social and environmental impacts proactively, reducing the likelihood of negative
externalities being realized.
Bae and Sami (2005) use similar logic when examining environmental performance and
ERCs. They theorize that potentially responsible parties for hazardous sites have greater
potential future environmental liabilities. This adds noise to current earnings signals
resulting in lower ERCs. Firms without such potential liabilities have more precise
earnings resulting in higher ERCs. They find higher (lower) ERCS for better (worse)

efficiency of funds, and thus enhance the firm value.

Chapter 3: Methodology
This part of the paper will explain the methods used in carrying out the study.
3.1 research objective:
This study tries to figure out the impact of CSR on financial performance, especially on
accounting performance of the firms. This impact will examine on three issues which are
the benefits and costs of CSR, how CSR reflect on accounting performance of the firms,
and how CSR reduce the cost of the firms. More over, this study also try to show the
outcome of adopted CSR between Vedan and Unilever in Vietnam in order to improve
the impact of CSR on the accounting earning of two company.
3.2 Research strategy:
This study will use the secondary data source in order to find out the problem, and the
research method of this study is qualitative method.
- Data source: secondary data
- Research method: qualitative
Secondary data is data for a research project that were initially collected for some other
purpose. It is often collected under conditions not known by the user. The types of
secondary data include internal secondary data and external secondary data. Internal
secondary data is the secondary information acquired within the organization where
research is being carried out. External secondary data is obtained from outside sources.
There are some advantages of secondary data. Firstly, secondary data may have fewer
resource requirements. For many research questions and objectives the main advantage
of using secondary data is the enormous saving in resources, in particular time and
money. In general, it is much less expensive to use secondary data than to collect the
data yourself. Consequently, researcher may be able to analyze far larger data sets and
also have more time to think about theoretical aims and substantive issues. Secondly,
secondary data is unobtrusive. If the researcher needs data quickly, the secondary data
may be the only viable alternative. In additional, they are highly to be higher quality data
than could be obtained by collecting your own. Thirdly, longitudinal studies may be