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This research note analyzes the relationship between indicators of corporate social and financial performance within a comprehensive theoretical framework. The results, based on data for 67 large U.S. corporations for 1982-1992, reveal no significant negative social-financial performance relationships and strong positive correlations in both contemporaneous and lead-lag formulations.
The relationship between the social performance and the financial performance of business corporations has been a topic of interest and controversy for more than half a century (Dodd, 1932), and serious empirical research on the association between financial and social performance indicators has been going on for several decades. Significant reviews and critiques of this work include Aldag and Bartol (1978); Arlow and Gannon (1982); Aupperle, Carroll, and Hatfield (1985); and Ullman (1985).
Yet in spite of this long record of discussion and analysis, the connection, if any, between corporate social and financial performance has not been fully established. Proponents of the stakeholder theory of the corporation argue that favorable social performance is a requirement for business legitimacy and that social and financial performance tend to be positively associated over the long term (Freeman,1984). Critics, tracing their position back to the classic statement of Friedman (1970), counterargue that managerial attention to interests other than those of investors is a breach of trust that inevitably reduces the welfare of shareowners. Some of the most comprehensive recent empirical studies have reported conflicting results. Cochran and Wood (1984) found a positive association between social and financial performance, and this result was subsequently confirmed by Spencer and Taylor (1987). However, Aupperle et al. (1985), using very sophisticated social performance indicators, found no relationship at all, and these results were subsequently strengthened by Aupperle and Pham (1989). The methodologically important study of McGuire, Sundgren, and Schneeweis (1988) yielded mixed results and raised more issues than could be answered with the data at their disposal.
The present study addresses the social-financial performance relationship as an empirical issue, not as a matter of corporate governance/legitimacy or business ethics. We frame the research question within a comprehensive typology of possible relationships between corporate social and financial performance, which accommodates all of the arguments and empirical findings presented in the literature. Within this framework, we address this research question: Which relationships between social and financial...