Abstract
Traditionally, a firm aims to achieve the goal of maximizing firm value. The concept of business ethics arises to examine how a firm could meet the goal of maximizing firm value while in the meantime meditating the conflicts among all the stakeholders ethically. Recently, the concept of business ethics evolves into corporate social responsibility (CSR), which now has become a major issue in the business environment. The modern definition of CSR argues that a firm, as a corporate citizen, is expected not only to fulfill its economic responsibility, but also its social and environmental responsibilities. Built on this new definition, this study aims to empirically explore the impact of fulfilling CSR on stock performance. For this research purpose, we construct a local CSR index (CSRI) based on two ideas, socially responsible investment (SRI) and corporate contributions to stakeholders. Sampled the data from Taiwan Stock Exchange and Taiwan Economic Journal for the time period of 2001-2009, three CSR portfolios based on the CSRI (high, medium, and low) are constructed to examine short-run and long-run stock returns relative to those of benchmark portfolios (market index, value stocks, and growth stocks). The main finding reveals that fulfilling CSR has a significantly positive impact on stock performance. The implication suggests that a firm could serve as a good corporate citizen, while in the meantime pursuing the growth of stockholder’s wealth.
Highlights
A firm operates to make profits in order to maximize wealth for its stockholders
As the first step of the methodology, the corporate social responsibility index (CSRI) is constructed on the ground of three dimensions, i.e., economic, social, and environmental, an idea originated from the Dow Jones Sustainability Index (DJSI)
A successful, responsible firm should eye on corporate growth while in the meantime rigorously endeavoring to enhance social growth
Summary
A firm operates to make profits in order to maximize wealth for its stockholders. Since stockholder’s wealth originates from the value of a firm, maximizing stockholder’s wealth is equivalent to maximizing firm value. A food company may mingle artificial substance into its products for the purpose of a better taste while its production complies with government inspections and regulations but might potentially harm human health in the long run due to accumulation of the substance. These examples lead to a voice in society calling for reestablishing the value of business ethics. The demand for a firm’s fulfilling its corporate social responsibility has become an important issue and a global common consensus. Firms are expected to be cautious about maintaining a balance between corporate growth and social progress when pursing their financial performance
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