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Corporate Social Responsibility, Performance, Measurement Problem
We empirically investigate whether corporate social responsibility (CSR) is really profitable in Korea. Specifically, we examine whether a potential measurement problem of CSR score measured by KEJI (Korea Economic Justice Institute) index affects the relationship between CSR and corporate financial performance (CFP). The empirical results regarding the relationship between CSR and CFP in prior studies have been inconsistent. Although some studies (e.g. Waddock & Graves, 1997) point out that the potential measurement problem of CSR score is likely to be an important factor to resolve the issue of mixed results, CSR measurement problem to date draws little attention from researchers particularly in Korea setting. We suspect that prior studies that report positive relationship between CSR and CFP using KEJI index is biased upward due to potential measurement problem of KEJI index that includes operating performance component. To examine this issue, we employ an adjusted CSR score which excludes operating performance component included in the unadjusted CSR score to mitigate measurement problem that can show a positive upward bias in the relationship between CSR and CFP in the prior studies.
We employ the sample data of 1,301 firm-year observations of manufacturing firms listed in Korea Stock Price Index (KOSPI) market during 2005-2010. Using adjusted CSR score, we find that the positive CSR-CFP relationship significantly weakens compared to unadjusted CSR score. This result remains robust after we perform various sensitivity tests. This study suggests that CSR measurements problem is likely to distort the relationship between CSR and CFP in Korea setting. This study’s main contribution is to provide evidence on the measurement problem of KEJI CSR score in the study on the relationship between CSR and CFP.