Responsible Investment

Caution: upward bias in estimates of financial impact of CSR

July 30, 2012
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In their paper, “Corporate social responsibility and financial performance: correlation or misspecification?”, the authors argue the inconsistency of the results of numerous studies of this relationship (negative, positive or neutral impact) “is not surprising, given the nature of the models that form the basis for the empirical estimation.” They demonstrate a particular flaw in existing econometric studies in this field. For example, they contend that the econometric model used by Waddock and Graves (1997)[1] “is misspecified due to omitted variables, because it does not control for a firm’s rate of investment in R&D and the advertising intensity of its industry.”

McWilliams and Siegel find this exclusion “especially problematic, because there is a long standing theoretical literature linking investment in R&D to improvements in the long-run economic performance (Griliches, 1998)[2]. In these models, R&D is considered to be a form of investment in “technical” capital. Investment in technical capital results in knowledge enhancement, which leads to product and process innovation.” This leads to better productivity, the authors argue, pointing to studies such as Lichtenberg and Siegel (1991)[3] who used data from over 2000 firms, “reporting a strong positive correlation between R&D investment and growth in total factor productivity.”

They go on to explain that “If R&D has a positive impact on firm performance, then the coefficient on any variable that is strongly positively correlated with R&D will be overestimated when R&D is omitted”, which is the case in the model used by Waddock and Graves (Theil, 1971: 549)[4]. McWilliams and Siegel hypothesize “that R&D and Corporate social performance (CSP) are positively correlated, since many aspects of CSR create either a product innovation, a process innovation, or both.” They go on to demonstrate the link between CSR and R&D by illuminating different examples of companies whose products or services have attributes or characteristics that indicate to consumers that the company is engaged with certain social issues. Many firms will also try to develop a socially responsible corporate image.

The authors write: “Simply put, the positive and significant coefficient on CSP, as reported by Waddock and Graves (1997), could simply reflect the impact of R&D on firm performance. It is impossible to isolate the impact of CSP on firm performance unless the model is properly specified. A similar argument could be made for other omitted regressors, such as advertising intensity, if they are also positively correlated with CSP and firm performance.” McWilliams and Siegel “properly specify” a model to include R&D intensity, and find that “CSP is shown to have a neutral effect on profitability.” They conclude with an explicit warning, “we caution readers to be wary of models that claim to “explain” firm performance, but do not include important strategic variables, such as R&D intensity.”


  1. Waddock, Sandra A., and Samuel B. Graves. “The Corporate Social Performance-financial Performance Link.” Strategic Management Journal 18, no. 4 (April 1997): 303–319.
  2. Griliches, Zvi. “R&D and Productivity: The Econometric Evidence.” National Bureau of Economic Research (January 1, 1998).
  3. Lichtenberg, Frank R., and Donald Siegel. “The Impact of R&D Investment On Productivity - New Evidence Using Linked R&D-LRD Data. Working Paper.” National Bureau of Economic Research, October 1991.
  4. Theil, H. “Principles of Econometrics.” Wiley, (1971): 549.

This article may be reproduced according to our terms of use with attribution (and link, if online) to To be cited as: “Caution: upward bias in estimates of financial impact of CSR”, Lloyd Kurtz, and Ingrid Ramaan,, July 30, 2012.

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Ingrid Ramaan
Administrative Editor FSinsight

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