Quantity over Quality? A study of a separate sustainability report's effect on financial performance for companies on NASDAQ OMX Stockholm Authors: Mirja Båtsman Sofia Geiser Supervisor: Catherine Lions Student Umeå School of Business and Economics Spring semester 2013 Degree project, 30 hp ABSTRACT The corporate scandals in the beginning of the 21st century caused distrust in the market and a pressure for more disclosure to increase transparency. To broaden the traditional reporting, companies started to voluntarily disclose information regarding soft measures like Corporate Social Responsibility (CSR). Due to the fast development and popularity of CSR, more companies started to disclose a separate sustainability report to communicate information about these activities. The aim of the report is to provide stakeholders with accurate and transparent information regarding the companies CSR activities, but also to legitimize the business. The main purpose of this research is to investigate if the quantity of information disclosed in the sustainability report affects the financial performance of companies listed on NASDAQ OMX Stockholm. We also aim to investigate whether the existence of a report affects the financial performance. With companies spending an increasing amount of resources on disclosing voluntary information it is important to extend the research regarding CSR and the benefits to financial performance. This research ontological and epistemological positions are objectivism and positivism with a deductive approach. A quantitative method was used to gather sufficient data from existing databases and reports. For the first research question our population is all companies listed on NASDAQ OMX Stockholm on April 12th 2013, and for the second research question our population is the companies with a separate sustainability report in English from the accounting year of 2011. The financial performance data was gathered from the period 2012-04-01-2013-03.31. To answer our research questions and sub- questions, six hypotheses were formulated based on relevant theories and previous studies. Several multiple linear regression analyses were performed to examine the relationship between the existence of the reports, and the quantity of information in them, to the company’s financial performance. Other regressions were performed to establish if the quantity disclosed was affected by industry classification or market capitalization size. Our results show that the neither the existence of a separate sustainability report nor the quantity of information disclosed in it has an effect on stock return. However, both having a separate sustainability and the quantity of information disclosed have a positive effect on stock volatility. Conclusively, companies do not benefit financially from disclosing their CSR activities through a separate sustainability report. Keywords: CSR, Sustainability report, quantity of information, voluntary disclosure, financial performance, stock return, volatility ACKNOWLEDGEMENT We want to thank and express our gratitude to all those who helped with the completion of this thesis. First, we want to thank our supervisor Catherine Lions for motivating and providing us with continuous feedback and extensive knowledge. Additionally, we would like to thank Jörgen Hellström, Rickard Olsson and Johan Svensson for their help with the mathematical and statistical parts of this research. All of you have contributed to a successful and rewarding writing process. Thank you! th Umeå, May 17 2013 Sofia Geiser Mirja Båtsman TABLE OF CONTENT CHAPTER 1: INTRODUCTION 1 1.1 PROBLEM BACKGROUND 1 1.2 RESEARCH QUESTION 4 1.3 PURPOSE 5 1.4 CONTRIBUTIONS & LIMITATIONS 5 1.5 CHOICE OF SUBJECT 6 1.6 DISPOSITION 7 CHAPTER 2: THEORETICAL METHODOLOGY 9 2.1 PRECONCEPTIONS 9 2.2 PERSPECTIVE 9 2.3 RESEARCH PHILOSOPHY 9 2.3.1 EPISTEMOLOGY 10 2.3.2 ONTOLOGY 12 2.4 RESEARCH APPROACH 13 2.5 RESEARCH DESIGN 14 2.6 RESEARCH STRATEGY 15 2.7 TIME HORIZON 16 2.8 RESEARCH METHOD 17 2.9 LITERATURE AND DATA SOURCE 17 2.10 SUMMARY OF THEORETICAL METHODOLOGY 19 2.11 ETHICAL, LEGAL AND SOCIAL CONSIDERATIONS 19 CHAPTER 3: THEORETICAL FRAMEWORK 21 3.1 FINANCIAL PERFORMANCE 21 3.1.1 FINANCIAL PERFORMANCE MEASURES 21 3.1.2 STOCK RETURN 22 3.1.3 VOLATILITY 22 3.1.4 EFFICIENT MARKET HYPOTHESIS 23 3.1.5 BEHAVIORAL FINANCE 25 3.1.6 NASDAQ OMX 25 3.1.7 NASDAQ OMX STOCKHOLM 26 3.2 DISCLOSURE 27 3.2.1 COMMUNICATION AND VOLUNTARY DISCLOSURE 27 3.2.2 STAKEHOLDER THEORY 28 3.2.3 LEGITIMACY THEORY 29 3.2.4 INFORMATION ASYMMETRY 30 3.3 CSR 31 3.3.1 THE DEVELOPMENT OF CSR 31 3.3.2 DEFINITION OF CSR 33 3.3.3 CARROLL’S CSR PYRAMID 35 3.3.4 TRIPLE BOTTOM LINE 36 3.4 SUSTAINABILITY REPORTING 38 3.4.1 SUSTAINABILITY REPORT 38 3.4.2 GUIDELINES AND REGULATIONS 39 3.5 OUR RESEARCH MODEL 42 CHAPTER 4: PRACTICAL METHODOLOGY 44 4.1 HYPOTHESES 44 4.1.1 RESEARCH QUESTION 1 44 4.1.2 RESEARCH QUESTION 2 45 4.1.3 ADDITIONAL RESEARCH 46 4.2 POPULATION 47 4.2.1 SEGMENTATION 48 4.3 TIME HORIZON 49 4.4 DATA COLLECTION METHOD 50 4.4.1 PROXIES 50 4.5 CALCULATION OF RETURN 51 4.7 STATISTICAL TESTS 52 4.7.1 DATA SETUP AND CODING 52 4.7.2 MULTIPLE REGRESSION ANALYSIS 52 4.7.3 CONTROL VARIABLES 53 4.7.4 ORDINARY LEAST-SQUARES REGRESSION 53 4.7.5 WHITE TEST FOR HETEROSCEDASTICITY 54 4.7.6 CORRELATION TEST 54 4.7.7 ROBUST REGRESSION 55 CHAPTER 5: EMPIRICAL FINDINGS 56 5.1 DESCRIPTIVE STATISTICS 56 5.1.1 RESEARCH QUESTION 1 56 5.1.2 RESEARCH QUESTION 2 58 5.2 MULTICOLLINEARITY AND HETEROSCEDASTICITY TEST 61 5.3 ROBUST REGRESSION ANALYSIS 61 5.3.1 HYPOTHESIS 1 62 5.3.2 HYPOTHESIS 2 62 5.3.3 HYPOTHESIS 3 63 5.3.4 HYPOTHESIS 4 64 5.3.5 HYPOTHESES 5 & 6 64 CHAPTER 6: ANALYSIS & QUALITY CRITERIA 68 6.1 ANALYSIS 68 6.1.1 HYPOTHESIS 1 68 6.1.2 HYPOTHESIS 2 70 6.1.3 HYPOTHESIS 3 71 6.1.4 HYPOTHESIS 4 72 6.1.5 HYPOTHESIS 5 74 6.1.6 HYPOTHESIS 6 74 6.1.7 CONCLUDING DISCUSSION 75 6.2 QUALITY CRITERIA 76 6.2.1 RELIABILITY 77 6.2.2 VALIDITY 77 6.2.3 GENERALIZABILITY 78 CHAPTER 7: CONCLUSION AND FURTHER RESEARCH 79 7.1 CONCLUSION 79 7.1.1 ANSWER TO RESEARCH QUESTIONS 79 7.1.2 CONCLUDING ARGUMENTS 79 7.1.3 THEORETICAL AND PRACTICAL CONTRIBUTION 80 7.2 SUGGESTIONS FOR FURTHER RESEARCH 80 REFERENCE LIST 83 APPENDIX 1: COMPANIES LISTED ON NASDAQ OMX STOCKHOLM 92 APPENDIX 2: COMPANIES WITH A SUSTAINABILITY REPORT 94 APPENDIX 3: COMPANIES WITH A SUSTAINABILITY REPORT 96 APPENDIX 4: SCATTERPLOTS 98 APPENDIX 5: GRAPHS 99 APPENDIX 6: WHITE TESTS FOR HETEROSCEDASTICITY 102 APPENDIX 7: MULTIPLE REGRESSION ANALYSES 105 LIST OF FIGURES Figure 1. "Influences on Business research" .................................................................................. 10 FIgure 2. Summary of the theoretIcal methodology .................................................................... 19 FIgure 3. Forms of effIcIent market .................................................................................................... 24 Figure 4. NASDAQ OMX Stockholm 30 Index ................................................................................ 26 Figure 5. Model of the Stakeholder Theory. .................................................................................... 28 Figure 6. Carroll'S CSR Pyramid ........................................................................................................... 36 FIgure 7. TrIple Bottom LIne ................................................................................................................. 37 Figure 8. Our Research Model ............................................................................................................... 42 FIgure 9. Graph of SIze dIStrIbutIon among companIeS ............................................................. 57 FIgure 10. DIStrIbutIon of InduStrIeS among companIeS ........................................................... 57 Figure 11. Sustainability report ........................................................................................................... 58 FIgure 12 DIStrIbutIon of companIeS wIth a SuStaInabIlIty report accordIng to SIze ... 59 FIgure 13. DIStrIbutIon of market capItalIzatIon SIze, wIth or wIthout a report. ........... 59 Figure 14. Distribution of industry, with or without a separate report ............................. 60 LIST OF TABLES Table 1. Summary of reSearch StrategIeS. ........................................................................................ 15 Table 2. Overview of CSR definitions ................................................................................................. 35 Table 3. The Chi-Square Distribution ................................................................................................ 54 Table 4. Descriptive StatiSticS: of population 1 ............................................................................. 56 Table 5. DeScrIptIve StatIStIcS for companIeS wIth a Separate SuStaInabIlIty report ... 58 Table 6. Descriptive Statistics for quantity proxies ..................................................................... 60 Table 7. Correlation Matrix for the control variables ................................................................. 61 Table 8. Correlation Matrix for the quantity proxies .................................................................. 61 Table 9. Result of regression analysis between Return and Sustainability report. ....... 62 Table 10. Result of regression analysis between Volatility and Sustainability report . 63 Table 11. Summary of the regreSSIon analySIS between Return and the dIfferent proxies for quantity