University of Twente Faculty of Behavioural, Management and Social sciences The moderating role of board characteristics in the impact of corporate social responsibility on the financial performance of Dutch listed firms Master Thesis Author: Bart Kruders (s1877143) University: University of Twente Program: MSc Business Administration Track: Financial Management First supervisor: Dr. H.C. van Beusichem Second supervisor: Prof. Dr. R. Kabir Date: 12-Dec-18 Acknowledgement This thesis is the last part of my master “Business Administration” with “Financial Management” as specialization track at the University of Twente. I would like to speak a word of thanks to a handful of people who helped me during my master thesis and this study. First of all, I would like to thank my first supervisor dr. H.C. van Beusichem from the department of Finance & Accounting. During my thesis he guided me through the obstacles that came on my path, but always gave me the freedom to find my own way. His guidance and knowledge have been critical in completing my thesis. Secondly, a word of thanks to my second supervisor Prof. Dr. R. Kabir for his critical look to my thesis. In addition, I would like to thank the employees of the methodology shop for their feedback during the thesis. Furthermore, I like to express my gratitude to all professors for the lectures of this master programme. Last of all, many thanks to my family and friends for their motivation and encouragements during my study at the University of Twente. Bart Kruders December, 2018 I Abstract Firms invest high amounts of money in corporate social responsibility (CSR) activities. Previous research found evidence that the implementation of CSR benefits a firm, although it is not guaranteed that CSR investments lead to improved financial performance. Overall agreement misses in the studies concerning the CSR and financial performance impact. This study contributes by investigating the role of CSR on financial performance for a sample of 81 Dutch listed firms during 2014-2017. Secondly the study investigates if board characteristics moderate the impact of CSR on financial performance. An ordinary least squares (OLS) regression is performed to investigate the impact. The results show that the impact of CSR is significantly positive for ROA, but insignificant for ROE, Tobin’s Q and RET. Thus, the results indicate that firms who more intensively engage in CSR activities have improved ROA. In addition, evidence is found that board size, gender diversity and age diversity weaken the impact of CSR on ROA. No significant impact is found for board independence. Keywords: corporate social responsibility (CSR), financial performance, ROA, ROE, Tobin’s Q, RET, corporate governance, board characteristics, board size, board independence, gender diversity, age diversity, Dutch listed firms. II Table of contents Table of contents ................................................................................................................................... III 1. Introduction .................................................................................................................................... 1 1.1 Introduction of the topic ......................................................................................................... 1 1.2 Problem statement and contributions .................................................................................... 2 1.3 Thesis structure ....................................................................................................................... 4 2. Literature review ............................................................................................................................ 5 2.1 Background .............................................................................................................................. 5 2.1.1 Definition of CSR .............................................................................................................. 5 2.1.1 Corporate governance ..................................................................................................... 6 2.2 Theories of CSR ........................................................................................................................ 7 2.2.1 Stakeholder theory .......................................................................................................... 8 2.2.2 Institutional theory .......................................................................................................... 9 2.2.3 Legitimacy theory .......................................................................................................... 10 2.2.4 Resource dependence theory ....................................................................................... 11 2.2.5 Agency theory ................................................................................................................ 12 2.3 Previous research on CSR ...................................................................................................... 13 2.3.1 Determinants of CSR ..................................................................................................... 13 2.3.2 The impact of CSR on financial performance ................................................................ 14 2.4 Hypothesis development ...................................................................................................... 16 2.4.1 CSR and financial performance ..................................................................................... 17 2.4.2 Board size ...................................................................................................................... 17 2.4.3 Board independence ..................................................................................................... 18 2.4.4 Gender diversity ............................................................................................................ 18 2.4.5 Age diversity .................................................................................................................. 19 3. Research methodology ..................................................................................................................... 20 3.1 Research method .................................................................................................................. 20 3.1.1 Research model ............................................................................................................. 20 3.1.2 Endogeneity problem .................................................................................................... 21 3.2 Measurement of variables .................................................................................................... 21 3.2.1 Corporate social responsibility ...................................................................................... 22 3.2.2 Financial performance ................................................................................................... 24 3.2.3 Board characteristics ..................................................................................................... 25 3.2.4 Control variables ........................................................................................................... 25 3.3 Sample and data selection .................................................................................................... 27 3.3.1 Sample and data ............................................................................................................ 27 III 3.3.2 Industry classification .................................................................................................... 27 3.4 Robustness tests .................................................................................................................... 29 4. Results ............................................................................................................................................... 31 4.1 Descriptive statistics .............................................................................................................. 31 4.2 Correlation matrix ................................................................................................................. 34 4.3 Regression results.................................................................................................................. 37 4.4 Moderating effect of board characteristics .......................................................................... 40 4.5 Robustness tests .................................................................................................................... 43 5. Conclusion ......................................................................................................................................... 49 5.1 Conclusions ............................................................................................................................ 49 5.2 Limitations and recommendations ....................................................................................... 51 References ............................................................................................................................................ 52 Appendices ............................................................................................................................................ 59 Appendix A – CSR keywords for content analysis ............................................................................