DBJ Discussion Paper Series, No. 1906

Long-term Financial Performance ofCorporate Social Responsibility, External Governance from
Foreign Stockholders,and Regional Stakeholders
Yoko Shirasu（Aoyama Gakuin University）
Hidetaka Kawakita（Kyoto University）

October

2019

Discussion Papers are a series of preliminary materials in their draft form. No quotations,reproductions or circulations should be made without the written consent of the authors in order toprotect the tentative characters of these papers. Any opinions, findings, conclusions or
recommendations expressed in these papers are those of the authors and do not reflect the views of
the Institute.

Long-term Financial Performance of Corporate Social
Responsibility, External Governance from Foreign Stockholders,and Regional Stakeholders

Yoko Shirasu
Department of Economics, Aoyama Gakuin University, Japan
Email: shirasu@cc.aoyama.ac.jp
Hidetaka Kawakita
Graduate School of Management, Kyoto University, Japan

Abstract
We conduct an empirical investigation of the relationship between corporate social responsibility(CSR) and long-term stock performance in Japan. We find that: (1) CSR activities related tolabor relations, community relations, and the environment are positively related to long-term
stock returns; (2) firms with strong external corporate governance, higher foreign investor
ownership, exhibit superior stock performance; (3) socially responsible regional customers play
an essential role in determining which CSR activities effectively enhance long-term stock returns,
whereby Europeans favor CSR measures related to the environment, and in developing countries,
CSR measures related to the community exhibit a significant, positive effect. All over regions,1the employee is interest. By applying a robust methodology to over 10 years of data, our study
supports the notion that investors in the Japanese market are significantly concerned about the
ethical policies of firms and these concerns are reflected in the markets. This study provides
quantitative evidence of the positive effect that CSR has on long-term stock investments in theJapanese market. It also provides evidence that higher foreign investor ownership andresponsible regional customers play a critical role in improving CSR activities. Based on the
results, we propose important ways for managers to enhance shareholder value and forpolicymakers to identify additional measures that promote welfare.

Keywords: corporate social responsibility, long-term stock performance, regional consumers,
foreign investors, corporate governance
JEL Classifications: G11; G32; G39

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1.

Introduction
Corporate social responsibility (CSR) has become a subject of growing interest for firms,

regulators, investors, and stakeholders. Based on various responsibility criteria, a increasing
number of institutes, investment funds, and publications are calling on firms to alter theirbusiness practices. In response to the increased attention given to the impact of CSR, a 2017
KPMG survey finds substantial growth in global CSR reporting rates (75% in 2017 compared to
73% in 2015 and 18% in 2002) and in the number of firms that include CSR information in theirannual reports (60% in 2017 compared to 56% in 2015). Although Japan lags behind North
America and Western Europe, where most CSR reporting takes place, CSR has neverthelessbecome an increasingly important business practice and academic issue. This growth reflects
regulatory changes and new requirements, as well as greater market awareness and pressure frominvestors and consumers.
For example, the Government Pension Investment Fund (JPIF) in Japan, the country’s
most significant public pension investment agency, has announced to investors that it will now
promote CSR financial activities. In addition, Japanese firms have increased the number offoreign stockholders. Figure 1 depicts the average ratios of foreign investors. These figures are
increasing annually, and the ratios of CSR-active firms are higher than those of non-CSR-active
firms. CSR has become one of the most important themes in the investment world, not only forJapanese domestic investors but also for global investors. Even in such circumstance of Japanesemarket, the empirical analyses about CSR activities focusing on long-term investment forJapanese firms are less.

【Insert Figure 1 around here】
3

On the academic side, Kolk (2016) confirms the importance of CSR issues. This reviewof the CSR literature over the past 50 years analyzes issues associated with the environment,
ethics, poverty, and sustainable development.
Theoretically, CSR is part of contract theory. The contractarian approach defines CSR asa “model of extended corporate governance whereby those who run firms (entrepreneurs,
directors, and managers) have responsibilities that range from fulfillment of their fiduciary duties
toward the owners to fulfillment of analogous fiduciary duties toward all the firm's stakeholders”(Sacconi, 2006). The origin of this definition is the neo-institutional theory (Grossman & Hart,
1986). Because the responsibilities of managers characterize the relationships between firms andshareholders/stakeholders, a firm can develop a reputation by adopting an explicitly announced
CSR standard despite information asymmetries (Antoni & Portale, 2011). Antoni and Portale(2011) indicate that “contractarian CSR practices are considered implemented when stakeholder
engagement becomes part of a firm’s governance, fiduciary relationships are constituted, and thefirm develops a reputation by complying with commitments subscribed in the social contract”.
CSR enables companies to acquire the “license to operate” that society implicitly grants
to corporations that perform well (Porter and Kramer, 2006). The license to operate can beconsidered as a screen of a company’s legitimacy that may be as important for ongoing
operations as financial returns (Campbell, 2007). Recently, one of the most frequently discussed
CSR issues is the relationship between CSR performance and stock performance. Namely, theconcern is whether CSR creates or destroys value (Margolis, Elfenbein, & Walsh, 2009;
Kitzmueller & Shimshack, 2012). CSR can destroy value in the presence of agency problems,
which occur if managers pursue CSR projects they prefer, but which do not enhance value
4

(Cheng, Hong, & Shue, 2013; Krüger, 2015). Brammer, Brooks, and Pavelin (2006) find thatcomposite CSR indicators have a negative influence on stock returns. Created value occurs when
CSR is used as a strategic tool to maximize shareholder wealth (Shirasu, 2011; Cheng, Ioannou,& Serafeim, 2014). Margolis et al. (2009) review 106 studies and show that the overall effect of
CSR created value is positive, but small, and that recent social and environmental activities
produce better financial results. Kim et al. (2012) remark that CSR-active information may
replace financial information to a large extent. Benlemlih (2017) finds that highly successful
CSR performance reduces information asymmetry. All in all, it can be said that the theoreticalissues regarding CSR and performance are relatively clearly defined, but the corresponding
empirical outcomes are still ambiguous.
Achieving the goals of CSR generally requires sustained efforts over long periods of time.
This includes tasks such as reforming the governance system, the development of positive
relationships between employers and employees, and welfare improvements in companies’communities. Therefore, we focus on long-term investment for investigating CSR performance.
This paper investigates the following three issues. First, we contribute to the literature on
the link between CSR and stock returns in the Japanese market. We employ the simplest firm
value measure; stock returns. We confirm whether the CSR activities increase the stock
performance in each CSR category. For example, employee satisfaction has a certain value, but
not immediately (Edmans, Li, & Zhang, 2018). As a result, we need to focus on the long-term
effects of CSR activities.
Second, we consider the role of overseas sale regions and the power of regional
consumers as stakeholders. Recently, Japanese firms have expanded into overseas markets toincrease sales. When Japanese firms operate their businesses in foreign countries, they must5

enhance their reputation and establish trust with foreign consumers, employees, investors, andthe society at large. It has been found that consumer firm assessment, product evaluation, final
consumption decision, and willingness to pay also depend on the firm’s CSR track record.
Empirical evidence of the positive impact of this type of trust on stock performance has beenfound to be strong for a number of emerging markets and Europe, but weak in the U.S. (Giese,
Lee, Melas, Nagy, & Nishikawa, 2019). Hence, we investigate CSR’s stock returns related to
CSR activities by sales regions over the long- term.
Third, we study the external power of foreign stockholders. Many foreign investors haverecently entered the Tokyo stock market as shareholders (see Figure 1) and expect managers tomaximize their investment returns. CSR may be seen as a strategic tool to enforce best practices
by managers and increase benefits to the firm. Indeed, foreign investors are particularly valuable
because they boost the management and market performance of Japanese firms due to theimproved corporate governance standards. The link between CSR and corporate governance is
explored by Cespa and Cestone (2007). They study whether an efficient manager should use
CSR. The investors with strong corporate governance power to firms who provide the incentive
of promoting social actives to firms by using the financial-investment tools (Hanazaki, 2014).
Thus, foreign investors as external governance to Japanese firms are associated with positive
CSR activities. The potential benefits of positive CSR activities suggest that Japanese firms withsignificant CSR activities and high levels of foreign ownership are more likely to exhibit better
financial performance. Also, empirically, Boubakri, El Ghoul, Wang, Guedhami, and Kwok
(2016) find the evidence that foreign investors enforce CSR performance. The authors also findthat cross-listed firms in the U.S. market have better CSR performance than domestic firms that6are not cross-listed. Moreover, cross-listed firms with better CSR performance exhibit higher
valuations.
Our results are as follows. First, we find that CSR activities related to employee, thecommunity, and the environment boost stock performance over the long-term in the Japanesemarket. Notably, during the 2008 global financial crisis period, the effect of CSR on stock
returns is stronger. Our empirical results are robust with respect to firm size and industry. Second,
the regions of overseas markets are essential for determining which CSR activities are effective.
Environmental measures have been found to be more effective in Europe while community
measures are more effective in developing countries. The reginal consumers evaluate the firms
value by purchasing products as stakeholders. Finally, firms with strong corporate governanceand higher foreign investor ownership display improved stock performance. Along withshareholder power, stakeholder power is also necessary to enhance long-term stock returns
through CSR activities.
The remainder of this paper is structured as follows. Section 2 develops our researchquestions. Section 3 describes our sample and presents our empirical methods. Section 4
discusses the empirical results, while Section 5 provides concluding remarks and directions forfurther research.

2.

Research Hypotheses
CSR is a model of extended corporate governance in which those who run the firm have

responsibilities not only towards the firm’s shareholders but also towards all the firm’s
7

stakeholders (Sacconi, 2006). Stakeholders not only include the financial claimholders, but also
employees, customers, communities, and government officials (Jensen, 2005). For example,
Friedman (1970) identified the following stakeholders as being relevant for social responsibility:
stockholders, customers, employees, people associated with environmental improvements, andpeople who fight poverty. Stigler (1962) indicates that CSR has enabled firms to adjust wage
labor and non-monetary conditions of employment by targeting lower-quality workers.
Bhattacharya and Sen (2003) suggest that social consumer preferences may drive CSR.
Moreover, the high demand for social goods empowers the business incentive of managers(Baron, 2008). Therefore, it is essential to study individual CSR activity categories as well as
their joint influence.
Since our CSR data are classified into five CSR categories—governance, customer,
community, employee, and environmental—CSR activity data by category are readily available.
However, by having access only to these five categories, we may necessarily see the whole
picture of Japanese CSR activities and may know the full extent of relationships between
different CSR categories. For this reason, we now provide an overall picture of the CSR
activities of Japanese firms. Thus, we conduct a preliminary investigation of the following
question before formulating the hypotheses:
What is the whole picture of CSR activities in Japan?

There are two views about the assessment of CSR value creation. The first addresses theaforementioned issue that CSR may signal the presence of agency problems whereby managers

8engage in CSR that benefits themselves at the expense of shareholders (Krueger, 2015) 1 .
Furthermore, managers engaged in time-consuming CSR activities may lose their focus on theircore managerial responsibilities (Jensen, 2005). Overall, some CSR-active activities can be theresult of good governance, which would be consistent with the creation of shareholder value,
while others can be driven by agency problems (Ferrell et al. 2016). Empirically, Harjoto and Jo(2011) show that CSR engagements help reduce the “conflict-of-interest between management
and non-investing stakeholders”.
The second view considers CSR from a strategic perspective, considering it to be a
strategic tool that can lead managers to maximize the wealth of all stakeholders, namely,
stockholders, employees, consumers/suppliers, and community. CSR can be market driven or“strategic,” as argued by McWilliams and Siegel (2001). Some empirical studies find that CSR
has a positive effect on firm value. Fatemi et al. (2015) explain that stronger ESG characteristics
are linked to better business practices, such as attracting more talented employees, achieving
better innovation management, creating long-term business plans, improving incentive plans for
management, and providing better customer satisfaction. Jiao (2010) finds positive valuation
effects of CSR when firms meet the expectations of their non-shareholders (employees,
community, environment, customers, etc.). Shirasu (2011) shows that, in Japan, stocks related tosocially responsible investments (SRI) exhibit better performance than non-SRI-related stocks;
the SRI score is related positively to stock returns. Dimson, Karakaş, and Li (2015) find that
better CSR performance is related to larger abnormal returns. El Ghoul, Guedhami, Kwok, andMishra (2011) find that CSR results in a lower cost of capital and enhances a firm’s valuation.

1

On the contrary, Brekke et al. (2003) shows that CSR can reduce moral hazard in the context of the labor market aswell as reducing agency cost due to the matching agents’ and principals’ interests.

9Following the theoretical setup by Mollet and Ziegler (2014), the relationship between
CSR activities and stock performance is ambivalent. The following three views are discussed in
the literature (Bauer et al., 2005; Hamilton, Jo, & Statman, 1993). The first view states that if
socially responsible investors increase stock prices of firms with high CSR performance, CSR
stocks are overpriced and should therefore have lower expected returns. The second view is thatthe expected returns of SRI stocks are higher if high CSR performance is related to a higher
corporate performance, but this has not been acknowledged by investors, implying that CSR
stocks are underpriced. Finally, the third view states that SRI stocks are not mispriced since thestock market correctly prices CSR activities. Although the first view is in line with an extensionof the capital asset pricing model (CAPM), if the CAPM is extended to reflect asymmetric
information, segmented markets are created in which stock prices are affected by the
combination of different investor bases and imperfect diversification. In this context, SRI stocks
can be overpriced due to a broader investor base. In contrast, in line with the second view, thestudies of Eccles, Ioannou, and Serafeim, (2014) and Edmans (2011) report positive abnormal
returns for CSR stocks in the US. Eccles et al. (2014) show that these firms follow different
practices and have different investor bases and thus, have higher stock performance. Several
types of investors plan on holding a stock for a longer term than others to optimize financial
performance over a longer period of time. These investors are likely to have different strategies,
such as CSR-related strategies, and are less interested in short-term performance fluctuations(Eccles et al. 2014).
There is evidence that some types of intangible assets, which are not directly captured byaccounting output, partly determine stock market prices. For example, intangible assets such as
firms with superior governance (Giroud & Mueller, 2011), customer satisfaction (Fornell, Mithas,
10Morgeson III, & Krishnan, 2006), environmental efficiency (Derwall, Guenster, Bauer, &Koedijk, 2005), and employee satisfaction (Edmans et al., 2018). Edmans (2011) reveals positive
abnormal returns related to employee satisfaction of the “100 Best Companies to Work for in
America” and concludes that specific SRI screens may increase stock returns. Manescu (2011)
finds a positive effect in terms of the relationship between job satisfaction and firm value.
It is reasonable to assume that the measure of financial performance that results from
CSR activities is not the accounting output but the stock returns in the Japanese stock market.
Stock returns provide the most straightforward measure of firm value and many market players
use stock returns as the most primary and simplest measure of success. In Japan, there are few
empirical results about the relationship between CSR performance and stock performance. Hence,
we analyze stock returns and consider the effect of five CSR categories: governance, customer,
community, employee, and environmental. We then compare the similarities and differences in
the financial performance of CSR-active firms, that is, firms which exhibit active CSR behavior.
Thus, we formulate our first hypothesis.
H1: activities result in better stock performance, but the strength of the effect differs
depending on the category of CSR activities.

As Eccles et al. (2014) contend, building good stakeholder relations depends on mutual
respect, trust, and cooperation, and this process generally requires a long period. Moreover,stakeholder engagement leads to the adoption of a longer-term time horizon because typically,
there are short-term trade-offs in meeting the needs of different stakeholder groups. To constructand maintain mutual trust and cooperation, firms must, over a longer time horizon, commit to thefulfilment and balancing of explicit and implicit stakeholder interests (Deng, Kang, & Low,11

2013). This alignment between the firm and its stakeholders contributes to the firm’s long-term
profitability (Freeman, Wicks, & Parmar, 2004). A firm devoted to CSR creates long-term value
by building the loyalty of customers, suppliers, creditors, and the community. As a result, thisalignment requires that stakeholders have a long-term perspective as well.
In the same line, Bénabou and Tirole (2010) argue that long-term investors are naturalmonitors who can ensure that managers choose the level of CSR that maximizes shareholder
value. As argued by Gaspar et al. (2005), long-term institutional shareholders have a strong
incentive to monitor the firm’s management. In addition, Chen et al. (2007) propose that longterm investors have lower costs and higher benefits than short-term investors and, moreover,long-term investors engage in more monitoring. Nguyen et al. (2017) confirm that long-term
investors increase shareholder value for companies undertaking CSR activities. This isinteresting in light of Edmans et al.’s (2018) argument that employee satisfaction has value butthat the market does not immediately capitalize it. Edmans (2011) also reports that the value ofeven the best firm in the U.S. is not adequately capitalized by the market until four or five years
later, despite the U.S. having the most efficient stock markets.
Because investment horizon matters, particularly long-term investment, we investigate
how various investment terms affect CSR-active stock returns and CSR activities. Thus, westudy the following hypothesis.
H2: Long- term investments show higher CSR-active stock returns.

While Japanese firms have been expanding their business into foreign countries, thesubject of CSR has been growing in importance worldwide. Global firms in several fields areunder increasing scrutiny. The range of socially responsible issues that they are required to12address has widened to include ethical, social, and working conditions, environmental concerns,
sustainable development issues (Kolk, 2016). Some scholars maintain that global firms should be
accountable to a broader range of CSR stakeholders who all enable their existence and growth(Enderwick, 2017).
Others have highlighted that social consumer preferences drive CSR and that socially
responsible consumers are loyal and committed (Kitzmueller & Shimshack, 2012). CSR is thesignal of orientation toward higher-quality products and consumers realize that only firms that
focus on product quality are willing to invest in CSR activities. Therefore, by engaging in CSR,
firms can claim to offer high-quality products (Fishman et al., 2008). According to a survey by
Mori (2003), more than half of American consumers say that a firm’s social reputationinfluences their purchase decisions; moreover, 70% of UK consumers state that they prefer todeal with firms that they perceive as ethically superior. Epstein and Reeves (2010) show that88% of consumers think companies should try to achieve their business goal while improvingsocial and environmental conditions and 83% think companies should support financial
donations. The socially responsible consumers take into consideration CSR activities by firms
when making purchase decisions (Berland, 2010). In fact, it has been found that consumer firm
assessment, product evaluation, final consumption decision, and willingness to pay also dependon the firm’s CSR track record. Consumers appear to bear at least some of the cost of CSR.
Moreover, as Servaes and Tomayo (2013) point out, socially responsible consumers’ purchasing
behavior affects a company’s financial performance and ultimately, firm value. Empiricalevidence of the positive impact of socially responsible consumer behavior on stock performance
was stronger in the emerging markets and Europe, but weaker in the U.S. (Giese et al., 2019).

13

Tsai and Child (1997) show that global firms have the potential to function as amechanism for the upward harmonization of CSR standards internationally. Furthermore, global
firms can act as moral hazard agents aiming to spread a social development model and improvesocial maturity for the betterment of wider communities (Collier & Wanderly, 2005). Hence, we
check stock returns related to CSR activities by sales regions, as reported by Blasi, Caporin, andFontini (2018). Stock returns also depend on the CSR categories in which firms invest. The
foregoing leads to the following hypothesis.
H3: Stock performance of CSR-active firms improves depending on consumers’ preference for
CSR in the regions where they operate their overseas businesses.

Global institutional investment provides a channel for promoting better governance andconvergence in governance practices across countries. Global investors potentially influencefirms either directly, by influencing the management and using voting rights (“voice”), or
indirectly, by their decisions to buy or threaten to sell their shares (“voting with their feet”)(Aggarwal, Erel, Ferreira, & Matos, 2011). In the Tokyo market, foreign investors expect
Japanese firms to maximize returns on investments through strong corporate governance. Ferreia
and Motos (2008) find that foreign institutional ownership is positively associated with firm
value and performance outside of the U.S. In Krüger (2015), foreign investors are the main
enforcers of management discipline by exercising voice (voting) and leaving (selling stocks).
Gillan and Starks (2003) highlight the unique role that foreign institutional investors play inpromoting change in corporate governance practices worldwide, and foreign institutions areoften credited with taking a more active stance, while domestic institutions that have strong
business relations with local corporations are less active governance. Improved governance14

mechanisms result in more cashflow for stockholders (Jensen, 1986) and better corporate
governance leads to greater firm values and higher stock returns (Gonper et al., 2003).
As CSR is one of several strategic tools available to managers. Manager’s actions are
disciplined by the investors who lead good corporate governance. Foreign investors empowersocially responsible firms to boost CSR performance through improved corporate governance,
for example; promoting the information disclosure of CSR reporting and review of CSR
activities. Harjoto et al. (2017) find a positive relationship between CSR and financial
performance when firms consider their CSR practices and levels of governance. Suto andTakehara (2018) shows that the relationship between foreign ownership and CSR performance ispositive in Japan. Furthermore, several studies investigate the relationship between foreign
ownership and environmental performance and find a positive relationship (Seroa da Motta,
2006)2. These benefits suggest that firms with high levels of CSR activities relating to high ratios
of foreign investors are likely to exhibit better stock performance.
H4: More foreign investment into CSR-active firms results in better stock performance.

3.

Empirical Analyses

3.1. Data and Methodology
We collected all available Japanese CSR score data from GoodBankers© (GB), an
independent advisory firm specializing in social investment research in Japan (See Appendix 2),
from 2004 to 2015. The CSR data were divided into five categories: “governance,” supply and2

Several studies investigated the relationship between foreign ownership and CSR performance and find a negative relationship(Kyu-Hong and Rock, 1999) and no significant relationship (Porgal and Wheeler, 1996).

15

consumption procedures (“customer”), social activities (“community”), “employees,” and theenvironment (“eco”). The CSR scores that we used are published once a year. We calculated
long-term CSR scores of more than two years from the average of the annual scores.

For arobustness test, we collected Japanese CSR score data from the Thomson Reuters Asset4
database. Detailed information about Asset4 is Appendix 3. We adjusted the CSR categories ofAsset4 based on the GB categories, “Environment”; including Emissions, Resource Use, andEnvironmental Innovation, “Governance”; including Shareholders, Management, and CSR
Strategy, “Customer”; including Product Responsibility and Human Rights and “Community.”
The number of companies covered by the Asset4 CSR score is only half of the number coveredin the GB data.
Accounting data are retrieved from the Nikkei Financial Quest and QUICK databases.
Stock data are from the QUICK database. Ownership data for foreign investors are taken fromthe Nikkei Financial Quest database.
In our sample, a CSR-active firm, which has covered by the respective CSR database,must have regular common stock listed on the Tokyo stock market and have accounting data
based on the Japanese yen. The observations that were greater or lower than the 1st or 99th
percentiles are omitted to remove any potential outliers. We calculated the excess adjusted
returns as raw stock returns minus the Industrial Price Index return, to mitigate macroeconomic
effects and industry-specific effects. Our study also controls for year-industry fixed effects. We
used annual returns. Moreover, long-term annual returns were calculated from average annual
returns over three or five years. In addition, the Fama–French three-factor model with
momentum (i.e., the Carhart (1997) four factor model) and the five-factor model from the16

Kenneth French website 3 were employed. We mainly employ the four factors of the Carhart
model as Edmans et al. (2018) find that it is more effective for controlling stock momentum inthe context of CSR analysis. This related index is converted to yen following the dollar–yen
exchange rate, despite the original index being dollar-based.
We consider three long term investment horizons, namely, one year, three years and five
years. Nguyen, Kecskés, and Mansi (2017) define long-term investors as those with a portfolio
turnover of 35% or less, which means that the investment horizon of long-term investors is morethan 3 years. To investigate the relationship between CSR activities and long-term stock
performance, we apply the following methodology.
Before the hypotheses investigation, to answer our initial research question regarding theoverall landscape of CSR activities in Japan, we apply the empirical method of principal
component analysis (PCA) and specify principal components.
To investigate hypotheses H1 - H4 empirically, we estimated the abnormal returns(alpha) effects using the four-factor Carhart model and five-factor models. Also, in the
regression models, the explanatory variable of interest is the CSR scores. All independent
variables are lagged by one year to examine the relationship between the explanatory variables
and future stock returns. Moreover, we used dynamic panel regression/GMM, two-stage leastsquares (2SLS) regression to accommodate for endogeneity problems, and Heckman’s two-stage
regression model (Heckit) to ensure robustness and resolve the selection bias issue, as pointed
out by Wu and Shen (2013); there is a selection bias problem in CSR empirical analyses.
Concerning 2SLS regression, for the robustness of endogeneity, the first instrumental variable isthe average of industrial CSR scores, lagged and second-lagged CSR scores. This is done3

http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

17because El Ghoul et al. (2011) suggest that firm CSR activities are influenced by the CSR
activities of comparable firms in the same industry. The second instrumental variable is theaverage of CSR scores for 10 groups. We calculate the 10 groups’ CSR scores based on sorting
firm observations into 10 groups depending on the firm size.

3.2. Sample Description
Table 1 presents an outline of the CSR data from 2004 to 2015. The description of
governance concentrates on corporate governance and compliance. Customer includes consumer
management, supply chains, procedural management, caring for developing countries, and caring
for local people. Community addresses societal activities. The employee category considers
capacity development, career development support, and labor unions. Finally, the eco category
relates to environmental management. Table 1 refer to the number of CSR scores and the averageof CSR sore.
【Insert Table 1 around here】

Panel A of Table 2 presents the basic descriptive statistics.

【Insert Table 2 around here】

Figure 2 illustrates the relationship between the CSR scores and the stock returns forgovernance, customer, community, employee, and eco. The stock returns are likely to positively
correlated with CSR scores.

18

【Insert Figure 2 around here】

As an alternative source of CSR data, we employ Asset4 from Thomson Reuters (seeAppendix 3). Alternative data is investigated to verify the robustness of Japanese local CSR data;
BG score data.

4.

Empirical Results

4.1. What is the whole picture of CSR activities in Japan?
First, we examine integrated CSR performance using BG score data. We empiricallyintegrate the five kinds of CSR scores using the PCA method. Panel A of Table 3 presents the
PCA results, namely, five principal components (PC), eigenvalues, proportions, and cumulativevalues are identified. Since only the eigenvalue of PC 1 is greater than one, the cumulative value
from PC 1 to PC 2 is above 0.90 and the variation of the categorized CSR score explains almost
90% of the observed variance, we restrict our attention to the first components, namely, PC, PC 1,
and PC 2.
Panel B of Table 3 presents the correlations and Z statistics (in parentheses) associatedwith the PCA sorted by PCs and categories. Almost all categories have a similar and statisticallysignificant correlation with PC 1; thus, PC 1 may be regarded as a represented well-balanced
company. Accordingly, we name PC 1 “Well balanced." Since PC1 is significant and only the19eigenvalue of PC 1 is significant, we can analyze every CSR-category using the well-balanced
PC and this investigation by category can be progressed4.
For robustness, using an alternative CSR measure; the Asset4 score, we check the resultsof the PC analysis. In Panel A of Table 3, Asset4 results show that only the eigenvalue of PC 1 islarger than one, which is similar to the BG results. Furthermore, in Panel B of Table 3, theAsset4 results indicate that PC 1 is significant and shows well-balanced attributes, also in linewith the BG results.

4.2. Do CSR Activities Improve a Stock’s Short-term Performance?
Before discussing the financial performance of CSR-active firms, we first consider thefactors that affect CSR-active firms. Appendix 2 presents the results of the logit model. To
identify CSR-active firms, the dependent variable is binary. Notably, we observe significantly
positive relationships between CSR-active firms and the firm size (msize), with the firm size as
the most important factor to explain CSR activities.
Panel B of Table 2 presents the mean differences between CSR-active and non-CSRactive stock returns. We find that the average return of CSR-active stocks is higher than for nonCSR-active stocks. However, this result is not significant for results analyzing one-year returns,
which suggests that a more extended period is needed to acquire an accurate valuation from thestock market.
Firstly, we focus on the short term retunes, one-year returns. Table 4 presents the resultsof the effects of the abnormal returns (alpha) levels of CSR-active stocks annually based on thefour-factors of the Carhart regression and the five-factor model regression using monthly return4

Although the eigenvalue of PC 2 is less than one, so it is insignificant, it looks like PC2 reflects an excellent environment scorewith weak governance.

20

data5. The results ([1]-[5] in Panel A of Table 4) show that the coefficients of abnormal returns in
the four-factor Carhart model with industry dummies and year dummies are significantly positive.
However, the coefficients of abnormal returns in the five-factor model and with/without year
dummies (Panel B of Table 4) and a four-factor model without year dummies ([7]-[11] in Panel
A of Table 4) are also positive, but only significant at the 10% level.
We must exercise caution when analyzing this finding as the results strongly depend on
the market model used and because, as Nguyen et al. (2017) note, the magnitude of abnormal
returns when computing from the Fama–French factors model may be overestimated.
Another problem is that almost all CSR-active firms are big Japanese listed companies.
As shown before, the choice of CSR activities is affected by firm size, Drempetic et al. (2019)find that firm size has a highly significant influence on the ESG scores, so there may be aconcern about a big company bias. To check the robustness with respect to firm size, we
compare the abnormal returns (alpha) between the CSR-active firms and big companies. 6
Column [6] of Panel A and Column [6] of B in Table 4 show the results of the other big firms
not engaging in CSR activities. For the big firm results, the coefficients of abnormal returns are
significantly positive, and their levels are higher than the abnormal returns of CSR-active firms.
Based on this result, it seems that the effects of CSR-active stock returns may be driven by thecharacteristics of the big-stock effect. Comparing with the bib firms results, the effects of CSRactive firms are smaller than the general big-stock effect. Our positive abnormal returns capturesystematic returns that are not captured by some idiosyncratic returns and model risks. It should
be noted that this factor model method reflects the effectiveness of a trading strategy that is5. We estimated the abnormal returns (alpha) by using monthly data. Results are almost the same as the results using
annual data.
6
We determine and calculate the big company as those with the top 30% of asset volumes among all listed Japanesefirms during our research term.

21based on CSR. However, if market participants recognize the effectiveness of the CSR factor andact based on this information, no abnormal return should be observed (Edmans, 2011).

【Insert Table 4 around here】

Additionally, we check the average treatment effects (ATE) of one-year adjusted returns
using propensity score matching (PSM). Appendix 2 presents the results. Almost all ATEs are
not significant.
For the robustness check, we estimate the relationship between one-year adjusted returns
and CSR scores as shown in Table 5, where Panel A presents the results of OLS. The results
show that the CSR score is significantly positive for the eco categories; however, both are only
significant at the 10% level. We use dynamic panel regression to consider the impact over time,
as highlighted by Blasi et al. (2018), and performance persistence problems, as empiricallyshown by El Ghoul and Karoui (2017). Panel B of Table 5 presents the results of this regression,
where the dependent variable is one-year stock adjusted returns; the independent variables arelagged returns, CSR score, market size, Q ratio, and other features. The results show that CSR
scores are significantly negative. We may say that CSR effects are not significant but also
negative effects for short-term (one year) investments. In the next section, we show the results
for the long-term investments, namely, an investment horizon above three years.

【Insert Table 5 around here】

4.3. Do CSR Activities Improve Stock Long-term Performance?
22Panel A of Table 6 presents the results of long-term adjusted stock returns, which arecalculated from each firm’s stock return minus the corresponding industry returns, and thefindings are presented for three and five years. The dependent variable is long-term CSR-active
adjusted stock returns. The independent variables are CSR scores together with many control
variables: firm characteristics (market size, Q ratio, leverage, dividend yields, forecast of
profitability, prior returns, volatility, volume of trading, and exchange rate), as used by Brennan,
Chordia, and Subrahmanyam (1998) and Blasi et al. (2018), and the foreign investor ratio as thecorporate-governance variable. The long-term stock return regression includes the forecast of
profitability as an independent variable, because, as shown by Blasi et al. (2018), performancebased on the stock market represents investors’ evaluation of a firm’s ability to generate future
profits. The most important variable, however, is the CSR score. We focus on the coefficients ofthis variable. The CSR score coefficient in Panel A of Table 6 is significantly positive for thethree-year and five-year investment term for the community, employee, and eco categories andsignificantly positive only for the community category at a 10% significance level. Long-term
CSR-active stocks which exhibit strong CSR measures in the employee and eco categories show
exceptional long-term stock market performance. The governance and customer categories are
not significant for any investment terms. It is of note that this result for governance differs fromthat of Krüger (2015).
Panel B of Table 6 shows the regression results using the alternative CSR score, Asset4.
The results for the employee, community, and eco categories for the three-year and five-year
horizons were positive and significant, following the main results using the BG score. However,customer is not significant.

23

【Insert Table 6 around here】

4.4. The Robustness of CSR Activities and Long-Term Stock Performance
We now check the robustness of the empirical results on the relationship between the
CSR scores and stock returns in several ways, as our results may be driven by unobserved firmlevel heterogeneity.
First, we consider the endogeneity problem by using 2SLS regression with an
instrumental variable (IV) to address the reverse causality and omitted variable concerns. The IVshould capture the CSR score but be exogenous to stock returns. Table 7 shows the results of thelong-term 2SLS regression using IVs. The IVs of Panel A in Table 7 are the averaged industrial
CSR score and CSR lagged scores, similar to the methods followed by El Ghoul et al. (2011).
The IVs in Panel B of Table 7 are the average of categorized firm-sized CSR scores andaveraged industrial CSR scores, and the IVs in Panel C are the lagged values, t-1 and t-2, of the
CSR score. Drempetic et al. (2019) find that firm size has a highly significant influence on the
ESG scores. We confirm the causality issues between stock returns and CSR scores, therelationship between industries and CSR, and the relationship between firm size and CSR.
Margolis et al. (2009) point out that the positive correlation between CSR and corporate financial
performance is at least as attributable to causation of corporate financial performance to CSR.
The results in Table 7 only show the CSR score coefficients. CSR scores are significantly
positive for three to seven-year investment terms for the community, employee, and eco
categories.

【Insert Table 7 around here】
24

Next, we consider the selection bias problem in the case of CSR. To deal with potential
issues in this regard, we use the Heckit model, that is, Heckman’s two-stage regression model, as
shown by Wu and Shen (2013) for the case of CSR.7 Table 8 presents the results of the long-term
regression using the Heckit model. As a first stage, we use the logit model to estimate setting theindependent variable as one for CSR-active stocks and otherwise zero. As a second stage
estimation, we regress the long-term CSR returns against Mills lambda ratio, considering theconditional effects of the logit regression. Panel B of Table 8 only shows the CSR scorecoefficients and the inverse Mills ratios for the five- and seven-year investment terms. Almost all
the results are similar to the prior simple ordinary least squares (OLS) regression; furthermore,
the inverse Mills ratios are significantly positive. These findings imply that those stock returns
related to CSR are determined as a condition of whether they are CSR-active. Additionally, ahigh CSR score makes a CSR-active stock perform significantly better in the employee and eco
categories for a three-year investment horizon, which is shown by the coefficients of CSR scorein Panel A and Panel B of Table 8. The significance of the investment terms depends on the
categories; for example, it is positively significant for the eco categories, but community andemployee are not significant, and customer is negatively significant. It seems that the reason
customer shows negative values is owing to how scoring works at the firm determining thescores. By meeting the firms, we discovered that the number of questions from GB (scoring
agency) to CSR firms about the customer is relatively small, which means that it is challenging
to acquire enough CSR information about the customer; supply-chain, etc. Additionally, weapplied the Fama-Macbeth four factor regression and find that the only positively significant
7

These authors do not use logistic regression as the first regression but multi-nominal regression for CSR analysis.
The multi-nominal regression is the advanced regression of the logistic regression and we apply their methodology.

25

CSR activities are related to the employee and eco categories (Appendix 4). In sum, in theemployee and eco CSR categories, CSR scores are useful for increasing stock returns.

【Insert Table 8 around here】

4.5. CSR-Stock Performance during Global Financial Crises
In this section, we try additional investigation that the relationship between SRI and stock
performance is dependent on the periods being considered (Mollet & Ziegler, 2014). Lins et al.
(2017) indicate that CSR positively and strongly affected stock returns during the global
financial crises when financial markets declined. Huppe (2011) also finds a significant positive
relationship between CSR and investment performance; however, the results depend on the
period. The SRI portfolios perform better during financial crisis periods, in which investors who
demand downside protection are at an advantage (Nofsinger & Varma, 2014). To examine
whether the estimation results differ over time (e.g., due to changing macro-economic conditions
or changing characteristics of market participants), we check the effects of the 2008 global
financial crisis period.
We investigate the relationship between adjusted long-term returns and the CSR score.
Panel A of Table 9 presents the results during the Global Crisis of 2008−2012. Panel B presents
the results after the crisis; however, for this period, we have only three-year investment results
and not five-year results. The results are reported only for the CSR score coefficients.
Interestingly, the coefficients of scores in Panel A of Table 9 during the crisis are positive andsignificant. However, after the crisis, the score coefficients become insignificant in Panel B. We
infer that CSR firms do not need to work on CSR activities as much to acquire their desired
26

reputation from the market. After the crisis period, with better market conditions and profitability
for all Japanese firms, almost all CSR firms recorded higher stock returns without making CSR
efforts. This result is consistent with other recent studies, for example, that of Yuyama et al.
(2018). In sum, there would be a possibility that CSR activities is a kind of insurance fromdown-side risk when the markets being under crushed.

【Insert Table 9 around here】

4.6. Does the relationship between CSR and stock performance depend on the region for
multinational firms?
In Table 10, we re-examine the results in detail by sales regions to measure multinationalfirm effects. The overseas consumer faces regional social problems; for example, in thedeveloping countries, they are suffering from poverty and political uncertainty, in Europe, they
are interested in the emission of CO2. Multinational firms operate sales depending on the social
problems of the overseas region. In this study, we consider the difference between regions. Our
empirical results are reported only for the CSR score coefficients in Table 10. Across the regions,the CSR scores of the employee categories are significantly positive for long-term investments.
However, some specific characteristics depend on the regions.

【Insert Table 10 around here】

In Europe, the CSR scores of the eco category are significantly positive. In contrast, in thedeveloping countries which comprise Mediterranean, African, and South American regions, the27CSR scores of the community category are significantly positive. CSR firms that operate theirbusiness and CSR activities consistent with the social needs of local customers record higher
stock returns. In Europe, multinational CSR firms operate their business with a high eco score
driving higher stock returns. In developing countries, multinational CSR firms operate theirbusiness with high community scores driving higher stock returns. Similarly, at the global scale,
all multinational CSR firms with high employee scores exhibit higher stock returns.
On the other hand, all the customer categories are negatively significant. We believe
one of the reasons is the aforementioned problem of scoring methodology. Another possible
explanation is that investors recognize the higher supply-chain costs. Although in South America,
governance categories are positively significant, there is another issue: the number ofmultinational firms isn’t many and the sample only includes large firms, such as IHI, Mitsubishi
Heavy Industries, Mitsui Engineering, and Shipbuilding. In sum, the effect of each CSR category
depends on the sales region, and the multinational CSR-active firms which operate their businessconsistent with local customer’s social needs register higher stock returns.

4.7. Do firms with Good Governance CSR Display Better Stock Performance?
Panel A of Table 11 presents the results of long-term stock returns using the foreign
investor ratio, divided into above-average and below-average ratios. The results are reported only
for the CSR score coefficients. For the above-average foreign investor ratio, the CSR scores are
related to the performance of CSR-active stocks significantly and positively in the community,
employee, and eco categories. The below-average foreign investor ratio is not significant for
stock performance at all. We observe that, for the community and employee categories, CSRactive stocks with higher levels of foreign investors perform considerably better. Panel B of28

Table 11 shows the results of the 2SLS regression using the instrumental variables for robustness.
Almost all the results are similar to the simple OLS regression results. Here we notice, foreign
investors ratio is the proxy variable of external governance and it shows significant results,
however the proxy variables of internal governance, the governance score, is not significant. We
may therefore say that the advantage of foreign investors, the power of external governance,
require good corporate governance from CSR firms.

【Insert Table 11 around here】

5.

Conclusions
Our study extends the CSR literature by providing comprehensive empirical analysis of

the links between CSR and adjusted long-term stock returns. Policymakers and businesspractitioners will also find our insights into CSR practical and informative. Our findings can besummarized as follows. First, we find that CSR activities related to labor relations, community
relations, and the environment are associated with better long-term stock performance. Moreover,during the global financial crisis, long-term stock returns had evaluated their CSR-active. Second,
stocks of CSR firms with stronger corporate governance and higher foreign-investor ratios, post
better stock performance over the long term. Third, it is essential for global firms to account forsocietal preferences in overseas sales operation regions for progressing CSR activities.
Accordingly, eco-activities are capitalized only in Europe and community CSR activities arecapitalized only in developing regions, although employee CSR is capitalized worldwide. Insummary, we find that not only shareholder power but also stakeholder power should beconsidered to enhance long-term stock returns through CSR activities.
29

Several issues and limitations remain to be addressed, such as the mechanism explaining
how CSR results in higher stock returns over the long term. Generally, to achieve higher returns,
companies adopt one of two approaches: increasing the future cash flow or decreasing risk andthereby, the cost of capital. Additionally, this study does not consider alternative measures oflong-term investment, such as investor turnover ratios. Another problem about methodology isthat, as Nguyen et al. (2017) note, the magnitude of abnormal returns (alpha) when computing
from the Fama–French factors model may be overestimated. These limitations should be
addressed by future research.

Acknowledgements
The authors are grateful to Kaoru Hosono, Masaharu Hanazaki, Amon Chizema, Sadok El Ghoul,
Takafumi Sasaki, Min-Ming Wen, Yoshikatsu Shinozawa, Hitoshi Takehara, Lynn Kendall, andJames A. Wilcox as well as participants at the seminar at Developement Bank of Japan, 2019
World Finance Conference, 2019 Nippon Finance Association Annual meeting, 2018 Japanese
Economic Association meeting, Darla Moore School of Business- Hitotsubashi University 3rdInternational Conference, 2018 Japan Finance Association meeting, and 2018 Conference of theSouthwestern Finance Association. The Japanese CSR performance data were provided by
GoodBanker© and Sadok El Ghoul. The remaining errors are ours.

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37Figure 1: The average ratio of foreign investors

Figure 2: The average returns and scores

Governance
4

3
2
1

0
20

40

60

80

100

80

100

80

100

80

100

80

100

Customer
4
2

0
20

40

60

-2
-4

Community
4

3
2
1

0
20

40

60

Employee
5
4
3

2
1
0

20

40

60

Eco
4
3
2

1
0

20

40

60

38

Table 1: Overview of the GB score data for CSR screening
Panel A ：Frequency for the number of scores per category

S

G

E

Governance

CustomerCommunity

Employee

Eco

2004

253

278

562

655

563

2005

448

906

904

904

533

2006

681

392

674

706

628

2007

567

399

697

777

643

2008

428

414

713

728

664

2009

427

420

752

753

656

2010

421

414

798

803

666

2011

398

398

744

744

761

2012

385

389

733

732

779

2013

373

373

753

740

812

2014

409

380

908

917

815

Total

5701

5665

9156

9377

8341

Panel B：Average of score per category

S

G

E

Governance

ProcedureSocialEmployee

Eco

2004

54.7

65.0

37.4

29.3

58.1

2005

45.8

20.2

27.0

27.0

59.6

2006

36.6

53.8

42.0

38.6

60.8

2007

47.4

59.8

44.0

38.3

60.7

2008

67.2

61.6

44.0

41.5

61.1

2009

65.9

62.6

45.5

41.2

61.6

2010

64.7

63.7

44.0

38.2

60.2

2011

65.4

67.0

50.4

42.5

57.8

2012

65.4

66.1

51.4

41.0

57.0

2013

66.9

66.5

51.4

40.1

56.1

2014

38.5

67.4

43.8

34.9

56.5

39

Table 2: Descriptive statistics
Panel A: Basic statistics
Variable

Obs

Mean

Std. Dev.

Score of Governance

5705

52.65125.739

Score of Customer

5635

52.37431.844

Score of Community

9163

43.25428.518

Score of Employee

9382

37.20728.769

Score of Eco

8347

58.64623.163Return:1 year

29731

4.695

30.928Return:3 years

25029

1.618

15.063Return:5 years

17692

1.833

10.746

The ratio of Foreign Investor

36761

9.309

11.370

The ratio of Oversea's sales

15152

32.51722.539

ROA

40290

5.586

5.518

ln(marketprice)

39879

23.592

1.686

Leverage

40326

50.19920.042Q ratio

38478

1.179

0.719

Divident Yield

38885

1.764

1.255

Forecast of profitability

14986

22.62677.312

volalitity

33697

0.010

0.013

ln(trading volume)38526

20.266

2.519

The change ratio of exchange rate

41829

0.364

10.04740

Panel B: t-tests between CSR-active and non-CSR-active stock returns

1Y

3Y

5Y

Governance

CustomerCommunity

Employee

Eco

Non-CSR

1.680

1.818

1.633

1.644

1.442

CSR

2.473

1.719

2.327

2.281

3.068

difference T test

(0.10)(0.84)(0.09)(0.11)(0.00) **Non-CSR-0.726-0.556-0.888-0.886-0.926

CSR

1.678

0.780

1.157

1.101

1.476

difference T test

(0.00) **(0.00) **(0.00) **(0.00) **(0.00) **Non-CSR

0.748

0.834

0.708

0.705

0.730

CSR

1.828

1.444

1.509

1.491

1.539

difference T test

(0.00) **(0.00) **(0.00) **(0.00) **(0.00) **z-statistics in parentheses*** p<0.01, ** p<0.05, * p<0.1

Table 3: The results of PCA
Panel A: Eigenvalues of PCA
GB Score

Asset4 Score

VARIABLES

Eigenvalues

Proportion

Cumulative

Eigenvalues

PC1

3.600

0.720

0.720

3.090

0.618

0.618

PC2

0.613

0.123

0.843

0.658

0.132

0.750

PC3

0.318

0.064

0.906

0.540

0.108

0.858

PC4

0.310

0.062

0.968

0.414

0.083

0.941

PC5

0.158

0.032

1.000

0.297

0.060

1.000

41

Proportion CumulativePanel B: Correlation and Z-statistics
GB Score

Categories
Governance
CustomerCommunity
Employee
Eco

Asset4 Score

PC1

PC2

PC1

Well-balanced

Environment
with poor
GovernanceWell-balanced

(1)

(2)

(3)

0.424***-0.577***0.385***(78.18)(-38.09)(54.79)0.455***-0.164***0.400***(103.5)(-8.491)(98.00)0.473***

0.102***

0.414***(125.6)(6.363)(64.64)0.487***-0.0751***

0.492***(151.3)(-6.127)(115.0)0.390***

0.790***

0.481***(61.68)(72.96)(104.1)

Robust z-statistics in parentheses*** p<0.01, ** p<0.05, * p<0.1

42

Table 4: Effects of abnormal returns (alpha) of CSR-active stocks using monthly return
Panel A: Carhart’s four-factor model
G

S

GovernanceCommunity

Employee

Eco

Customer[2]

E

Big Firm

Variable

[1]

[3]

[4]

[5]

α

1.8574 ***1.3753 **1.438 ***

1.6785 ***1.5887 ***2.396***(3.03)(2.19)(3.09)(3.94)(4.31)(6.689)0.6847 ***0.7164 ***0.6929 ***0.6869 ***0.699 ***

0.486***(78.89)(81.97)(97.42)(97.21)(93.17)(87.36)-0.4951 ***-0.4725 ***-0.4427 ***-0.4342 ***-0.4691 ***-0.0306***-(37.00)-(34.93)-(40.68)-(40.29)-(40.87)(-3.598)-0.5412 ***-0.6224 ***-0.5768 ***-0.5773 ***-0.5521 ***-0.534***-(42.12)-(49.33)-(54.80)-(55.26)-(49.97)(-68.55)-0.2876 ***-0.2946 ***-0.2844 ***-0.2843 ***-0.2878 ***-0.318***-(24.79)-(24.64)-(29.39)-(29.63)-(28.70)

Year FE

YES

YES

YES

YES

YES

(-43.42)
YES

Industry FE

YES

YES

YES

YES

YES

YES

Observations

58432

57180

91856

93819

84693

216571R-squared

0.25490.2626

0.23750.23490.24080.1057

[7]

[8]

[9]

[10]

[11]

[12]

1.121 *

0.65320.53910.743 *

0.6879 *1.017***(1.88)(1.07)(1.18)(1.78)(1.92)(2.911)0.6896 ***0.7189 ***0.6997 ***0.6945 ***0.7073 ***0.499***(81.32)(83.65)(100.18)(100.14)(96.29)(91.59)-0.4988 ***-0.4797 ***-0.4439 ***-0.4354 ***-0.469 ***-0.00943-(40.65)-(38.79)-(44.47)-(43.98)-(44.22)(-1.204)-0.557 ***-0.632 ***-0.592 ***-0.5929 ***-0.5707 ***-0.581***-(44.63)-(51.36)-(58.03)-(58.54)-(53.36)(-76.81)-0.2946 ***-0.3002 ***-0.2955 ***-0.2953 ***-0.2994 ***-0.340***-(26.29)-(25.86)-(31.60)-(31.82)-(30.90)

Year FE

NO

NO

NO

NO

NO

(-48.09)
NO

Industry FE

YES

YES

YES

YES

YES

YES

Observations

58432

57180

91856

93819

84693

216,571

R-squared

0.25170.25970.23340.2307

0.2365

0.098

mkt
smb
hml
wml

α
mkt
smb
hml
wml

Robust t-statistics in parentheses*** p<0.01, ** p<0.05, * p<0.1

43

[6]

Panel B: Kenneth French’s five-factor modelS

G
GovernanceCommunity

Employee

Eco

[3]

[4]

[5]

1.0501 *0.53980.5541

0.791 *

0.7236 *1.303***(1.69)(0.84)(1.18)(1.84)(1.95)(3.708)

[1]

α

smb
hml
rmw
cma

Big Firm

Customer[2]

Variable

mkt

E

[6]

0.8001 ***0.8121 ***0.8107 ***0.8188 ***0.681***(93.18)(95.11)(115.94)(116.19)(110.78)(118.0)0.813 ***

-0.108 ***-0.0948 ***-0.0365 ***-0.0281 **-0.0548 ***0.493***-(7.62)-(6.62)-(3.21)-(2.49)-(4.60)(54.71)-0.1075 ***-0.1303 ***-0.0986 ***-0.1006 ***-0.0782 ***-0.132***-(6.39)-(7.79)-(7.12)-(7.30)-(5.36)(-13.31)-0.9489 ***-0.9667 ***-1.0137 ***-1.016 ***-1.0072 ***-1.152***-(46.52)-(46.47)-(63.37)-(63.82)-(60.44)(-88.40)-0.5766 ***-0.5833 ***-0.6027 ***-0.6045 ***-0.6248 ***-0.655***-(29.08)-(28.57)-(36.93)-(37.29)-(36.43)(-53.75)

Year FE

YES

YES

YES

YES

YES

YES

Industry FE

YES

YES

YES

YES

YES

YES

Observations

58432

57180

91856

93819

84693

216571R-squared

0.29410.30330.28140.27880.2843

0.158

[7]

[8]

[9]

[10]

[11]

[12]

1.2005 **0.63210.50080.7187 *0.5981 *(1.97)(1.00)(1.08)(1.70)(1.65)(2.262)0.8042 ***0.8134 ***0.8184 ***0.8165 ***0.8254 ***0.692***(95.50)(96.54)(118.80)(119.19)(113.99)(123.4)-0.0885 ***-0.0785 ***-0.0172-0.0084-0.0349 ***0.527***

α
mkt
smb

0.775**-(6.51)-(5.78)-(1.59)-(0.78)-(3.04)(61.68)hml-0.118 ***-0.138 ***-0.1086 ***-0.1099 ***-0.0866 ***-0.167***-(7.09)-(8.34)-(7.96)-(8.09)-(6.02)(-16.95)

rmw-0.9652 ***-0.9839 ***-1.0358 ***-1.0382 ***-1.029 ***-1.195***-(49.43)-(49.47)-(67.44)-(68.00)-(64.17)(-96.40)-0.5764 ***-0.5774 ***-0.5984 ***-0.6018 ***-0.624 ***-0.649***-(30.03)-(29.10)-(37.62)-(38.07)-(37.26)

Year FE

NO

NO

NO

NO

NO

(-55.06)
NO

Industry FE

YES

YES

YES

YES

YES

YES

Observations

58432

57180

91856

93819

84693

216571R-squared

0.29230.30170.2796

0.27690.28250.155

cma

Robust t-statistics in parentheses*** p<0.01, ** p<0.05, * p<0.1

44

Table 5: Regression of one-year return and CSR score
Panel A: OLS regression
G

SE

VariableGovernance

CustomerCommunity

Employeescore-0.0269-0.01110.02090.01810.0324*(-1.456)(-0.674)(1.461)(1.351)(1.825)Observations

3,745

3,632

5,893

6,028

5,423

R-squared

0.111

0.144

0.108

0.108

0.096

Control

YES

YES

YES

YES

YES

Year FE

YES

YES

YES

YES

YES

Eco

Panel B: Dynamic panel regression
S

GE

VariableGovernance

CustomerCommunity

Employee

Eco

L.f1y

-0.0702*-0.0717*-0.0547**-0.0411*-0.0526**(-1.932)(-1.830)(-2.338)(-1.818)(-2.170)-0.0959**-0.298***-0.448***-0.170***-0.564***(-2.275)(-4.472)(-8.259)(-3.142)(-3.697)-47.60***-48.71***-52.42***-52.64***-49.16***(-10.92)(-10.34)(-15.95)(-16.22)(-15.32)-11.54***-12.55**-8.537***-4.507-7.671**(-2.602)(-2.366)(-2.813)(-1.481)(-2.271)

0.139

0.06490.536***

0.752***

0.728***(0.744)(0.342)(3.575)(5.129)(5.034)-3.529***-2.837***-1.870**-3.481***-3.564***(-3.472)(-2.729)(-2.362)(-4.400)(-4.356)-0.00227

0.000948

0.002380.000341

0.00140(-0.360)(0.139)(0.451)(0.0641)(0.269)-242.1***-245.6***-300.0***-288.1***-253.8***(-3.101)(-3.062)(-5.278)(-5.190)(-4.336)

0.358

0.987

1.517

0.543

-0.137(0.230)(0.595)(1.368)(0.494)(-0.125)

0.443***

0.536***

0.593***

0.545***

0.593***(5.678)(6.562)(10.87)(10.34)(10.84)0.0691

0.226

0.212

0.07800.105(0.324)(0.998)(1.434)(0.533)(0.726)

2,131

1,956

4,093

4,219

4,007

score
msize
q
lev
divyldforecstvollvolm
Exchang
Frgn
Observations

z-statistics in parentheses*** p<0.01, ** p<0.05, * p<0.1

45

Table 6: Regression of long-term CSR-active return
Panel A: GB data set
S

GVariableE

Governance

CustomerCommunity

EmployeeEco0.00620-0.00832

0.0158*0.0186**0.0239**(0.591)(-0.783)(1.776)(2.255)(2.190)1.957***

2.496***

2.115***

2.230***

2.044***(4.247)(5.113)(5.539)(5.872)(5.371)

3.665***

2.868***

3.572***

3.304***

5.048***(4.686)(3.529)(5.737)(5.611)(7.549)0.02200.0273*0.0222*0.0217*0.0428***(1.615)(1.916)(1.939)(1.923)(3.605)-0.601-0.540-0.624**-0.687**-0.497*(-1.634)(-1.385)(-2.104)(-2.347)(-1.661)

0.0563***0.0554***0.0518***0.0529***0.0480***(6.906)(6.775)(8.641)(8.817)(8.081)-5.858***-5.479***-5.464***-5.516***-6.129***(-6.102)(-5.369)(-7.228)(-7.396)(-7.266)-78.42-2.690-79.86*-80.55*-26.01(-1.318)(-0.0415)(-1.725)(-1.778)(-0.545)-1.244***-1.287***-1.229***-1.257***-1.539***(-3.850)(-3.657)(-4.654)(-4.828)(-5.685)-0.0804-0.0715

0.00233

0.0153-0.130(-0.573)(-0.480)(0.0189)(0.125)(-1.047)

0.0465*0.0557**0.0353*0.0342*0.0519**(1.806)(1.999)(1.739)(1.716)(2.414)

Observations

2,710

2,610

4,440

4,549

4,088

R-squared

0.144

0.136

0.148

0.154

0.168

Year FE

YES

YES

YES

YES

YES

0.0114-0.01070.0141*

0.0211***

0.0215**(1.308)(-1.268)(1.876)(3.110)(2.389)Observations

2,119

2,005

3,315

3,427

2,983

R-squared

0.177

0.180

0.196

0.198

0.215

Control

YES

YES

YES

YES

YES

Year FE

YES

YES

YES

YES

YES

Three year
CSR score
msize
q
lev
divyldforecstret112vollvolm
Exchange
Frgn

Five year
score

Robust t-statistics in parentheses*** p<0.01, ** p<0.05, * p<0.1

46Panel B: Asset4 data set
S

GE

Three year

Governance

CustomerCommunity

Employee

Eco

score

-0.00247

0.01050.0282**0.0206**0.0124***(-0.459)(1.460)(2.194)(2.098)(2.793)Observations

2,379

2,379

2,379

2,379

2,379

R-squared

0.150

0.150

0.152

0.151

0.152

Control

YES

YES

YES

YES

YES

Year FE

YES

YES

YES

YES

YES

-0.00538

0.01160.01900.0209**0.0136***

Five yearscore(-0.897)(1.503)(1.398)(2.008)(2.904)

Observations

1,409

1,409

1,409

1,409

1,409

R-squared

0.188

0.189

0.189

0.190

0.192

Control

YES

YES

YES

YES

YES

Year FE

YES

YES

YES

YES

YES

Robust t-statistics in parentheses*** p<0.01, ** p<0.05, * p<0.1

Table 7: Long-term 2SLS regression for robustness
Panel A: Average of industry scores and one-year-lagged scores as IV
S

GVariable
3 year
5 yearE

Governance

CustomerCommunity

EmployeeEco0.01760.007810.0304***0.0282***0.0198(0.969)(0.514)(2.709)(2.844)(1.592)0.0355**0.01080.0334***0.0329***0.0274**(1.966)(0.776)(3.219)(3.655)(2.340)47

Panel B: Average of firm-sized CSR scores and industry scores as IV
S

GVariable
3 year
5 yearE

Governance

CustomerCommunity

EmployeeEco-0.0179

0.0396*0.0841***0.02760.0773***(-0.615)(1.698)(2.762)(1.089)(2.917)-0.00876

0.0400**0.0938***0.0689***0.0895***(-0.338)(2.240)(3.579)(3.275)(4.060)Panel C: Lagged values, t-1, and t-2 of CSR scores as IVs
S

GVariable
3 year
5 yearE

Governance

CustomerCommunity

EmployeeEco0.00806-0.00699

0.0304***0.0264**0.0206(0.341)(-0.420)(2.602)(2.575)(1.608)0.0208-0.00947

0.0315***0.0289***0.0207*(0.873)(-0.629)(2.929)(3.109)(1.718)48

Table 8: The long-term effects of CSR-active returns estimated using the Heckit model
Panel A: The results for a three-year investment horizon
S

G
VariableE

Governance

CustomerCommunity

EmployeeEco0.00207-0.0230**0.01060.01090.0254**(0.165)(-2.012)(1.207)(1.344)(2.341)

10.56***

10.97***

3.537***

3.590***

4.399***(9.923)(10.44)(7.861)(8.283)(8.559)-0.183-1.4162.716***

2.483***

3.508***(-0.202)(-1.505)(5.119)(4.897)(5.780)0.0353**0.0464**0.0202*0.0196*

0.0268**(1.981)(2.480)(1.741)(1.703)(2.152)-0.0141-0.0473-0.539*-0.657**-0.352(-0.0318)(-0.101)(-1.844)(-2.258)(-1.154)0.0607***0.0603***0.0532***

0.0565***0.0521***(8.699)(8.407)(10.84)(11.74)(10.62)-5.297***-4.940***-4.842***-5.017***-5.545***(-5.513)(-4.902)(-6.811)(-7.154)(-7.533)-44.8028.10-57.41-64.427.577(-0.869)(0.516)(-1.401)(-1.587)(0.178)-0.888***-0.860**-0.926***-1.021***-1.313***(-2.762)(-2.527)(-3.550)(-3.954)(-4.944)-0.0899

0.00251

0.00405

0.0251-0.126(-0.508)(0.0139)(0.0333)(0.207)(-0.985)0.01910.0202-0.00251-0.00103

0.0334(0.583)(0.574)(-0.123)(-0.0513)(1.518)mills

19.42***

20.33***

3.673***

3.269***

5.910***

Year FE

YES

YES

YES

YES

YES

0.792***

0.724***

1.315***

1.347***

0.984***(43.03)(40.84)(46.63)(46.58)(46.26)-0.000260

3.18e-05-0.00134-0.00264**-0.00769***(-0.273)(0.0336)(-1.233)(-2.390)(-7.702)-0.0248***-0.0295***-0.0352***-0.0339***-0.0344***(-4.813)(-5.819)(-6.397)(-6.153)(-6.535)-0.153***-0.179***-0.294***-0.229***-0.350***(-3.472)(-4.231)(-5.988)(-4.726)(-7.542)0.0631***

0.0585***0.0470**0.0630***0.0675***(2.983)(2.806)(1.972)(2.617)(3.137)0.000109

0.000220-0.000117

0.000336

0.000436*(0.461)(0.957)(-0.454)(1.284)(1.813)0.000459

0.000987

0.0129***0.0189***0.0191***(0.261)(0.564)(5.712)(8.018)(9.749)Year FE

YES

YES

YES

YES

YES

Observations

11,038

11,053

10,414

10,358

10,547

Second Step
score
msize
q
lev
divyldforecstret112vollvolm
Exchang
Frgn

First Step
msize
lev
roa2
q
divyldforecstFrgn

z-statistics in parentheses*** p<0.01, ** p<0.05, * p<0.1

49

Panel B: The results for five and seven-year investment horizons
S

G
VariableE

Governance

CustomerCommunity

EmployeeEco0.00992-0.0199*

0.005470.0146**0.0209**(0.776)(-1.928)(0.790)(2.320)(2.415)mills

18.03***

15.97***

5.221***

4.786***

8.628***

7 year

0.0114-0.00890

0.00682

0.0182***0.0207**(1.263)(-1.209)(1.041)(3.061)(2.459)11.37***

9.281***

4.898***

4.555***

8.886***

5 yearmills

z-statistics in parentheses*** p<0.01, ** p<0.05, * p<0.1

Table 9: The regression of long-term return effects during the 2008 Global Financial Crisis
Panel A: During the global crisis period (2008-2012)
S

G
VariableE

Governance

CustomerCommunity

EmployeeEco0.00469

0.00992

0.0358***0.0425***0.0186(0.163)(0.622)(2.725)(3.604)(1.155)-0.00614

0.005190.0268**0.0261***0.0202(-0.237)(0.393)(2.539)(2.779)(1.509)Control

YES

YES

YES

YES

YES

Year FE

YES

YES

YES

YES

YES

3 year
5 yearPanel B: After the global crisis period (After 2013)
S

G
VariableE

Governance

CustomerCommunity

EmployeeEco-0.0422-0.0281-0.00232-0.0127-0.00497(-0.890)(-1.033)(-0.104)(-0.608)(-0.168)

Control

YES

YES

YES

YES

YES

Year FE

YES

YES

YES

YES

YES

3 yearRobust t-statistics in parentheses*** p<0.01, ** p<0.05, * p<0.1

50

Table 10: The regression of long-term return effects by sales region
S

G
V ariableE

G overnance C ustom er

C om m unity

E m ployee

E co-0.00999-0.0507***0.00192

0.01670.0205(-0.612)(-2.749)(0.126)(1.159)(0.940)-0.00985-0.0412***0.00646

0.0235**0.00898(-0.760)(-3.055)(0.511)(2.072)(0.505)-0.000898-0.0590***0.00900

0.0329**0.0406*(-0.0543)(-3.058)(0.585)(2.255)(1.726)-0.00145-0.0407***0.0176

0.0371***0.0499***(-0.109)(-2.750)(1.364)(3.258)(2.717)0.0157-0.0465***0.004800.0243*0.00532(1.046)(-2.816)(0.350)(1.929)(0.271)0.0125-0.0355***

0.00534

0.0249**0.0115(1.008)(-2.789)(0.470)(2.496)(0.708)-0.0964-0.154***0.226***

0.202***

0.130(-1.355)(-3.264)(2.754)(2.774)(1.131)

0.0446-0.1010.297***

0.253***

0.196(0.608)(-1.446)(4.540)(3.747)(1.521)0.302**

0.276***

0.416***

0.243**

0.0855(2.366)(3.358)(3.386)(2.047)(0.659)0.275**

0.200

0.305***

0.005900.134*(2.367)(1.636)(2.900)(0.0590)(1.956)

N othA m erica
3 year
5 yearE urope
3 year
5 year

A sia
3 year
5 yearM ed& A frica
3 year
5 yearS outh A m erica
3 year
5 yearR obust z-statistics in parentheses*** p< 0.01, ** p< 0.05, * p< 0.1

51

Table 11: A comparison between stock returns for companies with high and low ratios offoreign investors
Panel A: OLS regression
S

G
VariableGovernanceE

CustomerCommunity

EmployeeEco0.005350.00498

0.0190*0.0247***0.0186(0.467)(0.420)(1.870)(2.645)(1.586)0.0109-0.00296

0.0187**0.0214***0.0178*(1.129)(-0.308)(2.156)(2.745)(1.735)0.00627-0.01960.00229

0.006530.0202(0.236)(-0.769)(0.115)(0.345)(0.544)0.00377-0.0191

0.00757

0.02450.0338(0.184)(-0.894)(0.433)(1.494)(1.069)Foreign investor ratio>=mean
3 year
5 yearForeign investor ratio<mean
3 year
5 yearRobust t-statistics in parentheses*** p<0.01, ** p<0.05, * p<0.1

Panel B: 2SLS regression
G
VariableGovernanceS

E

CustomerCommunity

EmployeeEco0.01450.01810.0376***0.0300***0.0220*(0.733)(1.094)(3.016)(2.697)(1.677)0.03120.01920.0354***0.0313***0.0252**(1.583)(1.259)(3.123)(3.120)(2.038)CustomerCommunity

EmployeeEco0.01350.101***

0.122***

0.0958***0.0940***(0.432)(3.895)(3.532)(3.269)(3.267)0.00701

0.0724***0.120***

0.104***

0.0974***(0.244)(3.539)(3.971)(4.063)(3.830)Foreign investor ratio>=mean
3 year
5 year

Instrument variable: Industry avgerage CSR score

VariableGovernanceForeign investor ratio>=mean
3 year
5 year

Instrument varianle: Size category average CSR score and Industry average CSR score
Robust z-statistics in parentheses*** p<0.01, ** p<0.05, * p<0.1

52Appendix
1, Variable Descriptions
Variable

Description

Score

The main CSR score was evaluated by GoodBanker, Governance, Customer, Community, Employee, andEco. We use Asset4 score, too.

Foreign investors: Fran

Foreign investor ratio is the number of shares held by foreign investors over the total number of stocks.

Market capital size: msize

Market Size is defined as a log of the market value.

Leverage: lev

The leverage is defined as debt over the total assets.

ROA: roa

ROA is defined as EBIT over total assets.

Q ratio: q

The Q ratio is the market value of capital plus book value of debt over the book value of capital, as a measureof quality.

Dividend yield: divyld

Dividend yield.

previous return: ret112

The cumulative return over t-1 through t-12 month.

Volatility: vol

Volatility is volatility calculated from previous 12 months returns.

Volume: volm

The log of trading Japanese -yen volume.

Forecast of profitability: forecst

Forecast in profitability of financial analysts.

Year dummy: year D

Year dummy is a dummy variable of the announcement year of the CSR score.

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2, CSR Score (GoodBanker) data
2.1 GoodBanker
Goodbanker is the first independent SRI/ESG special research company in Japan, establishedfrom 1999. The GB created first SRI products, called “Nikko Eco Fund,” 1999 in Asia and has
continued original and detailed SRI analyses. The number of analysts is 13, the number of target
companies is more than 1000. They collect not only public information data but also private
information by direct meeting, hearing and receiving Q&A etc. Every year more than 200
companies were visited and had meetings. Since established, they effort to continues independentagency by no-paid consultants’ policy.
2.2 CSR categories and Research items
Points of screening

Categories
G

GovernanceS

Supply and consumption Procedure(Customer)

E

Corporate Governance system, Compliance, Management, Disclosure,Intellectual property, Managerial philosophy, Organization, Code/policy,
Auditing, Protection of personal data
Consumer management，Supply chain, procedure management，Developing
country care，Local people care

Social activities (Community)

Organization for social, Active program of social, educational support

Employee

Labor association, Care for temporally employee, Affirmative-action employer,
Nurseing leave program, Management of employee, Diversification of working
style, Meental health care, Safety, Shorter working hours, Development ofliteracy, Support of career-development , Perfomance appraisal, Equal
opportunity of working, Diversification, The handicapped, Employee creation

Environment (ECO)

ISO, Organization for environment, Director in charge, Code/policy, Co2emission, Waste materials, Draining, Chemical substance, Care of products54

3, Robustness Score (Asset4) data
3.1 CSR Screening
Categories

Points of screening

G

GovernanceBest practice corporate governance principles, Equal treatment of shareholders and the use of anti-takeover devices, practices tocommunicate that it integrates the economic (financial), social and environmental dimensions

Workforce

Job satisfaction, healthy and safe workplace

Community

Respecting the fundamental human rights conventions, Being a good citizen, protecting public health and respecting business ethics

Product

Product Responsibility; Produce quality goods and services integrating the customer's health and safety, integrity and data privacy.

Environment

Management of environment-friendlinessSE

3.2 The number of score data
2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014 Total

184

365

372

381

382

390

398

398

395

400

405

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3, The results of logit function and ATE from PSM
S

GE

VariableGovernance

CustomerCommunity

Employee

Eco

Frgn

0.000957-0.000195

0.0242***0.0335***0.0304***(0.318)(-0.0656)(6.066)(8.089)(8.618)1.321***

1.192***

2.012***

2.031***

1.570***(26.35)(24.44)(30.46)(30.37)(27.80)-0.387***-0.414***-0.639***-0.514***-0.723***(-6.041)(-6.542)(-8.384)(-6.802)(-9.968)0.0107***0.0111***0.00542***0.00328-0.00379**(6.074)(6.336)(2.699)(1.622)(-2.039)0.122***

0.125***

0.191***

0.231***

0.197***(3.282)(3.432)(4.605)(5.509)(5.169)-3.39e-05

5.49e-05

0.0002560.00124***0.000762*(-0.0838)(0.138)(0.568)(2.762)(1.834)-0.398***-0.402***-0.914***-1.076***-0.675***(-4.159)(-4.292)(-8.420)(-9.836)(-6.784)-12.83***-14.52***-8.064**-4.804-10.32***(-3.105)(-3.546)(-1.984)(-1.209)(-2.664)0.04520.0597*0.290***

0.315***

0.220***(1.416)(1.878)(8.126)(8.794)(6.603)-0.00269

0.00100-0.00269

0.00120-0.00342

msize
q
lev
divyldforecstret112vollvolm
Exchang(-0.279)(0.105)(-0.260)(0.115)(-0.349)

Year FE

YES

YES

YES

YES

YES

Industry FE

YES

YES

YES

YES

YES

Observations

10,695

10,695

10,695

10,695

10,695ATE

0.491-1.958-1.688-3.413**-1.666(0.441)(-1.639)(-0.947)(-2.033)(-1.094)z-statistics in parentheses*** p<0.01, ** p<0.05, * p<0.1

4, The results of Fama-Macbeth regression

Variable
3 year
5 yearG

S

E

Governance

CustomerCommunity

Employee

0.00664-0.02690.01400.01790.0335**(0.456)(-1.333)(1.068)(1.327)(2.483)0.00578-0.0197

0.009510.0193**0.0256***Eco(0.701)(-1.435)(0.980)(2.402)(4.412)Control

YES

YES

YES

YES

YES

Year FE

YES

YES

YES

YES

YES

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