Examining the Link between CSRD and FP in Korean Companies: The Moderating Effect of Company Reputation

Abstract

This study investigates two key aspects of Korean companies. First, we examine the significance of the relationship between corporate social responsibility disclosure and a company’s financial performance. Second, we explore the moderating role of company reputation in the link between corporate social responsibility disclosure and financial performance. We use data from Korean companies included in the Forbes Global 2000 list, employing a quantitative methodology and analyzing data from 66 Korean companies between 2017 and 2021. To estimate the relationship between the independent variable (corporate social responsibility disclosure) and the dependent variable (financial performance), we applied multiple regression models, using market value, sales, and net profit as control variables. Our study provides robust evidence of a positive and significant relationship between corporate social responsibility disclosure and the financial performance of Korean companies. We find that their influence is partially mediated by the company’s reputation, which serves as a signal of the firm’s ethical and social responsibility practices to stakeholders. Our results suggest that firms with a positive reputation for corporate social responsibility activities are more likely to experience enhanced financial performance, possibly due to increased stakeholder trust and loyalty, improved risk management, and enhanced access to capital.

1. Introduction

1.1. Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR) is a concept that encourages companies to be socially responsible for their actions, including toward their stakeholders, the community, governing bodies, and customers. CSR is implemented through actions that have high moral, environmental, and legal objectives that go beyond the interests of the company. The ultimate goal of CSR is to promote the long-term benefits and survival of the company by fostering optimistic public relations, high ethical standards, and minimizing business and legal risks, which, in turn, builds trust among shareholders. The strategies and actions of a company relating to CSR are strongly related to its sustainable growth. To achieve sustainable growth, it is essential for an organization to have a positive impact on its environment and all stakeholders, such as employees, customers, investors, and community bodies. The main function of CSR is to engage corporations to accomplish pro-social goals in addition to its profit maximization goal. The most common CSR objectives are to minimize environmental externalities, promote volunteering and charity activities among company employees, and develop a sustainable product-service system. The company’s corporate citizenship is equally valuable for the community and the company. Actions within this theory allow company managers to forge a stronger bond between employees and corporations, boost morale and ethics, and increase the self-esteem of both employees and employers by giving a feeling of connection with the community and bringing their socially good actions to the world around them.

To develop a CSR program [1,2], a company needs to have a sufficient level of profits and growth so that it has the financial resources to maintain and reach the CSR objectives. Thus, CSR strategy is mainly implemented with corporations in stable financial states. So, as the company gains more customers and success, the more responsible it has to be for its ethical behavior with respect to its employees, peer companies, competitors, and the industry.

The term corporate social responsibility disclosure (CSRD) refers to a company’s voluntary action of providing information on its objectives, policies, and actions toward the community, stakeholders, and workers. It is popular, particularly in developing countries that have no laws enforcing socially responsible practices. This study provides valuable insights into companies that disclose information about social and environmental activities and the extent of such quantity and quality of disclosure.

Corporate social responsibility disclosure (CSRD) is a key factor in identifying the company’s stage of development. Corporate social responsibility (CSR) is one of the most practical ways for companies to contribute to sustainability, a broader concept involving companies, institutions, society, and the environment. The CSR movement toward sustainable development provides a range of aspects to address. For instance, the majority of companies make an effort to develop environmental sustainability by recycling, using renewable energy resources or carbon offsets, and reducing waste. From the human resources perspective, an outstanding example is the effort to eliminate reliance on child labor, as well as unpaid and underpaid labor use, which can be addressed through the code of ethics and code of labor. Even though larger industry players make major efforts toward CSR goals, small business managers develop their CSR objectives on a smaller scale by making donations to local charities and sponsoring local community volunteering or environment-friendly events. These actions are the main building blocks of the brand image. It helps customers to believe in the better quality of the product or service that is made with care and special attention and attracts investors who hold ethical values. From this perspective, CSR is an integral part of corporate public relations. However, there are cases of management being persuaded to maintain social responsibility, with this conviction itself becoming a motivation to develop CSR programs.

1.2. Financial Performance

The company’s fiscal state is referred to as its financial performance. The term defines a business in a financially strong or healthy position when it has a sufficient amount of free cash flow, an increasing level of revenue, and well-managed debt. It is a quantitative aspect of any company that is measurable. There are several ways to measure the financial performance of the company; however, to assert a financially healthy company, financial measurements would not be enough. For instance, significant positive growth in revenue does not fully show its economic strength. A financial performance evaluation of any firm consists of expenses, liabilities, and available free cash flow metrics. The aim of financial evaluation is to provide insights into the economic state of the business in a snapshot of its current economic state and forecast its growth rate and position in the stock market.

Interested bodies in the financial analysis of the company are stakeholders, such as trade creditors, bondholders, investors, employees, and management. Each group benefits from the detailed and valid financial monitoring of the company. The evaluation provides information on the generated revenues and asset management of a company, as well as its liabilities and stock/stakeholders’ interests. The financial performance analysis methods vary according to the aim of the evaluation. After defining the aim and methods of analysis, the measurements cover such factors as revenue from operations, operating income, and total unit sales. Furthermore, investors could require a detailed report of the financial state with information on marginal growth rate and debt level fluctuation. This type of financial evaluation is referred to as the Six Sigma method.

The companies’ financial statements are reported in accordance with the internationally set accounting principles. The aim of producing it is to identify the most suitable business model to adopt for further development and profit maximization and to provide reliable information to all stakeholders.

Financial performance, typically analyzed quarterly or annually using balance sheets, income statements, and cash flow, reflects the overall health of a company. High-performing businesses attract consumers and investors by showcasing their success and the quality of their products or services. In contrast, financial instability may generate uncertainty, leading to decreased demand for products or services and a negative perception among investors. Thus, financial performance directly impacts a company’s reputation, affecting both customers and stakeholders.

1.3. Company Reputation

Company reputation is a critical factor that can significantly impact the development and revenue generation process of any firm. In our study, we defined the term “company’s reputation” as the external perception of a company’s operations by its stakeholders and the general public. To measure this variable, we used a combination of customer surveys, media coverage, and third-party ratings to assess the overall opinion about the organizational structure, employment conditions, products/services, and revenue fluctuations of the sampled Korean companies. We recognized that reputation is a complex and subjective construct that may vary at different stages of the business cycle, and we took steps to ensure the validity and reliability of our measurement approach.

Having a positive reputation is vital for companies to constantly increase demand, attract investments, and hire a qualified labor force. Reputation is a crucial part of brand recognition, sales, and company expansion. However, a company’s reputation is not a certain, measurable, or the most accurate reflection of the organization, as it is primarily based on subjective reasons. For example, a single news article may harm a company’s reputation, or celebrity-customer feedback about the business may boost its reputation.

In our study, we aimed to examine the relationship between corporate social responsibility disclosure (CSRD), financial performance (FP), and company reputation. Specifically, we sought to investigate whether there is a moderating role of reputation in the relationship between CSRD and FP for Korean companies. By analyzing these variables, we hope to provide insights into the importance of reputation management in promoting sustainable growth and financial success for Korean companies.

2. Literature Review and Hypothesis Development

2.1. CSR and FP

There is a great history of the impact of corporate social responsibility on different aspects of accounting and finance. The earliest work was performed by [3], who suggested the reputation that Corporate Social Responsibility (CSR) has within society. Moreover, the impact on civilization has been discovered from numerous vantage points. It has been stated the position of CSR and its influence on society has been investigated [4] from countless perspectives. However, their opinions are divided on the need for business CSR. Some studies [5] view CSR positively, claiming that “an establishment has a duty to society”. At the same time, some studies [6] report that “a corporation only has the duty to maximize its benefit within the fence of law and minimum ethical restrictions”.

However, in the 2000s, numerous studies such as [7] acknowledged CSR as a source of reasonable gain. Ref. [8] proposed reasonable sources related to CSR and its importance. Ref. [9] discussed a CSR technique or activity that can improve the performance of the companies. Similarly, Ref. [10] discovered that premeditated CSR actions support multinationals to gain inexpensive benefits. CSR activities could be productive for reserves according to [5]. He found that CSR assists firms in attracting consumers who value CSR expenses, and this trend leads to overpaying business administrators and employees whose personal goals and objectives are associated with the organization’s CSR objectives. The author highlights the fact that some stakeholders value CSR, even if these activities reduce turnover in the short run. This is explained as being due to the fact that they acknowledge the importance of investing in a business that contributes to socially beneficial actions.

On the contrary, more accountable companies increase their revenue as a result of their outstanding reputations, as suggested by [11]. A company’s revenue declines when it breaks with its CSR objectives. With regard to this trend, Ref. [6] raised the question of whether CSR helps companies in the long run. A commitment to CSR helps organizations gain a modest advantage over competitors, according to [12]. These researchers describe a significant positive relationship between CSR and financial performance in 98% of studied cases. Some studies connect the company’s reputation to the management issue of business development, such as discussion of the firm’s values and goals with its stakeholders and including them in its internal policies. Another studies by [13,14] concluded that there is a positive significance to the relationship between CSR objectives and corporate governance (CR). Organizations that value stakeholders’ protection have more chances to succeed with their business in the long run, [13]. CSR and corporate governance are strongly correlated, according to [14]. Additionally, Ref. [15] pointed out the “significance of corporate governance on the successful sustainability of companies”.

A literature review consists of three parts. The first group of research papers conducts empirical research that analyzed the positive effect of CSR programs on a firm’s financial performance [12,16,17,18]. The economic study of [19] found that a higher CSR index improves the financial state of a firm. It also suggested a positive effect of CSR on accounting and market-based profits by [12] in the period from 1972 to 2007.

The second group argues that CSR negatively influences economic performance. Ref. [20] reported the negative effect of CSR on companies’ financial performance. They examined organizations participating in environmentally friendly activities and concluded that it reflected negatively on a company’s financial performance. For instance, the Environmental Protection Agency’s Climate Leaders program showed a negative impact on the financial performance of companies that implemented this program.

The third group of authors reasoned that any relationship depends on the level of CSR according to [21,22]. Empirical studies provide evidence of a U-shaped relationship between CSR and FP. Although the assumptions do not directly state a U-shaped association, they originated the suggestion that the two extreme points of the CSR curve were connected with the top point of firm performance. However, a limitation of this study was that they used only one control variable.

In addition to the third group of literature reviewed, Ref. [23] delivered the foundation for a negative CSR-FP association. That is, “when the expected relationship between CSR and FP is U shaped, the negative relationship could be observed at an earlier stage of CSR effort because the cost of CSR caused the initial downward slope of the U curve”. Finally, a researcher [24] showed empirical evidence of a U-shaped curve relationship between corporate governance and FP within US corporations. This article is the first to show an empirical study with a U-curve association in the literature on CSR.

In conclusion, existing research [25,26] reveals a gap in the investigation of CSRD-related phenomena among Korean companies, specifically in the relationship between CSR and FP. The aim of this study is to fill this gap by examining the impact of CSR on FP in companies listed on the Korean (KOSPI) stock markets. What sets this research apart is the integration of unique Korean cultural, social, and regulatory factors that may influence the CSR-FP relationship, which has not been the focus of previous studies. By considering the local context, insights are sought into how CSR strategies encompassing environmental, social, and governance (ESG) objectives can be tailored to resonate with Korean stakeholders, fostering a sense of connection with the community and driving positive business outcomes. In the analysis, the S&P Global company database covering the period from 2017 to 2021 is used, with individual ESG disclosure scores being extracted to measure the level of CSR activities. This novel approach enables a better understanding of the intricacies of CSR and FP in the Korean context, providing valuable insights for stakeholders and policymakers.

Given the above literature about the CSRD, FP, and reputations of Korean companies, our study demands the following two hypotheses.

2.2. Research Hypotheses

A hypothesis is an author’s potential answer to the research question. It is the statement that is analyzed using empirical tests and experiments. It is important to construct a correct hypothesis in order to use the appropriate tools to test it and provide a reliable conclusion to research findings.

2.2.1. CSRD and FP

The literature [27] on the direct relationship between CSRD and FP often utilizes stakeholder theory or legitimacy theory. Stakeholder theory, as highlighted in [28], posits that external factors, such as stakeholders, investors, and competitors, influence management decisions to align with external expectations and objectives [29]. Legitimacy theory [30] contends that organizations are integral community members expected to operate within societal norms; failure to do so threatens their legitimacy.

Consequently, poor CSR practices can result in illegitimacy, while well-implemented CSR practices enhance a firm’s image and economic standing. The majority of researchers report a positive relationship between CSRD and FP.

Hypothesis 1.

Corporate Social Responsibility disclosure has a significant positive effect on Korean companies’ financial performance.

2.2.2. Company Reputation as a Moderating Variable

Most investigations into the link between CSR and FP use a firm’s reputation as an intermediate variable. For example, a survey that studied 96 random managers in Taiwan [31] stated that there is a partial moderating role of reputation in brand performance and CSR. Another investigation sampled 280 companies in Australia and concluded that reputation significantly influences [32] the CSR–FP relationship. These findings are supported by observations from 205 Iranian firms that reputation and consumer satisfaction are positively correlated to the financial state and CSR [33]. Previous literature encourages us to investigate the role of reputation in the CSRD and the economic state of the company relationship. We found a lack of empirical evidence in the literature reviewed.

Hypothesis 2.

The relationship between CSRD and Korean companies’ financial performance is moderated by company reputation, with a significant effect that strengthens the relationship between CSRD and FP.

3. Research Methodology

3.1. Research Philosophy

According to [34], research philosophy should be categorized into three key types. There are many fields of scientific research, and every kind of research has its own properties. This particular study extracts data mined from corporate reports and creates variables to conduct statistical analyses and test set hypotheses. We use quantitative research methods that are reported in numerical and binary forms [35].

3.2. Population and Sampling Technique

We use a linear and non-linear framework to investigate the Korean (KOSPI) stock market. The sample of Korean companies was selected from the Forbes Global 2000 list. To begin, we manually collected data, such as the name of the company, CEO, and industry, from the list of Forbes Global 2000 companies released on the Forbes.com website in the period from 2017 to 2021. In the second stage, we collected all financial data required for my research from Forbes, Bloomberg, and the companies’ official financial statements. For the CSRD rate, I am using ESG scores from the S&P Global research company website. In the third stage, we use the collected data to come up with the CSRD, ROA, ROE, and Tobin’s Q-ratio for each company in the sample. We have collected 330 firm-year observations with 2300+ data points from 66 Korean companies within various industries.

3.3. Study Variables

3.3.1. Independent Variable

We measure the financial performance of the Korean companies with Tobin’s Q-ratio, ROA and ROE. Many studies [36,37] have been suggested to measure financial performance in this way. Formulas used to obtain ROA, ROE, Tobin’s Q (q-ratio) are as follows:

$$ReturnonAsset\left(ROA\right)=NetIncome/AverageTotalAsset$$

(1)

$$ReturnonEquity\left(ROE\right)=NetIncome/ShareholdersEquity$$

(2)

$$TobinQ-ratio=MarketValueofAssets/ShareholdersEquity$$

(3)

3.3.2. Dependent Variable

CSR disclosure is our dependent variable that is measured with the ESG disclosure score by the Proprietary Bloomberg Group. The scores are given based on the disclosed actions of the company toward sustainability, environment-friendly improvements, and social and governing information. The score is a summary of disclosed non-financial achievements and actions of a company. The score ranges from 0.1 to 100; the more statistical data on selected aspects the company reveals, the more points it gains. Companies that are not included in the ESG score list do not have a disclosed report of CSR.

3.3.3. Control Variables

Control variables include financial factors that consider whether a company’s economic performance depends on the market performance. To fix an Omitted Variable Problem and biased results, we form a set of control variables that represent a major influence on the economic performance of the company. According to the previous literature, we use the following set of control variables:

• Market value: According to [38], market value is a measure of the financial market value of an asset or firm compared to its competitors.
• Sales: According to [39], a sale is an exchange of products or services for money. This transaction may appear between two or more parties. A party that purchases a product or service is the buyer, and a party that receives money is the seller.
• Net Profit: According to [40], net profit is any amount left after subtracting operating costs, taxes, interest, and depreciation from its revenues.
• CEO duality: [41] refers to a situation where the CEO of a company also holds the position of the board chair and has been a topic of interest in the study of corporate governance and its impact on firm performance. For this research, we will use a dummy variable of 1 or 0 for it.

3.4. Study Model

In order to check whether our two hypotheses are accepted or rejected, we built a model to demonstrate the variables. We used Equation (4) to check the first hypothesis:

$$\begin{array}{cc}\hfill FinancialPerformanc{e}_{i;t}& =\hfill \\ \hfill & \beta 0+\beta 1CSRdisclosur{e}_{i;t-1}+\beta 2MarketValu{e}_{i;t-1}+\beta 3Sale{s}_{i;t-1}+\beta 4NetProfi{t}_{i;t-1}+ϵit\hfill \end{array}$$

(4)

and Equations (5) and (6) are additionally applied to test the second hypothesis:

$$\begin{array}{cc}\hfill CompanyReputatio{n}_{i;t}& =\hfill \\ \hfill & \beta 0+\beta 1CSRdisclosur{e}_{i;t-1}+\beta 2Marketvalu{e}_{i;t-1}+\beta 3NetProfi{t}_{i;t-1}+\beta 4Tobi{n}^{\prime }s{Q}_{i;t-1}+ϵit\hfill \end{array}$$

(5)

$$\begin{array}{cc}\hfill FinancialPerformanc{e}_{i;t}& =\beta 0+\beta 1CompanyReputatio{n}_{i;t-1}+\beta 2CEOdualit{y}_{i;t-1}+\hfill \\ \hfill & \beta 3Marketvalu{e}_{i;t-1}+\beta 4Sale{s}_{i;t-1}+\beta 5NetProfi{t}_{i;t-1}+ϵit\hfill \end{array}$$

(6)

4. Data Analysis

4.1. Data Analysis and Results

Table 1. Descriptive Statistics.

Variable	Observations	Mean	Standard Deviation	Minimum	Maximum
CSRD	325	48.271	29.732	1	94
Market Value	325	12.934	0.492	11.9614	14.805
Sales	325	13.046	0.561	10.8389	14.447
Net Profit	325	11.791	0.634	9.0864	13.646
Return on Assets	325	0.0365	0.045	0.0003	0.489
Return on Equity	325	0.0907	0.063	0.0005	0.686
Tobin’s Q-ratio	325	5.3194	4.862	1	21.877

presents the descriptive statistics results for the various variables in the data sets. The CSRD data shows a large variation, with a standard deviation of 29.732. This indicates that the forecasted economic state of companies is influenced by different factors, including the sector, size, and geographical location of the companies. The average CSRD is 47.271, suggesting that companies are generally open about disclosing their CSR activities. However, it is important to note that Korean companies have less experience in CSRD compared to companies from other countries, which might influence their disclosure practices.

Financial policies reported by the industrial entities reveal diverse behavior in using internal and external sources, debt, and equity instruments for their financial assets and operations, as evidenced by the high standard deviation for the leverage variable. This diversity in financial policies may be influenced by factors such as industry sector, regulatory environment, and company size. Statistical analysis for Tobin’s Q-ratio values indicates high variance across Korean companies, possibly reflecting differences in market valuations and growth prospects. ROA and ROE, the indicators of Financial Performance (FP), show less variance compared to the CSRD, suggesting that the financial performance of companies is less volatile.

We examined the correlation coefficients and Variance Inflation Factor (VIF) for each pair of predictors to address potential multicollinearity [42] in our dataset.

Table 2. Variance inflation factor.

	VIF	1/VIF
Market value	2.044	0.489
Sales	2.198	0.455
Net profit	3.036	0.329
Return on Assets	4.818	0.208
Return on Equity	4.519	0.221
Tobin’s Q-ratio	2.377	0.421
Mean VIF	3.165

presents the VIF values for our model variables, with an average VIF value of 3.165, which is below the threshold value of 8. This indicates the absence of multicollinearity and ensures the robustness of our model in providing reliable insights into the relationships among the variables. The mean VIF for our dependent variables, including ROA, ROE, and Tobin’s Q-ratio, is 3.905, which further confirms the absence of multicollinearity.

Table 3. Correlation matrix of coefficients of regress model.

Variable	Market Value	Sales	Net Profit	Return on Assets	Return on Equity	Tobin’s Q-Ratio
Market value	1.000
Sales	0.374	1.000
Net profit	0.508	0.611	1.000
Return on Assets	0.416	0.059	0.362	1.000
Return on Equity	0.132	−0.052	0.374	0.795	1.000
Tobin’s Q-ratio	−0.469	−0.263	−0.050	−0.475	−0.074	1.000

displays the correlation coefficients, providing a comprehensive view of the interrelationships among the variables. To test for CSRD endogeneity, we examine the correlation between CSRD and the residuals R1, R2, and R3, which are derived from the pooled OLS models using Tobin’s Q, ROA, and ROE as dependent factors. Pearson correlation test, OLS, and fixed-effects estimations are employed, with bold text indicating significance at the 5% level or higher. The tests reveal no significant correlation between CSRD and each of the residuals (p > 0.05), which indicates that our model is robust and free from endogeneity concerns.

4.2. Hypothesis Testing

Table 4. Linear effect among the variables.

Variables	$\mathit{\beta }$	Standard Deviation	t-Statistics	p-Values
CR -> FP	0.498	0.053	7.686	0.000
CSRD -> FP	0.781	0.041	17.803	0.000
CSRD -> CR	0.796	0.038	12.608	0.000

presents the linear relationships among the variables in our model and the simultaneous estimation results obtained from SEM bootstrap. The performance of Korean companies is measured using Tobin’s Q-ratio, ROA, and ROE. The summary of our model in Table 4 shows a significant effect between Company Reputation (CR) and Financial Performance ($\beta$ = 0.498), highlighting the importance of reputation in determining a company’s financial outcomes.

CSRD and FP exhibit a strong relationship ($\beta$ = 0.781), supporting our first hypothesis that CSRD has a significant effect on the financial performance of Korean companies. This finding underscores the value of CSRD in enhancing a company’s financial standing and demonstrates that transparent CSR practices can lead to improved financial outcomes.

Table 5. Moderating effect of the company reputation.

Variables	$\mathit{\beta }$	Standard Deviation	t-Statistics	p-Values
CSRD -> CR -> FP	0.498	0.053	7.686	0.000

explores the moderating role of Company Reputation (CR) in the relationship between CSRD and FP. The results show that CR has a 36% positive moderating effect between CSRD and FP ($\beta$ = 0.362), and the p-value is less than 0.05, confirming the significance of the mediation effect. This finding supports our second hypothesis, which posits that CR plays a crucial role in moderating the relationship between CSRD and FP. With a significant moderating effect, CR serves as a valuable channel through which CSRD practices can influence the financial performance of Korean companies. In light of these findings, our null hypothesis is accepted, reinforcing the importance of transparent CSRD and positive CR in driving improved financial outcomes for businesses.

5. Conclusions

The results of the estimated models that account for the significant effect of CSRD on FP consistently show that CSRD exerts a significant effect on FP through firm reputation. A large number of prior studies assume the direct impact of CSRD on firm performance, and consequently, their findings are inconclusive. Unlike these studies that rely on cross-sectional data from small samples of firms participating in surveys, our findings were drawn from the longitudinal data of a large sample of firms from Korea. In this regard, our results offer more robust evidence that supports the role of CSRD in enhancing firm performance.

The moderating effect of CR between CSRD and FP suggests that CR plays a crucial role in influencing the financial outcomes of Korean companies. This finding has important practical implications, as it highlights the importance of companies actively managing their reputation and investing in CSR practices to improve financial performance. Overall, these results confirm the importance of CSR and reputation management in driving improved financial outcomes for Korean companies. The findings of this study can inform the development of effective CSR strategies and reputation management practices that can lead to better financial performance for businesses in Korea.

However, it is important to acknowledge potential limitations in our estimations. In contrast to the earlier studies, our research includes intervening factors and finds their significant effects on the relationship between CSRD and firm performance. In the process of transmitting the benefits of CSRD to firm performance, there may be some intervening factors destroying the benefits and leading to a negligible effect on firm performance. The lack of consideration of these intervening factors in previous studies is likely to be the reason for their inconsistent findings. Future research should continue to explore and identify additional intervening factors that may influence the relationship between CSRD and firm performance to further strengthen our understanding of this complex relationship.