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Article

Moral Imperative or Economic Necessity? The Role of Institutional Investors in the Corporate Social Responsibility—Financial Performance Relationship

by
Jihwan Yeon
1,*,
Hyoung Ju Song
2 and
Bora Kim
3
1
The College of Hospitality and Tourism Management, Sejong University, Seoul 05006, Republic of Korea
2
Rosen College of Hospitality Management, University of Central Florida, Orlando, FL 32819, USA
3
Surrey Hospitality and Tourism Management, University of Surrey, Guildford Surrey GU2 7XH, UK
*
Author to whom correspondence should be addressed.
Sustainability 2025, 17(2), 582; https://doi.org/10.3390/su17020582
Submission received: 25 November 2024 / Revised: 21 December 2024 / Accepted: 2 January 2025 / Published: 14 January 2025
(This article belongs to the Special Issue ESG Performance, Investment, and Risk Management)
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Abstract

:
This study examines how institutional ownership concentration, quantified by the Herfindahl-Hirschman Index (HHI), influences the financial consequences of CSR initiatives within the U.S. restaurant industry. This study distinguishes between CSR activities that are integral to core operations (operation-related CSR) and those that are not (non-operation-related CSR), analyzing their impacts on both market-based (ROA) and accounting-based performance (Tobin’s q) measures. Employing panel regression analysis, findings reveal that higher institutional ownership concentration enhances the alignment of operation-related CSR with improved financial performance. Conversely, the institutional ownership concentration does not significantly moderate the impact of non-operation-related CSR on both performance measures. Given the restaurant industry’s high consumer visibility and operational reliance on social and environmental factors, this study fills gaps in CSR literature by offering insights for aligning CSR strategies with institutional owners’ expectations. The results provide actionable guidance for policymakers and industry practitioners to optimize organizational outcomes from CSR activities.

1. Introduction

Corporate social responsibility (CSR), referred to as a firm’s commitment to operating in an ethical, sustainable, and socially responsible manner, has become a global trend among business, states, international organizations, and civil society organizations [1]. This trend increasingly demands that firms improve their social and environmental performance through CSR practices [2]. While implementing CSR practices may require substantial initial investments and expenses, those practices may provide economic benefits, such as increasing firm value and lowering operational risk under external crises, due to the firm’s enhanced reputation [3,4]. This is especially relevant in the restaurant industry, where CSR initiatives ranging from reducing waste to offering health food options, significantly influence customer choices and, eventually, organizational outcomes [5]. Responding to the trend, various restaurant firms have been engaging in CSR, offering healthy food options, promoting organic food ingredients, and reducing excessive energy consumption and food waste. For example, McDonald’s expressed the following objective in its 2018 mission statement:
We expect to prevent 150 million metric tons of CO2 equivalents (CO2e) from being released into the atmosphere by 2030, which is the equivalent of taking 32 million passenger cars off the road for an entire year or planting 3.8 billion trees and growing them for 10 years.
With the rise of socially responsible investment and initiatives of corporations, the role of institutional investors (e.g., pension funds, life insurance, and investment trusts) in shaping CSR strategies has become increasingly prominent [6]. Over the past several decades, the proportion of U.S. equity owned by institutional investors has surged from 6.1% in the 1950s to 70% in 2017, empowering them to exert significant influence on corporate management [7,8]. These investors often have access to extensive resources, expertise, and networks, which can profoundly impact a firm’s strategic approach to CSR [9,10].
However, given their diverse motivations and investment horizons, institutional investors may have distinct preferences for CSR strategies, leading to potential conflicts within management about which strategies to prioritize [10,11]. For instance, dispersed institutional ownership where shares are widely distributed may reflect diverse investor expectations, while concentrated institutional ownership where shares are held by a few key investors may exert more unified influence. Despite the importance of these dynamics, while existing literature on institutional investors’ preference for CSR often generalizes their influence on firms’ CSR strategies, it overlooks the role of ownership concentration and its potential impact on financial outcomes with the functions of CSR activities.
To address this gap, this study aims to explore the moderating effect of institutional ownership concentration on the relationship between CSR and financial performance (FP). This study, therefore, empirically investigates how the concentration of institutional ownership (either dispersed or concentrated) affects the financial outcomes of CSR practices within the U.S. restaurant industry. Given that institutional investors’ orientation toward firms’ performance evaluation and their strategic influence can differ depending on their motivation and investment time horizons, following the existing literature e.g., [12]. CSR dimensions were categorized into two types associated with operation-relatedness: operation-related and non-operation-related CSR activities. In addition, this study examines the impact of each CSR dimension on two distinct measures of financial performance: a market-based measure, Tobin’s Q, and an accounting-based measure, return on assets (ROA).
By doing so, this study extends a theoretical framework to uncover a more nuanced effect of CSR on FP by offering empirical evidence in relation to the impact of institutional investors. In addition, this study offers sound advice to owners, executives, and other stakeholders of hospitality firms when implementing and evaluating CSR practices by showing that the CSR-FP relationship is influenced differently by various dimensions of CSR associated with expectations of heterogeneous institutional investors.

2. Literature Review

2.1. Corporate Social Responsibility (CSR) and Firm Performance in the Restaurant Industry

Restaurants play a vital role in society by generating employment, supporting local economies, and advancing sustainability through responsible sourcing and eco-friendly menu options [13]. However, they also confront significant challenges, including food waste, carbon emissions, and social inequities. CSR-focused strategies provide a pathway for restaurants to address these issues by integrating profitability with accountability, thereby promoting both societal and environmental well-being [14]. The relationship between corporate social responsibility (CSR) and financial performance (FP) in the hospitality industry has been a subject of extensive academic investigation but remains inconclusive with studies yielding mixed results [15]. Some research demonstrates that CSR positively influences firm performance through mechanisms such as enhanced brand reputation, increased customer loyalty, and improved operational efficiency [14,16]. On the other hand, other studies report negative or insignificant effects, highlighting the multifaceted and context-dependent nature of the CSR-FP relationship in the hospitality sector [17].
Empirical evidence supporting a positive CSR-FP relationship often emphasizes the strategic advantages of CSR initiatives particularly in the hotel and restaurant sectors [16,18,19]. For instance, firms adopting green certifications or socially responsible marketing strategies in the restaurant industry often achieve improved market positioning and financial outcomes. These findings align with stakeholder theory, which posits that addressing the interests of diverse stakeholders enhances long-term financial performance [18,19].
Conversely, some studies highlight potential drawbacks of CSR, particularly when it is treated as a cost rather than an investment. Misaligned or overemphasized CSR initiatives may lead to resource misallocation, inefficiencies, or customer skepticism regarding the firm’s motives [14,15]. Additionally, other research finds no significant relationship between CSR and FP, suggesting that the financial benefits of CSR may take time to materialize or may be counterbalanced by factors such as market competition or operational inefficiencies [20,21]. These findings indicate that the CSR-FP relationship in the hospitality industry, including the restaurant sector, is further complicated by various contextual and moderating factors [15]. Industry-specific characteristics, such as the reliance on intangible and experiential products, amplify the importance of branding and reputation, potentially increasing the impact of CSR in this sector. Simultaneously, firm-specific factors such as size, geographic location, market dynamics, and cultural dimensions significantly influence the strength and direction of the CSR-FP link [14,21]. Given the pivotal role institutional investors play in shaping corporate strategy and driving CSR initiatives through significant influence and capital investment, this study focuses on the roles of institutional investors in the relationship between CSR and FP within the restaurant industry.

2.2. Institutional Investors and Their Role in Corporate Strategy

In the modern corporate world, the relationship between the owner and the management of the firm is complicated due to the separation of corporate ownership from corporate management, commonly resulting in an agency problem [22]. In the absence of effective corporate governance mechanisms, this situation enables managers to act in their own self-interest rather than in the interest of shareholders. The corporate governance literature provides substantial evidence that demonstrates shareholders can follow two broad strategies to ensure some return on their investment in the form of external and internal governance mechanisms [23]. On the one hand, shareholders may rely on external governance mechanisms, such as regulations (e.g., The Sarbanes-Oxley Act) or accounting and financial services from third parties (e.g., audits by accountants outside a firm), which play a disciplinary and monitoring role in mitigating agency problems [24]. Alternatively, as an internal governance mechanism to mitigate agency problems, shareholders may use their ownership in exercising their power on key strategic decision-making processes and/or position their own employees as board members [22].
Dam and Scholtens [25] suggest that shareholders tend to more closely scrutinize decision-making of a firm’s top management group when they hold appreciable shares of the firm. Moreover, institutional investors are frequently identified by the sizable percentage of shares that they possess in many firms [26,27]. The literature suggests that institutional investors act in the shareholders’ best interests by monitoring whether a corporate decision meets the objectives of shareholders [28,29] possibly mitigating agency problems between managers and other stakeholders, and/or restricting managers’ opportunistic behaviors [30]. Given that these investors are generally long-term investors who continuously keep watch on management activities in line with their long-term relationship with the firm and have accessibility to better quality information [31,32], they are expected to prevent management activities that can erode firm value and may exert their influence on corporate management to carry out their own preferences [33].
In addition, grounded on the resource dependence perspective, institutional investors can exert their influence on strategic decisions by directly and indirectly providing pivotal resources that influence the firm’s optimal decision-making. For example, institutional investors can actively offer managerial know-how, insights, and salient market information (e.g., industrial trends and strategic reactions of rivals) accumulated through a wide range of investment activities [34]. Particularly, the bigger an institutional investor’s size, the better able the investor is to take advantage of economies of scale using salient information from the markets they have entered and in which they have invested [35]. That is, as institutional investors with large voting power participate in annual meetings and provide necessary resources when a firm makes key strategic decisions (e.g., CSR activities, R&D, and internationalization), top executives of the firm employ the resources provided by institutional investors and expect to achieve better business outcomes [34].
Indirectly, resource dependence theorists suggest that institutional investors promote a firm’s better decision-making processes by electing a board of directors who play a role in providing key resources needed for the firm’s success [36,37]. Directors appointed by institutional investors and other shareholders can discipline and counsel the firm’s top executives based on their experience secured by plentiful work experience and networks in strategically related industries and firms [36]. For example, when top executives of a firm may lack sufficient managerial experience and the relevant market information needed to formulate a certain corporate strategy, directors can offer their expertise and skills and help the firm build external connections with important stakeholders [38].
Investment in CSR activities can also generate the agency problem since managers tend to make excessive investment in such activities due to personal reasons, such as reputation- and career-related reasons [39]. However, when accompanied by effective governance mechanisms, CSR activities can enhance firm value and reduce firm risk [40,41]. In this respect, institutional investors who have plentiful information and expertise to ensure effective control over managements can function as a pivotal group that enables a firm to derive better financial outcomes from CSR activities [42].

2.3. Institutional Investor Preferences for CSR

Unlike individual shareholders, institutional investors are generally believed to be rational shareholders with expertise in gathering and processing public information. More specifically, they have sufficient resources to collect and analyze information to evaluate firms’ strategies and are less prone to disapprove of investments that are expected to improve firm value in the long run [27,43] while individual shareholders are more likely to use financial press information and intuition for their evaluation rather than performing a proper analysis based on relevant information signals [44,45]. Therefore, given that the financial outcomes of CSR activities are likely to be realized in the long term and may require greater access to financial analytic skills to evaluate its feasibility, institutional investors are likely to support CSR and help implement CSR more successfully [27,46,47].
In addition, institutional investors may support firms that implement CSR initiatives because the investors’ constituents want to be associated with socially responsible investing and are attracted to firms that integrate societal concerns into investment decision-making to fulfill ethical responsibilities beyond the economic and legal responsibilities that Carroll [48] defined [49]. Given that institutional investors’ fiduciary duties include not only generating financial returns on investments but also making investment decisions in accordance with their clients’ investment preferences [50], institutional investors may be under pressure to incorporate firms’ CSR initiatives as a pivotal criterion when forming investment portfolios. In this respect, institutional investors significantly influence corporate management to actively engage in CSR by influencing managers decision exerting their owners’ voice and trading shares [10,47,51].
Fundamentally, institutional investors have fiduciary duties based on two major perspectives: legal and economic. The legal aspect relates to the fact that fiduciaries (i.e., institutional investors) manage the asset of others (i.e., clients of the institutional investors) whose interests are protected by law, while the economic aspect is based on the role of the institutional investors in the marketplace in managing and maximizing clients’ assets [52]. That is, institutional investors should place importance on the economic interests of their constituents and, therefore, avoid using any criteria outside those economic interests to select investments. In this respect, among the various dimensions of CSR, institutional investors are likely to prefer dimensions related to the core operations of a corporation, compared to other dimensions (e.g., community relations, diversity, or humanity) that benefit society as a whole but are less related to a firm’s core operations. While CSR activities that address such non-operational dimensions will, eventually, improve a company’s brand recognition and customer satisfaction [14], they may not instantly increase operational efficiencies and enhance FP in a short time frame. On the other hand, CSR activities closely related to a company’s operations, such as product quality, labor relations, and corporate governance, that influence engagement with customers, employees, investors and other stakeholders are more likely to capture institutional investors’ attention since these CSR activities are more likely to have a direct impact on a firm’s operational efficiencies and, as such, may economically benefit the firm within a relatively shorter period. Therefore, institutional investors are prone to support CSR activities that directly relate to companies’ operations and potentially bring economic benefits. In the hospitality literature regarding CSR multidimensionality, previous studies e.g., [12] have proposed two dimensions of CSR: (1) the operation-related dimension, where CSR activities facilitate improved efficiencies in a firm’s core operations from an instrumental viewpoint, and (2) the non-operation-related dimension, where CSR activities may not directly contribute to a firm’s efficient operation but may improve firms’ public image from an ethical perspective. While previous research has yielded positive outcomes regarding the influence of institutional investors on CSR strategy, it has not specifically examined the distinction between institutional investors’ preference or support for operation-related and non-operation-related CSR initiatives. Given institutional investors’ possible interest in operation-related CSR activities that can fulfill their economic duty while also supporting their clients’ interests in socially responsible investing, this study proposes that different types of CSR activities might yield different financial outcomes when institutional investors exercise their power over the firm’s strategic directions as owners.

2.4. The Moderating Effect of Institutional Ownership Concentration

While researchers have largely considered institutional investors as a homogenous group sharing similar characteristics and investment tendencies, some studies suggest that each institutional investor are unique in investment objectives [24,51], suggesting that different institutional investors may have conflicting goals, thereby influencing the strategic directions of the firms in which they invest in different ways. Particularly, institutional investors’ differing investment horizons can prompt them to take different stands on firms’ CSR strategies, which potentially leads to conflicting preferences for a firm’s strategy [9]. Moreover, numerous researchers have indicated that the potential conflicts of interest among institutional investors that may result from a high level of institutional ownership can diminish the effectiveness of monitoring e.g., [35,53].
For example, long-term investors, such as pension funds, life assurance funds, and charitable funds, demonstrate a positive association with corporate social responsibility (CSR) due to their extended investment horizons and the potential for CSR to deliver long-term financial gains and reduce risks [9,54]. Particularly, these investors prioritize employee- and environment-related CSR initiatives, which contribute to operational efficiency and risk mitigation, while showing comparatively weaker preferences for community-focused CSR, likely because of its limited direct financial returns [55]. In contrast, short-term investors, including unit and investment trusts, emphasize liquidity and immediate financial returns, resulting in a generally negative association with CSR [9,54]. However, short-term investors, such as investment trusts and unit trusts, exhibit a relatively stronger preference for employee-related CSR initiatives, which provide quicker operational benefits [55]. These differing priorities reflect the alignment of investment strategies with the expected time horizon for realizing CSR benefits, potentially leading to conflicts among institutional owners, particularly when a focal firm’s ownership is dispersed across different types of investors.
These conflicts of interest can arise participants’ lack of complete and accurate information pertaining to each other’s actions, knowledge, and preferences. Nevertheless, theories such as agency theory and shareholder primacy theory rest on the assumption that all shareholders share a homogeneous interest in and preference for corporate strategies. To the contrary, researchers have discovered, instead, that shareholders’ interests are divided along many fault lines, including disagreement among short term vs. long term investors; or between egocentric investors who are only concerned about their own material returns, and altruistic investors with interest in society’s good in general. Several studies argue that institutional investors have different preferences towards CSR strategies due to heterogeneous investment horizons and types of institutions [54,56]. Potential preference conflicts and information asymmetry among institutional investors and their representatives (e.g., directors appointed by institutional investors) may impede managers’ ability to devise appropriate strategies when they are unsure voices that they should pay attention to in formulating and implementing a strategy [35]. This provides evidence against the agency theory assumption that institutional investors are unified in their governance actions. Oh et al. [11]. propose that potential benefits of CSR can be attained by ongoing dedication in need of unified assistance from a small group of large shareholders. In this respect, although institutional investors can exert a great influence on decisions, incongruous voices from their counterpart institutional investors may prevent constant dedication to CSR and may even negatively impact a firm’s commitment to CSR [57]. However, the impact of conflicting voices among institutional investors on formulating and implementing a firm’s CSR strategy has not been sufficiently examined in the literature.
In other words, the agency problem between owners and managers may result from more than just the separation of ownership and control: dispersed corporate ownership can also lead to the problem. In a highly dispersed ownership structure, little incentive exists for any one owner to monitor managers’ opportunistic behavior because the monitoring cost for the individual owner would be increased while the other shareholders would still enjoy the benefits [24]. Furthermore, if those with marginal shareholdings were willing to monitor managers, their lack of strong voting power would limit their influence on corporate decision-making [11]. In this respect, many researchers have evidenced that the involvement of a small number of large shareholders can help limit the agency problem [58,59]. Indeed, large shareholders who own significant amounts of equity hold the power to affect corporate decisions by appointing directors on the board [60]. Accordingly, concentrated ownership has been identified as an important tool for curtailing managers’ propensity to pursue their own interests and implement inefficient strategies [28,61]. In other words, a relatively high concentration of institutional ownership may mitigate agency costs caused by the principal–agent relationship by reinforcing the effectiveness of the monitoring efforts of large shareholders [62]. Especially because institutional investors often hold large blocks of stocks and cannot easily dispose of these shares quickly for short-term gains, they are more likely to pay careful attention to corporate strategies and decisions compared to other shareholders and act in their long-term interest [11,63].
As noted, with the benefit of voting power, institutional investors are likely to exert a real influence by monitoring corporate management so that management decisions are made in the shareholders’ best interests. However, considering that different dimensions or aspects of CSR initiatives target different stakeholders and result in a disparate effect on corporate outcomes [64,65], the influence of institutional investors regarding formulation and implementation of firms’ CSR initiatives would differ accordingly. While some studies argued that firms can create competitive advantage and benefit from excess returns if they creatively combine non-economic considerations with CSR implementation [66,67]. This suggests that firms can maximize shareholders’ value while satisfying other stakeholders through CSR initiatives [68], and large institutional investors have the incentive to exercise closer oversight and control of management as well as corporate decision-making in a way that increases shareholders’ return on equity and improves firms’ overall FP [69]. That is, for CSR strategies that are highly likely to financially pay off in a relatively short term, institutional investors who hold similar preferences may put the power in the hands of corporate management through voting control based on concentrated ownership [70]. Based on the discussion regarding support for the potential moderating role of institutional ownership concentration on the relationship between certain dimensions of CSR and their financial consequences, the current study posits the following hypotheses:
H1: 
The degree of institutional ownership concentration positively moderates the effect of operation-related CSR activities on restaurant firms’ financial performance.
H2: 
The degree of institutional ownership concentration does not have a moderating effect on the relationship between non-operation-related CSR activities on restaurant firms’ financial performance.

3. Methodology

3.1. Data

The sample of the current study encompassed publicly traded U.S. restaurant firms, including full-service restaurant (North American Industry Classification System codes 722511) and limited-service restaurant (North American Industry Classification System codes 722513) firms, in accordance with the North American Industry Classification System (NAICS). Data on CSR activities of restaurant firms in the sample were collected from KLD STATS, a data set comprising comprehensive CSR ratings with 80 indicators of firms listed on the S&P500 and Russel 3000 indices. The study selects the sample period to reflect more recent phenomena of the proposed relationships. Thus, to retrieve all available necessary data, the sample period was established as 2004 through 2019. The sample period was limited only up to 2018 due to the limited availability of the CSR data provided by KLD STATS database.
Restaurant firms’ financial market-based performance (Tobin’s q) and accounting-based performance (Return on assets), along with other firm-level characteristics as control variables (e.g., firm size and leverage ratio), were retrieved from their annual reports (form 10-Ks) in the electronic data gathering, analysis and retrieving (EDGAR) system and Compustat database. The key variable, institutional ownership (i.e., the concentration of institutional ownership), was collected from the Compustat database and a firm’s proxy statements (DEF14As) to complement missing values. Although we were able to access up-to-date data of firm performance, institutional ownership, and other firm-level characteristics from 1991 to 2020, the current study solely employed data from 2004 to 2019 to match them with CSR ratings obtained from KLD STAT, as stated previously. After eliminating missing data and outliers with absolute values of studentized residuals > 3, the current study obtained 326 firm-year observations for analyses.

3.2. Model and Estimation Method

To examine the impact of institutional ownership concentration on the relationship between CSR activities and firm performance in the U.S. restaurant industry, this study employed the Herfindahl-Hirschman Index (INST_HHI hereinafter). As dependent variables, the current study used a financial market-based measure of firm performance or firm value (Tobin’s q) and an accounting-based measure (ROA) of firm performance or profitability [71]. We classified restaurant firms’ CSR activities into two dimensions in research models: operation-based CSR (OP_CSR hereinafter) and non-operation-based CSR (NOP_CSR hereinafter). Research models 1 through 4 were devised to examine the moderating role of INST_HHI on the relationship between CSR activities (i.e., OP_CSR and NOP_CSR) and firm performance. Following are the research models for hypotheses testing:
Model 1: Tobin’s qit = α0 + α1OP_CSRit−1 + α2INST_HHIit−1 + α3OP_CSR × INST_HHIit−1 + α4SIZEit−1 + α5LEVit−1 + α6DIVit−1 + α7FRit−1 + εit,
Model 2: Tobin’s qit = α0 + α1NOP_CSRit−1 + α2INST_HHIit−1 + α3NOP_CSR × INST_HHIit−1 + α4SIZEit−1 + α5LEVit−1 + α6DIVit−1 + α7FRit−1 + εit,
Model 3: ROAit = α0 + α1OP_CSRit−1 + α2INST_HHIit−1 + α3OP_CSR × INST_HHIit−1 + α4SIZEit−1 + α5LEVit−1 + α6DIVit−1 + α7FRit−1 + εit,
Model 4: ROAit = α0 + α1NOP_CSRit−1 + α2INST_HHIit−1 + α3NOP_CSR × INST_HHIit−1 + α4SIZEit−1 + α5LEVit−1 + α6DIVit−1 + α7FRit−1 + εit,
where Tobin’s q indicates a financial market-based measure of firm performance; ROA indicates an accounting-based measure of firm performance; OP_CSR indicates operation-related CSR activities; NOP_CSR indicates non-operation-related CSR activities; INST_HHI indicates institutional ownership concentration; SIZE indicates a firm’s size measured by the natural log of total assets; LEV indicates a firm’s debt-to-equity ratio; DIV indicates total dividends that are the sum of common and preferred dividends; and FR indicates the degree of franchising.
This study used a one-year time lag, marginalizing the possibility of simultaneity. In other words, all independent variables including control variables in the models were measured at time (t − 1), while dependent variables were measured at time (t).
To estimate coefficients, this study relied on the panel regression analysis to address endogeneity issues, particularly those arising from omitted variable bias caused by unobservable firm-specific and time-specific heterogeneity [72]. An estimation method that addressed suspect variations in each firm’s time-invariant characteristics and time-series differences across all the firms was needed to derive unbiased and consistent results [73]. Accordingly, following the results of the Hausman test that supported a fixed-effects method over a random-effects method for research models 1 and 2 (χ2 = 15.85, p < 0.05), the two-way fixed effects method was employed for this research [72]. For research models 3 and 4, following the results of the Hausman test (χ2 = 0.81, p > 0.05), the two-way random effects method was employed. In addition, Newey-West standard errors were used to deal with probable heteroskedasticity and autocorrelation problems [72].

3.3. Dependent Variable

The current study firstly utilized Tobin’s q to measure the FP of a restaurant firm. Tobin’s q has been recognized as an established financial market-based performance measure because Tobin’s q not only represents a firm’s past performance, as other measures do as ex post measures (e.g., ROA and ROE), but also reflects the firm’s prospects at a point in time [71,74]. For convenience, this study utilized the approximate Tobin’s q developed by Chung and Pruitt [75] measured as (MVE + PS+ Debt)/TA, where MVE represents a firm’s stock price×the number of shares outstanding; PS represents the preferred stocks’ liquidating value; Debt represents the sum of short-term assets and long-term debt, indicating a firm’s short-term liabilities; and TA represents total assets’ book value.
Meanwhile, this study also employed ROA as another dependent variable, considering that a group of scholars argued that an accounting measure can compensate for possible facts in a financial market-based measure of firm performance [76,77]. That is, an accounting-based measure reflects a firm’s return more directly, while a financial market-based measure may be affected by investors’ forecasts of future cash flow or various macro-economic factors.

3.4. Main Variables

The operation-related CSR rating (OP_CSR) is defined as CSR activities that have direct implications on a restaurant firm’s business activities: (1) product quality and safety, (2) relationships with employees, and (3) corporate governance. The ratings of these three dimensions were summed to derive the composite values of OP_CSR. NOP_CSR refers to activities that are indirectly and gradually associated with a firm’s business activities, pertaining to environment, community, diversity, and human rights. Similar to the process for determining the composite values of OP_CSR, the values of all these dimensions were added to generate the composite values of NOP_CSR. Although the KLD STATS offer other additional categories of CSR activities, such as military involvement, they were not considered in the current study’s context due to their limited relevance and data accuracy.
To measure institutional ownership, the analysis focused on a specific dimension—INST_HHI. Regarding INST_HHI, the current study measured the level of concentration of institutional ownership, employing the Herfindahl-Hirschman Index (HHI), which has been extensively employed to capture the degree of concentration [78,79,80]. The HHI was measured by ∑Si2, where Si indicates the percentage of shares outstanding held by an institutional investor (Si), ranging from 0 to 1.

3.5. Control Variables

This study employed four control variables. First, firm size (SIZE), measured by the natural log of total assets, was included in the research models, given that a larger firm is prone to benefit from economies of scale and market power advantage more than its smaller counterparts, which influences firm performance [81]. A firm’s leverage (LEV), measured by a debt-to-equity ratio, was controlled for the benefits (e.g., high liquidity) and costs (e.g., danger in default of payment obligation) of the use of debt (McConnell and Servaes, 1990). Next, total dividends (DIV), the sum of common and preferred dividends, were included in the models considering that DIV acts as a significant signal of the current managerial situations of a firm’s businesses to shareholders and potential investors, which affects Tobin’s q [71]. The degree of franchising (FR) was also included as a control variable in the models because it has been commonly used as a growth strategy in the restaurant industry to expand a firm’s market size and operations into multipoint locations, thereby influencing firm performance as a whole [82].

4. Results

4.1. Descriptive Statistics

Table 1 presents a summary of the variables’ descriptive statistics. Tobin’s q, a dependent variable, showed a mean of 2.987 with a standard deviation of 2.204. That is, on average, a restaurant firm’s market value was approximately three times greater than its book value. OP_CSR had a mean of −0.505, while the mean value of NOP_CSR was 0.472. Also, NOP_CSR values had a larger range, from −4.000 to 11.000, whereas OP_CSR values ranged from −5.000 to 4.000. INST_HHI showed a mean value of 0.061, ranging from 0.023 to 0.508. Given that the HHI indicated the degree of concentration on a range from 0 to 1, the mean value of 0.061 indicated a lower degree of concentration of institutional ownership in the restaurant industry. According to the descriptive statistics of institutional ownership obtained from the main variable (INST_HHI), the U.S. publicly traded restaurant firms’ shares outstanding have been largely and diffusely occupied by institutional investors. Control variables, including SIZE, LEV, DIV, and FR, showed sufficient variation for the analyses.
Table 2 provides a summary of the correlations among the variables in the research models. Tobin’s q was positively associated with OP_CSR, NOP_CSR, DIV, and FR, while a negative correlation was observed between Tobin’s q and INST_HHI. ROA was positively associated with NOP_CSR and FR, while a negative correlation was observed between ROA and INST_HHI, similar to the case of Tobin’s q. Additionally, firm-level characteristics were significantly correlated with each other. For example, SIZE was positively related to DIV at a 5% significance level.

4.2. Main Analyses

Table 3 and Table 4 report results of the main analyses, contingent on two different dependent variables. Firstly, in Table 3, the results of the main analyses using Tobin’s q as a dependent variable are presented. In the first column without an interaction term, both OP_CSR and NOP_CSR show an insignificant impact on Tobin’s q. For the moderating effect of the concentration of institutional ownership (INST_HHI), consistent with our speculation, we found that while INST_HHI has an insignificant moderating effect on the relationship between NOP_CSR and Tobin’s q, it has a positive and significant moderating effect in the case of OP_CSR, supporting H1 (β = 3.080, p < 0.05; See Figure 1). That is, the interaction (i.e., OP_CSR × INST_HHI) showed a significant effect on Tobin’s q, implying that restaurant firms with a high concentration of institutional ownership are more likely to achieve better financial performance measured by Tobin’s q when undertaking operation-related CSR initiatives. Secondly, to check the robustness of our main results, we additionally estimated coefficients with ROA as another dependent variable. In Table 4, we found a positive moderating effect of INST_HHI on the relationship between OP_CSR and ROA, supporting H1 (β = 0.149, p < 0.05; See Figure 2), while the interaction between INST_HHI and NOP_CSR showed an insignificant effect on ROA. In other words, INST_HHI positively moderated the relationship between OP_CSR and firm performance measured by Tobin’s q and ROA. However, a coefficient of the interaction term between INST_HHI and NOP_CSR indicated an insignificant impact on financial performance in both cases, suggesting that the concentration of institutional ownership did not function as an important factor in enhancing the financial consequences of non-operation-related CSR activities. Therefore, H2 was rejected.

5. Discussion and Conclusions

This study examined whether concentration of institutional investors that hold blocks of shares in the restaurant industry demonstrated varied degrees of support for CSR initiatives that were relatively more or relatively less closely related to a firm’s core operation and how that moderated the effect (non) operation-related CSR activities impact on firm financial performance. That is, given institutional investors’ power and influence on management activities, this study examined the moderating impact of institutional investors by examining the concentration of ownership (i.e., spread of constituents among institutional investors of a firm).
Our examination of the CSR-FP relationship revealed that neither OP_CSR nor NOP_CSR had a significant main effect on FP, which is consistent with findings from previous studies in the hospitality literature e.g., [12,83]. That is, the results indicated that CSR activities per se did not significantly affect organizational market-based FP but suggested that contingent factors that may adjust the impact of CSR on FP need to be considered.
Institutional investors, compared to non-institutional investors, tend to make use of their influence on corporate management to enhance firms’ CSR performance and are better positioned to help firms enhance the financial benefits of CSR activities with their voting power, resources, and financial expertise. At the same time, given that potential conflicts of interest among institutional investors can arise owing to heterogeneity of each group’s preferences and investment horizons, this study examined whether the concentration of ownership among institutional investors influences the CSR–FP association.
The findings of this study show that when the ownership of outstanding shares of a firm was dispersed across institutional investors to a lesser degree, more effective monitoring and controls of the governance were achieved, while fewer potential conflicts of interest were identified. In other words, when the concentration of institutional ownership increased, restaurant firms were better able to link their CSR efforts to their FP. Specifically, this moderating effect was significant only when CSR activities were closely associated with a firm’s core operations. That is, as institutional owners of a restaurant firm favor operation-related CSR that align with their interests, possibly because they have better potential to yield benefits in the relatively short run, they help restaurant firms with such CSR activities by offering pivotal resources (e.g., advice, counseling, networks with strategically related stakeholders). This impact is enhanced when a firm’s share is held by a smaller number of institutional owners. Meanwhile, the non-significant moderating effect of concentrated institutional ownership may stem from the fact that such ownership often prioritizes operational efficiency and shareholder returns over peripheral CSR initiatives, thereby diminishing the latter’s influence on financial outcomes.
This study enhances our current understanding of the impact of CSR activities on FP in the hospitality industry. Complementing agency theory where heterogeneity between principals were not considered, this study suggests that different institutional investors may have competing interests and will perceive the same CSR initiatives through different lenses. This may lead to divergent views and interpretations of the potential financial impact of CSR initiatives among multiple institutional investors.
Based on institutional investors’ fiduciary duties (particularly the economic aspect), this study suggests that institutional investors are prone to support CSR initiatives that are more likely to have a direct impact on a firm’s operational performance, enhancing FP within a relatively shorter period of time. The current study further provides evidence to support that the concentration of institutional ownership (i.e., a large proportion of equity of a firm held by a few institutional shareholder) in the firm’s ownership structure positively moderates the CSR–FP relationship. To date, although there have been several empirical attempts that investigate the role of corporate governance structures in the CSR-FP link in the hospitality industry, such as family ownership [16] and CEO compensation [84], the institutional owners’ assessments and involvement toward CSR initiatives have been understudied notwithstanding the strong voting power and influence on the decision-making process. As this study’s results shed light on institutional owners’ contingent effect (i.e., institutional ownership concentration) on the CSR-FP relationship, our study contributes to ongoing research that gauges the financial benefits of CSR initiatives and provides an implication for environmentally and socially responsible investments.
As practical implications, our findings can help industry practitioners and policymakers identify how concentrated ownership structures affect restaurant firms’ CSR initiatives and how they benefit from certain CSR dimensions. Specifically, managers are advised to be aware of the impact that institutional ownership can have as an internal mechanism that may limit or encourage firms’ environmental and social commitment and divergent views among institutional investors can hinder reaching agreement on a few CSR priorities and resource allocation.
In addition, the results may be useful for restaurant firm executives and managerial CSR decision-making practices. Under the conditions of a small number of institutional investors holding shares of a company that implements CSR activities, executives and managers may consider investing in operation-related CSR activities, such as developing safe and healthy food products, improving employees’ working conditions and benefits, or nominating independent boards of directors for better corporate governance. These operation-related CSR strategies will be monitored and advised by institutional investors so that the financial benefit of such activities is more likely to be realized in the market. In other words, the findings suggest that firms should actively engage institutional investors in aligning CSR strategies with core business operations, ensuring that these initiatives are strategically integrated and designed to drive both social impact and financial returns. Also, the results provide guidance to regulators and policymakers alike regarding which policies to follow in relation to firms’ ownership concentration, as institutional investors wield their influence in different dimensions of CSR.
In spite of the contributions described, the current study entails several limitations. First, despite its wide use in the extant literature, the KLD STATS database still suffers from limited construct validity due to its evaluative practice of assigning a mostly binary value to each CSR activity, which may lead to an inaccurate weight problem. In this respect, future research may utilize and compare different datasets, such as CSRHub or Refinitiv, to enhance construct validity. In addition, while this study underscores the heterogeneity of institutional investors in investments horizon in the investee companies shaping different financial outcomes of CSR, the current study did not specify and examine how different types of investments, such as pension funds, mutual funds, and commercial banks, differently impact the CSR–FP relationship. It should be acknowledged that the concentrated institutional ownership can lead to conflicts of interest, as institutional investors may prioritize short-term returns or their own strategic goals over the long-term health and growth of the company. Therefore, future studies can further investigate whether some types of funds or institutional investors with certain characteristics have different effects on the support and implementation of CSR strategies.
In addition, only the case of publicly traded restaurant firms is included in this study, due to the nature of data availability of secondary data. As there are no publicly available financial data for private family firms (often, they are small), those firms could not be included in the data of the current study. In this respect, future studies are encouraged to expand the sample size to private family firms to replicate the relationship between CSR and FP in the presence of institutional ownership in a more comprehensive manner.
Next, while this study suggests that concentrated ownership among institutional investors can help restaurant firms yield better financial benefits when investing in operation-related CSR activities, potential drawbacks and issues this concentrated ownership structure may have were not investigated in this study. Future research can examine pros and cons of having concentrated ownership structure and how such a structure affects management decision-making relative to resource allocation differently.
Additionally, this study employed both the two-way fixed-effects and random-effects methods, combined with time-lagged independent variables, to mitigate omitted variable bias and simultaneity bias. However, we acknowledge that other sources of endogeneity, such as reverse causality (e.g., better-performing firms’ implementation of more active CSR strategies) attracting institutional investors), may still affect the results. Future research could consider utilizing instrumental variable (IV) techniques (e.g., 2SLS and 3SLS) or other advanced methods (e.g., Gaussian copula approach) to further enhance causal inference.
Lastly, the findings of this study indicate that institutional ownership positively moderates the relationship between OP_CSR and firm performance measures. However, it does not significantly moderate the impact of non-operational CSR activities on firm performance, as measured by Tobin’s Q and ROA. As non-operation-related CSR activities, such as donations and charitable initiatives, constitute significant components of a firm’s CSR efforts requiring substantial capital and managerial resources, future research should examine other significant corporate governance structures (e.g., managerial ownership, board of directors’ external ties) to ensure the effective implementation of these activities and their linkage to improved firm performance.

Author Contributions

Conceptualization, J.Y. and H.J.S.; methodology, J.Y. and H.J.S.; writing—original draft preparation, J.Y. and H.J.S.; writing—review and editing, J.Y., H.J.S. and B.K.; supervision, J.Y. All authors have read and agreed to the published version of the manuscript.

Funding

This research received no external funding.

Institutional Review Board Statement

Not applicable.

Informed Consent Statement

Not applicable.

Data Availability Statement

The data presented in this study are available in a public dataset.

Conflicts of Interest

The authors declare no conflict of interest.

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Sustainability 17 00582 g001
Figure 1. The Interaction Effect of Operation-related CSR and Concentration of Institutional Ownership (Tobin’s q).
Figure 1. The Interaction Effect of Operation-related CSR and Concentration of Institutional Ownership (Tobin’s q).
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Figure 2. The Interaction Effect of Operation-related CSR and Concentration of Institutional Ownership (ROA).
Figure 2. The Interaction Effect of Operation-related CSR and Concentration of Institutional Ownership (ROA).
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Table 1. Summary of descriptive statistics.
Table 1. Summary of descriptive statistics.
VariablesNMeanStd. DevMinMax
Tobin’s q3262.9872.2040.56116.066
ROA3260.0900.687−0.1840.399
OP_CSR326−0.5051.355−54
NOP_CSR3260.4721.911−411
INST_HHI3260.0610.0550.0230.508
SIZE3266.7151.5002.22010.544
LEV3260.21112.269−173.15100.32
DIV326155.35516.2203255.9
FR3260.4220.3470.0000.993
Table 2. Summary of Pearson’s correlations.
Table 2. Summary of Pearson’s correlations.
Variables(1)(2)(3)(4)(5)(6)(7)(8)(9)
(1) Tobin’s q1.000
(2) ROA0.715 **1.000
(3) OP_CSR0.105 **0.0331.000
(4) NOP_CSR0.151 **0.172 **0.104 **1.000
(5) INST_HHI−0.143 **−0.233 **0.033−0.143 **1.000
(6) SIZE−0.0470.088−0.0640.345 **−0.205 **1.000
(7) LEV−0.051−0.1020.094−0.007−0.0150.0161.000
(8) DIV0.154 **−0.270 **−0.0380.272 **−0.147 **0.651 **−0.0151.000
(9) FR0.329 **0.314 **−0.0910.0950.0190.042−0.0730.249 **1.000
Note: ** p < 0.05.
Table 3. Summary of Main Results (Tobin’s q).
Table 3. Summary of Main Results (Tobin’s q).
(1)(2)
VariablesTobin’s qTobin’s q
OP_CSR−0.003
(0.067)
NOP_CSR 0.018
(0.039)
INST_HHI−6.944 **−6.978 **
(2.466)(2.517)
OP_CSRXINST_HHI3.080 **
(1.551)
NOP_CSRXINST_HHI −1.199
(1.554)
SIZE0.632 **0.587 **
(0.302)(0.285)
LEV−0.005 **−0.005 **
(0.002)(0.002)
DIV0.00030.0003
(0.0003)(0.0004)
FR2.197 **2.199 **
(0.897)(0.895)
Constant−1.438−1.817
(1734)(1.698)
Observations326326
Note: ** p < 0.05; e-indicates ten to the minus n th power.
Table 4. Summary of Main Results (ROA).
Table 4. Summary of Main Results (ROA).
(1)(2)
VariablesROAROA
OP_CSR0.004 *
(0.002)
NOP_CSR −0.001
(0.0015)
INST_HHI−0.286 **−0.279 **
(0.071)(0.075)
OP_CSRXINST_HHI0.149 **
(0.071)
NOP_CSRXINST_HHI 0.024
(0.075)
SIZE0.0030.004
(0.004)(0.004)
LEV−0.001 *−0.001 *
(0.001)(0.001)
DIV0.00003 **0.00003 **
(0.00001)(0.0003)
FR0.056 **0.058 **
(0.025)(0.025)
Constant0.056 *0.045
(0.030)(0.030)
Observations326326
Note: ** p < 0.05, * p < 0.10; e-indicates ten to the minus n th power.
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Yeon, J.; Song, H.J.; Kim, B. Moral Imperative or Economic Necessity? The Role of Institutional Investors in the Corporate Social Responsibility—Financial Performance Relationship. Sustainability 2025, 17, 582. https://doi.org/10.3390/su17020582

AMA Style

Yeon J, Song HJ, Kim B. Moral Imperative or Economic Necessity? The Role of Institutional Investors in the Corporate Social Responsibility—Financial Performance Relationship. Sustainability. 2025; 17(2):582. https://doi.org/10.3390/su17020582

Chicago/Turabian Style

Yeon, Jihwan, Hyoung Ju Song, and Bora Kim. 2025. "Moral Imperative or Economic Necessity? The Role of Institutional Investors in the Corporate Social Responsibility—Financial Performance Relationship" Sustainability 17, no. 2: 582. https://doi.org/10.3390/su17020582

APA Style

Yeon, J., Song, H. J., & Kim, B. (2025). Moral Imperative or Economic Necessity? The Role of Institutional Investors in the Corporate Social Responsibility—Financial Performance Relationship. Sustainability, 17(2), 582. https://doi.org/10.3390/su17020582

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