How Corporate Social Responsibility Affects Firm Performance: The Inverted-U Shape Contingent on Founder CEO

Round 1

Reviewer 1 Report

Thank you for providing me with the opportunity to read your paper.

I have found it very interesting, however, I have some comments for you to improve the quality of this paper.:

 

First, in introduction, you said “the impact of CSR on firm performance needs to be further explored to provide a holistic understanding of this important practice.”You need to clearly explain why this study is important and how it will advance our knowledge in introduction.

 

Second, in theoretical background, you used stakeholder theory, resource dependence theory, agency theory, stewardship theory. I suggest you do not integrate multiple theories to explain the relationship and the moderating effect.

 

Third,In Table 2, you provided the descriptive statistics, but please report the variables explicitly, so that the readers can have an idea about distributions. 

 

Finally, the discussion section is as important as introduction and other parts. Therefore, I suggest you to enhance the discussion. The future research directions are as important as the theoretical contributions.

 

I hope you find my recommendations valuable. 

Author Response

RESPONSE TO REVIEWER 1 COMMENTS

We greatly appreciate your insightful and constructive comments, which have helped us tremendously in improving this manuscript. We hope you are satisfied with our revisions.

1. Comment: The contribution of the paper is extremely limited. The curve-linear effect of CSR has been examined in many studies on shareholder value (Sun, Yao and Govind, 2019), financial performance (Meier, Naccache, and Schier, 2019), firm risk (Farah, Li, Li and Shamsuddin, 2021), managerial ownership (Shan, Tang, and Zhang, 2021), and many others. My first concern is how the current study distinguishes from the existing studies on the non-learning relationship between CSR and firm performance. Second, the fundamental argument of this study is that excessive CSR is harmful to firm performance, but specifically, how do the authors measure excessive CSR? CSR can be both positive and negative, where genuine CSR enables a firm to obtain resources for long-run survival (legitimacy theory); however, CSR can be driven by greenwashing purposes and managerial self-interest. Such issues have already been widely discussed and empirically tested.

Response: We carefully read the literature you provided and compared it with our research. Our research is focused on the start-ups and considers the moderating role of the founder CEO on the relationship between CSR and firm performance. Prior research has not considered founder CEO’s moderating role in this context. Please see our discussion on why our research is unique in the Introduction section.

Thanks for raising the question about how to measure over-investment in CSR. This is a great question. In our paper, we define CSR overinvestment as a relative concept which does not have an absolute threshold value to distinguish between high vs. low. In the literature, it is a common practice to judge over-investment in CSR by inspecting the quadratic term of CSR (e.g., Sun et al. 2018; Li et al. 2022). The reasoning is that there is CSR overinvestment when firm performance starts to decrease as CSR level increases.

Sun, W., Yao, S., & Govind, R. (2018). Reexamining corporate social responsibility and shareholder value: the inverted-u-shaped relationship and the moderation of marketing capability. Journal of Business Ethics. 14, 26.

Li, X. , Liu, G. , Fu, Q. , Rahman, A. , Meero, A. , & Sial, M. S. . (2022). Does corporate social responsibility impact on corporate risk-taking? evidence from emerging economy. Sustainability, 14, 26.

2. Comment: The issue between founder CEO and professional CEO is fundamentally due to divergence of interest, i.e. agency costs and managerial ownership. Lennox (2005) shows that managerial behavior varies due to the convergence-of-interest effect and entrenchment effect; as such, financial performance and managerial ownership are shown non-linear in literature (Morck et al., 1988). This further reduces the contribution of the current study.

Response: We carefully read the two articles, Lennox (2005) and Morck et al. (1988), compared the founder CEO and professional CEO issues in our study, and revised the research contribution. In start-up enterprises, the role of the founder was very important, and few studies have considered the moderating role of the founder CEO on the relationship between CSR and financial performance, which was a unique contribute of our research.

3. Comment: There is no analysis of the channels through which CSR influences financial performance.

Response: We explored the mediating role of financing constraints in the relationship between CSR and financial performance and conducted additional mechanism analysis. Please see Section 5.4 for details.

4. Comment: Analysis-wise, I have the following concerns:
5. reversal causality – can firm performance cause CSR? Although the authors used a lead-lag model, it does not solve reversal causality. I suggest the authors adopt an exogenous shock and examine the relationship through a DiD approach.
6. selection bias – CSR is voluntary for firms in GEM (if not listed), thus, selection bias is possible.
7. There are many errors in the tables reported. For example, in table 4, the paper states “Standard errors in parentheses” but the SE for CSR is 1.814 and it is given *** (significant at 0.001). This is not possible due to such great SE. I am concerned about the accuracy of the results

Response: First, the CSR data in our article was a composite indicator that takes many factors into account. It is not the result of a certain CSR event, so the DID approach was not applicable in our analysis. In addition, for the reverse causality in the article, we added a regression test after swapping the independent variable and the dependent variable, which could alleviate this relationship to a certain extent. Please see section 5.3.4 of the article.

Second, we added the Heckman test to further eliminate the problem of selection bias, in section 5.3.4 of the article.

Third, we are sorry about the careless mistakes in the table. The correct notation is: *** represents 0.01, ** represents 0.05, and * represents 0.10. We have revised all the tables in the paper.

Reviewer 2 Report

attached

Comments for author File: Comments.pdf

Author Response

Response to Reviewer #2:

We greatly appreciate your insightful and constructive comments, which have helped us tremendously in improving this manuscript. We hope you are satisfied with our revisions.

1. Comment: You should present all your results in the intro. Then, you should clarify the contributions of the paper which are not elaborated well in the current paper. For example, you may say something like our results support x theory and we are the first to study the role of founder CEO, etc. You can talk about the following contributions: What insights can you provide based on your finding? Do they push forward our understanding? What should we do with your research? Do you have any suggestions to improve the current regulation or practice? Adding the above discussion and extend your literature review may help you make more contributions and position your contributions better.

Response: We summarized the results in the introduction and revised the research contribution according to your comments.

2. Comment: The paper seems to claim causality but does not discuss the potential endogeneity issue and its remedies sufficiently. The instrumental variable, average value of all firms in the same industry, is clearly endogenous. Some industry shocks (time variant) or dynamics can make the IV endogenous. In addition, the endogeneity problem can be driven by unobservable firm and CEO characteristics you need to discuss.

Response: It is widely adopted as a valid approach in the CSR literature that using the average value of all companies in the same industry can be used as an instrumental variable to reduce the endogeneity problem. Please see the two articles below for reference.

Bouslah, K. , Kryzanowski, L. , &  M'Zali, B. . (2018). Social performance and firm risk: impact of the financial crisis. Journal of Business Ethics, 149(3), 1-27.

Li, X. , Liu, G. , Fu, Q. , Rahman, A. , Meero, A. , & Sial, M. S. . (2022). Does corporate social responsibility impact on corporate risk-taking? evidence from emerging economy. Sustainability, 14, 26.

Thanks for your insightful comments on the endogeneity problem driven by the unobservable firm and CEO characteristics. We don’t have data on CEO characteristics. Therefore, we discuss this as a limitation of our paper in Section 6.3.

3. Comment: My main concern is the paper is not clear what the role found CEO could play. What does a flatter curve mean? I hypothesize that founder CEO can always optimize CSR investment and therefore the in-the-equilibrium result is that CSR is not systematically related to performance. Ought to make your story more clear and compelling with sharper tests and anecdotes. Also, refer to new papers on how CSR affect financial performance like Kim et al. Understanding the Impact of ESG Practices in Corporate Finance. Sustainability 2021, 13, 3746. You need to discuss those aspects of possible channels to give readers a more comprehensive view and a richer story and/or point out future research direction from these perspectives.

Response: The flatter curve means that, compared to non-founder CEOs, founder CEOs seem to be able to avoid over investment on CSR, because there is no turning point when the curve is flattened. As Figure 3 shows, for founder CEOs, the relationship ship between CSR and firm performance becomes almost positive and linear. We explained more about the role of founders in the hypothesis and discussion sections.

Thanks for providing the citation of Kim’s research. We cited in our paper. We also add a new section to explore financing constraints as a channel for CSR to influence firm performance. Please see Section 5.4 for details.

4. Comment: Also, refer to new papers on how CSR affect financial performance like Kim et al. Understanding the Impact of ESG Practices in Corporate Finance. Sustainability 2021, 13, 3746. You need to discuss those aspects of possible channels to give readers a more comprehensive view and a richer story and/or point out future research direction from these perspectives.

Response: We referred to and cited the paper by Kim (2021), which pointed the way for future research from the perspective of further distinguishing CSR types, in section 6.3 of the paper.

5. Comment: The last section of conclusion, which is too short, should summarize all your findings, their implications to researchers and practitioners, future direction for research, limitation of the current study, etc. You need to seriously proofread the paper and extend and update your references.

Response: Our Discussion section contained all conclusions and implications for research, and management practice, and points out future research directions, current limitations, etc. Therefore, our findings were briefly summarized in the conclusion of the last section. We had carefully proofread the paper and expanded and updated the references.

Reviewer 3 Report

Please see my comments in the attachment. 

Comments for author File: Comments.pdf

Author Response

Reviewer #3

We greatly appreciate your insightful and constructive comments, which have helped us tremendously in improving this manuscript. We hope you are satisfied with our revisions.

1. Comment: First, in introduction, you said “the impact of CSR on firm performance needs to be further explored to provide a holistic understanding of this important practice.” You need to clearly explain why this study is important and how it will advance our knowledge in introduction.

Response: We have revised the introduction by adding an explanation of the importance of the research and how it can advance our knowledge.

2. Comment: Second, in theoretical background, you used stakeholder theory, resource dependence theory, agency theory, stewardship theory. I suggest you do not integrate multiple theories to explain the relationship and the moderating effect.

Response: In this paper, we found an inverted U-shape between CSR and firm performance and the moderating role of founder CEOs. Stakeholder theory, resource dependency theory, agency theory, and stewardship theory were very important to provide a comprehensive explanation of this complex phenomenon, and that’s why we describe all of them in the theoretical background section and integrate them the hypothesis section.

3. Comment: Third, in Table 2, you provided the descriptive statistics, but please report the variables explicitly, so that the readers can have an idea about distributions.

Response: We have explained and introduced the variables in detail in the descriptive statistics section for the convenience of readers.

4. Comment: Finally, the discussion section is as important as introduction and other parts. Therefore, I suggest you to enhance the discussion. The future research directions are as important as the theoretical contributions.

Response: We have improved the Discussion in the manuscript, especially with more outlook on future research directions.

Reviewer 4 Report

Dear authors

My congratulations on your work quite well in the use and discussion of theories and the role of the founding CEO as an agent of greater management capacity based on agency theory.

However, some suggestions to improve your article.

It is important that you explain in the abstract the objective of the article and the research gap. In addition, specify the aspects that this article contributes to the theory, since the subject of CSR has been extensively investigated for several years, as well as the relationship between CSR and organizational performance.

So why the research question: ¿What is the relationship between CSR and company performance? is it important or original? This question needs to be justified and discussed focusing on the research gap.

On the other hand, this work requires an exhaustive review of the literature on the concept of CSR, and the dimensions that make up CSR. There is a lack of a previous discussion about this concept that is multidimensional, its evolution and approaches.

And it would be very interesting to carry out a meta-analysis to study which are the CSR variables that correlate the most or are significant with the performance of the company.

Regarding the second research question, when is the company led by a founding CEO or a professional CEO? It is interesting because of the theoretical discussion and the business implications.

Therefore, this article needs to develop the discussion, conclusions and managerial contributions focused on the results of the moderating effect of the role of the founding CEO versus the CEO.

The methodology could describe the sample of companies analyzed, type of industrial sector, size, among others.

And it would be interesting to see if there are differences between the types of companies.

This work needs to deepen the discussion of the results. And also further develop the theoretical and empirical conclusions. This section is weak and needs to be improved.

Author Response

We greatly appreciate your insightful and constructive comments, which have helped us tremendously in improving this manuscript. We hope you are satisfied with our revisions.

1. Comment: It is important that you explain in the abstract the objective of the article and the research gap. In addition, specify the aspects that this article contributes to the theory, since the subject of CSR has been extensively investigated for several years, as well as the relationship between CSR and organizational performance.

Response: In our abstract, we explained the purpose of the article, identified research gaps, and clarified our theoretical contributions.

2. Comment: So why the research question: ¿What is the relationship between CSR and company performance? is it important or original? This question needs to be justified and discussed focusing on the research gap.

Response: Previous studies have shown that the relationship between CSR and firm performance is positive, negative, uncorrelated, and nonlinear, and there is no consensus on the relationship. It is on this basis that we set out to explore what the relationship is among Chinese GEM firms. We compared the existing studies, addressed the research gaps, and further explained the differences between our research in the introduction section of the article.

3. Comment: On the other hand, this work requires an exhaustive review of the literature on the concept of CSR, and the dimensions that make up CSR. There is a lack of a previous discussion about this concept that is multidimensional, its evolution and approaches. And it would be very interesting to carry out a meta-analysis to study which are the CSR variables that correlate the most or are significant with the performance of the company.

Response: We added relevant literature on studying the relationship between CSR and firm performance. We are not intended to study the dimensional concept of CSR, and that’s why we didn’t discuss the dimensions of CSR in detail. Instead, we used a single composite score to measure CSR. We recognize this as a limitation in the Limitations section. We appreciate your suggestion to conduct a meta-analysis on which CSR variables correlate the most with performance. However, because we are not studying specific CSR dimensions, such a meta-analysis is out of the scope of this paper. We do think this is a great idea and included it as a future research direction. Please see the third point in the Limitations and Future Research section.

4. Comment: Regarding the second research question, when is the company led by a founding CEO or a professional CEO? It is interesting because of the theoretical discussion and the business implications. Therefore, this article needs to develop the discussion, conclusions and managerial contributions focused on the results of the moderating effect of the role of the founding CEO versus the CEO.

Response: Taking your suggestion into account, we have looked at the sample data in detail and found that when the firm's size is small and its age is small, it tends to be led by a founder CEO, while as the firm grows, the age of the firm increases and the firm becomes larger, the firm is more likely led by a non-founder CEO. This point have been added to the analysis in section 6.2 of the article.

5. Comment: The methodology could describe the sample of companies analyzed, type of industrial sector, size, among others.

Response: We reported the characteristics of the sample in Section 5.1 and Table 2.

6. Comment: And it would be interesting to see if there are differences between the types of companies.

Response: In our econometric models, industry fixed effects are included to eliminate possible biases caused by industry differences. We are not intended to study industry differences in this paper, but will certainly explore it in our next projects. Thanks for your great suggestion.

7. Comment: This work needs to deepen the discussion of the results. And also further develop the theoretical and empirical conclusions. This section is weak and needs to be improved.

Response: Thanks for your suggestion. We have strengthened the discussion section.

Round 2

Reviewer 2 Report

Good work!

Author Response

Thanks for your approval.

Reviewer 4 Report

Dear authors,some additional suggestions to improve your work

1. An exhaustive review of the literature is necessary to better evidence and discuss the previous studies that have shown that the relationship between CSR and company performance is positive, negative, non-correlated and non-linear. This needs more discussion.
2. In general, this work needs to develop, deepen and argue the discussion of the results. And also the conclusions. This section is weak and needs to be improved.

 

Author Response

Thanks for your helpful comments. We have carefully revised the paper based on your suggestions.

1. Comment: An exhaustive review of the literature is necessary to better evidence and discuss the previous studies that have shown that the relationship between CSR and company performance is positive, negative, non-correlated and non-linear. This needs more discussion.

Response: We provide a detailed review of the literature and tabulate the results of previous studies. We categorize the studies into different groups based on the nature of the relationship between CSR and firm performance: positive, negative, nonlinear or non-significant. Please see Appendix A for details.

2. Comment: In general, this work needs to develop, deepen and argue the discussion of the results. And also the conclusions. This section is weak and needs to be improved.

Response: We further deepened the discussion of the findings, theoretical implications, and practical implications, and enriched the conclusion section.