Corporate Social Responsibility, Customer Satisfaction, and Market Value

Author(s): Xueming Luo and C. B. Bhattacharya

Source: Journal of Marketing , Oct., 2006, Vol. 70, No. 4 (Oct., 2006), pp. 1-18
Published by: Sage Publications, Inc. on behalf of American Marketing Association

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 Xueming Luo & C.B. Bhattacharya

Corporate Social Responsibility,

Customer Satisfaction, and Market
Value
Although prior research has addressed the influence of corporate social responsibility (CSR) on perceived
customer responses, it is not clear whether CSR affects market value of the firm. This study develops and tests a
conceptual framework, which predicts that (1) customer satisfaction partially mediates the relationship between
CSR and firm market value (i.e., Tobin's q and stock return), (2) corporate abilities (innovativeness capability and
product quality) moderate the financial returns to CSR, and (3) these moderated relationships are mediated by
customer satisfaction. Based on a large-scale secondary data set, the results show support for this framework.
Notably, the authors find that in firms with low innovativeness capability, CSR actually reduces customer satisfaction
levels and, through the lowered satisfaction, harms market value. The uncovered mediated and asymmetrically
moderated results offer important implications for marketing theory and practice.

In today's competitive market environment, corporate various stakeholders, including consumers. A decade ago,
social responsibility (CSR) represents a high-profile Drumwright (1996) observed that advertising with a social
notion that has strategic importance to many companies. dimension was on the rise. The trend seems to continue.
As many as 90% of the Fortune 500 companies now have Many companies, including the likes of Target and Wal-
explicit CSR initiatives (Kotler and Lee 2004; Lichtenstein, Mart, have funded large national ad campaigns promoting
Drumwright, and Bridgette 2004). According to a recent their good works. The October 2005 issue of InStyle maga-
special report in BusinessWeek (Berner 2005, p. 72), large zine alone carried more than 25 "cause" advertisements.
companies disclosed substantial investments in CSR initia- Indeed, consumers seem to be taking notice; whereas in
tives (i.e., Target's donation of $107.8 million in CSR repre- 1993, only 26% of people surveyed by Cone Communica-
sents 3.6% of its pretax profits, General Motors's donation tions could name a company as a strong corporate citizen,
of $51.2 million represents 2.7% of its pretax profits, Gen- by 2004, the percentage surged to as high as 80% (Berner
eral Mills's donation of $60.3 million represents 3.2% of its 2005).
pretax profits, Merck's donation of $921 million represents Motivated, in part, by this mounting importance of CSR
11.3% of its pretax profits, and Hospital Corporation of in practice, several marketing studies have found that social
America's donation of $926 million represents 43.3% of its responsibility programs have a significant influence on sev-
pretax profits). By dedicating ever-increasing amounts to eral customer-related outcomes (Bhattacharya and Sen
cash donations, in-kind contributions, cause marketing, and 2004). More specifically, on the basis of lab experiments,
employee volunteerism programs, companies are acting on CSR is reported to affect, either directly or indirectly, con-
the premise that CSR is not merely the "right thing to do" sumer product responses (Brown 1998; Brown and Dacin
but also "the smart thing to do" (Smith 2003, p. 52). 1997), customer-company identification (Sen and Bhat-
Importantly, along with increasing media coverage of tacharya 2001), customer donations to nonprofit organiza-
CSR issues, companies themselves are also taking direct tions (Lichtenstein, Drumwright, and Bridgette 2004), and,
and visible steps to communicate their CSR initiatives to more recently, customers' product attitude (Berens, Van
Riel, and Van Bruggen 2005).
Although this stream of research has contributed a great
Xueming Luo is Assistant Professor of Marketing, Department of Market-
deal of insight, there is still a limited understanding of
ing, University of Texas at Arlington (e-mail: [email protected]). C.B. Bhat-
whether and how CSR affects financial outcomes of the
tacharya is Associate Professor of Marketing, Department of Marketing,
School of Management, Boston University (e-mail: [email protected]). The firm, such as its market value. Yet it is important to evaluate
authors thank Biao He, Khurram Ansari, Thitikarn Rasrivisuth, and CSR's impact on market value (i.e., stock-based firm per-
Xiaochu Yu for their assistance with data collection and analysis. They formance) because a firm's financial health is the ultimate
also thank the anonymous JM reviewers, Guido Berens, Donald Lichten- test for the success or failure of any strategic initiative.
stein, Fernado Jaramilo, and seminar participants at the University of Moreover, prior laboratory studies and anecdotal examples
Texas at Arlington for their constructive and insightful comments on previ-
ous versions of this article.
are yet to be complemented with a large-scale analysis
using secondary data. Indeed, Brown and Dacin (1997, p.
To read or contribute to reader and author dialogue on this article, visit 80) urgently call for research on "how societally oriented
htfp://www marketingpower. com/jmblog. activities might bring about positive outcomes for the firm."
Echoing this, Berens, Van Riel, and Van Bruggen (2005)

0 2006, American Marketing Association Journal of Marketing

ISSN: 0022-2429 (print), 1547-7185 (electronic) 1 Vol. 70 (October 2006),1-18
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energetically call for research efforts that directly link CSR previously neglected "dark side" of CSR. That is, CSR
to stock market performance. actually reduces customer satisfaction levels in firms with
Our research responds to this call by investigating the low innovativeness capability and, through this negative
linkage between CSR and firm market value with a longitu- impact, harms firm market value. The uncovered mediated
dinal, archival data set. In keeping with contingent linkages and asymmetrically moderated results suggest a more
between CSR and consumer responses that prior nuanced understanding of the financial returns to CSR for
researchers articulated (see, e.g., Bhattacharya and Sen both practitioners and marketing researchers.
2004), we do not predict a simple, unconditional relation-
ship between CSR and market value. This is because firms
are not the same in executing, supporting, and exploiting Conceptual Framework and
CSR initiatives in the marketplace (Brown 1998; Sen and Hypotheses
Bhattacharya 2001). Specifically, companies may generate
CSR and Market Value
different (i.e., positive, nonsignificant, and negative) market
returns from CSR under different conditions. For example, Broadly defined, CSR is a company's activities and status
Starbucks's superior brand equity and its successful CSR related to its perceived societal or stakeholder obligations
initiatives with the charity agency CARE are due, at least in (Brown and Dacin 1997; Sen and Bhattacharya 2001;
part, to its superior product quality, innovative skills, and Varadarajan and Menon 1988). Although studies in strategy
ability to obtain and sustain customer satisfaction over time. and finance have explored the relationship between CSR
In contrast, many companies find that CSR results in nega- actions and firm performance, empirical evidence to date
tive financial returns because of the added costs of making has been rather conflicting (for a review, see Orlitzky,
extensive charitable contributions and the diverted attention Schmidt, and Rynes 2003; Pava and Krausz 1996). For
from improving product quality that would have allowed example, the returns to CSR are found to be positive in
them to better satisfy customer needs and wants (McGuire, some studies (e.g., Fombrun and Shanley 1990; Soloman
Sundgren, and Schneeweis 1988; Sen and Bhattacharya and Hansen 1985) but negative in others (e.g., Aupperle
2001). Thus, the research questions in this study are as fol- Carroll, and Hatfield 1985; McGuire, Sundgren, and
lows: (1) Under what conditions do CSR initiatives result in Schneeweis 1988). Thus, Margolis and Walsh (2003, p.
positive financial performance? and (2) Does customer sat- 277) conclude that the relationships between CSR and
isfaction matter in the relationship between CSR and firm financial performance are decisively "mixed."
performance? There are at least two explanations for these conflicting
To address these questions, we develop and test a con- findings. First, existing studies have largely related CSR to
ceptual model that proposes that CSR initiatives enable backward-looking firm profitability (i.e., accounting-based
firms to build a base of satisfied customers, which in turn return on investment) but not to forward-looking firm mar
contributes positively to market value. Specifically, we pre- ket value (i.e., stock-based Tobin's q). Theoretically, how-
dict that customer satisfaction partially mediates the rela- ever, market value is different from (and perhaps mor
tionship between CSR and market value. Although extant important than) return on investment because "accounting
marketing literature has addressed the direct impact of cus- measures are retrospective and examine historical perfor-
tomer satisfaction on firm shareholder value (e.g., Ander- mance. In contrast, the market value of firms hinges on
son, Fornell, and Mazvancheryl 2004; Fornell et al. 2006), growth prospects and sustainability of profits, or the
the mediating role of customer satisfaction in the financial expected performance in the future" (Rust, Lemon, and
contribution of CSR has been ignored. In this study, we Zeithaml 2004, p. 79). Second, the equivocal link between
explicitly theorize this role and argue that building cus- CSR and firm performance may be due, in part, to extant
tomer satisfaction represents part of the underlying mecha- strategy and finance literature having largely omitted the
nism through which the financial promises of CSR are underlying processes or contingency conditions that may
capitalized. explain the range of observed relationships (Sen and Bhat-
Furthermore, we explore the boundary conditions under tacharya 2001).
which firms may derive positive or negative market value We precisely examine these research issues in this
from CSR. Drawing on various theoretical bases, we argue study. In particular, as we show in Figure 1, our framework
that firms that have better inside-out corporate abilities (i.e., proposes that the relationship between CSR and firm mar-
product quality and innovativeness) to begin with tend to ket value is better understood by the mediating link of cus
generate more market value from outside-in strategic initia- tomer satisfaction. In recent times, scholars (e.g., Anderson
tives (i.e., CSR programs). Conversely, firms that exhibit Fornell, and Mazvancheryl 2004; Fornell et al. 2006) hav
poorer corporate abilities may find that CSR actually harms demonstrated the positive relationship between customer
customer satisfaction and, because of the lowered satisfac- satisfaction and market value. We build on this literature
tion, decreases stock performance. and institutional theory to propose that CSR is a driver of
Based on multiple secondary data sets that comprise rat- customer satisfaction and that the CSR-firm market value
ings of large companies, the results show support for the linkage exists (at least partially) because of the underlying
CSR -3 customer satisfaction -> firm market value causal process through customer satisfaction. In addition, drawing
linkage. In addition, we find that a proper combination of on work in the area of corporate identity and associations
external CSR initiatives and internal corporate abilities can (e.g., Brown and Dacin 1997), we posit that a firm's corpo-
lead to synergistic returns. However, the data also reveal a rate abilities (i.e., product quality and innovativeness capa-

21 Journal of Marketing, October 2006

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 FIGURE 1
Conceptual Framework

CSR x
Corporate
Ability
H4

(Corporate Ability
.Product quality
.Innovativeness H3

capability CS

Market Value
Customer
,Tobin's q
CSR Satisfaction 'Stock return
H1
(CS)

H2
CS

Notes: Bolded paths are hypothesized relationships. Unbolded paths have been studied previously (e.g., Anderson, Fornell, and Mazvancheryl
2004; Anderson, Fornell, and Rust 1997; Fornell et al. 2006; Griffin and Hauser 1996; Mithas, Krishnan, and Fornell 2005b). Dashed
paths indicate that the depicted relationships are partially mediated by customer satisfaction.

bility) moderate the relationship between CSR and market potential members of various stakeholder groups that com-
value. Finally, we expect that customer satisfaction medi-panies need to consider. Viewed in this way, such general-
ates, at least partially, these moderated relationships. ized customers are likely to be more satisfied by products
and services that socially responsible firms (versus socially
CSR and Customer Satisfaction
irresponsible counterparts) offer.
Customer satisfaction is defined as an overall evaluation Second, a strong record of CSR creates a favorable con-
based on the customer's total purchase and consumption text that positively boosts consumers' evaluations of and
experience with a good or service over time (Anderson, attitude toward the firm (Brown and Dacin 1997; Giirhan-
Fornell, and Mazvancheryl 2004; Fornell 1992). In the mar- Canli and Batra 2004; Sen and Bhattacharya 2001). Specifi-
cally, recent works on customer-company identification
keting literature, customer satisfaction has been recognized
as an important part of corporate strategy (Fornell et al. (Bhattacharya and Sen 2003, 2004) suggest that CSR initia-
2006) and a key driver of firm long-term profitability and tives constitute a key element of corporate identity that can
market value (Gruca and Rego 2005). induce customers to identify (i.e., develop a sense of con-
nection) with the company. Indeed, Lichtenstein,
Why should a firm's CSR initiatives lead to greater cus-
tomer satisfaction? At least three research streams point Drumwright,
to and Bridgette (2004, p. 17) note that "a way
such a link: First, both institutional theory (Scott 1987) that
and CSR initiatives create benefits for companies appears to
stakeholder theory (Maignan, Ferrell, and Ferrell 2005) be by increasing consumers' identification with the corpora-
tion ... [and] support for the company." Not surprisingly,
suggest that a company's actions appeal to the multidimen-
sionality of the consumer as not only an economic being identified
but customers are more likely to be satisfied with a
also a member of a family, community, and country (Han- firm's offerings (e.g., Bhattacharya, Rao, and Glynn 1995;
delman and Arnold 1999). Building on this, Daub and Bhattacharya and Sen 2003).
Ergenzinger (2005) propose the term "generalized cus- The third literature stream that enables us to relate CSR
tomer" to denote people who are not only customers who to customer satisfaction examines the antecedents of cus-
tomer satisfaction. For example, perceived value is a key
care about the consumption experience but also actual or

Corporate Social Responsibility, Customer Satisfaction, and Market Value I 3

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antecedent that has been empirically shown to promote cus- firm's customer satisfaction level at least partially medi-
ates this influence of CSR on market value.
tomer satisfaction (Fornell et al. 1996; Mithas, Krishnan,
and Fornell 2005b). In our context, all else being equal, cus-
tomers likely derive better perceived value and, conse- The Moderating Role of Corporate Abilities
quently, higher satisfaction from a product that is made by a
In this section, we argue that the relationship between CSR
socially responsible company (i.e., added value through
and firm market value may not be universally positive but
good social causes). Furthermore, engaging in CSR may
rather contingent on several boundary conditions. That is, a
allow firms to understand their generalized customers better
positive or negative relationship may be observed, depend-
and thus improve their customer-specific knowledge (Sen
ing on the levels of corporate abilities. In general, corporate
and Bhattacharya 2001). Because improving customer
abilities refer to various elements of a firm's expertise and
knowledge represents another antecedent that has been
competency, such as the ability to improve the quality of
found to enhance customer satisfaction (Jayachandran et al.
existing products/services and the ability to generate new
2005; Mithas, Krishnan, and Fornell 2005a), we believe that
products/services innovatively (Gatignon and Xuereb 1997;
CSR initiatives may help promote customer satisfaction.
Rust, Moorman, and Dickson 2002; Zeithaml 2000).
Hl: All else being equal, firms that are viewed more favorably According to Brown and Dacin (1997), a company's CSR
for their CSR initiatives enjoy greater customer and corporate abilities both influence customers' percep-
satisfaction.
tions of the company's products.
We expect that firms with low levels of corporate abili-
The Mediating Role of Customer Satisfaction ties (i.e., low levels of innovativeness capabilities and prod-
uct quality) generate negative market value from CSR for
The existing marketing literature shows accumulating evi-
dence for the influence of customer satisfaction on firm mar- several reasons. On the basis of institutional theory, Handel-

ket value. For example, firms with satisfied customers tend

man and Arnold (1999) contend that companies should
to enjoy greater customer loyalty (e.g., Bolton and Drew
engage in CSR with good causes (for the social aspect of
legitimation) and, at the same time, provide a good product
1991; Oliver 1980), positive word of mouth (Szymanski and
(for the pragmatic aspect of legitimation). Thus, it is likely
Henard 2001), and customer's willingness to pay premium
that CSR initiatives fail to generate a favorable impact if the
prices (Homburg, Koschate, and Hoyer 2005), all of which
can increase a firm's market value. Indeed, several studies firm is perceived as less innovative and as offering poor-
quality products (i.e., due to a lack of pragmatic legitima-
find that firms with higher levels of customer satisfaction
are able to achieve higher levels of cash flows (e.g., Gruca
tion; see DiMaggio and Powell 1983). Indeed, Sen and
and Rego 2005; Fornell 1992; Mittal et al. 2005) and less Bhattacharya (2001) show that CSR initiatives may even
backfire with reduced purchase intent and negative percep-
volatility of future cash flows, thus leading to superior mar-
tions if consumers believe that CSR investments are at the
ket value (e.g., Anderson, Fornell, and Mazvancheryl 2004;
expense of developing corporate abilities, such as product
Fornell et al. 2006; Srivastava, Shervani, and Fahey 1998).
quality and innovativeness (i.e., investments represent "mis-
In linking this evidence for the influence of customer
guided priorities" on the part of the firm with low levels of
satisfaction on firm market value with our first hypothesis
corporate abilities). More important, consumers may make
on the influence of CSR on satisfaction, a mediating role of
negative and detrimental attributions regarding a firm's
customer satisfaction in the CSR-performance linkage
motives if a low-innovativeness or low-product-quality firm
might logically be expected. That is, CSR affects customer
satisfaction, which in turn affects market value. In other engages in social responsibility. This would ultimately
result in an unattractive corporate identity and, thus, nega-
words, customer satisfaction represents the mediational
tive market returns by virtue of negative word of mouth and
pathway through which CSR actions affect firm market
value. detrimental customer complaints (Brown 1998; Varadarajan
and Menon 1988).1
However, there may be "noncustomer routes" by which
Conversely, we predict that firms with high levels of
CSR affects market value. For example, both textbooks
corporate abilities generate positive market value from
(e.g., Kotler and Lee 2004; Pava and Krausz 1996) and aca-
CSR. Such firms tend to posses better corporate image and
demic articles (e.g., Godfrey 2005; Margolis and Walsh
more attractive identities with which consumers want to
2003) have pointed to the impact of CSR on multiple stake-
holders, such as employees and investors as well as con-
sumers. In particular, positive "moral capital" as a result of
CSR (Godfrey 2005, p. 777) could directly affect market
lour focus here is on the moderating role of corporate ability in
value by improving employee morale and productivity. In
the CSR-performance link rather than on the direct relationship
addition, CSR creates public goodwill (Houston and John-
between CSR and corporate ability. That is, we do not investigate
son 2000; McGuire, Sundgren, and Schneeweis 1988), whether CSR directly affects or is related to innovativeness and
which provides an "insurance-like" protection to share- product quality (i.e., corporate ability-related constructs) given the
holder wealth. As a consequence, putting the pieces conflicting literature. On the one hand, Brown and Dacin (1997, p.
together, we predict a partially mediating role of customer 68, emphasis added) contend that "CSR associations are often
satisfaction on the impact of CSR on market value. unrelated to the company's abilities in producing goods and ser-
vices." On the other hand, it is possible that a firm's innovation is
H2: All else being equal, firms that are viewed more favorably CSR oriented (e.g., environmentally responsible packaging), and
for their CSR initiatives enjoy higher market value, and a CSR initiatives may affect product-quality perceptions.

4I Journal of Marketing, October 2006

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identify (Bhattacharya and Sen 2003). When coupled with tive Media Reporting (CMR), and Center for Research in
high corporate abilities, a firm's CSR actions are more Security Prices (CRSP).
likely to generate favorable attributions and consumer iden-
tification. This would ultimately promote performance- Measuring CSR
enhancing behaviors, such as customer loyalty (Bhat- One approach to measuring market perceptions of firms'
tacharya and Sen 2004). Indeed, if a firm can accommodate CSR initiatives is to rely on the amount of CSR investments
customers and other stakeholders and meet different sets of disclosed in firms' annual reports to shareholders. However,
norms (e.g., pragmatic and social norms) by not merely there are many important doubts about the validity of the
executing CSR initiatives but also developing strong corpo- announced CSR investments, despite the seeming attrac-
rate abilities to support and exploit these CSR actions, it is tiveness of this approach. For example, there is a lack of
in a better position to win the social contract, institutional consensus on what should be included (or excluded) in CSR
allegiance, moral legitimacy, and consumers' support for investments (Margolis and Walsh 2003; Orlitzky, Schmidt,
the organization (cf. Handelman and Arnold 1999, p. 34; and Rynes 2003; Tsoutsoura 2004). Few companies have
Scott 1987). Taken together, these beneficial effects suggest their announced CSR investments audited or validated
a positive market return to CSR for firms with high levels of externally by third parties. Thus, some firms may overreport
corporate abilities. Therefore, we propose an asymmetric CSR investments for impression management (i.e., exagger-
moderating effect of corporate abilities on the association ating their giving). Other firms may underreport CSR
between CSR and firm market value.
investments because they may regard CSR investments only
H3: Corporate abilities (i.e., product quality and innovative- as donated cash or in-kind products and services (excluding
ness capability) moderate the relationship between CSR investments that benefit the environment and their employ-
and market value. The relationship will be negative for ees). Furthermore, although some external sources (e.g.,
firms with low corporate abilities but will be positive for 100 best corporate citizens by Business Ethics,
firms with high corporate abilities.
csrwire.com, Social Responsibility Initiative reports) may
track companies' CSR investments objectively, the nature
and amount of CSR investments for the same firm can
The Mediating Role of Customer Satisfaction in
the Moderated Relationships change dramatically from one source to another (Berner
2005; Fombrum and Shanley 1990; Margolis and Walsh
Finally, as we have argued, part of the mechanism by which
2003).
CSR actions influence a firm's market value is customer
Therefore, we turn to subjective measures of CSR.
satisfaction. Thus, it is conceivable that the positive impact
Although some studies use small-scale survey data with a
of CSR on firms with high levels of corporate abilities
limited set of firms (e.g., Christmann 2000), prior research
enhances the level of customer satisfaction, which then
suggests the use of a more comprehensive, large-scale sur-
leads to enhanced market value (Anderson, Fornell, and
vey data set available from FAMA to measure CSR
Mazvancheryl 2004; Brown and Dacin 1997; Sen and Bhat-
(McGuire, Sundgren, and Schneeweis 1988). More specifi-
tacharya 2001).
cally, in ranking the United States' most admired corpora-
On the contrary, for firms that are low in corporate abil-
tions each year, FAMA polls more than 10,000 financial
ity (i.e., they are neither innovative nor competent in prod-
analysts, senior executives, and Wall Street investors from
uct quality), CSR actions may not be able to generate much
more than 580 large companies (see Fortune 2005, p. 68).
institutional legitimacy, customer-company identification,
For each firm-year observation, FAMA collects ratings
or customer satisfaction (Scott 1987). As a result, CSR ini-
of CSR that have been made on an interval scale ranging
tiatives may relate little to financial results and market value
from 0 to 10, with 10 as the highest; the ratings represent a
(e.g., Margolis and Walsh 2003; Mithas, Krishnan, and For-
comparison among major competing companies in a given
nell 2005b) in firms with low levels of corporate abilities.
industry. Studies in both marketing and strategy (e.g., Fom-
Thus:
brum and Shanley 1990; Houston and Johnson 2000;
H4: A firm's customer satisfaction at least partially mediatesMcGuire, Sundgren, and Schneeweis 1988) have reported
the moderated relationship among CSR, corporate abili-evidence of reliability and validity of this data source. In
ties (i.e., product quality and innovativeness capability),
and market value.
particular, McGuire, Schneeweis, and Branch (1990, p.
170) note, "Fortune reputation is one of the most compre-
hensive and widely circulated surveys of attributes avail-
able. Both the quality and number of respondents are com-
Data and Variable Construction parable or superior to the `expert panels' usually gathered
for col-
In this section, we describe the secondary data that we such purposes." Houston and Johnson (2000, p. 12) also
acknowledge it as the "best secondary" data source.
lected to test the hypotheses. We also present the construc-
tion of the variables, such as CSR, corporate abilities, cus-
Prior research has shown that there is a reverse-causality
tomer satisfaction, and market value. In Table 1, weconcern
report between CSR and financial performance (e.g.,
the variables, their definitions, and data sources. WeMcGuire,
col- Sundgren, and Schneeweis 1988). That is, a
lected data for the publicly traded Fortune 500 companies
firm's CSR affects its future performance, and a firm's his-
from multiple archival sources: COMPUSTAT, Fortune tory of financial performance contributes to its current CSR
America's Most Admired Corporations (FAMA), the involvement. We accommodate this concern by using the
American Customer Satisfaction Index (ACSI), Competi- approach that Roberts and Dowling (2002) recommend. In

Corporate Social Responsibility, Customer Satisfaction, and Market Value ! 5

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 TABLE 1
Variables and Data Sources

Variables Definitions; Measures Secondary Data Sources Data Types

CSR Broadly defined as a company's activities FAMA Interval from 0 to 10
and status related to its perceived societal
or stakeholder obligations; latent variable
indicated by CSR scores in 2001
(published in 2002), 2002 (published in
2003), and 2003 (published in 2004).

Customer Defined as an overall evaluation of the ACSI Interval from 0 to 100

satisfaction postconsumption experience of products or
services in the minds of customers; latent
variable indicated by customer satisfaction
scores in 2002, 2003, and 2004.

Product quality Defined as the minimum condition or the FAMA Interval from 0 to 10
threshold of product attributes that a firm
must meet when offering its products or
service in competitive markets; latent
variable indicated by quality of
products/services scores in 2001, 2002,
and 2003.

Innovativeness Defined as a firm's ability to apply its internal FAMA Interval from 0 to 10
capability knowledge stock to produce new
technology, new products/services, and
other new fronts; latent variable indicated
by quality of products/services scores in
2001, 2002, and 2003.

Tobin's q Stock price-based measure of firm market CRSP Ratio

value; observed variable based on the COMPUSTAT
average of Tobin's q in 2002, 2003, and
2004.

Stock return Stock price-based measure of firm market CRSP Ratio

value; observed variable based on the COMPUSTAT
average of stock return in 2002, 2003, and
2004.

selling and psychology literature streams (Blue

particular, we regress CSR scores against firm financial per-
formance (return on assets [ROA]) in the prior four years Boles, Johnston, and Hair 1997; Johnston et al
meyer, Maxham, and Pullig 2005).
and save the residual of this regression as the final measure
of CSR. Because this residual is independent from financial
performance, the reverse-causality bias is no longer Measuring
a Corporate Abilities
concern.
We do not view corporate abilities simply as a
Following the work of Cho and Pucik (2005), we used Instead, we consider two speci
sional construct.
the ratings of CSR for each firm in 2001, rate
2002,abilities:
and 2003 product quality and innovativene
(but published in 2002, 2003, and 2004, due(Gatignon
to a one-year
and Xuereb 1997; Rust, Moorman, an
lag in print) as three separate indicators of2002;
the latent con-
Zeithaml 2000). In our view, both innovat
struct of CSR.2 This approach of using measurement itemscan represent the dimensions o
product quality
with different time frames is also widely applied
ability in Brown
that the and Dacin (1997) propose
strategy (e.g., Li and Atuahene-Gima 2001) and personal-
product quality refers to a firm's ability to "e
capabilities of products already in the marketpl
Pucik 2005; March 1991), innovativeness re
firm's ability to "explore" new market possibilit
2Cho and Pucik (2005) find strong support (construct and
of developing new products (Kim and Maubo
criterion-related validity) for using multiyear ratings from Fortune
Kleinschmidt and Cooper 1991). In addition, com
magazine as indicators of the underlying latent variable. McGuire,
Sundgren, and Schneeweis (1988) also employto the quality
single-year of existing products is essential f
CSR
ratings from Fortune as the measure of CSR. firm's current customers happy, whereas in

6 / Journal of Marketing, October 2006

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essential for reaching new customer bases and catering to across firms and years (Fornell et al. 1996; Fornell et al.
ever-changing customer needs. 2006; Mithas, Krishnan, and Fornell 2005b). A comprehen-
Formally, product quality can be defined as the mini- sive test of the validity and reliability of this satisfaction
mum condition or the threshold of product attributes that a measure can be found in the work of Fornell and colleagues
firm must meet when offering its products/services in (1996). Parallel to CSR, innovativeness capability, and
competitive markets (Rust, Moorman, and Dickson 2002; product quality, we treat customer satisfaction as a latent
Vargo and Lusch 2004; Zeithaml, Parasuraman, and Berry variable and measure it using its ACSI ratings in 2002,
1990). Prior studies have established that a firm's ability to 2003, and 2004 as three separate indicators.
provide a superior product/service quality is critical for its
long-term survival and success (e.g., Buzzell, Gale, and Measuring Market Value
Sultan 1975; Mittal et al. 2005; Rust, Moorman, and Dick- We have two separate measures of market value at the firm
son 2002). level across years: Tobin's q and stock return. We follow
In a similar fashion to CSR, we measure product quality prior marketing studies (Lee and Grewal 2004; Rao, Agar-
by FAMA ratings in 2001, 2002, and 2003 (published in wal, and Dahlhoff 2004) to calculate Tobin's q for each
2002, 2003, and 2004) as the underlying indicators. Again, firm-year observation.3 In addition, following Jacobson and
because of the reverse causality between financial perfor- colleagues (i.e., Aaker and Jacobson 1994, 2001; Mizik and
mance and FAMA ratings, we control for this bias and Jacobson 2003), we derive the measure of stock return
obtain clean measures for product quality and innovative- using the COMPUSTAT and CRSP databases.4 Rather than
ness capability by employing the same residual approach as using a simple year-end stock price, we use a more con-
in the case of CSR (e.g., Roberts and Dowling 2002). servative measure of stock price-that is, the average of the
Innovativeness capability is a firm's ability to apply its end of the four quarters of stock prices-when calculating
internal knowledge stock to produce new technology, new Tobin's q and stock return (Lee and Grewal 2004). We then
products/services, and other new fronts (Drucker 1993; use the derived three-year average (2002, 2003, and 2004)
Griffin and Hauser 1996). According to exploration learn- of Tobin's q and stock return as observed measures for mar-
ing theory (March 1991), innovation is also critical for the ket value. Compared with market value, the predicting
survival and success of organizations because dynamic mar- variables of CSR, innovativeness capability, and product
kets constantly shake out the players that lack capabilities quality were all lagged by one year to be more precise on
to explore new market opportunities (Gatignon and Xuereb the specific direction of causality and to reduce the possibil-
1997; Schumpeter 1934). Similar to product quality, we ity of endogeneity bias (Murthi, Srinivasan, and Kalya-
measure the latent variable of a firm's innovativeness capa- naram 1996; Rust, Moorman, an Dickson 2002).
bility by using its Fortune ratings in 2001, 2002, and 2003
from FAMA (published in 2002, 2003, and 2004) as three Measuring Control Variables
separate indicators underlying this construct. Prior research
We obtained the data for control variables such as research-
has employed this data source to measure companies' inno-
and-development (R&D) intensity, firm size, competition
vativeness capability (Cho and Pucik 2005).
intensity, and ROA from COMPUSTAT, and we obtained
the data for advertising intensity from CMR. More specifi-
Measuring Customer Satisfaction
cally, R&D intensity is the ratio of R&D spending to total
We used the ACSI database to measure customer satisfac-
assets. We control for the influence of R&D expenditures
tion. In the marketing literature, the ACSI has been shown on performance because a firm's R&D intensity enhances
to be a reliable source of measuring customer satisfaction.innovation activities and investors' evaluations of the firm
Several studies employ this database to assess overall cus- (Chauvin and Hirschey 1993; Gruca and Rego 2005;
tomer satisfaction of total purchase and consumptionMcGuire, Sundgren, and Schneeweis 1988).
experience at the firm level (e.g., Anderson, Fornell, and Advertising intensity is the ratio of reported advertising
Mazvancheryl 2004; Fornell et al. 2006; Gruca and Regospending to total assets. Because COMPUSTAT has many
2005; Mithas, Krishnan, and Fornell 2005b; Mittal et al. missing data points for firm advertising expenditure, we use
2005). The National Quality Research Center at the Univer-
sity of Michigan developed and maintains the ACSI data
set. It has data for nearly 200 Fortune large companies that
span all major economic sectors and constitute approxi-
3Rao, Agarwal, and Dahlhoff (2004, p. 130) provide a detailed
mately 43% of the U.S. economy. To obtain ACSI data, function on how to derive Tobin's q. That is, q = (share price x
more than 50,000 household consumers (actual product number of common stock outstanding + liquidating value of the
users) of these large firms are polled on a quarterly basis. firm's preferred stock + short-term liabilities - short-term assets +
Each valid respondent has passed screening questions book value of long-term debt)/book value of total assets.
related to predefined purchase and consumption periods. 4In particular, Aaker and Jacobson (2001, p. 489) and Mizik and
Jacobson (2003, p. 71) suggest a detailed function on how to cal-
The ACSI uses an interval scale ranging from 0 to 100, with
culate stock return. That is, stock return = (current year's share
100 as the highest level of customer satisfaction.
price x number of common stock outstanding + dividends - previ-
Based on multi-item, multiconstruct criteria, the ACSI
ous year's share price x number of common stock outstanding)/
is a reliable data source because it employs the same survey (previous year's share price x number of common stock
questionnaire, random sampling, and estimation modeling outstanding).

Cornorate Social Resnonsibility. Customer Satisfaction, and Market Value 17

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the CMR database for advertising-spending data (Rao, words, neither the low-innovativeness nor the high-
Agarwal, and Dahlhoff 2004). We control for the influence innovativeness firms are dominated by particular industry
of advertising expenditures on performance because intense types.
advertising promotes customer awareness, brand equity, and
sales revenues (e.g., Joseph and Richardson 2002; Morgan Merged Final Data Set
and Rego 2006). We merged data from these different archival sources and
Firm size is the log of number of employees. We control obtained unbalanced panel time-series, cross-sectional data
for the influence of firm size because large firms may have consisting of 452 firm-year observations across 113 firms
more resources and thus enjoy economies of scale, but for the 2001-2004 periods. However, one year's data are
small firms may have higher strategic flexibility when seek- lost because we employed the lagging process (2001-2003
ing entrepreneurial rents (Dutta, Narasimhan, and Rajiv for CSR, product quality, and innovativeness; 2002-2004
1999; Rao, Agarwal, and Dahihoff 2004). for customer satisfaction, Tobin's q, and stock return) to
Strategic focus is the number of business segments in reduce the endogeneity bias and reverse-causality concerns
which the firm operates (Rao, Agarwal, and Dahlhoff described previously. Thus, we were able to use 339 data
2004). This variable is available directly from the menu points for hypotheses testing. This merged data set includes
choice at the Compact Disclosure (CD-ROM), which individual firms in various industries, ranging from
defines it as "the number of unique business segments of an durables (e.g., automobiles, household appliances, personal
individual company." We control for this influence because computers), to nondurables (e.g., cigarettes; athletic shoes;
of possible diversification effects. That is, more diversified services, such as airlines, hotels, and utilities), to retail (e.g.,
firms may have a faster asset turnover rate and exhibit department stores, discount stores, supermarkets), among
economies of scope. However, highly diversified firms may others. Although FAMA has ratings of CSR, innovativeness
lack focus in the highly segmented, competitive market- capability, and product quality for approximately 580 firms
place and thus experience negative returns (Fombrum and (Cho and Pucik 2005; Fortune 2005) and ACSI has data on
Shanley 1990; Gruca and Rego 2005). approximately 190 firms/brands (Fornell et al. 1996; For-
We measure competition intensity by using the Herfind- nell et al. 2006; Gruca and Rego 2005; Morgan and Rego
ahl concentration index, derived from COMPUSTAT. Fol- 2006), we were not able to obtain a larger sample of firms
lowing prior work (Gruca and Rego 2005; Mithas, Krish- in the merged final data set. This is because many firms
nan, and Fornell 2005a), we calculate this concentration included in Fortune's source are not represented in the
index at the primary four-digit industry level of Standard ACSI source and because the same firm may have several
Industrial Classification codes (which has been replaced by brands in the ACSI (Anderson, Fornell, and Mazvancheryl
the North American Industry Classification System) for 2004). We also tried to search other relevant secondary
each firm-year observation. We use this covariate to control sources (Standard & Poor's industry reports, company
for impact of industry competition level (Rao, Agarwal, and annual reports, Compact Disclosure, and Moody's report) to
Dahlhoff 2004). cross-validate our final data set spanning the period from
Finally, we control for the influence of ROA in predict- 2001 to 2004.
ing stock return and Tobin's q (Chauvin and Hirschey Note that COMPUSTAT does not have complete data
1993). In particular, we measure ROA as the ratio of net points for all variables. For example, because COMPUS-
income after extraordinary items to book value of total TAT does not require companies to report their R&D invest-
assets, derived from COMPUSTAT. We used the average of ments (volunteered responses only; see Joseph and Richard-
the 2002, 2003, and 2004 data points as the measure of son 2002), we found that more than 40% of observations for
ROA. We include ROA as a covariate variable because of
the control variable of R&D are missing across the years.
the impact of financial information on the stock market Before testing the hypotheses, we controlled for the covari-
(Chauvin and Hirschey 1993; Erickson and Jacobson 1992). ates using the same approach applied in prior studies (e.g.,
Table 2 presents the summary statistics for all variablesAhearne,
in Bhattacharya, and Gruen 2005; Pan, Ratchford,
this study. and Shankar 2002). In particular, we ran a linear regression
Despite having these stringent controls, in light of our with all control variables (firm-level and industry-level) as
moderation hypotheses, a lingering issue is whether there independent variables and Tobin's q as the dependent
are systematic industry differences between firms that are variable. We saved the unstandardized residuals from this
rated high on product quality (and/or innovativeness) and regression and then used them as the surrogate for Tobin's q
those that are rated low. A close examination of the top and in all structural equation models (SEMs). We also applied
bottom firms on the dimensions of product quality and this approach to obtain the surrogates for stock return.
innovativeness allays this concern. We find that both the top
and the bottom firms in terms of their innovativeness and
product quality ratings cover a variety of industries, such as Analyses and Results
retail, services, and manufacturing. More specifically, top
Measurement Model Results
innovativeness firms include Apple, Google, Procter &
Gamble, FedEx, Nike, and Target, among others; bottom Following the work of Anderson and Gerbing (1988),
innovativeness firms include United Airlines, Dillard's, employ confirmatory factor analysis (CFA) to test t
Kmart, and Qwest Communications, among others, accord- validity of the measures. Overall model statistics show th
ing to Fortune's large-scale survey data in 2005. In other the chi-square for the model is 90.73 (d.f. = 48, p > .0

81 Journal of Marketina. October 2006

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 TABLE2

DescriptvSaofVbl

1.CSR60395 5.Tobin'sq1823*0 6.Stockreun2941"7*0 7.Advertisngy06812" 8.R&Dintesy04735216 9.Firmsze(logfat)4160527

2.Customeraifcn79068*1 3.Inovatiescpbly601427*8 4.Productqaliy597108*2"

10.Straegicfous2876-34 1.Competinsy073-4258 12.ROA36897"*0-

VariblesMSD1234567890 *p<.05 *D<.01

Corporate Social Responsibility, Customer Satisfaction, and Market Value / 9

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and the comparative fit index (CFI), goodness-of-fit index cally significant, in support of H. We assess the signifi-
(GFI), and root mean square error of approximation cance of the reported SEM path estimates through a boot-
(RMSEA) are satisfactory (.94, .92, and .06, respectively). strapping approach with 1000 resamples. As the CFI, GFI,
As we report in Table 3, the CFA results lend some sup- and RMSEA indicate, Model 1 fits the data well.
port for the convergent validity for all the measures because H2 predicted that CSR would positively influence a
all estimated loadings of indicators for the underlying con- firm's market value and that customer satisfaction would
structs are significant (i.e., smallest t-value = 6.53, p < .05). mediate this influence. To establish the existence of this
Cronbach's alpha of the constructs exceeded the .7 thresh- mediation effect, four conditions should hold (Andrews et
old (Nunnally 1978). The minimum reliability of these al. 2004): (1) The predictor variable (CSR) should signifi-
measures is .85, as we reported. In addition, the average cantly influence the mediator variable (customer satisfac-
variance extracted (AVE) across the constructs exceeds the tion); (2) the mediator should significantly influence the
.5 benchmark (see Fornell and Larcker 1981). As Table 3 dependent variable (market value); (3) the predictor (CSR)
shows, the smallest AVE of the constructs is .72. The data variable should significantly influence the dependent
also supported discriminant validity of the measures. We variable (market value); and (4) after we control for the
examined pairs of measures using the constrained model mediator variable (customer satisfaction), the impact of the
and unconstrained model in a series of chi-square difference predictor (CSR) on the dependent variable (market value)
tests (Anderson and Gerbing 1988). The test results consis- should no longer be significant (for full mediation) or
tently indicated that for each pair of constructs, the uncon-
should be reduced in strength (for partial mediation) (Baron
strained models fit the data better than their constrained and Kenny 1986, p. 1177).
counterparts, suggesting discriminant validity. In addition, As Table 4 shows, Model 1 meets the first two
we compared the estimated AVE of each measure with the conditions. That is, CSR affects customer satisfaction.
squared correlation between-measure pairs (Fornell and Furthermore, satisfaction significantly affects both Tobin's q
Larcker 1981). In all cases, we found that the AVEs and stock return, which is consistent with existing studies
exceeded the squared correlations, further confirming the (Anderson, Fornell, and Mazvancheryl 2004; Bolton and
discriminant validity of the constructs. Drew 1991; Fornell et al. 2006). Model 2 qualifies the third
condition; the predictor variable of CSR affects market
Results for the Mediating Role of Customer value in terms of Tobin's q and stock return. As Table 4
Satisfaction
shows, Model 2 does not include the mediator of customer
satisfaction
In testing the mediating role of customer satisfaction, we and appears to fit the data reasonably well. The
used SEM to consider explicitly the possible bias offourth
mea- condition holds if the effects of CSR on market value
become insignificant or less significant after the mediator of
surement error on path estimates. Consistent with the proce-
customer satisfaction is included. Model 3 results (no-
dures in psychology (e.g., Holmbeck 1997) and marketing
mediation model in Table 4) show that the inclusion of
(Andrews et al. 2004; Handelman and Arnold 1999; Selnes
customer satisfaction diminishes the strength of the effect of
and Sallis 2003), our SEMs not only account for measure-
ment error but also allow for a comprehensive test ofCSR on firm market value. The main effects of CSR on both
the
Tobin's q and stock return are no longer significant.5 Thus,
hypotheses related to mediation, moderation, and mediated
moderation.
Table 4 reports the results of the SEMs. Hi predicted 5We also employed ordinary least squares to test the mediation
that CSR would positively affect customer satisfaction. hypotheses. The results are consistent and suggest strong support
Model 1 examines this prediction, and the result is statisti- for the mediation results of CSR. However, because SEM offers at

TABLE 3
Results of the CFA

Construct Items Factor Loading t-Value AVE CR

CSR .75 .90
CSR --> CSR01 .69 13.43
CSR ---> CSR02 .71 13.55
CSR ---> CSR03 .75 13.54
Innovativeness capability (IN) .74 .87
IN --> IN01 .67 11.10
IN --> INO2 .68 11.16
IN -> INO3 .62 9.98
Product quality (PQ) .76 .91
PQ -> PQ01 .78 13.39
PQ -> P002 .83 13.92
PQ ---> P003 .80 13.51
Customer satisfaction (CS) .72 .85
CS --> CS02 .50 7.21
CS --> CS03 .48 6.92
CS --> CSO4 .46 6.53

Notes: All t-values are significant (p < .05); X2 = 9

10 / Journal of Marketing, October 2006

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 TABLE 4
SEM Results for Mediation Effects

SEM Estimates

Model Specifications x2 d.f. X2diff (d.f.diff) CFI GFI RMSEA

Model 1 362.10 101 Compared base .94 92 .05
Model 2 112.82 59 .92 .91 .07
Model 3 391.58 96 29.48** (5)a .91 .89 .07
Model 4 345.05 97 17.05** (4)b .96 .94 .04

Full Partial
Mediation: PV --> DV: Nonmediation: Mediation:
Model 1 Model 2 Model 3 Model 4

CSR -> T0 .14* .09

IN -> T0 .10 .10 .11*
PQ -> TQ .17** .14* .12*
CSR x IN -> TQ .14* .09
CSR x PQ -)) TQ .20** .15* .13*

CSR -> CS .23** .23**

IN -> CS .20** .19""
PQ -> CS .28** .26""
CSR x IN -> CS .12* .14*
CSR x PQ --> CS .18** .18""

CSR SR .13* .08

IN -> SR .08 .07
PQ -> SR .11* .09
CSR x IN -> SR .10 .07
CSR x PQ -> SR .18** .12* .11"

CS -> TQ .25** .23** .22**

CS -> SR .22** .21** .19**

R2
CS .34 .32
TQ .46 .41 .45 .48
SR .38 .34 .37 .39

*p < .05, one-tailed t

**p < .01, one-tailed
aThe results of the difference between Model 1 and Model 3.
bThe results of the difference between Model 1 and Model 4.
Notes: CS = customer satisfaction, IN = innovativeness capability, PQ = product quality, TQ = Tobin's q, and SR = stock return. Model 2 (PV --->
DV) does not include the mediator of customer satisfaction. Model 3 (nonmediation effects) includes the mediator of customer
satisfaction.

customer satisfaction seems to mediate fully the direct Results for the Moderating Role of Corporate
impact of CSR on firm market value (though it does not Abilities
mediate fully the interaction effects between CSR and
H3 predicted that corporate abilities, such as innovativeness
corporate abilities on market value, as we detail next). As
capability and product quality, would moderate the impact
such, the data provide strong support for H2, which
of CSR on market value. Table 5 reports the hierarchical
predicted that CSR would increase a firm's long-term
SEM results related to moderation effects. Following the
financial performance through the mediator of customer
work of Aiken and West (1991), we mean-centered the
satisfaction.6
CSR, innovativeness capability, and product-quality
variables before generating the interaction terms, and then
we added the interaction terms hierarchically from Model 2
least a weak test of causal pathways and easily compares different to Model 3.7 The results in Table 5 show that the interaction
rival models, but ordinary least squares does not account for mea-
surement error, we report the results based on the SEMs for all 7Multicollinearity bias was not a severe problem. The highest
hypotheses in this study. variance inflation factor was 3.06, and the largest condition index
6We also tested the hypotheses with single-year items for the was 3.51. Note that in a mean-centered interaction-effects model,
predicting and dependent variables (rather than the reported the estimated coefficient of one independent variable is obtained
multiple-years-based separate items). The results are similar in under the assumption of the mean value of other variables. More-
pattern and further support the hypotheses. over, the entry of the interactions terms for CSR, innovativeness

Corporate Social Responsibility, Customer Satisfaction, and Market Value / 11

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 TABLE 5
Hierarchical SEM Results

SEM Estimates

Rival Models x2 d.f. X2diff (d.f. diff) CFI GFI RMSEA

Model 1 15.83 5 96.99** (54)a .90 .86 .08
Model 2 177.09 40 64.27** (19)b .91 .89 .07
Model 3 112.82 59 Compared base .92 .91 .07

Direct Effects: Direct Effects: Moderated Effects:

Model 1 Model 2 Model 3

CSR ---> TQ .14* .12* .14*

IN ---> TQ .11* .10
PQ --> TQ .17** .17**
CSR x IN ---> TQ .14*
CSR x PQ ---> IQ .20"*

CSR -4 SR .12* .13* .13*

IN -> SR .08 .08
PQ -, SR .10 .11*
CSR x IN --> SR .10
CSR x PQ --> SR .18**

R2
TQ .30 .35 .41
SR .28 .29 .34

*p < .05, one-taile

**p < .01, one-tail
aThe results of the difference between Model 1 and Model 3.
bThe results of the difference between Model 2 and Model 3.
Notes: CS = customer satisfaction, IN = innovativeness capability, PQ = product quality, TQ = Tobin's q, and SR = stock return.

term of CSR x product quality significantly affects both tical approach. Essentially, it is similar to the four condi-
Tobin's q and stock return, though the interaction term oftions of mediation we described previously, but it requires
CSR x innovativeness capability affects only Tobin's q. entering the interactions items (CSR x innovativeness capa-
To facilitate the interpretation of the moderating effects, bility and CSR x product quality) rather than the main
Figure 2, Panel A, illustrates the relationship between CSR effect of CSR. More specifically, to establish mediated
and Tobin's q for firms with low or high innovativeness moderation, four specific conditions must be met: (1) The
capability (see Aiken and West 1991, pp. 12-14). Figure 2, interaction variables (CSR x innovativeness capability and
Panel A, suggests that firms with low innovativeness capa- CSR x product quality) should significantly influence the
bilities generate negative market value from CSR, whereas mediator (customer satisfaction); (2) the mediator should
firms with high innovativeness generate positive market significantly influence the dependent variable (market
value from CSR. However, Figure 2, Panel B, shows that value); (3) the interaction variables (CSR x innovativeness
though firms with high product quality generate positive capability and CSR x product quality) should significantly
market value from CSR (the upward-sloping line), firms influence the dependent variable (market value); and (4)
with low product quality seem not to be penalized in terms after we control for the mediator variable (customer satis-
of generating market value from CSR (the rather flat line). faction), the impact of the interaction variables (CSR x
As such, overall, we find support for H3 when we use inno- innovativeness capability and CSR x product quality) on the
vativeness capability as the measure of corporate abilities, dependent variable (market value) should be no longer sig-
but we find only partial support for H3 when we use product nificant (for full mediation) or reduced in strength (for par-
quality as the measure of corporate abilities. tial mediation) (Baron and Kenny 1986, p. 1179). Follow-
ing this advice, prior studies in both strategy (Shin and
Results for the Mediating Role of Customer Zhou 2003) and marketing (Andrews et al. 2004; Handel-
Satisfaction in the Moderated Relationships man and Arnold 1999) have tested hypotheses combining
H4 predicted that customer satisfaction would mediate the mediation and moderation.
moderated relationships in H3. Although a test of this com- Because the second and third conditions are met, when
bination of mediation and moderation is somewhat compli- testing H1-H3, we need to check only for the first and
cated, Baron and Kenny (1986, p. 1179) recommend a prac- fourth conditions. The significant paths from these interac-
tion terms to satisfaction in Model 1 (Table 4) suggest that
capability, and product quality explained significantly more vari- the first condition is also met. In addition, entering the
ance of market value beyond the main effects, adding 6% more mediator of customer satisfaction indeed decreases the
variance for Tobin's q and 5% more variance for stock return. impact of these interaction terms from Model 2 to Model 3

12 / Journal of Marketing, October 2006

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 FIGURE 2 Rival Models and Alternative Explanations
The Moderated Effect of CSR on Market Value
We conducted additional analyses and ruled out several
competing explanations. Because the aforementioned
A: The Moderating Role of Innovativeness Capacity
results suggest partial mediation, we fit several additional
SEMs with different partial mediation effects (step-by-step
Tobin's q adding/removing of individual paths from the predictive
variables of CSR, innovativeness, and product quality to the
3.10 predicted variables of Tobin's q and stock return). The path
estimates of the best-fit partial mediation model appear in
Figure 3 and in the last column (Model 4) in Table 4. An
examination of Figure 3 suggests three insights. First,
although the main effect of CSR is fully mediated by cus-
tomer satisfaction, CSR has an interaction effect with prod-
uct quality that is not fully, but rather partially, mediated by
.30 customer satisfaction (in other words, this interaction effect
between CSR and product quality directly influences
Tobin's q and stock return). Second, a firm's product quality
2 4 6 8 CSR
and innovativeness both have direct and indirect (through
customer satisfaction) influence on Tobin's q performance,
which is consistent with prior literature
High innovativeness (Dutta, Narasimhan,
capability
and Rajiv 1999; Fornell et al. 1996; Rao, Agarwal, and
Low innovativeness capability
Dahlhoff 2004). Third, we can reject several alternative
explanations, including the conjectures that the impact of
product quality on market value is fully mediated by satis-
faction and that innovativeness capability influences only
B: The Moderating Role
firm performance of outcomes,
but not intermediate Product such as Q
customer satisfaction.

Tobin's q Furthermore, we ruled out several rival models. For

example, as we report in Table 4, our SEM results suggest
that the partial-mediation SEM (Model 4) fits the data better
3.10 than the full-mediation SEM (Model 1; x2diff = 29.48,
d.f.diff = 5, p < .05) and that the full-mediation SEM fits the
data better than the nonmediation SEM (Model 3; x2diff =
17.05, d.f.diff = 4, p < .05). Another criterion for SEM com-
parison is the number of significant parameters (Morgan
.30 and Hunt 1994; Selnes and Sallis 2003). We find that the
rival models with full mediation and nonmediation gener-
ated fewer significant path estimates. Thus, our hypothe-
sized partial-mediation model fits the data better than com-
2 4 6 8 CSR peting models in terms of both the relative predictive power
of the overall model and the relative number of significant
path estimates.
High product quality
Low product quality
Discussion
How is CSR related to firm market value, and why do
initiatives result in financial gains for some firms but l
in Table 4. In for others? Our study
particular, the suggestsimpact
that the answer to of
the
ness capability on questions Tobin's is twofold: (1)
q CSR
isaffects
no market value part
longe
gesting full mediation through the mediator of
(this iscustomer
not satisfaction,
the an c
in which the coefficients in both Model 2 and Model 3 are returns to CSR can be both positive and negative depend
insignificant). In addition, the impact of CSR x product
quality on both Tobin's q and stock return is diminished
(but still significant), indicating partial mediation. Thus, that controlling the mediator makes the influences of C
innovativeness capability and CSR x product quality no lo
these results suggest that the moderation relationships in H3
significant or less significant. This is different from "moder
are only partially mediated by customer satisfaction, in sup- mediation," in which the moderators should also moderate
port of H4.8 mediator-performance linkage (Baron and Kenny 1986, p. 1
A pictorial illustration of the differences between medi
8Note that Baron and Kenny (1986, p. 1179) label the moderation and moderated mediation can be found in the work of
relationships we tested as "mediated moderation," which means Handelman and Arnold (1999, p. 38).

Corporate Social Responsibility, Customer Satisfaction, and Market Value / 13

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 FIGURE 3
SEM Results of Best-Fit Partial Mediation Model

Product Quality

.26"" .12*

.11*
Innovativeness
Market Value
Capability
19"" .Tobin's q
22**
.13*
.23
Customer
CSR Satisfaction

.19* Market Value

.Stock return
.18"'

.11*
CSR x Product
Quality

.1

CSR x
Innovativeness
Capability

*p < .05, one-tailed test.

**p < .01, one-tailed test.
Notes: Bolded paths are hypothesized relationships. Dashed paths are supported partial mediation results. We assessed the significance of all
SEM path coefficients through a bootstrapping approach with 1000 resamples.

spending
on the levels of a firm's corporate abilities. Based on a com-in an ideal way (i.e., by uncovering the relative,
prehensive secondary data set, our results show that incremental,
cus- and synergistic impact of CSR, advertising,
and R&D
tomer satisfaction plays a significant role in the relationshipon a firm's market value).
between CSR and firm market value and that a proper com-
Implications
bination of both CSR initiatives and product-related abili- for Marketing Theory
ties is important. These results have implications Although
for both CSR has been linked to customer responses (e.g.,
marketing theory and practice. Bhattacharya and Sen 2004; Brown 1998; Brown and Dacin
Before presenting the implications, we note that
1997), this was the first marketing study to explore the rela-
FAMA's survey-based measure of CSR is an important lim-
tionship between CSR and market value. Our work extends
itation of this article. As we detailed in the "Data and
the research stream on the outcomes of CSR from perceived
Variables" section, the FAMA ratings are one possible customer responses based on hypothetical lab experiments
source of CSR information and thus restrict our analysis toward eventual financial returns based on large-scale sec-
and conclusion. To inspire greater confidence in our find-
ondary data. It provides a direct answer to the calls for
ings, further research should also attempt to replicateefforts
and that link CSR to a firm's stock performance (Berens,
extend our analysis with alternative measures of CSR. VanFor Riel, and Van Bruggen 2005; Luo and Donthu 2006;
Rust, Lemon, and Zeithaml 2004). Indeed, Brown and
example, measuring direct spending on CSR initiatives with
a large-scale record of CSR monetary expenses across Dacin (1997, p. 68) note that "we do all good things,... but
many firms (if obtained reliably from third-party agencies
we don't know if we get anything out of it." The findings
or firms' own reporting; see Margolis and Walsh 2003; Orl-
pertaining to the significant influence of CSR on a firm's
itzky, Schmidt, and Rynes 2003; Tsoutsoura 2004) would
Tobin's q and stock return attest to the financial value of
put CSR on par with measures such as advertising CSR
and programs as strategic initiatives. Thus, future market-
R&D investments. A clear advantage of this direct approach
ing research should examine a wider spectrum of the bene-
is that marketing researchers would be able to compare fits
and of CSR, ranging from perception-based outcomes to
archive-based
contrast the financial returns to these different types of financial returns.

14 / Journal of Marketing, October 2006

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 A more important contribution of this research is that In particular, this theory holds that low (high) innova-
we identified a route through which CSR is related to a tiveness competency in firms may serve as a cue of inferior
firm's market value. Our results of the significant CSR - (superior) competitiveness to corporate stakeholders, thus
customer satisfaction -> market value causal chain suggest signaling weaker (stronger) future performance to financial
that a firm's CSR helps build a satisfied customer base and investors in the marketplace. In the light of signaling theory,
that customer satisfaction partially mediates the financial we conjecture that though CSR may help firms obtain insti-
returns to CSR. This mediating role of customer satisfaction tutional legitimacy (i.e., by being socially responsive and
is important for two reasons. First, it extends the CSR lit- supportive), firms that are less innovative in meeting cus-
erature by uncovering a previously ignored outcome (i.e., tomer needs may send a negative signal of incorrect strate-
customer satisfaction) of CSR. Although prior work has gic choice and misguided firm priorities in the market that
noted that CSR should affect various kinds of consumer contaminates and degrades this legitimacy (DiMaggio and
Powell 1983; Scott 1987). The resulting costs of signaled
responses, customer satisfaction has not yet been explicitly
examined as one such outcome. Second, it also extends the noncompetitiveness in the market may outweigh the bene-
research stream on customer satisfaction (Anderson, For- fits of CSR and thus lead to negative market value. Con-
nell, and Mazvancheryl 2004; Fornell 1992) by uncovering ceivably, consumers may view CSR activities in firms with
the antecedents (i.e., CSR) of customer satisfaction. low asset specificity as opportunistic (i.e., manipulative and
Although an emerging research strand has examined the misleading with disguised selling purposes), which causes
outcomes of customer satisfaction (Anderson, Fornell, and CSR to backfire and leads to consumer boycotts (Sen and
Mazvancheryl 2004; Anderson Fornell, and Rust 1997; For-
Bhattacharya 2001; Smith 2003). It is also possible that
firms that are low in corporate abilities likely invest in less
nell et al. 2006; Mittal et al. 2005), efforts have rarely been
undertaken to examine factors that increase or decrease cus- influential and pure cost-adding CSR activities, such as
cash donations. In contrast, firms that are high in corporate
tomer satisfaction. Overall, this chained relationship from
abilities implement "smarter" CSR strategies that are rela-
CSR to customer satisfaction to a firm's market value sug-
tively idiosyncratic and thus generate more long-term finan-
gests that achieving customer satisfaction represents one of
cial benefits. We call for further investigation of possible
the underlying pathways through which the financial poten-
explanations of the observed asymmetric returns to CSR.
tial of CSR is realized and capitalized. The notion that the
extent to which CSR is beneficial to the firm is determined
Implications for Marketing Practice
by how much CSR builds a satisfied customer base points
further research in a more precise direction when evaluating
Marketers have pondered whether companies should take a
the ultimate financial impact of CSR.
more strategic tack on CSR and how "doing good" can con-
tribute to their bottom line (Brown and Dacin 1997; Sen and
Furthermore, our findings suggest that the financial
returns to CSR are not the same, but rather are different,
Bhattacharya 2001). These are important issues that have
strong managerial implications because prudent practition-
across firms with different internal situations. In particular,
ers face tough choices in allocating their limited resources
our finding that the positive financial returns to CSR are
and in prioritizing different strategic initiatives.
amplified in firms with higher product quality indicates that
a proper mix or combination of external CSR initiatives and Even evangelists such as Nardelli [chief executive officer
internal corporate abilities likely generates and sustains of Home Depot] stop short of saying that companies
should divert money from other strategic priorities to sup-
financial value for the firm. In this sense, we provide
port [CSR]. But at corporations like Home Depot and
empirical evidence for the resource-based view. That is, in [General Electric], good works are being bred into Big
support of the resource-based view (Barney 1986; Penrose Business. `It's just the right thing to do,' says Nardelli.
1959; Wernerfelt 1984) and marketing capability (Day Good PR? Sure. Money well spent? The goodwill refund
1994; Vorhies and Morgan 2005) literature, we find that a could be in the mail. (Grow, Hamm, and Lee 2005, p. 78)
firm's sustainable competitive advantages indeed result
Our finding that CSR contributes positively to market
from a complementary "bundle" of valuable internal (cor-
value suggests that managers can obtain competitive advan-
porate abilities) and external (CSR initiatives) assets. Thus,
tages and reap more financial benefits by investing in CSR.
further research is encouraged to go beyond the simple, uni-To be more specific, we calculated that for a typical com-
versal effects of CSR and explore contextual situations that pany in our sample with an average market value of approx-
moderate the associations between CSR and market value.
imately $48 billion, one unit increase of CSR ratings would
Finally, existing marketing research has been enthusias- result in approximately $17 million more profits on average
tic about the positive benefits of CSR, but unfortunately, itin subsequent years, a substantial increase of financial
has potential negative outcomes (for an exception, see Sen returns.
and Bhattacharya 2001). Our research indicates that CSR Indeed, companies should realize that CSR initiatives
can harbor a dark side. That is, in firms that are less innova- can represent a robust public relations strategy, particularly
tive in nature, CSR may decrease customer satisfaction lev- in the current market environment in which stakeholders,
els and ultimately reduce the firm's financial returns. This such as customers (and employees), may have strong social
finding of the negative returns to CSR in the low-concerns. Creative executives at Home Depot, IBM, Wal-
innovativeness condition can be understood from the per- Mart, General Electric, and Cisco are engaging in "smarter
spective of competitive signaling theory (Caves and Porter corporate giving" than merely writing checks (Berner 2005,
1977; Stigler 1961). p. 68). For example, Home Depot donated 2 million hours to

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various types of community services, and IBM gave away reputation in the presence of corporate scandals or regula-
more than 100 specialized business applications (i.e., trans- tory scrutiny. In addition, CSR can boost internal employee
lation servers changing English e-mails into Spanish mes- morale and commitment within the firm (Godfrey 2005;
sages) in heavily Latino-populated schools and community McGuire, Schneeweis, and Branch 1990) and attract more
groups. Closer examination of the CSR portfolios of some of capable, young talents who are trying to "marry their work
the top- and bottom-rated firms in terms of CSR sheds addi- and nonwork lives" (Grow, Hamm, and Lee 2005; for
tional light on how managers may derive positive market detailed benefits of CSR and cause-related marketing, see
returns from CSR and/or avoid negative returns. That is, Varadarajan and Menon 1988, p. 60). Importantly, we sug-
many of the firms at the top of the CSR heap (e.g., United gest an additional insight to managers: CSR initiatives also
Parcel Service, Alcoa, Verizon Communications) seem to influence customers' satisfaction levels, which ultimately
have integrated CSR tightly with their business strategies. lead to higher market returns. To managers, this means that
For example, these firms invest in a host of employee-related building satisfaction is an important intermediate step in
initiatives, such as education and safety, that engender iden- converting CSR into financial gains.
tification and instill pride among employees, all of which However, our findings of the boundary conditions of the
influence customer satisfaction and market value. Moreover, returns to CSR suggest that managers should not ignore the
these firms have employee volunteerism programs in which inherent traps and pitfalls of CSR. For example, we show
employees are visible contributors to the local communities. that firms are not always able to benefit from CSR actions.
This helps capture customers' favorable attention. When companies are not innovative, our findings indicate
In contrast, firms at the bottom of the CSR heap, such as that CSR actually decreases their market return. Thus, CSR
Toys `R' Us and Mitsubishi Motors, seem to be perceived as seems to be a double-edged sword; without proper support
"irresponsible" by dint of mistreating workers and/or con- of corporate abilities, such as innovativeness, CSR can be
cealing product defect information. Such negative actions harmful to firm performance. Indeed, when "doing better at
tend to receive media coverage in today's scrutiny-intensive doing good" (Bhattacharya and Sen 2004, p. 9), it is impor-
world. Viewed in conjunction with our results, these exam- tant for managers to consider CSR initiatives in the light of
ples suggest that managers should not only "get their house the firm's corporate abilities. In particular, less innovative
in order" to avoid negative returns to CSR but also adopt an companies may be better off financially by avoiding CSR
integrated, strategic perspective and allocate resources to actions. Managers should understand that a misalignment of
CSR programs for superior market performance. After all, CSR with internal factors can be detrimental and lead to
"it is no longer an option [for companies] to sit on the side- decreased market value. As a consequence, marketers need
lines" (Grow, Hamm, and Lee 2005, p. 77; Smith 2003). to examine carefully the organizational context in totality
Our findings that CSR increases customer satisfaction, before implementing CSR initiatives.
which in turn leads to positive financial returns, may In conclusion, this research suggests a more nuanced
improve managers' understanding of why CSR matters. In understanding of the market returns to CSR initiatives. Our
particular, marketers may have already known that CSR findings seem to indicate that "doing good" has compli-
helps promote external social benefits, such as public good- cated implications and that customer satisfaction plays an
will outside the firm (Houston and Johnson 2000; McGuire, important mediating role in the relationship between CSR
Sundgren, and Schneeweis 1988), which can polish a firm's and firm market value.

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