Does Voluntary Corporate Citizenship Pay? An Examination of the United Nation’s Global Compact
International Journal of Accounting & Information Management, Vol. 19, No. 3, pp. 288-303, 2011
Posted: 31 Aug 2012
Date Written: August 11, 2011
Purpose - The UN Global Compact (GC) is the world’s largest voluntary corporate citizenship initiative. Signatory companies voluntarily agree to abide by the GC ten principles and explicitly declare compliance with social and human rights, environmental protection, and anti-corruption business practices. Participants are required to publish a yearly corporate responsibility report called Communication on Progress (COP) and are labeled “non-communicating” (“delisted”) if they fail to provide the COP for one year (two years). The purpose of this paper is to study whether firms that choose to comply with the COP requirement differ systematically from those that choose not to and whether voluntary corporate citizenship pays.
Design/methodology/approach - Studying the period from the launch of the GC to the date that the first list of non-reporting firms was made public, we investigate the extent by which being a signatory company (i.e., a COP reporting firm) reduces information risk, and thus is associated with higher market valuation, better profitability, lower cost of debt and lower cost of equity by contrasting financial and performance characteristics of the COP-reporting and non-reporting firms.
Findings - Our results suggest that communicating (reporting) firms that voluntarily embrace CSR have statistically significant higher market valuation relative to book value (captured by lower book-to-market ratio) than companies that agree to participate in the GC initially yet fail to comply with the reporting requirement subsequently. Communicating firms also have statistically significant higher return on assets, return on equity and lower CAPM Beta indicating greater profitability and less systematic risk. We also find some evidence that the non-reporting firms may have joined the GC to enjoy “free riding” benefits to improve their market valuation and profitability that have been declining in the two years prior to their joining action.
Originality/value – This paper adds to the limited GC literature by documenting significant differences between the COP-communicating firms and non-reporting firms.
Keywords: Global Compact, Communication on Progress, voluntary corporate citizenship initiative, sustainability reporting
JEL Classification: M14, M41
Suggested Citation: Suggested Citation