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Theoretical Framework
Stakeholder Theory
Stakeholder theory was first developed by Freeman (1984) and deals with the idea that every firm has multiple stakeholders who all have different claims on the company. Typical examples of stakeholders include shareholders,employees, suppliers,government, trade unions, civil society, customers and other financiers but generally a stakeholder can be said to be anyone who has a claim, implicitly or explicitly (Cornell & Shapiro, 1987), on the company.Stakeholder theory can be viewed as opposite to the more traditional view of the company where the firm´s owners and their explicit claim of return on investment is the only firmstakeholder relationship of importance. Friedman´s (1970) famous New York Times article is an example of this view.
One of the implications of stakeholder theory that is of particular importance for this study is outlined by Cornell & Shapiro (1987). In their framework stakeholders can have either implicit or explicit claims on a firm. Explicit claims are easy to identify and could typically be wage contracts, dividend policies, required returns or bond payments. Generally put; claims that can be explicitly priced and formulated in contracts.Implicit claims are basically all claims which cannot be priced or explicitly regulated in a contract. Such claims could for example be the implicit promise of a manufacturer to supply spare parts for its products, an employer to provide a certain work environment for its employees or a producer of a support product or service to continue to exist. An example of the latter would be auto repair shops. Every car that is sold is sold together with an implicit promise that if the car breaks down there would be an, often independent, mechanic around to fix it. If all auto repair shops specialized in a specific brand of cars would go out of business, the value of the car sold would be less for the buyer.The implications of this reasoning is that in a situation where every firm have multiple stakeholders and those stakeholders all have their own claims, the firm suddenly finds itself in a situation where it needs to service (or appear to be able to do so in the future) both implicit and explicit claims.Cornell & Shapiro (1987) shows us that the firm’s prospects of being able to serve these claims are part of the overall valuation of the firm. In their framework, firms can very well default on implicit claims without defaulting as a whole, but a default on implicit claims leads to a decrease in market value of the firm as markets become uncertain about the ability of the firm to service its other implicit claims in the future. A default on explicit claims such as bond payments or wages would of course also result in a decrease in market value. Thus, given that the failure to service an implicit or explicit claim leads to a decrease in market value, it can be said that in the context of stakeholder theory the service of claims to all stakeholders becomes necessary to be able to serve the traditional claim of maximized shareholder value.In this paper, corporate social responsibility is treated as an implicit claim held by society as a whole, on the company. It thus follows that companies that service this claim by being perceived as socially responsible should be better at maximizing value for its shareholders because it helps them uphold its market value (Cornell & Shapiro, 1987).
Agency Theory
While stakeholder theory focuses on the relationship between the firm and all its stakeholders,agency theory focuses on the relationship between the management of the firm and its owners, i.e. its shareholders, but could be extended to any principal-agent relationship.An agency relationship arises when a contract is established between a principal and an agent,ordering the agent to carry out some services on behalf of the principal (Jensen & Meckling,1976). In the case of a public firm, the agency relationship is between the stockholders (principals) that own the firm and management (the agent) that are employed to make decisions that maximize value for the first group. However as Berle & Means (1930) was among the first to point out, the interests of management and owners of a firm doesn’t necessarily coincide, giving rise to principal-agent problems. We may thus observe costs associated with the separation of ownership and control that characterizes a public company. Such costs are known as agency costs and consist of (1) monitoring costs and (2) residual loss (Jensen &Meckling, 1976).Monitoring costs arises as a results of the need for the stockholder to monitor the managers of a firm, or generally, for principals to monitor the agent. Such monitoring is undertaken as a mean for the owners to ensure that management are indeed acting with their best interest in mind. One way in which the owners of a firm can monitor the managers is the annual reports.Others include setting up budget constraint and forming a compensation policy for management that creates incentive to act in the best interest of the shareholders, such as e.g.stock-option programs (Jensen & Meckling 1976).
1. Introduction
1.1 Background and Problem Discussion
1.2 Previous Research
2 Theoretical Framework
2.1 Stakeholder Theory
2.2 Agency Theory
2.3 Theories of Corporate Reputations
2.4 Q-theory of investment
3 Method
3.1 Measures
3.1.2 Measure of Corporate Social Responsibility
3.1.3 Measure of Corporate Financial Performance
3.2 Data
3.3 The Model
3.4 Estimation Technique
4 Empirical Results
5 Summary & Conclusions
References
Appendix
