Hypotheses on Relationship between CSRD, Dimensions of CSRD and IO

Similar to the framework for the hypotheses on the relationship between CSRD and CFP, this section also explores five antecedents, namely; CSRD on IO; employee relations dimension on IO; community involvement dimension on IO; product dimension on IO; and environment dimension on IO. Hence, the hypotheses in this study also employ both aggregated CSRD and separate measures consisting of four dimensions of CSRD.

3.4.2.1. Hypothesis on Relationship between CSRD and IO

It appears that social information should theoretically be of use to various stakeholders. A number of empirical studies examine whether social disclosures are demanded or useful. Hence, a company has an obligation to disclose information fully and literally to their owners. Further, from the responsibility point of view, the organization has a moral obligation to provide a report to the community about the allocation of the resources of production entrusted to it (Gray, Owen, and Maunders, 1991). Theoretically, it is apparent that social information should be useful to various stakeholders. Also, several empirical studies observe whether social disclosing is requested or helpful.

Many individual and social investors and several institutional funds from foreign countries have integrated socially responsible principles into their policies of investment. Therefore, according to Boutin-Dufresne and Savaria (2004), it is clear that most investors, given the choice between two investment opportunities with identical risk-adjusted prospects, will more likely invest in companies that contribute to increasing the average CSR level.

124 Empirical studies show a positive and significant relationship between social performance and shares held by institutional investors (Graves and Waddock, 1994). Cox et al. (2004) find that corporate social performance is positively related to long- term institutional investment. Findings of a recent study by Mahoney and Roberts (2007) also report a significant relationship between a company‘s composite social performance and the number of institutions investing in its shares. In this study, CSRD is as a proxy to measurement of CSR for the Malaysian PLCs. This leads to the following hypothesis:

H6: There is a positive relationship between CSRD and IO.

3.4.2.2. Hypothesis on Relationship between Employee Relations and IO

Several institutional investors such as socially responsible investors (SRIs) confirm that they select a company to invest in that which is consistent with their personal values (Sauer, 1997). As socially responsible investors become aware of the companies‘ non- responsiveness to social concerns, they can place pressure on those companies to change. A clear message from a survey of the US institutional investors (Taub, 2001) is that most of the concerns of institutional investors relate to corporate governance and disclosing issues. More than 76 percent of 89 participants in his survey find that institutional investors place more pressure on companies to improve business governance. Some of the highest concerns of the respondents are shared option grants and pension fund reporting. Indeed, more than 70 percent of institutional investors relate unhappiness with the number of escalating share options (Taub, 2001).

Superior corporate citizenship may create strong loyalty to a company, and, as a result, a responsible company may experience improvement in product sales, developing good employee relations, as well as presenting an optimum position to attract and maintain

125 good employees. The supporters of social responsibility investing suggest that employee loyalty is advantageous for a company as it improves productivity, innovation, lowers production cost, thereby increasing profitability (McGuire et al., 1988).

The empirical research by Cox et al. (2004) found a positive and significant impact of employee relations on long-term institutional investors, whereas Mahoney and Roberts (2007) reveal a negative partially significant effect on employee relations and the number of IO. Hence, this leads to the hypothesis which in developed as follows: H7: There is a positive relationship between employee relations dimension and IO.

3.4.2.3. Hypothesis on Relationship between Community Involvement and IO

Businesses face increasing responsibilities and the improvement of social expectations concerning what a business should do for a community. At the same time, a company also values the beliefs of stakeholders and wants more interaction with them (Kanter, 1999). For example, the improvement of a company‘s performance increasingly depends on its capacity to anticipate and adjust to competition and rapid technological transformation, as well as to changes in the attitudes of consumers, workers, and society at large.

The external factors are increased by the pressure for the introduction of a social programme. This incentive is connected with the re-assessment of the sources of the competitive advantage as well as to the attitude of employees and managers‘ values. Kanter (1999) noticed that a vital type of benefit that companies can obtain from community involvement programmes is that society can be utilized as a learning laboratory for its innovations. Besides, being attentive to financial performance,

126 product quality, and the environment, institutional investors may also be pondering on company‘s contributions to local communities and their relationships with women, minorities, and employees (Schwab and Thomas, 1998).

Tilson and Vance (1985) depict corporate giving as a method for companies to extend a competitive edge through improving their public image and producing goodwill. A study by Fry, Keim, and Meiners (1982) proves that charitable contributions are profit motivated expenditure. In this way, it may signal the existence of an enlightened management, but it may also alert the investor of economic concerns. This proposes that the viscosity of CSR and economic performance is more chaotic. Clearly, there is potential for compatibility, although the search for empirical proof of charitable contributions creating economic returns has often been inspected; regrettably it has been without much success (Coffey and Fryxell, 1991).

A recent empirical study by Mahoney and Roberts (2007) reveal that there is positive but not significant impact of community involvement on the percentage of shares ownership of institutional investors. However, a study by Cox et al. (2004) found a positive partially significant relationship between community involvement activities and long-term investors. This leads to the following hypothesis:

H8: There is a positive relationship between community involvement dimension and IO.

3.4.2.4. Hypothesis on Relationship between Product Dimension and IO

Companies have the incentive and tools to determine the information that prospective customers for their products may find useful. Benston (1997) observes that if investors cannot easily consider the products, it is worth less to them. Consequently, the products have to sell at a lower price to compete with alternative investments that more efficient.

127 On the other hand, investors will not pay compensation for excessive information costs provided by companies.

Although a company‘s product of lower quality tend to lead astray, careless information to investors about the deficiencies of their products is likely to be unlawful. Again, rivals can take advantage by showing the deficiencies of such products. It is important for a company aspiring to stay in business to show its reputation for honesty, service and expertise (Kerr, 1997).

Empirical testing by Mahoney and Roberts (2007) and Teoh and Shiu (1990) reveal that the product dimension of CSR relates to shares owned by IO. Their conclusion proposes that institutional investors pay special attention to how companies arrange this CSR dimension. Hence, the following hypothesis is formulated:

H9: There is a positive relationship between product dimension and IO.

3.4.2.5. Hypothesis on Relationship between Environmental Dimension and IO

According to Turban and Greening (1977), institutional investors notice the long-term benefits from a socially responsible company through maintaining the quality of products, more attention to the environment, community and their employees. Spicer (1978) argues that institutional investors assume companies that are less socially responsible and poor in their environmental performance signify higher risks. Such risks may include costly sanctions from regulatory action, decisions of the court and consumer retaliation.

The considerable concerns about sustainability of huge US pension funds provide a guide for managers to take active awareness in corporate governance, including the

128 governance of the environment (Repetto, 2005). The researcher notices that in the UK, pension funds have been petitioned to release how they respond to the social and environment problems in their investment portfolio. The environmental and social consideration is also included in decisions for investment by big pension funds in other countries.

In choosing the socially responsible companies among those which are similar, the investors may achieve the same returns with fewer risks. They believe that both risks and returns, although high social responsibility may reduce the risk, provide an incentive for a company‘s managers to involve in CSR practices (Mahoney and Roberts, 2007).

The empirical testing by Cox et al. (2004) found that the environmental dimension and long-term investors is positive and significantly related, whereas contrary results by Mahoney and Roberts (2007) report a negative significant impact of the environmental dimension on the number of institutional owners, as well as the percentage of IO. This leads to the following hypothesis:

H10: There is a positive relationship between environment dimension and IO.