Do socially responsible activities help hotels and casinos achieve their financial goals?

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Abstract

While the concept of corporate social responsibility (CSR) has gained much attention and is currently practiced by many companies, it has yet to be empirically examined in the context of hotels and casinos, especially in regard to the potential effects of CSR on firm value and performance. As the findings on the relationship between CSR and financial performance have been inconclusive and this relationship has been found to differ among industries, this study examines the relationship between CSR and firm value and profitability for hotels and casinos. Results of the Durbin–Wu–Hausman (DWH) test and a subsequent two-stage least square (2SLS) method show that hotel companies’ CSR has a simultaneous and positive relationship with financial performance. For casino companies, however, results show that CSR has no simultaneous or particular effect on financial performance. Findings suggest that hotel companies can confidently and strategically increase CSR investment to enhance both short-term (profitability) and long-term performance (firm value). Casino companies need to carefully examine the effects of CSR on financial performance, when making CSR-related decisions.

Introduction

After the devastating Indian Ocean tsunami in 2004, hotel companies in Phuket, Thailand, actively engaged in various activities to restore local communities through efforts that included making sympathetic and supportive public statements, raising funds, providing support for rebuilding homes and schools, and sponsoring orphans (Henderson, 2007). In recent years, many hotel companies have initiated or continued various corporate social responsibility (CSR) efforts to conserve the environment, reduce social problems, and assist in developing communities. Along with the trend, casino companies have also started practicing CSR activities as discussed further in Section 2. However, despite efforts made by the casino industry and the public's gradual acceptance of gambling as a legitimate leisure activity, casinos may still face the challenging notions that providing unchecked gambling is unethical and that casino operators should be more socially responsible.

Companies execute CSR activities for various benefits: to improve corporate images, to enhance the morale of their employees, to improve employee retention rates, to build sound relationships with governments and communities, and to respond to the growing expectations of customers and social groups (Henderson, 2007, Jones et al., 2006, Tsoutsoura, 2004). As the concept of CSR is now widely recognized, not only by the public, but also embraced and practiced by companies (Barner, 2007, Jones et al., 2006), it becomes critical to determine if CSR investment actually increases firm value and profitability. Given that the bottom line (fundamental goal) for a company is to maximize its value (Friedman, 1970), it has become important considerations for companies to judiciously invest in CSR activities, which concurrently can maximize firms’ value and profitability. Nonetheless, little has been empirically examined regarding the impacts of such activities on firms’ financial goals (maximized value and financial profitability) in the context of hotels and casinos.

According to the mainstream CSR literature, the findings on the relationship between CSR and financial performance have been inconclusive (Arlow and Gannon, 1982, Cochran and Wood, 1984, Frooman, 1997, Griffin and Mahon, 1997, Salzmann et al., 2005). Studies have also found that this relationship differs across industries (Benergee et al., 2003, Henriques and Sadorsky, 1996, Lankoski, 2000, Salzmann et al., 2005), implying that the hotel and casino industries may show different results. Moreover, the hotel industry may be more sensitive to CSR issues because of its “bidirectional relationship that exists between the tourist product offered and its natural, economic, social and cultural environment” (Rodriguez and Cruz, 2007, p. 825), while the casino industry may be different in regard to CSR issues because of its particular image, as discussed earlier.

Therefore, this study empirically analyzes the relationship between CSR and financial performance (firm value and profitability) of publicly traded hotels and casinos in US. This study also examines the direction of the relationship between CSR and financial performance to see if CSR leads to financial performance or financial performance leads to CSR, or they have a simultaneous relationship. Understanding the presence or absence of the relationship and the nature of the relationship would assist hotel and casino companies in formulating better strategic decisions about CSR. The findings show that the relationships between CSR and both firm value and profitability for hotels are mainly positive and simultaneous, whereas similar relationships are not present for casinos.

Following a literature review is a discussion of research methods which includes sub-sections devoted to DWH test, models and variables. Data, results, and discussions and suggested future research conclude the study.

Section snippets

Current CSR practices by hotels and casinos

In recent years, many hotel and casino companies as well as industry associations have initiated various CSR programs. Table 1 presents some current examples, collected from major hotel and casino corporate websites and CSR-related news and reports.

For example, Accor has the “Earth Guest Program” that focuses on preserving and protecting the environment and supporting local development. This program also encompasses their efforts to eliminate child sex tourism and AIDS. InterContinental Hotels

Durbin–Wu–Hausman (DWH) test

An important issue in examining impacts of CSR is a possible simultaneous relationship between CSR and firm value or profitability. The simultaneity could occur because practicing CSR activities may lead to better firm value or profitability, and concurrently, the latter may simultaneously enable a company to invest more in CSR activities (Preston and O’Bannon, 1997). Thus, this study first performs the Durbin–Wu–Hausman test to determine if the simultaneous relationship exists.

Two steps were

Data

As described in Section 3.3, collection of the main CSR data is via KLD STATS. KLD scores are those produced by KLD Research and Analytics for the years 1991–2006 and encompass the S&P 500 companies (1991–2006), and companies of the Russell 1000 (2001–2006) and the Russell 2000 (2003–2006). The availability of KLD scores, therefore, defines the sample period of this study, 1991–2006. Other annual financial data, such as total assets, total debts, sales, and total equities, were retrieved from

Results

In this section, findings of descriptive statistics are presented followed by the results of the primary analysis: the relationship between CSR and firm value (performance) for hotels (2SLS) and casinos (multiple regression analysis).

Discussion and suggested future research

The purpose of this study was to examine the impacts of CSR on hotels’ and casinos’ value and profitability. In addition, an existence of simultaneous relationship between CSR and firm value (profitability) was examined by the DWH test and if a simultaneity was detected, a two-stage least squares (2SLS) analysis was performed. The study analyzed the sampled hotel and casino observations separately because previous literature indicated industry idiosyncrasies (Benergee et al., 2003, Henriques

Conclusion

The current study examined the relationship between CSR and firm value (profitability) for the publicly traded hotels and casinos in the U.S. based on the data from 1991 to 2006. First, the findings of the study are consistent with previous literature (Benergee et al., 2003, Henriques and Sadorsky, 1996, Lankoski, 2000, Salzmann et al., 2005), supporting the industry differences in the relationship between CSR and firm performance. The findings also show support for a simultaneous relationship

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