Week 4 Discussion Sustainability Solutions

Cornell Hospitality Quarterly XX(X) 1 –12 © The Author(s) 2013 Reprints and permissions: sagepub.com/journalsPermissions.nav DOI: 10.1177/1938965513505700 cqx.sagepub.com

Article

Although the triple bottom line (i.e., profits, people, and planet) has become a common framework for discussions of hospitality firms’ success, the fact remains that the key factor in a firm’s stance toward socially responsible actions is the profit portion of the triple bottom line, that is, eco- nomics. While firms are encouraged to invest resources in socially responsible initiatives by customers and other stakeholders, there is limited empirical evidence that such investments indeed lead to profitability or enhance firm value (Orlitzky, Schmidt, and Rynes 2003). Despite what appears to be a tenuous link between a firm’s environmental performance and its financial performance, numerous firms are investing in initiatives that involve recycling, pollution prevention, and reduction of waste. The firms then commu- nicate their initiatives to stakeholders, including investors, customers, media, and regulatory authorities on the expec- tation that this will encourage brand loyalty, build reputa- tion, and proactively prevent onerous regulation (Bird et al. 2007; Miles, Covin, and Heeley 2000).

Studies of the interaction of economic conditions and social and environmental programs have indicated that firms often cut back on corporate social responsibility (CSR)1 programs when economic conditions are unfavor- able. Lee, Singal, and Kim (2013) found this to be true of hospitality firms that, for instance, curtail their nonopera- tional CSR initiatives (e.g., environment and community

programs), although they continue to invest in operations- related programs, such as product quality and employee relations. However, I have seen little research that explains the connection between an individual firm’s financial per- formance and its investment in sustainable initiatives (Myung, McClaren, and Li 2012). This gap is important to fill because firms often face difficult conditions that may tempt them to focus on short-term tactics while cutting down on long-term sustainability initiatives, which may eventually result in loss of customer and employee loyalty, and reputation, thus eroding sustained competitive advan- tage. Therefore, in this article, I seek to answer the follow- ing question: Does firm financial performance affect investment in sustainability initiatives? To address this mat- ter, I compare the level of environmental investments made by firms in the hospitality industry with that of firms in other industries. More critically, I test the impact of envi- ronmental investment on firm financial performance to

505700 CQXXXX10.1177/1938965513505700Cornell Hospitality QuarterlySingal research-article2013

1Virginia Polytechnic Institute and State University, Blacksburg, USA

Corresponding Author: Manisha Singal, Pamplin College of Business, Virginia Polytechnic Institute and State University, 362 Wallace Hall, Blacksburg, VA 24061-0489, USA. Email: [email protected]

The Link between Firm Financial Performance and Investment in Sustainability Initiatives

Manisha Singal1

Abstract While sustainability initiatives by firms are increasingly encouraged by customers, investors, and the government, the economics of sustainable decisions remains in question. The study described in this paper examines the link between sustainability and economic performance for the hospitality industry, as compared with other businesses. Using data spanning 1991 through 2011 from MSCI’s Environmental, Social, and Governance (ESG) Indices and credit ratings from Standard and Poor’s representing 16,325 firm-years, the analysis finds that hospitality firms on average invest more in environmental programs than do businesses in other industries; that hospitality firms have significantly fewer environmental concerns; that strong financial performance leads to increased investments; and that going green, in turn, pays off in future periods, creating a virtuous cycle. One implication is that hospitality firms should go forward confidently in establishing their sustainability programs, as it appears that customers support the effort financially.

Keywords environmental concerns, corporate finance, hospitality and tourism industry, competitive strategy, strategy formulation and strategy implementation.

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evaluate whether socially responsible behavior toward the environment pays off financially.

To summarize the findings, based on a data set of 16,325 firm-years covering the period from 1991 through 2011, I find that hospitality and tourism firms score higher on environmental performance than their nonhospitality and tourism peers, and that investment in environmental mea- sures varies directly with financial performance. Most important, I find that superior environmental performance improves future financial performance in this sample, sup- porting the value of greening initiatives.

This paper contributes to the literature in three ways. First, it compares investments made by firms in the hospi- tality industry with those of other firms, thus adding to the sustainability literature both in the services sector generally and the hospitality sector specifically (Singal 2012). Second, the study applies a hitherto unexamined variable, financial performance as measured by credit ratings, in explaining differential investment in sustainability initia- tives, whereas most studies have examined managerial motives and personal proclivities as explanations of corpo- rate greening programs (Ayuso 2006; Tzschentke, Kirk, and Lynch 2008). Finally, this study establishes a critical link between CSR and financial performance by demon- strating that investment in environment management (which consists of several measures) affects firm financial performance—a link that has previously shown mixed results.

Theory Development

Hospitality and Tourism Industry and Investment in Environmental Initiatives

The involvement of stakeholders is particularly crucial to the success of hospitality and tourism industry sustainabil- ity initiatives for at least two reasons. First, the hospitality sector has a substantial environmental footprint, and it also sees opportunities for reducing this footprint through sus- tainability programs, which are encouraged by industry associations such as the American Hotel and Lodging Association’s Green Resource Center, the National Restaurant Association’s Conserve initiative, and the Global Sustainable Tourism Council. Moreover, reducing environmental impact gives firms a competitive advantage, given customers’ demands for sustainability. Research has established the willingness of some consumers to pay more to stay at green hotels or eat at green restaurants. Choi et al. (2009), for instance, reported that consumers in Greece and the United States were willing to pay higher prices to patronize hotels with environmentally friendly policies and some hotels have tested higher prices for green initiatives (Choi and Parsa 2007). In other studies, green hotels with sustainable practices attracted positive word-of-mouth

intentions, higher willingness to pay, and greater return intentions (Kang et al. 2012; Millar and Baloglu 2011). Similar results were found by Hu, Parsa, and Self (2010), Schubert et al. (2010), and Namkung and Jang (2013) for green restaurants. In a survey by the National Restaurant Association, it was found that 60 percent of consumers would prefer to patronize a green restaurant, and 51 percent would pay a median of 10 percent more at a restaurant that adopts green practices.

While sustainability initiatives may seem more neces- sary in industries where pollution is actually visible, like oil refining, mining, or chemical manufacturing, hospitality operations often involve the support of a wide spectrum of physical components and reliance on natural resources (Sloan, Legrand, and Chen 2013). Sloan, Legrand, and Chen (2013) stated, for instance, that the U.S. Environmental Protection Agency calculates that a one-night stay in a hotel room generates an average of 29.53 kg of CO

2 . Moreover, a

survey of twenty-eight InterContinental Hotel properties in 2007 led to an extrapolated estimate that, at 59 kg per night, the average hotel room’s carbon footprint is roughly equal to that of the average U.S. home.

Since the hospitality and tourism industry requires close contact with customers who experience the service, the industry’s firms should be more responsive to demands of multiple stakeholders like shareholders, regulators, domestic and international travelers, and corporate clients. As services in hospitality are coproduced and concurrently consumed, and quality of service is perceived based on the spillover effect of corporate reputation and investment in customer salient issues, I posit that hospitality firms will invest more in sustainability initiatives than nonhospitality firms. Thus,

Hypothesis 1: Firms in the hospitality sector will invest more in sustainability initiatives than firms in the non- hospitality sectors.

Financial Performance and Investment in Sustainable Initiatives

Among the motives for organizational investment in sus- tainable initiatives are reputation, customer and employee loyalty, and self-regulation (Hart 1995; Turban and Greening 1997). However, the forces governing the timing of such investments are not clear. Macroeconomic condi- tions clearly have an effect (Lee, Singal and Kang 2013), and a firm’s stable financial condition and organizational slack can also have a positive correlation with sustainability investments (Bowen 2002; Tuzzolino and Armanndi 1981). Financial performance, resource levels, and managerial interpretations of munificence have led to increased invest- ment in environmental initiatives (McGuire, Sundgren, and Schneeweis 1988; Seifert, Morris, and Bartkus 2004; Sharma 2000).

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Within the hospitality industry, organizational perfor- mance, which contributes to slack resources and stable financial condition, is also likely to influence firm invest- ment in environmental initiatives. Green initiatives require upfront investment that firms with good financial perfor- mance are more likely to consider adopting than firms in financial distress. Garay and Font (2012), for instance, found that for firms in the hospitality and tourism industry, financial slack is an important determinant of investment in CSR. Therefore, I expect that hospitality firms with higher financial performance will likely invest more in sustainabil- ity programs.

Consumer attitudes are also a driver of the hospitality and tourism industry’s environmental investment. In a Deloitte survey of more than 1,000 business travelers (Weissenberg, Redington, and Kutyla 2008), 95 percent of respondents thought that lodging companies should be undertaking green initiatives. Similarly, the 2012 Canadian Travel Intentions Survey found that 42 percent of business travelers surveyed said that practices like recycling and energy efficiency matter to them when choosing where to stay, a figure that had increased by 5 percentage points from the prior year.

Thus, I expect that given a similar level of financial per- formance, firms in the hospitality and tourism sector will invest more in sustainability measures than their nonhospi- tality peers, as summarized in the following hypotheses:

Hypothesis 2a: Financial performance will affect invest- ment in sustainability initiatives in all firms. Hypothesis 2b: Higher financial performance will lead to higher investment in sustainability initiatives in the hos- pitality sector. Hypothesis 2c: Controlled for financial performance, firms in the hospitality sector will invest more in sustainability initiatives than firms in the nonhospitality sector.

Impact of Environmental Sustainability Initiatives on Financial Performance

Scholars in both strategic management and hospitality lit- erature have examined the impact of environmental initia- tives on firm performance and financial performance, but the results are mixed. For example, using a broad sample of firms, Berman et al. (1999) did not find any significant effect of environmental factors on firm performance, although they did find a positive correlation between employee and product safety factors with firm performance. Also relying on a cross-industry sample of firms, Bird et al. (2007) found that there is a conflict between environmental strengths and stock price performance though the market seems to value firms that meet minimal environmental stan- dards. Similarly, a meta-analysis of corporate social respon- sibility and corporate social performance conducted by

Orlitzky, Schmidt, and Rynes (2003) found that environ- mental responsibility pays off only weakly in firm perfor- mance, and Hillman and Keim (2001) reported that stakeholder management led to improved shareholder value, while social issue participation was negatively asso- ciated with shareholder value.

In contrast, other studies have found a positive link between environmental performance and economic perfor- mance, with industry growth moderating the relationship (Russo and Fouts 1997); havesuggested that the market rewards ecoefficiency, although environmental information is incorporated with a drift, and valuation increases over time (Guenster et al. 2011); and have concluded that pollu- tion prevention, rather than pollution treatment, helps per- formance (King and Lenox 2002). An intriguing meta-analysis of the moderators that define the corporate environment–financial performance relationship found that smaller firms benefit more than larger firms, U.S.-based firms benefit more than international firms, and that market measures of performance react most to environmental investments (Dixon-Fowler et al. 2013).

Hospitality industry results are likewise varied. Studies of Spain’s hotels have shown a positive link between socioenvironmental responsibility and firm performance (Rodriguez and Cruz 2007) and between revenue genera- tion and environmental certification (Segarra-Oña et al. 2012). While studying the commitment to levels of quality jointly with environment management, Tari et al. (2010) found that both initiatives influenced hotel performance. However, Claver-Cortes et al. (2007) did not find a link between environmental proactivity and organizational per- formance. Similarly, Park and Lee (2009) and Lee and Park (2009) reported that financial rewards for social responsibility benefitted U.S. hotels, while casinos and res- taurants did not experience a clear benefit.

Although some scholars have attributed the mixed findings in the hospitality sector to the use of diverse measures (Zhang, Joglekar, and Verma 2012), a literature review of thirty-two quantitative studies on the link between environmental perfor- mance and financial performance (Molina-Azorín et al. 2009) and the meta-analysis by Dixon-Fowler et al. (2013) con- cluded that studies reporting a positive link dominate.

For these reasons, I propose the following:

Hypothesis 3: There will be a positive link between investment in environmental initiatives and financial performance, especially in the hospitality sector.

Method

Sample and Sources of Data

Data come from three primary sources. The first data set, MSCI’s Environmental, Social, and Governance (ESG)

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Indices (also known as the KLD database), is an annual data set originated in 1991 with ESG performance infor- mation, which is used to evaluate investment in environ- mental corporate social responsibility.2 The ESG database has been extensively used and validated for studying cor- porate social performance (Agle, Mitchell and Sonnenfeld 1999; Hillman and Keim 2001; Mattingly and Berman 2006; Waddock and Graves 1997). The other two data sets are standard in the finance and accounting literatures: his- torical and current credit ratings of firms from Standard and Poor’s (S&P) Compustat and stock returns and market capitalization from Center for Research in Security Prices (CRSP) at the University of Chicago.

The intersection of ESG data and S&P credit ratings data generates a total sample of 16,325 firm-years of which 624 firm-years relate to the hospitality and tourism sector. To identify hospitality and tourism firms, we match the firms in the ESG ratings sample with a sample of hospitality and tourism firms that traded on any U.S. exchange between 1980 and 2011.3 In the regression analysis, hospitality and tourism firms are identified with a hospitality and tourism dummy set to 1.

Variables and Methods

Environmental CSR variables are constructed from 1991 through 2011 using two types of indicators: strength indica- tors such as pollution prevention, recycling, and waste man- agement systems, and concerns indicators such as gaps in regulatory compliance, severity of controversies related to land use, and biodiversity. Each ESG indicator is a binary variable, which is set to 1 if the firm meets the criteria for that indicator, and 0 otherwise. Hence, higher scores on strength environmental indicators imply stronger environ- mental performance, whereas greater scores on concern indicators denote poorer performance. Following estab- lished practice, I sum each category of indicators to arrive at composite assessment of strengths (EnvStr) and concerns (EnvCon; Bartkus and Glassman 2008; Berrone, Surroca, and Tribó 2007; Hillman and Keim 2001; Ruf, Muralidhar, and Paul 1998). Such composites have been successfully used in other studies (Bird et al. 2007; Dyer and Whetten 2006). In addition, I compute an overall environmental CSR composite (EnvAll) as the ratio of the two composites:

EnvAll = ( )

( )

1

1

+ + EnvStr

EnvCon .4

Financial performance is measured by historical long- term issuer ratings assigned to a firm by S&P.5 Flow vari- ables such as stock returns, return on assets, sales growth, and return on equity suffer from their transitory nature in measuring the impact of CSR on financial performance unless there is a significant change in CSR during the period under observation (Gregory and Whittaker 2013). If firms consistently have high CSR, for instance, flow variables would show no change, and it would be difficult to relate

CSR to financial performance. Most stock variables (mea- sured at a point in time) depend greatly on accounting num- bers such as Tobin’s Q, which is subject to accounting policy choices, or must be benchmarked to an accounting number such as market-to-book value instead of just market capitalization. I therefore chose credit rating as it is a better measure of firm performance than other measures. Kisgen (2006, 1038-39) states, for instance: “Credit ratings may provide information on the quality of a firm beyond other publicly available information. Rating agencies may receive significant company information that is not public . . . and thereby provide more reliable measures of a firm’s credit- worthiness.” The relationship between equity performance measures and credit ratings is evidenced by the reaction of stock prices to rating changes, which Hand, Holthausen, and Leftwich (1992) and Holthausen and Leftwich (1986) found to directly affect both bond and stock prices. Credit ratings are also easily comparable across different firms and provide direct information about financial slack available for discretionary investments.

The sample’s S&P rating ranges from AAA, which I give a numerical value of 25, to D, which I assign a value of 1. Following standard industry practice, ratings are further partitioned into investment grade (InvGrade), which has a dummy value of 1 for ratings at or above BBB− and nonin- vestment grade, based on ratings at or below BB+.

Control and other variables. With credit rating as the measure of a firm’s financial condition, this analysis does not need variables controlling for leverage, risk, and other factors intended to measure the financial condition of a firm. In addition, since the primary analysis is concerned with firms in the hospitality and tourism industry, industry-specific control variables are redundant. In the end, the two most relevant control variables are size of the firm, which may affect credit rating and investment in environmental initia- tives, and stock performance, a flow measure of firm per- formance. Consequently, size and stock performance are included in regressions as control variables. Size is mea- sured using the log of market capitalization (LogSize) at the end of the previous year following Graves and Waddock (1999),6 and performance is measured by stock return.

In addition, to isolate the effect of financial performance on environmental initiatives in the hospitality industry, I use an interaction term Hospitality and tourism firm dummy with the investment grade dummy. Using unbalanced panel data from the sources described earlier, I conducted t tests and multivariate regression analysis to evaluate the three hypotheses proposed here.

Results

The summary statistics and correlation matrix reported in Exhibit 1 are generally consistent with the hypotheses. The high positive correlation between environmental CSR and

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Exhibit 1: Summary Statistics and Correlations.

Variable N M Median SD 1 2 3 4 5 6 7 8

Hospitality and tourism dummy (1) 16,325 0.04 0.00 0.19 1.00** EnvAll (2) 16,325 1.07 1.00 0.63 0.04** 1.00** EnvStr (3) 16,325 0.33 0.00 0.75 −0.02 0.69** 1.00** EnvCon (4) 16,325 0.45 0.00 0.91 −0.08** −0.40** 0.26** 1.00** LogSize (5) 16,089 8.12 8.04 1.46 −0.05** 0.10** 0.28** 0.25** 1.00** StockReturn (6) 16,058 0.16 0.11 0.63 0.01 −0.02* −0.03* −0.01* −0.18** 1.00** InvGrade (7) 16,171 0.66 1.00 0.47 −0.12** 0.05** 0.15** 0.13** 0.52** −0.06** 1.00** Rating (8) 16,171 15.75 16.00 3.53 −0.13** 0.06** 0.16** 0.13** 0.64** −0.06** 0.81** 1.00**

Note: N is reported in firm-years; size is the log of market capitalization in millions of dollars. *p < .05. **p < .01.

credit ratings shows that CSR is likely to be more prevalent in firms that have higher financial performance. The corre- lations also show that the hospitality and tourism firms in this sample are smaller and have lower credit ratings and lower investment grades than the firms in other industries. In spite of their smaller size, I observe from Column 1 in the exhibit that hospitality and tourism firms are positively cor- related with the overall environmental CSR, EnvAll. This finding is in accordance with Hypothesis 1 and suggests that hospitality and tourism firms have higher investment in the environment than firms in other industries. Hospitality and tourism firms have slightly lower strengths (EnvStr) than other firms but significantly lower environmental con- cerns (EnvCon) than the other firms.

Hospitality and tourism firms’ comparative effective- ness at environmental CSR is underscored by the data in Exhibit 2, which contains results related to Hypotheses 1 and 2.7 Again consistent with Hypothesis 1, Panel A1 shows that EnvAll is larger for hospitality and tourism firms than for the other firms by a statistically significant 0.126. Despite the fact that hospitality and tourism firms have fewer strengths and fewer concerns, the magnitude of the difference in concerns (EnvCon) is much greater at −0.393 than the magnitude of difference in strengths (EnvStr) at −0.077.

Consistent with Hypothesis 2a, investment grade firms have a better record of environmental CSR than noninvest- ment grade firms (Panel A2), such that the overall environ- mental score, EnvAll, is higher by a statistically significant 0.067 for investment grade firms. The results become clearer in Panels A3 and A4, where firms are evaluated by financial performance. In both cases, consistent with Hypothesis 2b, we find that investment grade firms gener- ally have a better record of overall environmental CSR than noninvestment grade firms, both for hospitality and tourism firms and nonhospitality and tourism firms. For hospitality and tourism firms, investment grade companies outperform noninvestment grade firms by a statistically significant 0.214, while in other industries the outperformance of investment grade firms is a statistically significant 0.069.

Both strengths and concerns are higher for investment grade firms, although the difference in strengths is relatively much higher than for concerns.

The relatively higher environmental effort of the hospi- tality and tourism industry is summarized in Panel A5, which compares firms with similar financial performance. In that regard, EnvAll is significantly greater for investment grade hospitality and tourism firms than for comparable firms in other industries (0.236), and the same is true for noninvestment grade firms, in which hospitality and tour- ism firms are also relatively higher (0.091). While there is no statistically significant difference in strengths in either sets of firms, I find that hospitality and tourism firms have significantly fewer concerns than comparable firms in other industries. For investment grade firms, the difference is −0.412, and for noninvestment grade firms, the difference is −0.274. Thus, the results for overall CSR and environmen- tal concerns are consistent with Hypothesis 2c because, controlled for financial performance, hospitality and tour- ism firms have significantly superior environmental CSR performance than nonhospitality and tourism firms. An analysis of variance inflation factors (VIFs) for Panel B of Exhibit 2, and Exhibit 3 indicated no instances of multicol- linearity. In addition, statistical significance is based on heteroskedasticity-consistent standard errors.8

The models presented here further support the hypothe- ses and tabular material. The first set of three models, 1 to 3, relate to Hypothesis 1 and Panel A1 (see Exhibit 2). Model 1 reveals that hospitality and tourism firms have a statistically significantly greater EnvAll score (0.127) when compared with other firms, primarily because hospitality and tourism firms have far fewer concerns than other firms (−0.404 in Model 3) and the hospitality and tourism firms have marginally fewer strengths (−0.082 in Model 2). Consistent with Hypothesis 1, the results show that hospi- tality and tourism firms have significantly greater invest- ment in environmental initiatives than do firms in other industries.

Models 4 to 6, corresponding to Hypothesis 2a and Panel A2, examine the relationship between environmental

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Exhibit 2: Environmental CSR and Financial Performance.

Panel A: Indicators of Environmental CSR

Panel A1 All Hospitality and Tourism Firms All Nonhospitality and Tourism Firms Difference

EnvAll 1.196 1.070 0.126** EnvStr 0.260 0.337 −0.077** EnvCon 0.074 0.467 −0.393**

Panel A2 All Firms, Investment Grade All Firms, Noninvestment Grade Difference

EnvAll 1.097 1.030 0.067** EnvStr 0.413 0.181 0.231** EnvCon 0.537 0.291 0.245**

Panel A3 Hospitality and Tourism,

Investment Grade Hospitality and Tourism, Noninvestment Grade Difference

EnvAll 1.328 1.114 0.214** EnvStr 0.437 0.150 0.287** EnvCon 0.134 0.036 0.098**

Panel A4 Nonhospitality and Tourism,

Investment Grade Nonhospitality and Tourism,

Noninvestment Grade Difference

EnvAll 1.092 1.023 0.069** EnvStr 0.412 0.184 0.228** EnvCon 0.546 0.311 0.235**

Panel A5 Difference between Hospitality and Tourism and Nonhospitality and Tourism Firms, by Financial Performance

EnvAll 0.236** 0.091** EnvStr 0.025 −0.033 EnvCon −0.412** −0.274**

Panel B: Regression Results For Environmental CSR in Hospitality and Tourism Firms and Nonhospitality and Tourism Firms

Dependent Variable

EnvAll EnvStr EnvCon

Independent Variables Model 1 Model 2 Model 3

Intercept 1.073** 0.338 0.464** Hospitality and tourism dummy 0.127** −0.082** −0.404** Stock return −0.007 0.013† 0.035** LogSizea 0.041** 0.151** 0.159** N 15,907 15,907 15,907 Adjusted R2 (%) 0.8 6.2 5.4

Independent Variables

Dependent Variable

EnvAll (All Firms) EnvStr (All Firms) EnvCon (All Firms)

Model 4 Model 5 Model 6

Intercept 1.032** 0.179** 0.283** InvGrade 0.067** 0.233** 0.247** Stock return −0.004 0.023** 0.045** LogSizea 0.042** 0.151** 0.160** N 15,907 15,907 15,907 Adjusted R2 (%) 0.9 8.3 6.3

Dependent Variable

EnvAll (Hospitality and Tourism

Firms) EnvStr (Hospitality and Tourism

Firms) EnvCon (Hospitality and Tourism

Firms)

Independent Variables Model 7 Model 8 Model 9

Intercept 1.115** 0.153** 0.038** InvGrade 0.195** 0.258** 0.087** Stock return 0.024 0.028 0.006 LogSizea 0.100** 0.152** 0.057** N 606 606 606 Adjusted R2 (%) 7.0 12.0 7.4

(continued)

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Exhibit 2: (continued)

Dependent Variable

EnvAll (InvGrade) EnvStr (InvGrade) EnvCon (InvGrade)

Independent variables Model 10 Model 11 Model 12

Intercept 1.026** 0.181** 0.302** Hospitality and tourism dummy 0.094** −0.027 −0.271** Hospitality and tourism × InvGrade or Rating

0.137** 0.027 −0.170**

InvGrade or Rating 0.069** 0.231** 0.238** Stock return −0.004 0.023** 0.046** LogSizea 0.041** 0.151** 0.161** N 15,907 15,907 15,907 Adjusted R2 (%) 1.2 8.2 6.8

Independent variables

Dependent Variable

EnvAll (Rating) EnvStr (Rating) EnvCon (Rating)

Model 13 Model 14 Model 15

Intercept 0.904** −0.206** −0.044 Hospitality and tourism dummy −0.241* −0.127 −0.004 Hospitality and tourism × InvGrade or Rating

0.029** 0.007 −0.027**

InvGrade or Rating 0.011** 0.034** 0.032** Stock return −0.004 0.026** 0.050** LogSizea 0.042** 0.163** 0.183** N 15,907 15,907 15,907 Adjusted R2 (%) 1.2 8.3 7.1

Note. Statistical significance for Panel B is based on heteroskedasticity consistent standard errors. CSR = corporate social responsibility. aSince size is correlated with investment grade, this variable represents the residual from a regression of logsize on InvGrade. *p < .05. **p < .01.

CSR and financial performance. Here I apply the invest- ment grade dummy (InvGrade) to distinguish firms with high levels of financial performance from firms with low levels of financial performance. Model 4 shows that invest- ment grade firms (i.e., financially strong firms) invest more in overall environmental CSR than weaker firms (0.067). The coefficients in all three models (4-6) are close to the differences reported in Panel A2, and consistent with Hypothesis 2a.

Turning to hospitality and tourism firms only, Models 7 to 9 correspond to Hypothesis 2b and Panel A3 and evaluate the effect of financial performance on environmental CSR. Once again, financial strength seems to drive environmen- tal investment, as the coefficient on InvGrade in Model 7 is significantly positive at 0.195. Models 8 and 9 also show that the positive impact of financial performance on strengths is much larger than the effect on concerns. These results support Hypothesis 2b, which predicts that

Exhibit 3: Effect of Environmental CSR on Financial Performance.

Dependent Variable

Rating Rating Rating Rating Rating Rating Rating

Independent Variables Controls Only Model 16 Model 17 Model 18 Model 19 Model 20 Model 21

Intercept 3.142** 3.000** 3.150** 3.028** 3.034** 3.162** 3.031** Hospitality and tourism dummy −1.840** −1.822** −1.874** −2.420** −1.936** −1.900** Hospitality and tourism × LagEnvCSR (EnvAll) (EnvStr) (EnvCon) (EnvAll) 0.485** (EnvStr) 0.405* (EnvCon) 0.228 LagEnvCSR 0.130** 0.027 −0.149** 0.116** 0.017 −0.150** Stock return 0.300** 0.333** 0.332** 0.340** 0.333** 0.333** 0.340** LogSize 1.552** 1.553** 1.551** 1.576** 1.551** 1.550** 1.576** N 15,907 14,146 14,146 14,146 14,146 14,146 14,146 Adjusted R2 (%) 40.7 42.5 42.4 42.6 42.5 42.4 42.6

Note: Statistical significance is based on heteroskedasticity-consistent standard errors. CSR = corporate social responsibility. *p < .05. **p < .01.

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investment grade hospitality and tourism firms will invest more in environmental CSR than their financially weaker cousins.

I control for financial performance in Models 10 to 12 as I compare hospitality and tourism firms with those in other industries. This is accomplished with an interaction term between InvGrade and Hospitality and tourism dummy. Controlled for financial performance (InvGrade) and consistent with Hypothesis 2c, hospitality and tourism firms have better overall performance in environmental CSR than the other firms (0.137). Again, hospitality and tourism firms have significantly fewer concerns than non- hospitality and tourism firms (−0.170), although there is no significant difference in strengths. I used the Rating vari- able in Models 13 to 159 to evaluate the effect of financial performance at a finer level than InvGrade in Models 10 to 12, with similar results.

A critical aspect of my analysis is Hypothesis 3, the effect of environmental corporate citizenship on a compa- ny’s financial outcome, shown in Exhibit 3. First, I note that the negative coefficients on the independent variable Hospitality and tourism dummy show that, on average, hos- pitality and tourism firms have a rating that is two steps below the rating of other firms. The coefficient on LagEnvAll in Model 16 shows that the current period’s financial strength (Rating) is significantly affected by the prior peri- od’s environmental investment, EnvAll (0.130). Although the rating is not affected by the strengths composite, as evi- denced by an insignificant coefficient on LagEnvStr (Model 17), the rating is significantly affected by the concerns com- posite, LagEnvCon (Model 18). The negative coefficient (−0.149) suggests that fewer concerns would result in a higher credit rating.

I further contrast the effect of environmental invest- ments on future performance for hospitality and tourism firms compared with firms in other industries using an interaction term between the hospitality and tourism dummy and lagged environmental CSR, as shown in Models 19 to 21. Comparing the effect of prior environ- mental CSR on hospitality and tourism firms with its effect on other firms, the coefficient of 0.485 on Hospitality and tourism × LagEnvAll in Model 19 shows that the effect of LagEnvAll is greater on hospitality and tourism firms. Credit rating is also affected by the prior period’s strengths composite (0.405), though not significantly by the prior period’s concerns composite (0.228). However, the main effect on credit rating continues to arise from the overall environmental CSR (LagEnvAll) and the concerns com- posite, LagEnvCon. Overall, the results in Exhibit 3 are consistent with Hypothesis 3 and suggest that environmen- tal CSR has a real impact on credit ratings of a firm, and that the effect is greater for hospitality and tourism firms than for firms in other industries.

Discussion

This analysis of 16,325 firm-years showed support for the three hypotheses that express the idea that hospitality and tourism firms are more environmentally committed than firms in other industries. I found that hospitality and tour- ism firms significantly outperformed other firms when ESG measures of overall environmental CSR are used. I also found that hospitality and tourism firms have marginally fewer environmental strengths (such as beneficial products and services, pollution prevention, clean energy, and recy- cling) than firms in other industries. On the other hand, hos- pitality and tourism firms have far fewer concerns (such as emissions of toxic chemicals, noncarbon emissions, and controversies related to noncompliance with regulations or climate change allegations) than the other firms. It appears then that hospitality and tourism firms are perhaps more proactive in mitigating concerns in their approach to green- ing, and are just beginning to become proactive in taking initiatives. This is interesting to note because research has found that proactive measures, such as process innovation, and collaboration with suppliers and stakeholders including employee training, result in the development of valuable organization capabilities such as stakeholder integration, higher order learning, and continuous innovation (Dixon- Fowler et al. 2013; Sharma and Vredenburg 1998). These are all important outcomes for the hospitality industry. While measures to mitigate environmental concerns are also important, especially for maintaining organizational image and reputation, it may become important for hospi- tality and tourism firms to move further along the proactive stage by adopting the initiatives mentioned before.

With regard to performance, the analysis showed that financially well performing firms, irrespective of sector, scored higher on environmental programs. Beyond that, hospitality and tourism firms invested significantly more in the environment than did equivalent firms in other indus- tries. Again as mentioned earlier this increased investment came in the form of reduced concerns. Finally, I found that a firm’s credit rating is positively related to the prior peri- od’s investment in environmental CSR, and negatively related to the prior period’s environmental concerns. Thus, investment in the environment and mitigation of concerns in one period had a positive impact on the next period’s credit rating. This effect of environmental corporate respon- sibility on credit rating was much greater for hospitality and tourism firms than for firms in other industries, highlighting the importance of a progressive stance on environmental programs among hospitality and tourism firms. This bodes well for companies like Starwood, for example, who have recognized the importance of sustainability and built their “Element” hotels that have a brand-wide commitment to pursue U.S. Green Building Council’s Leadership in Energy

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& Environmental Design (LEED) certification in addition to their reduce, reuse, and recycle initiatives. Moreover, it bodes well for the entire set of firms in the hospitality and tourism sector that offer natural ventilation, enhanced day lighting, and sustainable site locations encouraged by World Energy Engineering Congress.

Conclusion

Contributions and Implications

Although the hospitality literature is rich in studies related to the environment, few studies have empirically examined the relationship between firms’ environmental initiatives and financial performance. Myung, McCaren, and Li (2012, 1296) recommended such research: “First, the most impor- tant issue in this field is perhaps evaluation of green prac- tices and economic or financial performance of the firm.” I examine this important issue in this study and contribute to the literature in several ways. Foremost, I find that firms in the hospitality and tourism sector score higher than those in other industries on overall environment ratings, thereby supporting the contention that environmental reputation matters to hospitality firms in their quest to attract all cus- tomers and especially those with green inclinations. Second, I extend the argument that organizational slack in the form of financial performance supports social responsibility ini- tiatives to the hospitality and tourism sector. In short, I find that “doing well” paves the way for “doing good” in all firms including the hospitality and tourism industry. Even within the subset of hospitality and tourism firms, firms with higher financial performance measured by higher credit ratings have higher scores on environmental perfor- mance. By confirming that financial performance is an important determinant of social performance, future research would do well to include this variable as a key determinant while evaluating and comparing the CSR per- formance of firms. Third, I also find that going green in turn results in doing well in all firms, but relatively more in hos- pitality and tourism firms, once again supporting the theory that reputation enhances performance, or, in this case, that a firm’s credit ratings are affected by its investment in the environment. Thus, this study does not support the negative view that environmental practices foment poor performance by drawing resources and management away from a busi- ness’s core areas (Hull and Rothenburg 2008).

A novel feature of this study is the use of two data sets that have been little used for the hospitality industry. The first database is ESG MSCI, which in contrast, has been used extensively for quantitative analysis of firm policies and corporate social performance in broad samples in other industries (Agle Mitchell, and Sonnenfeld 1999; Hillman and Keim 2001; Mattingly and Berman 2006; Waddock and

Graves 1997). A strength of the ESG is its long time series of data (1991-2011) on a variety of different environmental factors for a wide array of firms. The second database, the S&P ratings database, has heretofore not been used for evaluating financial performance and CSR in the hospitality and tourism industry. As I argued at the outset, credit rat- ings are a better measure of financial performance than many other measures that are based on historical data, fail to account for anticipated changes in the economic environ- ment, and cannot include private information available to the rating agencies. I call on researchers to consider using the ESG and S&P ratings databases for studies in the future.

Another contribution of this study is that I analyze cor- porate social responsibility at the corporate level, rather than a business unit or property level. While analysis at the property level has management value, it becomes difficult to generalize local level findings to the whole firm, whereas corporate level assessment of the firms’ environmental pol- icy is useful in strategic decision making and analysis.

The main implication and the most important result of this article is that investment in environmental CSR mat- ters, and is in fact part of a virtuous cycle with the firm’s financial performance. The study also underlines the impor- tance of firms’ mitigating concerns that arise from environ- mental abuse. Results of this study suggest that both an increase in environmental strengths and a decrease in con- cerns are associated with an improvement in a firm’s finan- cial performance. Finally, for strategic reasons, managers should continue to invest in environmental initiatives even in times of low financial performance. Although this analy- sis finds that firms reduce their focus on the environment when they are passing through difficult financial times, investment in the environment seems almost more impor- tant in lean times because of its impact on future perfor- mance and on the positive externalities on the firm’s reputation and customer perceptions. This is in line with scholars who propose an integrative logic rather than an instrumental logic for the symbiotic relationship between corporate social, environmental, and financial performance. Gao and Bansal (2013) state, for instance, that the three are not only causally related but also simultaneously related, and urge practitioners to acknowledge the concurrent deter- mination of system-wide elements that allow firms to gen- erate creative solutions in developing environmental proactive behaviors.

Limitations and Future Research

The limitations of this article can serve as avenues for future research. Since I examined only publicly traded firms, these results may not apply to small, privately owned firms. Moreover, I did not conduct subsector analysis within the hospitality and tourism sector, so future research may

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10 Cornell Hospitality Quarterly XX(X)

conduct a subsample analysis to gauge whether there are differences in relative performance responses to environ- mental programs in different sectors (e.g., hotels, casinos, gaming, tourist attractions, and restaurants). Finally, since this study relied only on the ESG database for environmen- tal indicators, it is desirable for future studies to compare the results of this study with research based on alternative data sources for validation.

Acknowledgments

The author thanks Professor Vijay Singal, Department of Finance, Virginia Tech, for help and guidance with the Data and Methodology sections of this article.

Declaration of Conflicting Interests

The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author received no financial support for the research, author- ship, and/or publication of this article.

Notes

1. While definitions of CSR vary, we use the definition given by the Commission of European Communities (2001), a concept whereby companies integrate social and environmental con- cerns in their business operations and in their interaction with their stakeholders on a voluntary basis.

2. http://www.msci.com/products/indices/esg/. 3. The sample is constructed from many sources including

CRSP, Security and Exchange Commision’s EDGAR data- base, Hoover’s online, Business and Company Gale database, and Yahoo! Profiles using sector codes from North American Industry Classification System (NAICS), Standard Industry Classification (SIC), and Global Industry Classification Standard (GICS) and name searches.

4. Similar EnvAll scores can result for a firm with high EnvStr and high EnvCon, as for a firm with low EnvStr and low EnvCon, though the two firms are inherently different. To avoid any confusion, I report results for EnvAll along with separate results for EnvStr and EnvCon throughout the article.

5. A credit rating, which is issued for a firm, is different from a bond rating, which is issued for individual bonds. Instead of using individual bond ratings, we use credit issuer rating, an overall measure of financial performance of a company.

6. There is no change in our conclusions if we use log of sales to proxy for size instead of log of market value.

7. The reported t statistics recognize unequal sample sizes and variances.

8. To remove the effect of any omitted time-constant variable in the regressions, I examine the results with a firm fixed effects regression. There is no change in any of the reported coeffi- cients or their significance.

9. The coefficient of 0.029 on the interaction term in Model 13 should be read with the average value of Rating, which is 15.75 from Exhibit 1.

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Author Biography

Manisha Singal conducts research in the areas of strategic manage- ment, entrepreneurship, and firm ownership. She examines the ante- cedents to corporate financial performance and corporate social performance in the context of the hospitality and tourism industry.

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