Corporate social responsibility, internal control, and firm financial performance

Abstract

As the global challenges facing sustainability issues continue to expand, the issues of corporate social responsibility (CSR) and ethical governance have become the focus of continued academic attention. CSR is important for firms to enhance their reputation and promote sustainable development. Using A-share listed firms from 2012 to 2019, this study empirically investigates the effect of CSR fulfillment on internal control and firm financial performance by constructing a regression model. The results show that there is a positive relationship between CSR and firm financial performance. Therefore, CSR fulfillment effectively improves the firm financial performance. Furthermore, this study finds that there is a partial mediating effect of internal control between CSR fulfillment and firm financial performance. Therefore, good internal control leads the firm to implement CSR, strengthen management, and improve financial performance. Further results show that the nature of ownership plays a moderating role in the mediating effect of internal control. This study enriches the mechanism of CSR on firm financial performance. Furthermore, it provides a theoretical basis for Chinese listed firms to fulfill CSR, improve ownership, and strengthen internal control.

Sustainable Practices and Performance of Resource-Based Companies: The Role of Internal Control

“…Along with bigger listed companies, some medium-sized and smaller companies have started to tell the public about their social responsibility reports and information on how well their CERs are being met [27]. Companies are investing more in the environment when the long-term development factor is considered [8,9] to successfully enhance the conditions for the growth of companies and the creation of their products, as well as to assist them in developing a positive social reputation [28]. CER is essentially a signaling mechanism to gain support from stakeholders [29].…”

“…The composite scores of the methodologies of CFP were calculated using prior research from the literature [8,9,35]. To produce more precise and useful indicators and findings, the weights of the composite indicators created by using the entropy weight approach were selected as proxy variables for the explanatory variable company's financial performance (Score) [7].…”

“…This index has been widely recognized and validated by academics and has strong authority and universality. This study chose the company's internal control index (Dib_index) as the moderating variable of the model [6,9,10].…”

“…To reduce the influence of other factors on the results, the following control variables were also selected based on the existing literature [6,8,9,35]: enterprise nature (Soe), enter-prise size (Size), proportion of independent directors (In_rate), management shareholding ratio (Manger_rate), enterprise age (Age), separation of two positions (Dua), shareholding ratio of the largest shareholder (Crl), year dummy variables (Year), and industry dummy variables (Ind). The specific variables are defined in Table 3.…”

“…The theory of sustainable development emphasizes meeting current needs without compromising the needs of future generations [7]. The theory explains that companies seek a balanced relationship between CER and CFP [8][9][10]. The relationship between CER and CFP in China is related to the social, political, and economic context of China.…”