The causality direction of the corporate social responsibility – Corporate financial performance Nexus: Application of Panel Vector Autoregression approach

Abstract

This study is an attempt to model the bidirectional linkages between corporate social responsibility (CSR) and corporate financial performance (CFP) by using the prospective and retrospective approaches. A panel data set for 100 of the Fortune Most Admired Companies was used to study the relationships. Moreover, 1000 firm-year observations were examined between the sample periods of 2007 and 2016. A new methodology known as Panel Vector Autoregression (Panel VAR) approach using the Generalised Method of Moments (GMM) was used in this study. The salient findings are: (1) better financial performance of firms lead to a better CSR engagement and (2) better CSR need not necessarily lead to superior CFP. A strong and substantial negative impact has been observed on CSR and the three CFP measures, namely, return on equity, return on assets, and return on invested capital. This finding has consistency with the trade-off hypothesis. This hypothesis posits that when firms are ''being socially responsible'', they will have a tendency to experience minimised shareholder wealth and lower profits, which restricts the socially responsible investments.

Sustainable development and economic performance: Gaps and trends for future research

“…They found that there is a significant negative short-term impact of CSR adoption and business performance. The CSR-CFP Corporate Financial Performance (CFP) relationship was visited again by several authors (Škare & Golja, 2012;Pätäri, Arminen, Tuppura, & Jantunen, 2014;Vergini, Jacomossi, Turra, & Hein, 2015;Rodriguez-Fernandez, 2016;Carini, Comincioli, Poddi, & Vergalli, 2017;Choongo, 2017;Oh, Hong, & Hwang, 2017;Ang & Weber, 2018;Beck, Frost, & Jones, 2018;Hategan, Sirghi, Curea-Pitorac, & Hategan, 2018;Cherian et al, 2019;Lin, Hung, et al, 2019;Lin, Law, et al, 2019), some of which considered environmental leadership (DiSegni, Huly, & Akron, 2015), its impact on innovation, and firm performance as possible moderating variables (Martinez-Conesa, Soto-Acosta, & Palacios-Manzano, 2017). Ekatah, Samy, Bampton, and Halabi (2011) sought to explore whether CSR is linked to profitability employing simple statistic methods and linear regression.…”

Sustainability Reporting as a Mixture of CSR and Sustainable Development. A Model for Micro-Enterprises within the Romanian Forestry Sector

“…In the following, we proceeded to analyze the recent specialized literature that had, like its topic, the study of CSR in correlation with different financial indicators used in this study in order to construct the econometric model. Thus, taking into account the variable fixed asset capitalization, various studies attempted to examine the relationship between CSR and CFP [15,78], with corporate political activity (CPA) serving as the moderator [16], or correlation between CSR and profit [79]. In the study undertaken by Dam and Scholtens [80], the variable liquidity rate was used to investigate "how ownership concentration in European multinational firms is associated with these firms' CSR".…”

“…In the study undertaken by Dam and Scholtens [80], the variable liquidity rate was used to investigate "how ownership concentration in European multinational firms is associated with these firms' CSR". The variable rate of sustainable growth has been used in numerous studies to investigate "the effect of CSR on information asymmetry between firms and creditors" [81] and to examine the relationship between CSR and CFP [16], as well as in the relationship between CSR and financial performance [81]. Profitability of using workforce is one of the variables often used in studies to "investigate the relationship between the budget related to CSR, innovation, and training, defined as sustainable factors, and the financial results of small and medium-sized enterprises (SMEs)" [19], to examine the correlation between CSR and financial performance, to examine the relationship between CFP and CSR, as well as the relationship between corporate social responsibility activities (CSRA) and human capital (HC) and the relationship between HC and CFP [82].…”

“…Profitability of using workforce is one of the variables often used in studies to "investigate the relationship between the budget related to CSR, innovation, and training, defined as sustainable factors, and the financial results of small and medium-sized enterprises (SMEs)" [19], to examine the correlation between CSR and financial performance, to examine the relationship between CFP and CSR, as well as the relationship between corporate social responsibility activities (CSRA) and human capital (HC) and the relationship between HC and CFP [82]. To examine the relationship between CSR and CFP, Lin et al [16] used the variable profitability rate. The variable insolvency risk was used by Yang, Bento, and Akbar [2019] to investigate whether CSR efforts enhance firm performance.…”

“…Our findings contributed to the following aspects. Firstly, we examined the connection between the corporate social responsibility (CSR) and concepts, such as corporate financial performance (CFP) [13][14][15][16], non-financial reporting [13,17], sustainable development, sustainability reporting, socially responsible firms [18], sustainability of SMEs [19], CSR disclosure [20], CSR mandatory [21], environmental reporting [22], social responsibility investment [23], corporate social performance [24], forest management [25]. Secondly, in this study, the two-stage least squares method (TSLS) technique [26] was used for developing an econometric model of estimating the risk/vulnerability of the sustainable development based on the general coefficient of vulnerability of the sector (GCVs), considering four areas of activity in the forestry sector.…”