CSR and Financial Performance: Trick Or Treat? A Longitudinal Study on Holistic CSR Practices

Abstract

This paper aims to test the impact that a firm’s adopted CSR level has on its financial performance, in terms of accounting, financial and market-based measures. In particular, we employ a panel OLS analysis to test the effect of firm’s sustainable efforts (measured by the “Sustainable score”, a tailor-made variable) on three performance measures: return on assets (ROA), return on equity (ROE) and Tobin’s Q.This work provides for methodological differences that led to divergent research results over existing literature in the field, examining the relationship of interest within three timeframes that exploit underlying dynamics over both long- and short-term horizons. Furthermore, we contributed to current knowledge focusing on the effect of holistic CSR practices on financial performance and examining the impact of the 2007 financial crisis on the relationship. To that end, we have employed a customized measure to represent effective CSR practices that go beyond CSR-washing cases and studies of CSR through single-dimension variables, while quantitatively exploring the relationship of interest within three separate time periods that span both before and after the financial meltdown of 2007.Results highlight a positive relationship between the operating and financial performance of companies and their sustainability commitment. What is more, findings indicate that CSR individual actions do not produce any significant impact on firms’ performance, unless applied jointly through a holistic sustainability strategy. Finally, the relationship between the sustainability level of a firm and its financial performance presents various significance levels and temporal profiles, with the years to follow the financial downturn of 2007 presenting the strongest results as opposed to the absence of important influence during the pre-crisis period.

CSR and Corporate Financial Performance: An Inter-Sectorial Analysis

“…Finally, as underlined by Salvi et al (2018), more sustainable firms reduce information asymmetries, giving investors the chance of more informed investment decisions, especially in the light of the growing attention CSR is gaining worldwide. Moreover, more sustainable firms, characterized by a superior non-financial disclosure, help investors better understand a firm's ESG strengths and weaknesses (Fatemi et al, 2017), further reducing information asymmetries.…”

“…A set of control variables has been introduced in the econometric analysis following prevailing literature in the field (Hart & Ahuja, 1996;King & Lenox, 2001;Chollet & Sandwidi, 2018;Salvi et al, 2018). Control variables employed are classified into two categories: (1) firm characteristics (firm size, EBITDA margin and financial leverage) and (2) country characteristics (regulatory quality, rule of law index and control of corruption).…”

“…The reasons appear to go further than mere ethical considerations. As a matter of fact, the most forward-looking companies have seized the opportunities offered by the implementation of corporate sustainable strategies and are those that have best managed the negative impacts during recession phases (Ellis & Bastin, 2011;Salvi et al, 2018).…”