Assessing the long-term financial performance of ethical companies

Abstract

With the increased importance of corporate social responsibility (CSR), its impact on a firm's financial performance has been investigated in the marketing/finance interface. Prior research has found that CSR is positively related to firm market value, but most efforts have been focused on examining the relationship between CSR and short-term financial performance. Motivated by this research gap, this study attempts to uncover CSR's long-term financial performance using archival data on composite CSR scores and individual CSR dimensions. The results show that CSR is negatively related to a firm's systematic and unsystematic risks, suggesting that once recognized as ethical company, a firm can reduce its risks. Of the eight CSR dimensions, ‘Community’ and ‘Employee Relationship’ can be seen to lower systematic risk, whereas ‘Product/Customer’ and ‘Employee Relationship’ are the main drivers that enhance a firm's idiosyncratic return.