Abstract
This study analyzes whether and how corporate social responsibility (CSR) affects the financial performance of the European banking industry. According to agency theory, CSR engagement should be negatively related to financial performance. By contrast, from the stakeholder perspective and according to the resource-based view, CSR should positively impact banks’ financial performance. Over a period of six years (2009-2015) following the explosion of the sub-prime crisis, the econometric estimates of the current study confirm a positive effect of CSR engagement on banks’ financial performance. Net interest income and profitability increase with the increase in social performance. At the same time, CSR is negatively related to non-performing loans. Therefore, in contrast to the trade-off model, our results support a win-win vision of the relationship between the social and financial performance of banks.
Highlights
The bursting of the real estate bubble in 2008, coupled with the spread of toxic assets linked to sub-prime mortgages, has increased interest in the modes by which banks manage their affairs
The current study aims to enrich the debate on the relationship between corporate social performance (CSP) and corporate financial performance (CFP) by filling several gaps left by previous research
Low corporate social responsibility (CSR)-banks are collocated in areas with a lower degree of restriction on securities activities lower GDP per capita
Summary
The bursting of the real estate bubble in 2008, coupled with the spread of toxic assets linked to sub-prime mortgages, has increased interest in the modes by which banks manage their affairs. The growth of non-performing loans (NPL) contributed to that crisis, resulting in reduced confidence in banks and financial institutions in general (Brunswick, 2016). This phenomenon renewed interest in the management of reputational risk as a topical issue for the banking industry (De Castro, López & Sáez , 2006; Dell’Atti & Trotta, 2016). For a long time, the banking sector was excluded from the broad debate in the field of CSR (Forcadell & Aracil, 2017; Wu, Shen & Chen, 2017) This has been generated by the collective perception that financial organizations, by the nature of their business, cannot be compared to the sectors that are considered most controversial (Kiliç, Kuzey & Uyar, 2015). Over the years, many financial institutions (92 from 37 countries at April 2018) have decided to adopt the Equator Principles that were formally launched in 2003 for determining, assessing and managing environmental and social risk in project finance
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