Corporate Social Responsibility and Corporate Financial Performance

Abstract

This thesis investigates the relationship between corporate social responsibility (CSR) and corporate financial performance (CFP). CSR is measured by an aggregated KLD score from 1998 to 2008. This thesis uses the market based assets and shareholder value framework to build a case for CSR. CFP is measured with both accounting based and market based financial measurements. The Fama-French three factor model is used to derive the numbers for abnormal return, idiosyncratic risk and systematic risk. In order to assess the relationship between CSR and CFP, a hierarchical multiple regression with a one year lag on the independent variable is used. The results show a U-shaped relationship between CSR and the accounting based financial measurements. Only Tobin’s Q shows an inverse U-shaped relationship. However, both results indicate that there is a threshold. The presence of CSR concurs with previous studies that it lowers idiosyncratic risk. However, it has no effect on systematic risk. In addition, higher association with CSR also yields lower abnormal return. The relationship between abnormal return and CSR may help explain the inverse U-shaped relationship between CSR and Tobin’s Q. At the peak of the inverse U, firms still enjoy many benefits from CSR and are less affected by lower return.