Financial performance of listed commercial banks in Sri Lanka: does corporate social responsibility matter?

Abstract

This paper examines the impact of Corporate Social Responsibility (CSR) on the financial performance of the listed commercial banking sector in Sri Lanka. CSR is measured using content analysis based on an index. The financial performance of the banking firms is measured by accounting-based performance indicators (ROA, ROE, and PAT) and market-based performance indicators (P/E, EPS, and MTB). Bank size and Leverage were the control variables for the study. Annual reports have been used to collect secondary data of the listed commercial banks for 10 years from 2010-2020. Fixed effect panel regression was employed for the data analysis and to test the study hypotheses. The study findings reveal that CSR partly has a significant positive influence on the banks’ financial performance. Accordingly, CSR of listed commercial banks in Sri Lanka positively impacted the market-based financial performance. Consequently, investments in CSR lead to increase market-related-performance indicators of listed commercial banks compared to accounting performances measures. Moreover, study results conclude that CSR does not have an impact on the accounting-based performance measures, and therefore, CSR disclosures are not reflected through accounting-based performance in Sri Lankan commercial banks. However, the relationship between control variables and firm performance is uncertain. Consequently, there is no difference between larger banks or smaller banks based on their financial performances. Further, the study concludes that the leverage of the listed commercial banks is not highly critical in achieving financial performance during the last ten-year period. In sum, the operating profitability of commercial banks is not guaranteed through CSR involvement as well as the banks do not engage in CSR only for the reason that they are profitable. However, wellcoordinated investments in CSR and its disclosure could affect banks’ share prices, investors’ funds, and stakeholder loyalty. Moreover, spending on CSR as a non-profit making activity could assist the banks to enhance future intangible profits, to face the competition in the market while addressing the social responsibility requirements of the banking firms.