How Does Environmental Corporate Social Responsibility Affect Firms' Performance in a Dysfunctional Institutional Environment of Pakistan: the Role Legitimacy Complemented by Legal Ineffectiveness, and Environmental Performance Complemented by Its Non-Linearity.

Abstract

Despite the insights gained from this research stream, the role of CSR in firms attempting to gain legitimacy remains under-examined. Legitimacy refers to ‘‘a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate. Under conditions of information asymmetry, stakeholders’ evaluations of legitimacy often reflect the collected signals of a firm’s quality and intention. This legitimacy has even more important where the legal environment is dysfunctional, as it creates more uncertainty aggravating asymmetric information problems. Drawing on institutional and signaling theories, this study examines how environmental corporate social responsibility (ECSR) affects firm performance (FP) in a dysfunctional institutional environment by suggesting that ECSR indirectly influences firm performance through the mediating effects of legitimacy. Two types of external stakeholders (legitimacy) are evident in emerging economies that are political and business legitimacy. ECSR and Legitimacy relationship is complemented by a dysfunctional institutional environment that indicates the legal incompleteness and legal inefficiency. On the other hand, expenditure on improved Environmental Performance (EP) is typically viewed by firms as costs, however, a positive link between EP and FP would license companies to pursue the good—even by incurring additional costs, hence ECSR also affects FP indirectly through improved EP. Moreover, we posit a more complex relationship between EP and FP that could be curvilinear, specifically quadratic. This would mean that EP will moderate the link between EP and FP. We measure firm performance through returns (return on sales and profit margin) and growth (sales growth and profit growth). Hence, we combined two strands of literature by modifying Wei et. al. (2017) model to incorporate the EP and its non-linearity. Empirical validity was established by conducting a survey as well as relying on secondary sources. Data on firms’ performance was collected from 92 listed companies from 2015 to 2019, taking the average for that period. To measure other factors, collected from employees of these companies, using a close-ended questionnaire. Data was and analyzed using confirmatory factor analysis and structured equation modeling. The results suggested that ECSR seems to have a positive effect on EP, as well as business legitimacy, however, their further effect on FP was not substantiated. As expected, legal incompleteness also seems to positively affect political legitimacy, however, the effect of both moderators i.e. Legal Incompleteness, and Inefficiency on legitimacy remained insignificant. We also did not find any evidence of a Curvilinear Relationship Between EP and FP. Implications and limitations of the study are discussed.