THE IMPACT OF CSR ON FINANCIAL PERFORMANCE: CONTROVERSIAL EMPIRICAL EVIDENCE AND REASONS BEHIND IT

Abstract

Business case for corporate social responsibility (CSR) is becoming increasingly relevant today because it allows companies to align interests of different groups of stakeholders through creating a shared value. To integrate CSR in a company’s business model effectively, it is important to understand the relationship between CSR and financial performance. However, a large number of studies on the impact of CSR on a company’s bottom line have yielded controversial results. The goal of this article is to provide an overview of discrepancies in the results of empirical studies on the relationship between CSR and financial performance reported in the literature and summarize the reasons and methodological issues underlying the lack of consensus regarding this relationship. We show that most authors observed a positive impact of CSR on financial performance, however some authors reported a negative, U-shaped, inverted U-shaped, and S-shaped relationships, as well as the absence of any impact of CSR on financial performance. The discrepancy in the results can be related to a multidimensional and heterogeneous nature of CSR, and hence, to the lack of uniformity in measuring it. Similarly, financial performance can also be measured through a variety of indicators, both accounting- and market-based. The differences in the measurement methodology make the results of different studies less comparable. The relationship between CSR and financial performance can also depend on the approach to CSR used by companies. If CSR serves as an instrument for wealth creation, its impact on financial performance should be positive by definition. If CSR is based on purely ethical considerations, it may be merely a cost-center with no economic benefits. The relationship between CSR and financial performance can be weakened or strengthened by a large number of external and internal situational factors, such as the institutional environment, industry dynamism, company size, form of ownership and many others that can have a moderating effect on the relationship. The causality within this relationship can be bidirectional and result in a virtuous cycle, but it can also be reversed and asymmetrical. The ambiguity of the results reported in the literature can be connected with a delayed effect of CSR on financial performance, when it takes some time for investments in CSR to pay off in terms of financial benefits.