The moderating role of Shariah compliance on the relationship between firm profitability and CSR activities

Abstract

PurposeThere is a debate between sound Shariah-compliant firms engaging in social good as a moral obligation and behaving ethically in terms of increasing corporate social responsibility (CSR) activities and those firms that are not Shariah-compliant. The purpose of the present study is to contribute to this debate by empirically investigating the effect of the profitability of firms on CSR activities and shareholders’ dividends and the interaction effect of a firm’s Shariah compliance with religious and ethical principles.Design/methodology/approachThe data used in this study were collected from the annual financial reports of 74 Pakistani listed companies over 2012-2016 (N = 370). An epistemological model of the unity of knowledge was applied to determine the contribution of Shariah-compliant enterprises to community well-being. Furthermore, the Tawhidi string relation methodology was used to establish the circular causal model. To check the robustness of our findings, we also analysed the data using fixed and random effects regression models to test the effect of firm profitability on CSR activities and dividends, whereas moderation regression analysis was applied to test the moderating effect of Shariah-compliant firms.FindingsThe results show that the profitability of firms has a significant impact on shareholders’ dividends in both Shariah and non-Shariah firms. Furthermore, the relationship between firm profitability and CSR is stronger for non-Shariah-compliant firms than Shariah-compliant firms. This indicates that Shariah firms are less involved in doing CSR activities than non-Shariah firms. This implies that Shariah status does not play an important role in ensuring managers’ ethical behaviour.Practical implicationsThe results suggest that the Security and Exchange Commission of Pakistan should attach more importance to Shariah compliance by firms in developing their CSR policies to improve social development and human well-being. These findings have important implications for many Islamic countries irrespective of whether they are developed or developing.Originality/valueThe present study provides a new addition to the prior literature by investigating the relationship between profits and CSR activities and the interaction effect of Shariah-compliant firms. From an Islamic ethical perspective, this study can also contribute to the growing discussion on Shariah compliance and CSR activities.