The Role of CSR in the Relationship Between Social Trust and Financial Performance

Abstract

Institutional theorists suggest country-level informal institutions influence the economic prosperity of countries and firms. In this study, we examine the relationship between country-level social trust and firm-level financial performance, emphasizing the role of corporate social responsibility (CSR) as a mediator. In a society with strong social trust, individuals and organizations are expected to cooperate and behave honestly. Accordingly, individual interactions are guided by the norms of trustworthiness and the willingness to trust others. This study proposes that a firm can satisfy the norm of social trust by committing to socially responsible activities, which, in return, positively influence a firm’s financial performance. Our analysis based on various data sources partially supports our theory. Although the mediation effect of CSR is found to be significant when a firm’s financial performance is measured by return on assets (ROA), it is not significant when return on equity (ROE) is used as a financial performance proxy.