The “simultaneous cycle” between corporate social responsibility and firms’ financial performance

Abstract

Despite scads of research on the relationship between corporate social responsibility (CSR) and firm financial performance (FFP), the literature is still inconclusive. Accordingly, we examine the dynamic relationship between CSR and FFP based on causality using accounting and financial measures (return on assets and Tobin’s Q, respectively) to present a holistic approach to the CSR–FFP linkage. The current study uses the environmental, social and governance index as a proxy for CSR, and the firms’ annual reports as a proxy for FFP. The data used have been published by Bloomberg for a ten-year period (2008–2017). We find CSR and FFP to be endogenously determined. First, we find that higher and more objective environmental disclosure improves the FFP using both measures. Second, we find that corporate environmental disclosure also improves the firm’s market value while reducing its market risk. Third, we find that FFP reduces its combined CSR disclosure, which confirms the dynamic trade-off relation between the two constructs. Our findings provide more understanding of the simultaneous cycle and the likelihood of restricting investments in CSR activities. In addition, our findings are also useful to the firms’ stakeholders and regulators. Overall, these results have important conceptual and methodological implications for future research, as well as policy and practice related to the wider role of business in society.