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The causality direction of the corporate social responsibility – Corporate financial performance Nexus: Application of Panel Vector Autoregression approach

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  • Lin, Woon Leong
  • Law, Siong Hook
  • Ho, Jo Ann
  • Sambasivan, Murali

Abstract

This study is an attempt to model the bidirectional linkages between corporate social responsibility (CSR) and corporate financial performance (CFP) by using the prospective and retrospective approaches. A panel data set for 100 of the Fortune Most Admired Companies was used to study the relationships. Moreover, 1000 firm-year observations were examined between the sample periods of 2007 and 2016. A new methodology known as Panel Vector Autoregression (Panel VAR) approach using the Generalised Method of Moments (GMM) was used in this study. The salient findings are: (1) better financial performance of firms lead to a better CSR engagement and (2) better CSR need not necessarily lead to superior CFP. A strong and substantial negative impact has been observed on CSR and the three CFP measures, namely, return on equity, return on assets, and return on invested capital. This finding has consistency with the trade-off hypothesis. This hypothesis posits that when firms are ‘‘being socially responsible’’, they will have a tendency to experience minimised shareholder wealth and lower profits, which restricts the socially responsible investments.

Suggested Citation

  • Lin, Woon Leong & Law, Siong Hook & Ho, Jo Ann & Sambasivan, Murali, 2019. "The causality direction of the corporate social responsibility – Corporate financial performance Nexus: Application of Panel Vector Autoregression approach," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 401-418.
    • Handle: RePEc:eee:ecofin:v:48:y:2019:i:c:p:401-418
    DOI: 10.1016/j.najef.2019.03.004
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    More about this item

    Keywords

    Corporate Social Responsibility; Corporate Financial Performance; Panel Vector Autoregression; System GMM; Panel Granger Causality;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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