How does corporate social responsibility influence firm financial performance?

• DOI: https://doi.org/10.1108/CG-10-2020-0467
• Published date: 30 November 2021
• Date: 30 November 2021
• Pages: 1-22
• Subject Matter: Strategy,Corporate governance
• Author: Sourour Ben Saad,Lotfi Belkacem

How does corporate social responsibility

influence firm financial performance?

Sourour Ben Saad and Lotfi Belkacem

Abstract

Purpose –This paper has three main purposes. First, this paper aims to study the effect of corporate

social responsibility (CSR) on firm financial performance. Second, this study aims to examine how

mandatory CSR disclosure impacts financial performance. Further, this paper aims to investigate the

intervening role of capital structure decisions on the relationship between CSR and financial

performance.

Design/methodology/approach –Based on a sample of French non-financial listed companies over

the period 2006–2017, this study uses structural equations modeling and a difference-in-differences

approachto highlight these effects.

Findings –This paper findsthat CSR has a significant positive associationwith financial performance. In

addition, although the mandate does not require firms to spend on CSR, the socially responsible firms

experience an increase in profitability subsequent to the mandate. Finally, this study argues and finds

evidence that the relationship between CSR and financial performance is mediated through the capital

structurechannel.

Originality/value –This paper contributes to the literature in several ways. First, the study provides a

new researchstream by examining the effect of mandatoryCSR disclosure on firm financial performance.

Second, is to knowledgethe first to examine whether and how CSR affects financial performance through

the capitalstructure channel.

Keywords Corporate social responsibility, Firm financial performance, Capital structure decisions,

Mandatory CSR disclosure

Paper type Research paper

1. Introduction

The environment, human and animal health, biodiversity, global security, sustainability in

finance and economics are environmental and social issues that civil society recognizes

and have global implications. The expectations of society are higher. A broader

corporate responsibility that encompasses the requirements of all stakeholders. This is

why each organization must not stop changing over time to be able to navigate the storm

of shocks and crises, and thus ensure its survival and its development. In this context, an

important factor related to sustainability and corporate social responsibility (CSR) such

as the ISO 26000 is considered as a main innovation in the emerging universal social

responsibility rule planning. The ISO 26000 “Guidelines on Social Responsibility” is the

first standard that establishes a set of principles taken into account for a company to be

socially responsible (Moratis and Cochius, 2017). By referring to this standard, CSR is

defined as “an organization’s responsibility for the impacts of its decisions and

activities on society and the environment, resulting in a transparent and ethical behavior”

(ISO 26000). The concept of transparent and ethical behavior was first introduced by

Bowen (1953) and defined as:

The obligation of businessmen to pursue those policies, to make those decisions or to follow

those lines of action which are desirable in terms of objectives and values of our society.

Sourour Ben Saad is based

at the Faculty of Economics

and Management Sciences

of Sousse, Laboratory

Research for Economy,

Management and

Quantitative Finance

(LaREMFiQ), University of

Sousse, Tunisia.

Lotfi Belkacem is based at

the Institute of High

Commercial Studies of

Sousse, Laboratory

Research for Economy,

Management and

Quantitative Finance

(LaREMFiQ), University of

Sousse, Tunisia.

Received 18 October 2020

Revised 14 February 2021

Accepted 3 March 2021

DOI 10.1108/CG-10-2020-0467 VOL. 22 NO. 1 2022, pp. 1-22, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 1

The increasing attention on CSR from the scientific community, policymakers and investors

has raised the question of its financial impact. The purpose of this paper is to examine the

effect of CSR on firm financial performance. Several studies have focused on this

relationship (U

´beda-Garcı

´aet al.,2021;Pham and Tran, 2020;Wei et al., 2020;Chijoke-

Mgbame et al., 2019). However, no consensus on the nature of this relationship has been

achieved, which motivates this presentstudy.

Theoretically, the relationship between CSR and firm financial performance can be

observed from two contradictory viewpoints. The first view is the positive interpretation

based on the stakeholder theory proposed by Freeman (1984). The second is the

pessimistic viewpoint. This is the shareholder value theory developed by Friedman (1970)

assuming that the maximization of shareholders’ value is the primary responsibility of

business entities toward society. This view stipulates that CSR affect negatively firms’

financial performance. The study of the relationship between CSR and financial

performance is interesting and complex given the existence of two completely opposing

views.

Our study makes several contributions to the literature. First, our study provides a new

research stream by examining the effect of mandatory CSR disclosure on firm financial

performance. Our analysis exploits France’s 2013 mandate requiring firms to disclose

CSR activities, using a difference-in-differences design. Thus, we compare the change in

financial performance surrounding the issuance of the mandatory CSR disclosure

regulation among two groups of firms: high CSR firms (treatment firms) and low CSR

firms (control firms). Second, our study extends previous literature by examining the

mediating role of capital structure in the relationship between CSR and financial

performance. The indirect relationship remains largely unexplored. We fill this gap by

examining whether and how CSR relates to financial performance. We particularly

identify and test the capital structure as a channel in this relationship. To the best of our

knowledge, this is the first paper to systematically test this indirect relationship in France,

which is a different institutional setting compared to the US. Third, our study provides

new empirical evidence on the French market in which new CSR practices are emerging.

This led to the creation of the Platform for Global Actions on CSR, in 2013 by the

government and whose role is to bring all stakeholders around the French strategy in

terms of CSR. The motivations behind the choice of this study’s context also include the

performance of French companies in terms of CSR. Indeed, France is a world leader in

CSR activities according to a study carried out jointly by Ecovadis and Intra-company

mediation in 2015 [1].

Using panel 1,044 firm-year observations from the French non-financial companies over the

period from 2006 to 2017 and after controlling for firm-level characteristics, we find a

positive relationship betweenCSR and firm financial performance. These results confirmthe

hypotheses of Integrativesocial contracts theory and Instrumental theory, whichare listed in

the stakeholder theory proposed by Freeman (1984). In fact, CSR influences business

reputation, thereby provoking a competitiveadvantage (Freeman, 1984), which leads to the

increase of the corporate financial performance. Furthermore, although the mandate does

not require firms to spend on CSR, we find that socially responsible firms experience a

considerable improvement in financial performance subsequent to the mandate. In

addition, we note that the effect of CSR on financial performance can be transmitted

through partial mediation of the capital structure decisions. In fact, social responsibility

decreases the leverage ratio of Frenchcompanies, which improves financial performance.

This paper is organized as follows. Section 2 presents a literature review and develops

research hypotheses. Meanwhile, Section 3 describes the data and empirical strategy. This

is followed by the results of the analysis and robustness tests in Section 4. Section 5

concludes the paper.

PAGE 2 jCORPORATE GOVERNANCE jVOL. 22 NO. 1 2022