CSR and financial performance positively linked

Tsoutsoura discusses many studies that try to determine if and how social and financial performances are connected, outlining their methodology and their respective complications. “According to Margolis and Walsh (2001)^[1], 122 published studies between 1971 and 2001 empirically examined the relationship between corporate social responsibility and financial performance.” Tsoutsoura describes two types: those that use event study methodology to assess the short-run financial impact of CSR and those that look at effects in long term financial performance, by using accounting or financial measures of profitability. Both types of studies find mixed results, reporting positive, negative or no relationship between CSR and financial performance.

“There remains a protracted debate about the legitimacy and value of corporate responses to CSR concerns. There are different views of the role of the firm in society and disagreement as to whether wealth maximization should be the sole goal of a corporation”, Tsoutsoura writes in her 2004 paper. Using a dataset that includes most of the S&P 500 firms and covers the years 1996-2000, Tsoutsoura explores and tests the sign of the relationship between corporate social responsibility and financial performance. “The sign may imply negative, neutral or positive linkages.” Tsoutsoura concludes, “Results indicate that the sign of the relationship is positive, which supports those studies that found positive linkages in the past (Waddock and Graves, 1997^[2]; McGuire, et al., 1988,1990^[3]; Aupperle, et al., 1985^[4]). Different explanations for this result depend on the direction of the causality between CSR and profitability.”

References

1. Margolis, Joshua D., and James P. Walsh. “Misery Loves Companies: Rethinking Social Initiatives by Business.” Administrative Science Quarterly 48, no. 2 (2003): 268–305.
2. Waddock, Sandra A., and Samuel B. Graves. “The Corporate Social Performance-financial Performance Link.” Strategic Management Journal 18, no. 4 (April 1997): 303–319.
3. McGuire, Jean B., Alison Sundgren, and Thomas Schneeweis. “Corporate Social Responsibility and Firm Financial Performance.” The Academy of Management Journal 31, no. 4 (December 1, 1988): 854–872.
4. Aupperle, Kenneth E., Archie B. Carroll, and John D. Hatfield. “An Empirical Examination of the Relationship Between Corporate Social Responsibility and Profitability.” The Academy of Management Journal 28, no. 2 (June 1, 1985): 446–463.

This article may be reproduced according to our terms of use with attribution (and link, if online) to www.tias.edu. To be cited as: “CSR and financial performance positively linked”, Margarita Tsoutsoura, www.tias.edu, July 11, 2012.

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