Relationship between corporate social performance and firm financial performance

Relationship among merged cordial process and firm pecuniary performanceThere have been many theoretical and empirical debates about the congressship amid corporate accessible performance and firm financial performance.The debate on the affinity between CSP and CFP involves two important issues direction and causality of the birth (Preston OBannon, 1997).Based upon the literature review, the relationship between CSP and CFP could be positive, neutral, and banish.Preston and OBannon (1997) have distinguished between the direction of the CSP-FP relationship (positive, negative or neutral) and the causal sequence does CSP inuence FP, does FP inuence CSP, or is there a synergistic relationship between the two? They have developed sise possible causal and directional hypotheses social opposition theory, deliberate picks hypothesis, trade-off hypothesis, managerial opportunism hypothesis, positive synergy hypothesis and negative synergy hypothesis.The social impact hypoth esis is based on the stakeholder theory which suggests that meeting the needs of various corporate stakeholders will organise to favourable FP (Freeman, 1984). According to this hypothesis, serving the unspoken claims of stakeholders enhances a companys reputation in a way that has a positive impact on its FP. Conversely, disappointing these groups of stakeholders may have a negative nancial impact (Preston and OBannon, 1997).The results also supported uncorrupted management theory that states that frank management practice resulting from engagement in social domains enhances the relationship with stakeholders causing better financial performance (Freeman, 1984).Preston and OBannon (1997) was one of the surveys that used the Fortune reputation index. In particular, this survey assessed CSP according to three variables (1) rating of community and environmental responsibility, (2) ability to select and bear on good people, and (3) quality of products and services. They found tha t a positive relationship existed between these variables and ROA.Preston, L. E. and D. P. OBannon (1997). The corporate social-financialperformance relationship a typology and analysis, Business and Society ,vol.36,no.4 419-429.The slack resource hypothesis predicts that better FP potentially results in the availability of slack resources that may increase a rms ability to invest in socially responsible domains such(prenominal) as community and society, employee relations or environment (Waddock and sculpt, 1997).One of the essential aspects of CSR and financial performance is the direction of causality. Waddock and Graves (1997) studied the empirical linkage between financial and social performance and found out that CSR was positively associated with prior financial performance. The results were in line with the slack resource theory that supports that the existence of slack resources resulting from better financial performance made companies invest in areas that are cogitate to social domains. The results also supported good management theory that states that good management practice resulting from engagement in social domains enhances the relationship with stakeholders causing better financial performance (Freeman, 1984).Waddock and Graves (1997) reported that CSP was positively associated with prior and early CFP. They concluded that these findings indicated that not only does CSP follow CFP but also CSP drives CFP. It is notable that they measured CSP by a constructed index based on five factors related to the stakeholder and three factors with responsiveness to significant external pressure. This index is provided by a rating firm-Kinder, Lydenberg, Domini Co., Inc (KLD).Waddock, S.A. and S.B. Graves (1997). The corporate social performance-financialperformance link, Strategic Management Journal, vol.18, no.4. 303-319.Waddock Graves (1997) and Dean (1998) put forward two theories to answer the question slack resource theory and good management theo ry. Under the slack resource theory, a company should focus on its financial position, allowing it to contribute to the CSP. Conducting good social performance requires funds that might result from the success of fi-nancial performance. According to this theory, financial performance comes first. A good management theory holds that social performance comes first. Based on this theory, a company perceived by its stakeholders as having a good reputation will result in a stronger financial position (through merchandise mechanism).The trade-off hypothesis supposes a negative impact of CSP on FP. This hypothesis deals with the neo classical economists position which holds that socially responsible behavior will net few economic benets while its numerous costs will shrivel prots and shareholder wealth (Waddock and Graves,1997).This hypothesis reects the classic Friedman position and is supported by the well-know nearly nding of Vance (1975) that corporations displaying strong social cre dentials experience declining telephone circuit prices relative to the market average(Preston and OBannon, 1997,p.421).Studies using measures of take back based on the channel market also indicate diverse results. Vance (1975) refutes previous research by Moskowitz by extending the time period for analysis from 6 months to 3 years, thereby producing results which contradict Moskowitz and which indicate a negative CSP/CFP relationship. However, Alexander and Buchholz (1978) improved on Vances analysis by evaluating stock market performance of an identical group of stocks on a risk adjusted basis, yielding an inconclusive result.Alexander, G. J., and Rogene A. Buchholz (1978) Corporate social responsibility and stock market performance. Academy of Management Journal, 21 (3) 479-486.Vance, S. C.(1975) Are socially responsible corporations good investment risks?Management Review, 64 18-24.According to the managerial opportunism hypothesis, corporate managers may pursue their own priv ate objectives to the detriment of both shareholders and other stakeholders ( Weidenbaum and Sheldon, 1987Williamson, 1967, 1985).In fact, when FP is strong, managers may reduce social expenditures in order to maximize their own short private gains. Conversely, when FP weakens, managers may engage in conspicuous social programs in order to offset their disappointing results (Preston and OBannon, 1997).The positive synergy hypothesis supposes that higher(prenominal) levels of CSP lead to an improvement of FP, which offers the possibility of reinvestment in socially responsible actions (Allouche and Laroche, 2005a). Indeed, favourable CSP leads to a surplus of available funds (social impact hypothesis) which is reallocated, in part, to the different stakeholders (slack resources hypothesis). There may then be a simultaneous and interactive positive relation between CSP and FP, forming a virtuous circle (Waddock and Graves, 1997).However, according to the negative synergy hypothesis, higher levels of CSP lead to decreased FP, which in turn limits the socially responsible investments. There may then be a simultaneous and interactive negative relation between CSP and FP, forming a vicious circle.While empirical results concerning the nature of the relationship between CSP and FP continue to be mixed, the largest number of investigations found a positive relationship. This object towards the positivism of the CSP-FP link is supported by subsequent Meta analysis (Allouche and Laroche, 2005b Orlitzky et al., 2003 Wu, 2006).Another study was conducted by Orlitzky HYPERLINK http//www.emeraldinsight.com/journals.htm?issn=1741-0401volume=59issue=3articleid=1846089show= hypertext mark-up languageidb45et al.HYPERLINK http//www.emeraldinsight.com/journals.htm?issn=1741-0401volume=59issue=3articleid=1846089show=htmlidb45 (2003) who found a strong correlation between corporate financial performance and corporate social/environmental performance. This relationship is more st rongly pronounced for theaccounting based measures of performance than the market-based measures of performance (Orlitzky HYPERLINK http//www.emeraldinsight.com/journals.htm?issn=1741-0401volume=59issue=3articleid=1846089show=htmlidb45et al.HYPERLINK http//www.emeraldinsight.com/journals.htm?issn=1741-0401volume=59issue=3articleid=1846089show=htmlidb45, 2003).Another vein of research focused on the causal relationship between CSP and FP. For instance, using traditional statistical techniques, Waddock and Graves (1997) and Hillman and Keim (2001) nd a positive synergistic relationship between CSP and FP showing the existence of a virtuous circle between the two constructs .McGuire et al.(1988) nd that lagged FP measures lead to improved genuine CSP measures, but the latter does not affect FP. In a more recent study, Nelling and Webb (2006) examine the causal relationship between CSP and FP by introducing a new-fashioned econometric technique, the Granger causality approach. Their n dings suggest that, using ordinary least square (OLS) regression models, CSP and FP are related. In disagreement with prior empirical research, they nd a lower relationship between CSP and FP when employing a time series xed effects approach. The same result is found when introducing Granger causality models. Furthermore, by counsel on individual measures of CSP, they nd causality running from stock market performance to CSP ratings regarding employees relationships.In addition to those large-scale American empirical studies, Mahoney and Roberts (2007) have examined the relationship between CSP and FP in the Canadian context. This study has examined the relationship between these constructs using the CSID measure of CSP.1Contrary to Waddock and Graves (1997), Mahoney and Roberts (2007) found no signicant relationship between a composite measure of a rms CSP and FP. However, using a one-year lag, their ndings indicate as ignicant positive relationship between individual measures of a rms CSP regarding environmental and international activities and FP. This study has examined only one direction of causality from CSP to FP.The latest study of corporate social and financial performance was done by Mahoneyand Roberts (2007). They performed empirical analyses on a large-sample of publicly heldCanadian companies. Based on tests utilizing four years of panel data they found nosignificant relationship between a composite measure of companies social and financialperformance. However, they found significant relationships between individual measures ofcompanies social performance regarding environmental and international activities andfinancial performance.Mahoney, L., Roberts, R.W., 2007. Corporate social performance, and financialperformance and institutional ownership in Canadian firms. Accounting Forum 31, 233-253.Rim Makni, Claude Francoeur Franois Bellavance (2009). Causality Between Corporate kind Performance and Financial Performance Evidence From Canadian Firm s. Journal of Business Ethics 89 (3).This study assesses the causal relationship between corporate social performance (CSP) and financial performance (FP). We perform our empirical analyses on a sample of 179 publicly held Canadian firms and use the measures of CSP provided by Canadian Social investment funds Database for the years 2004 and 2005. Using the Granger causality approach, we find no significant relationship between a composite measure of a firms CSP and FP, except for market returns. However, using individual measures of CSP, we find a robust significant negative impact of the environmental dimension of CSP and three measures of FP, namely return on assets, return on equity, and market returns. This latter finding is consistent, at least in the short run, with the trade-off hypothesis and, in part, with the negative synergy hypothesis which states that socially responsible firms experience lower profits and reduced shareholder wealth, which in turn limits the socially re sponsible investments