CSR and Firms Financial Performance


Corporate Social Responsibility (CSR) is the most talked about topic in the present scenario. In day to day life one often comes across this term. As time passes by people are getting more concerned about CSR. Before understanding the importance of CSR, one should know the true meaning of corporate.

The term corporate was well defined by Melvin Aron Eisenberg in the following fashion "the business corporation is an instrument through which capital is assembled for the activities of producing and distributing goods and services and making investment. The business corporation should have as its objective the conduct of such activities with a view to enhancing the corporations profit and the gain of the corporation's owners, that is, the shareholders. " (Monks & Minow, 2008, p. 8).

The term CSR comprises of three distinct words "corporate", "social" and "responsibility". All these terms are self explanatory. Thus, CSR covers the responsibility which a corporation (or any other profit making organisation) has towards society within which they operate (A Guide to Corporate Social Responsibility, n.d., p. 2).

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The management literature has defined social responsibility as an important duty of the corporation for its society (Quinn, Mintzberg, & James, 1987). This society comprises of the stakeholders towards whom the organisation has responsibility. For an organisation the dimension of the society in which it is operating differs from industry to industry.

Different researchers have proposed different definition for CSR; few of them are given below:

Archie B. Carroll, (1979) suggested that "social responsibility of a business comprises of economic, legal, ethical, and discretionary expectations which society has from the organisation at given pint of time." (Carroll, 1979, p. 500).

The Institute of Directors, UK (2002) argued that "real essence of CSR for any business or other profit making organisation refers to going beyond legal obligation. This is done to manage the impact which they have on society and on environment. CSR includes that how they interact with their employees, suppliers, customers and the whole community in which they exist and operate." (Lea, 2002, p. 10).

Over past 15 to 20 years many researchers are working on Corporate Responsibility which is also known as Corporate Social Responsibility, Corporate Sustainability or even Sustainable Business. It has been noticed that as the time passes by, more and more companies are reporting their corporate responsibility performance in their annual reporting statement or on their web site. The main aim of introducing non-financial information in the annual report is to communicate the company's non-financial performance to the society and to the stakeholders including institutional investor and shareholder groups. Different theorists have put forward different arguments regarding CSR (Arnold, 2008, p. 4).

There are many opportunities related to CSR. The companies that followed CSR made enormous benefits apart from the usual monitory gain. These benefits include better stability in risk management, good reputation and understanding with customers as well as employees, and better reputation in society. A company that gives importance to their corporate responsibility can attain sustainable competitive advantage and soon identify changes that results in lead position in the society. CSR and ethics both moves hand in hand. To understand the involvement between CSR and ethics, one has to identify five major elements which are

"Corporate Social Responsibility" which takes care regarding how to strengthen the business by use of CSR, how much of CSR is enough and should business utilise CSR to reach its business objective.

"Business and Marketing Ethics from a Normative Prospective" helps to identify that what is the right thing to do and how to make ethical business decision.

"Ethical Consumerism" deals with how do the consumers track CSR behaviour of a company and how do they react to ethical consumerism.

"Ethics of Defaults" tell that up to which limit consumers are vulnerable to marketing exploitation.

"The Opening of Firms' Boundaries" covers the fact that how the company should manage this challenge along with managing their internal and external challenges (Smith, n.d., p. 2).

Different researchers consider CSR in different ways and to prove their fact they have given many evidences. One group of researchers have a view that by undertaking corporate social responsibility, the companies incurs cost that put them in economical disadvantage (Ullmann , 1985, p. 540-577). A second group says that cost of social responsibility is almost negligible and by adopting CSR a firm will be benefited in term of moral employees and higher productivity (Soloman & Hansen, 1985). The third group's view differs a little from the second one. They argued that cost incurred by a company on CSR is significant but by undertaking its implication on business, the cost can be offset with some other cost of business (Cornell & Shapiro, 1987. p. 5-14.).

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Concept of CSR differs from one country to another depending on culture and socio-economical environment. Alexander and Bucholtz (1978) suggested that the stakeholders and stockholders consider CSR as an indicator to analyse management skills. It can hence be concluded that by making investment in CSR, firms actually invest in building their reputation in society as being responsible.

In recent years the shareholder, customers, suppliers, governments, community groups and share holders have encouraged firms to undertake more investment pertaining to corporate social responsibility. Different companies have responded in different ways to this. Some welcomed this and invested more resources whereas some reacted negatively and gave the argument that more expenditure will result in reduced profit. This has lead to a controversy: whether CSR has any impact on financial performance of a company or not.

CSR is a global business strategy of most of the successful business houses. This represents their social commitment towards society irrespective of the location of their business. Such incorporation of CSR in the corporate strategy has resulted into a major change in society. These changes are:

Change in method of production with an aim to reduce environmental change.

Change in labour-management relationship.

Changes are also visible outside the firm as development in infrastructure in local community or development in philanthropic community.

But even so the fact is still remains controversial whether firms that have any social responsibility beyond making wealth function (Friedman, 1962).

With the passage of time, pressure is increasing on the firms to expand their CSR activities (Logsdon & Wood, 2002, p. 155-188). As firms are operative in different nations that follow different laws and orders and have different social structure, hence, the degree and nature of pressure for CSR differ from nation to nation (Matten, D., & Crane, A, 2005, p. 166-180).

CSR and social changes

It is witnessed that social changes and CSR are inter-related. Many a times it has been found that society shows reactive changes in responding to CSR whereas at other times society has shown proactive changes (Hart, S., & Milstein, M, 2003, p. 56-69). Taking the importance of CSR into consideration, more than half of Fortune Global 500 Multinational Companies (MNC) separately releases their annual CSR report (Williams, 2004, p. 457-502). Chiquita Company is one such example which is seriously engaged in CSR for bringing positive social changes. They have introduced living wage standards for all their employees in different nations where they are operating. Chiquita Company has also introduced state of art environment practices in their supply chain (Taylor & Scharlin, 2004.). Such a move by Chiquita was replicated by many other companies starting from pharmaceutical to automobile and to other industries (Global Compact. 2005).

CSR has a fluid concept and is an integrated element of the firm's strategy. The success of the firm's CSR reflects by how well the firm incorporates the stakeholders' concerns during implementation of its business model. CSR goes on changing with time. At present, Ethics and corporate governance are the topics that are attracting researchers and students as important component of CSR. Archie Carroll University of Georgia was the first one that made distinction between different kind of organisational responsibilities and proposed a pyramid of CSR:

Discretionary responsibility

Ethical responsibility

Legal responsibility

Economical responsibility

This model represents that the primary responsibility of a firm is to earn profit for its shareholders who are the owners of the firm. Secondly, the firm is to operate within the legal framework of a nation and hence, their actions should not violate the legal framework. Thirdly, as the stakeholders have interest in the working of a firm; the firm should take into consideration its stakeholders' interest and also the environment in which it operates. The final and the last stage is discretionary responsibility which is more proactive in nature and have an aim to benefit the stakeholders and the society (Werther & Chandler, 2005, p. 9).

Literature Review

There are few theories related to CSR which can be distinguished as Instrumental (descriptive) Theory and Normative (prescriptive) Theory (Donaldson and Preston, 1995, p. 65-91). These two theories are very much different from each other. Instrumental CSR theory explains CSR phenomena by using empirical data. This theory helps us to understand the different CSR policies of different companies and the correlation between CSR and other social economical performances which are motivational factors for the organisation. Normative CSR theory is more theoretical in nature. It provides basic principals for CSR and also explains that why firms should undertake CSR and why they should have certain social responsibilities. Other than these two theories there are many other theories but all of them are not acceptable. Instrumental theory is considered valid as it has been proved through a number of tests whereas the normative theory got accepted due to its rationality and internal consistency (Melé, 2006, p. 1). But even so there exists some difficulties in understanding and organising the varity of approach in CSR (Garriga and Melé, 2004, p. 51-71).

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There are some main stream normative theories of CSR which are as follow:

Corporate social performance theory

This theory has developed from several previous approaches and its root being found in Howard R. Bowen of 1953. He referred to a businessman's responsibility to follow those policies, practices or actions that leads to social welfare (Bowen, 1953, p. 6).

In the 1970's new direction emerged between social relationship and business. A protest developed against capitalism. The growing concern for social welfare resulted into increased government regulation and formalisation of procedures. It referred to development of social responsibility in a proactive manner. The concept provided by Carroll was taken further by Wartick and Cochran (1985). They suggested that corporate social involvement directly depend on principles of social responsibilities and policy related to issue management (Wartick & Cochran, 1985, p. 758-769).

Wood brought a new development by introducing a basic model of CSP. This model comprised:

Principle of CSR consisting of three levels: institutional, organisational and individual.

Principal of corporate social responsiveness

Outcome of corporate behaviour (Melé, 2006, p. 3).

This theory explained that in the long run those who do not use power in the way which society demand, they will lose their power. The theory also explained that business should stick to a standard of performance that is prescribed by law and public policies. It also proclaims that managers are moral actors hence it should be their obligation to exercise social responsibility. In modern day, many groups have interest in CSR of a company. These groups are stakeholders, non-government organisations, activities, media, community and government along with other institutional forces. They all question the company regarding their CSR policies and process. To handle this pressure many companies are publishing their annual CSR reports that disclose their performances related to economy, society and environment (Elkington, 1998).

In 2006, the latest edition of Global Initiative Report (GIR) was introduced. This became highly popular while making certification and reports. This made the CSR process more complex but the conceptual foundation remained unaltered. This theory has two major limitations; the first one is the separation between businesses and society. Business is related to economy whereas, social responsibility is considered a constrain. The second limitation of this theory is that the CSP model is not ethical instead, it has more social expectation.

Fiduciary Capitalism Theory

This theory leads to the shareholder's value oriented management theory. This theory explains that the sole motto of business is to earn profit for their shareholders and to increase the company's economic value. The organisation should take up only those social goals that will result in the maximisation of the shareholders' wealth. This theory is based on the traditional neoclassical economic theory that regarded maximisation of shareholders wealth as the primary concern. Milton Friedman was the representative of this model. He said that the only responsibility of any business is to maximize shareholders' profit. He claimed that social responsibility is purely a socialism concept. This theory represented that managers are just a representative of the shareholders whose only obligation is to maximise the shareholders' capital (Friedman, M, 1970, p. 32-33, 122, 126).

'Shareholder value-oriented' concept was popular in many business schools during the last decades. As per this concept, the owner was considered as the principal and the managers were considered agents. The managers perform their duty towards the principal and in response to that they receive massive incentives (Jensen & Meckling, 1976, p. 305-360).

In the present scenario it has been accepted that shareholders are often benefited when companies perform their responsibility towards the society through CSR. Jensen (2000) gave "enlightened value maximisation" which specified the long term value maximisation of the firm. This allowed a trade-off between social responsibility and profit maximisation of shareholders (Jensen, 2000, P. 235-256).

Burke and Logsdon (1996), suggested "Strategic Corporate Social Responsibility" (SCSR) that proposed those policies and programs that resulted into sustainable business and supported core business activities and completion of its business mission. Later on an ideal level of CSR was derived utilizing cost-benefit analysis and other factors those are vital for both the firm and the society (McWilliams& Siegel, 200, p. 117-127).

It has been found that the fiduciary capitalism theory has its roots in the seventh century. John Locke, a British philosopher had written a lot on this matter and introduced three main rights, which are:

The right to live

The right to private property

The right to freedom

This theory considers a corporation as an artificial person who has been created through law, so this person has certain duties and right. In the neoclassical literature, a firm was considered "a nexus of contracts" (Melé, 2006, p. 6). The contact indicates relation between principal and agent (Jensen & Meckling, 1976, p. 305-360).

It can be concluded that this theory is a reflector of the society and presents the contracts between buyers and sellers. This made it clear that business is a private activity that is bounded by government's regulations. It has solely one responsibility and that is earning profit for its stakeholders.

Stakeholder Theory

This theory is based on the assumption that the firm has an obligation to take into consideration a group in society other than its stockholders who are beyond any kind of legal or union contracts (Jones, 1980, p. 59-60).

This theory is regarding stakeholders who have a stake or any kind of claim in the company. This includes both kinds of stakeholders, those who are internal and those who are external to the company such as stockholders, employee, suppliers, customers, community and government of the nation in which the organisation is active. This theory was first proposed as managerial theory. Freeman (1984) gave a new thought regarding strategic management. He argued that a management executive can bring changes in the corporation and advance it towards attaining success. Freeman also argued that the management has moral obligation to protect the organisation and its stakeholders' interest. The role of the top management is to establish balance between the conflicting stakeholders (Freeman, 1997, p. 151).

The term "stakeholders" can be taken both in the narrow sense where it includes only those groups that are considered vital for the existence and success of the firm whereas in the broad sense stakeholders indicate all those groups that get affected by the firm's existence (Freeman and Reed, 1983). This theory proposed that the management should create value for the stakeholders through conversion of their stake into either goods or into services and should develop coordination among all stakeholders (Clarkson, 1995, p. 105-108).

The theory also states that decision making structure of the corporation should be governed by the top management but government should intervene for safe guarding stakeholders' interest in the best possible manner. As discussed by Evan and Freeman (1988), the stakeholder theory comprises of two ethical principles which are "Principle of Corporate Effects" and "Principle of Corporate Right" (Beauchamp, & Bowie, p. 75-93). Both of these principles where based on Kant's concept that talks about respect for persons. It emphasied on the fact that a firm should not violate other's right for the sake of their own future. Evans and Freeman in the year 1988 introduced two more principles. These principles were P1 and P2. The first principle says that an organisation has the obligation or duty for the benefit of the stakeholders and they should participate in decision making activities of the company.

The second principle represented the management as an agent of the stakeholders to represent their ownership. It is also essential for the management to act as the organisation's representative and also safeguard the stakeholders' interest. As this theory is based on Kantian principles, so it is directly related to "Property right". These property rights indicate distributive justice (Donaldson and Preston, 1995, p. 65-91).

The stakeholder theory takes into consideration both the legal requirement and stakeholders' interest and not just what is required by the law of the nation. This expands the management's duty to the stakeholders, instead of restricting it to just the stockholders (Carson, 1993, p. 174).

The followers of this theory considered the organisation as an abstract entity which comprises of different groups who have interest in the firm. A major problem related to this theory is the divergent interest of stakeholders which led to the problem in solving conflicts that arise between different stakeholders (Burton & Dunn, 1996, p. 133-147). While solving these conflicts different theories where proposed by different theorists like the Feminist Ethics, the Common Good Theory, the Integrative Social Contracts Theory and many more.

The Integrative Social Contracts Theory

This theory was initially developed by Thomas Donaldson and Thomas Dunfee. This is a contextual approach that lies in domain of Business ethics. This theory was published in two articles in the year 1994-95. Within just ten years, this theory became an integrated part of specialised decision making theory. The book called Ties That Binds, published in 1999 by the originator of this theory contains all the detailed description regarding the theory. This theory is based on hypothetical social contracts (Dunfee, 2006, p. 1-3). The author of this theory tried to prove that world is rational a knowledgeable, the human knowledge is bounded and economical activities are compatible with divergent culture, regional attitude and philosophy. These factors lead to formation of micro-social contracts which are affected by ethical issues. These contracts are the foundation of community's existing culture, philosophy and values related to religion. Frame work of the theory provides foundation for ethical decision making process. These micro social contracts need consideration and tolerance in norms and value that leads to ethical decision making process. The first set for making ethical decision making requires identification of stakeholders. Later on the micro contracts have to be identified which are based on implicit agreement. Identification of the norms that exist in the society is very important. It should be identified that these norms are legitimate and these norms assists in decision making process. For verification of a norm that whether it is legitimate or not, it has to be compared against the hyper norm. These hyper norms are ideal norms. This theory plays vital role in exploring ethical problem and then for searching an appropriate alternative solution (Lucas, 2001, p. 414-421). It can b concluded that this theory provides guidance to managers for making decision on basis of ethical ground. Soon this theory got criticised by many researches. They raised different questions related to this theory related to nature and value; practicality of the theory which assists managers for making vital ethical decisions; theory's robustness and many more. Few asked for reform in hyper norms so that hey can play vital role in decision making process (Hartman et al.,

2003). Need for modification in hyper norms was required as it was not clear that where they can be identified for solving a real problem, are they justifiable as per social contract, and it was also questionable that are these hyper contact are necessary at all? After a great degree of research, it was conclude that hyper norms are highly hypothetical and they cannot be determined. But this theory was applied to wide range of ethical issues including gender discrimination, privacy and direct marketing, marketing of family planning in Bangladesh, bank's marketing of credit cards to college students and more (Dunfee, 2006, p. 11).

Development of Corporate Social Responsibility

The history of Corporate Social Responsibility is very old. From the documental evidences it can be concluded that CSR begin in 1950's and the writing was published in US, but it is believed that CSR had its roots throughout the world. Initially people find it useless and they gave negative views for CSR, but soon another group of thinkers gave arguments in favour of CSR. The first and oldest school of though that was led by Milton Friedman was against CSR and suggested that firms should solely focus toward profit maximisation. By making investment for CSR, firm actually makes misallocation of their resources which could be used for more value-added activities like making investment in internal project or providing return to share holders.

On the other side another thinkers had a view that by adoption of CSR, firm can further enhance their degree of satisfaction of their stakeholders. This will result into potential benefit as other which develops due to claims of stakeholders can be reduced down. The issue that where the CRS is beneficial for financial prospective of a company or not is still controversial.

The modern era of CRS begin after publishing of "Social Responsibilities of the Businessman" by Howard R. Bowen in 1950s. Because of him immense work in the field of CSR, he was regarded as "Father of Corporate Social Responsibility" (Carroll, 1999, p. 272). His work focused on the fact that business have obligation regarding society and they should take social values into consideration and should think beyond pure profit. In the era of 1960's, Keith Davis, developed 'Iron Law of Social Responsibility'. The researcher correlated social responsibility along with size of the business. As per Davis, the larger is the impact of business on society, the larger should be the amount of social responsibility (Carroll, 1999, p. 273).

By the end of 1970's the most famous and highly accepted definition of CSR was provided by Archie Carroll. The literature review of this era has gave evidences that business at this phase of time emphasised on corporate philanthropy and relation of business with community (Carroll, 1999, p. 275). The literature of early 1971 indicated that business have multiple interest with its shareholders, employees, supplies, customers, public and government. Within the same era Committee for Economic Development's (CED) published "Social Responsibility of Business Corporations". It defined that business has three major responsibilities. At first it should emphasis on economical activities, secondly it should be more aware toward social changes and should take social value into consideration, and finally business should participate in those activities which are aimed for improving the social environment.

The era of 1980s was vital in respect to CSR as many researchers carried out research to investigate the potential benefit for businesses, if they incorporate CSR. Thomas Jones, one of those researchers that made great contribution for bringing major shift in corporate paradigm (Carroll, 1999, p. 291). The research by Philip Cochran and Robert Wood on CSR resulted to development of pyramid of need and they tried to answer to the question that "where business can be profitable which carryout social responsibilities."

1990's was the era that emerged out with many new models and further expansion of CSR concept. Corporate Social Performance and corporate citizenship was some of the vital output of his time frame. More and more companies accepted CSR as an integrated part of their business process. This journey of constant progress continued still date and with the passage of time it will grow further.

Assurance on CSR Report

The term Corporate Social Responsibility is a part of sustainability policy of a firm. A firm depends directly on the society for attaining all four basic requires component which are Man, Material, Money/capital and land. So it is the duty of business to take certain responsibility toward society. Many argue and by providing goods and services, business fulfils all its responsibility. It also provides employment opportunities that further helps in upgrading live standards of the employees. As a result the whole economy gets benefited. But is this the only responsibility of corporations toward society? Different thinkers gave their on views, but now all the nations as well as corporate bodies has identified the fact that business should think more seriously about their responsibilities toward society. For his along with the financial statement, firms publish their CSR report. This report gives all the details regarding the investment made by company for the betterment of their stakeholders and the environment. The stakeholders are asked to give their response toward CSR report and then to rank the corporation. To understand the fact that why companies ask assurance for their CSR report and how the stakeholders take this whole concept, a global survey was conduced by PWC. In this survey altogether 50 companies participated from 18 different countries. 77% of the participant companies reported that their CSR report contains an assurance statement. Among these around 45% provides separate assurance report from eternal sources. These assurance providers are the audit firms which have good reputation in the market. In Australia and UK, the consultancy firms have strong position for providing assurance for Corporate Responsibility report, where as n countries like Europe, companies rely more on the audit firms for providing assurance statement to their CSR report. This is because the companies in Europe publish their CSR report as a part of the annual report. When the question was asked that why these companies provides assurance statement along the CSR report, major of them answer that this enhance the credibility. Another importance factor disclosed by them was that such assurance provides internal assurance on performance data and systems; some other answers that this is just company's policy and some other said that this is the demand of stakeholders.

Sustainability assurance is a special type of non-financial assurance. With realisation the requirement of assurance, many important auditing standards where incorporated and one such standard is ISAE 3000. This standard specifies the special requirement for auditing sustainability of a firm. It was made mandatory that the audit team should be multidisciplinary and independence of auditor is essential. The CSR reporting is at developmental stage so with the passage of time further modification are quite possible. The main problem for the auditors is that the data for CSR originates from different department, the there is lack of transparency which hinders robustness of the CSR report. Thus the stakeholders have to come up and have to actively participate in the process of auditing of CSR through stakeholders' panel (PWC, 2007).

Hypothesis development

For the very early days there has been continues controversy regarding CSR. How the researchers had contradictory views regarding profitability of firm and its CSR. It is a fact that CSR has some negative prospect as well as some positives. Too less investment in CSR may result into dissatisfaction among stakeholders as a negative image of the corporation. On the other hand too much investment leads to heavy expenditure that reduces profit margin and the shareholders may feel that they are loosing their profit for the sake of company's CSR. But it is a fact that CSR earns a good name for the company. Through CSR they can benefit not only their stakeholders, but the whole society gets benefited. Many researchers are conducting vital investigation on this fact, but till date no clear cut conclusion can be derived. This has kept CSR and its impact on financial profitability into debatable state. To analyse the reality behind CRS and its financial performance of a company, a research was conducted on 60 companies listed in Dow Jones Sustainability World indexes which belong to different industries. The aim of this research was to detect that where the financial performance of a company have any relation with its CRS index, and if there exists any relationship, then what is the degree and nature of such relation. The variables employed for research are EPS, stock price, and CRS ranking.

The hypotheses that are to be tested through this research are as follows:

H1: the EPS of the firm has positive correlation with company's CSR index

This is because the as the company enhance its CSR activity, it gains more and more goodwill in market which gets clearly reflected through increment in stock prices of that company. People have more faith on the company which taken CRS more seriously because this reflects that the company has a serious determination toward social value and ethics.

H2: ROE of a company has positive relation with CSR index of the company.

It have been assumed that as the company pay more emphasis on its CRS activities, it develops better relations with its stakeholders and thus the company's business expands resulting in better earnings and high profits for company as well as for the share holders. A company that is highly committed toward its social responsibility can easily attract and retain quality human resource. This is also a major factor that helps in enhancement in company's productivity.

Data and Methodology

Data Source

To continue with the analysis, we have collected data for two years, viz., 2007 and 2008, on 22 firms enlisted in the Fortune Global 500 rankings of the individual companies, and have considered observations on Return on Equity, Return on Assets, Earning per Share (basic) and on the Sustainability Index that is calculated by the Dow Jones standard. The former three variables are used to indicate the financial performance of the firms being considered, while the latter one is used as an indicator of the corporate social responsibility. Information on these variables were not found directly, but rather had to be calculated from their respective annual reports that had information on the consolidated income statements and consolidated balance sheet. The data originally collected were on Total Operating Revenue, Total Assets and Total Equity from which the ratios on Return to Assets and Return to Equity were calculated using the following formulae -

Return to Assets = Total Operating Revenue / Total Assets

Return on Equity = Total Operating Revenue / Total Equity.

However, all the data obtained were not expressed in terms of a common currency. Thus, to arrive at a consistent result they were all converted in terms of US dollars.

After conversion two separate regressions, one for 2007 and the other for 2008, were run on the variables so obtained, with the Fortune Global 500 rankings of the individual companies as the dependent variable and ROA, ROE and EPS as the independent ones in each of them, since the purpose of the study is to find the existence of any significant relation between the stated dependent and the independent variables.


The results so obtained give useful information on a number of aspects which are explained below.

Sign of Coefficients - They provide information on the relation that the variable holds with the dependent variable.

T-Statistics - They show the significance of relation with the dependent variable of each individual independent variable. An estimated t-statistic is compared with the tabulated one and the conclusions reached after a comparison are as follows :

If the estimated | t | > tabulated t at the given degrees of freedom and level of significance, we reject the null hypothesis at the particular level of significance.

If the estimated | t | < tabulated t at the given degrees of freedom and level of significance, we do not reject the null hypothesis at the particular level of significance.

F-Statistics - It shows how significantly all the independent variables can explain the variations in the dependent variable. According to the value of the estimated F-Statistic, we arrive at two conclusions as under :

If the estimated F > tabulated F at the given degrees of freedom and level of significance, we reject the null hypothesis at the particular level of significance.

If the estimated F < tabulated F at the given degrees of freedom and level of significance, we do not reject the null hypothesis at the particular level of significance.

R Square - This statistic helps to find out the goodness of fit of the estimated model. The regression that is used to estimate the behavior of the population is actually done on the basis of sample observations. This value of R Square shows how nicely the estimated model is can describe population variations.

With the help of all the above information, our next step will be to run the sample regression and analyse it properly so as to find how relevant is the relation between corporate social responsibility and financial performance of a firm.

Descriptive Statistics

The descriptive statistics of the variables being used are given as follows for both the years on whose data the analysis was carried out.

The regression results have been shown in the appendix to this chapter. We will explain them one by one on a yearly basis, i.e., first for the year 2007 and then for 2008. The regression has been carried on with the help of the statistical software STATA that gives information automatically on the data being processed. Those information are sufficient to decide the acceptance or rejection of the corresponding null hypothesis.

In 2007, it is found that none of the explanatory variables can play a significant role in explaining variations in the dependent variable. It is evident from the p-value of the individual estimated coefficients. P-value shows the probability of Type-I error and thus, higher the p-value is, the less significant is the variable. In fact, we take a standard measure to take an decisions regarding the null hypotheses. Usually, we standardize a level of significance, which is nothing but the rejection area in the cumulative distribution curve and reject the null hypothesis if the p-value is greater than this level of significance. In most cases, this standard is considered to be 5%. So, our criterion in this case will be,

If p-value > 0.05, we do not reject the null hypothesis.

If p-value < 0.05, we reject the null hypothesis.

The above criterion also applies for testing the F-statistic, meant to test the significance of all the explanatory variables in explaining the variations in the dependent variable.

We also could have used the criterion mentioned in the methodology part and arrived at similar results. However, as the former process is more tedious, so we will stick to the one mentioned above.


For the year 2007, it is found that the t-statistic of each and every explanatory variable has a p-value greater than 0.05. So, it cannot be said that any of them play a vital role in explaining the variations in the CSR performance, indicated by their CSR rankings, significantly. Again for the year 2008, too, though the figures are different, but their implications are similar. None of the t-statistics for the variables display a significant p-value, implying that they fail to produce significant effects on the dependent variable. Thus in case of both years, for all the variables, the null hypothesis that each of them do not play a significant role in explaining variations in the dependent variable is ruled out. Speaking more statistically, in each case, the null hypotheses are accepted at 5% level of significance.


The F-statistic for the year 2007, overall, however indicates a significant relation between the explanatory variables and the dependent variable. The p-value of the F-statistic is 0.0257, which is lower than 0.05 (5%), and hence implies that all the explanatory variables together can explain variations in the dependent variable, CSR rankings. But, on the contrary, the results for the year 2008 are exactly the reverse and imply no such significant relation. Thus, although in the first case, we do not reject the null hypothesis, in the latter one, we do reject it at 5% level of significance.

Adjusted R Square

In case of the regression run on the data for the year 2007, the adjusted R Square value is 0.4347, while for regression carried on using the 2008 year data, the value is 0.2148. it is obvious that neither of the values of the Adjusted R Square statistics are evident of the fact that the model being fitted is a good one. For a model to become a good estimate of the observed values, a rule of thumb is that the value of the Adjusted R Square statistic must be greater than 0.7. But, here both of them are found to be much lower than that. So, a good fitted model could easily be ruled out.


From the statistics calculated above, it cannot be supported that the explanatory variables so considered are able to explain the variations in the dependent variable in a way as expected. Neither in the year 2007, and nor in 2008, the variables are found to be significantly explaining variations in the dependent variable individually or collectively. Even the values of Adjusted R Square defy the rules for a good fitted model. In 2007, the value of F-statistic although is significant, yet the values of the individual t-statistics or the Adjusted R Square are not, hence implying the presence of multicollinearity in the data so collected.

So, it is found from the empirical analysis carried on in this paper that the independent variables being considered to be the indicators of the financial performance of a firm are unable to play a significant role in explaining its sustainability where the latter is substituted here by the CSR rankings made by the Fortune Global 500 on an annual basis. However, it is in sharp contrast with the theoretical findings that financial performance of a firm indeed decides the corporate social responsibility of the same. However, the results that have been found are on the basis of just a sample of 22 observations. So, the possibility of a sampling fluctuation cannot be ruled out as well. This sampling fluctuation might not hamper the results if the sample so collected had been a large one. This leaves room for further studies on the topic.

But on an average it can be conclude that the CSR activity of a firm affects its financial performance. The concept of CSR has come across a long journey right from the early industrialisation phase to till date of era of modernisation. And there is full possibility that with the changing socio-economical status, it will touch further heights in coming time.