Corporate social responsibility and financial performance: correlation or misspecification?

TLDR

Studies have reported inconsistent effects of CSR on financial performance, likely due to flawed empirical analysis. The paper aims to expose a specific flaw in current econometric studies linking CSR to financial performance. Existing models regress firm performance on CSR and controls but omit R&D investment, causing misspecification. When the model is properly specified, the bias disappears and CSR is found to have a neutral impact on financial performance. © 2000 John Wiley & Sons, Ltd.

Abstract

Researchers have reported a positive, negative, and neutral impact of corporate social responsibility (CSR) on financial performance. This inconsistency may be due to flawed empirical analysis. In this paper, we demonstrate a particular flaw in existing econometric studies of the relationship between social and financial performance. These studies estimate the effect of CSR by regressing firm performance on corporate social performance, and several control variables. This model is misspecified because it does not control for investment in R&D, which has been shown to be an important determinant of firm performance. This misspecification results in upwardly biased estimates of the financial impact of CSR. When the model is properly specified, we find that CSR has a neutral impact on financial performance. Copyright © 2000 John Wiley & Sons, Ltd.