Does Corporate Social Responsibility Improve the Firm’s Financial Performance: A Theoretical Perspective of Agency and Stakeholder Theory by Financial Sector of Pakistan

Abstract

The objective of this study is to investigate the impact of Corporate Social Responsibility (CSR) on Firm’s Financial Performance (FP) in both accounting measures (short-run) and market measure (long-run). According to the agency theory the core motive of the firm’s is to maximize the wealth of its shareholder and therefore spending on the other stakeholder in form of CSR is extra burden for the firm’s which decreases the FP contrary to this theory; stakeholder theory states that the firm’s should satisfy the social needs of various stakeholders and perform CSR as it protects the firm’s from negative conflicts and boycotts that reduces the operational costs and boosts the FP. To validate these theories a sample of 40 Pakistani financial sector firms has been taken for the period 2012-2015 by using correlation matrix, panel regression analysis. The proxy variable for CSR is Workers Welfare Fund (WWF) and denotations. The proxy for accounting measure FP used are, Earning per Share (EPS), Return on Assets (ROA), Return on Equity (ROE), Sales Growth Rate (GR) and market measure proxies are, Tobin’s q (TOBQ) ratio and Price to Earnings ratio (PE). The controlling variables are size of the firm in sales and assets, age of the firm, risk and leverage. The findings of accounting measure; ROA, EPS and SG has positive but insignificant and ROE has negative and insignificant impact on CSR. In case of market measure PE and TOBQ has negative and insignificant impact on CSR. Our findings show that there is no significant impact of CSR on firms FP in both accounting and market measures. On the basis of our results and agency theory approach we conclude that CSR does not boost the FP and it is an extra cost which may in future eases the FP.