THE IMPACT OF CORPORATE SOCIAL

RESPONSIBILITY ON FIRM
PERFORMANCE

Hamna Gul

MSBA-011R17P-7

Supervisor

Prof Dr. Ghulam Abbas

INSTITUTE OF SOUTHERN PUNJAB MULTAN, PAKISTAN

Table of Contents

Chapter: 1 INTRODUCTION .................................................................................................................... 4

!.1 Background ................................................................................................................................... 4

1.2 Problem Statement ....................................................................................................................... 5

1.3 OBJECTIVES OF THE STUDY ........................................................................................................... 5

1.4 RESEARCH GAP .............................................................................................................................. 5

1.5 Importance of the study ............................................................................................................... 5

Chapter: 2 LITERATURE REVIEW ............................................................................................................ 7

2.1 RESEARCH HYPOTHESIS ................................................................................................................ 9

Chapter: 3 Research Methodology ...................................................................................................... 10

3.1 Data and Variables ............................................................................................................................ 10

3.2 Conceptual Model ....................................................................................................................... 10

3.3 Sampling Method ........................................................................................................................ 11

3.4 Regression Model ....................................................................................................................... 11

3.5 Research Design ......................................................................................................................... 11

3.6 Statistical Model......................................................................................................................... 12

 3.7 Study Variables ........................................................................................................................... 12

3.7.1 Independent Variable ......................................................................................................... 12

3.7.1.1 Ethical Responsibility ......................................................................................................... 12

3.7.1.2 Economic Responsibility..................................................................................................... 13

3.7.2 Dependent Variable ............................................................................................................ 13

3.7.2.1 ROA..................................................................................................................................... 14

3.7.2.2 ROE ..................................................................................................................................... 14

3.7.2.3 Financial Leverage .............................................................................................................. 14

3.7.2.4 Real Stock ........................................................................................................................... 15

Inventory Turnover ............................................................................................................................. 15

References .................................................................................................................................................. 16
Chapter: 1 INTRODUCTION
!.1 Background

The concept of shared value or Corporate Social Responsibility (CSR) has exponentially

attracted the attention of the business world as well as researchers. The overall performance of an

organization is greatly dependent on the ethical business activities and activities related to social

and environmental benefits. These activities will help an organization to sustain its reputation and

goodwill. CSR is actually consists of all the practices of corporate governance which are related

to policies, procedures, practices the focus of which is to improve social conditions, rights,

protections, environmental protections and protection of the interest of all the stockholders of the

business. It is the time not to confine business only for profitability of the firm but associate those

with the social benefit as financial gain are actually associated with a social benefit of society.

CSR is not just investment but a strong link between the firm and its stakeholders.

According to Ruben and Christopher (2009) CSR activities require a responsibility on the part of

corporations toward its stakeholders specifically its customers, employees and community in

addition to its profit maximization goals. These activities include donations or commitments

regarding environment protection; social well being projects, and providing a healthy and safe

working place for its employees.

Holme and Watts (2007) describe that corporate social responsibility is considered as long term

promise to act as economic development and to improve the living standards of the societies. The

CSR is about understanding and organizing the connection between our trading operations and the

financial system, situation and communities within which we operate Scott (2007).
1.2 Problem Statement

The concepts CSR its profitability are very important for its long term success and its

goodwill. Problem statement of this study is to find the impact of CSR practices on the profitability

and value of the firm in KSE( Karachi Stock Exchange ) top 100 companies of Pakistan.

1.3 OBJECTIVES OF THE STUDY

 The attention of our study is to examine the connection among

corporate social responsibility and firms performance.

 The relationship between CSR and effectiveness of firms (ROA ,ROE,FL,RS)

1.4 RESEARCH GAP

As per discussed literature it is not cleared that what is the relationship between CSR and

the firm’s financial performance in the short term and the long term as conflicting results have

been observed. This study will attempt to observe the association between CSR and firms

performance in (ROA ,ROE,FL,RS).

1.5 Importance of the study

This study aims at to examine the impact of corporate social responsibility (CSR) on the

firm’s performance. Corporate social responsibility (CSR) is measured as the summation of the

donation and the environment cost which is taken from annual reports of the companies.
The study that is conducted consists of 100 companies which are listed in Karachi stock exchange

in Pakistan. The companies which selected for sample purpose are taken from 25 sectors. A panel

regression is then performed on the data to validate the impact of corporate social responsibility

on the financial performance of firms.

Chapter: 2 LITERATURE REVIEW

The concept of CSR is not very difficult to understand, in simple it is related to activities which

will consider itself a responsible entity of the society which not only fulfill its economic goals but

also fulfills ethical and moral values of the society. The concept of CSR emerged in 1950 by

Bowen, 1953. Carroll model (Carroll and Buchholtz, 2003) suggests that the first important goal

of the organization is to fulfill its economic goals, after that its legal obligation, than ethical and

philanthropic goals.

Moir (2001) have discussed the business loyalty with corporate social responsibility. They

described CSR to know the attitude of people who were known as users. They find out the

outcomes by using the corporate social responsibility for creating loyalty among consumers just

like Ali, Rehman, Yilmaz, Nazir and Ali (2010) and the Al‐Khater and Naser (2003). They have

concluded that response of consumer and CSR were the different segments. They have concluded

that positive attitude had a positive impact on the value of shares which can enhance the loyalty of

business. Four factors which were defined above had positive influence on CSR but out of them

one factor “friendly environment” had negative impacts on some types of consumer groups. They

use segmentation process to find the best initiatives of CSR.

Singh (2014) has investigated the influence of CSR disclosure on the financial performance of the

companies in UK. He has conducted his research on main three industries consist on sub industries.

The data is taken for the study from annual reports for the period of 5 year from 2008-2012. He

uses linear regression model in his study. He tries to find the CSR influence on the financial

performance the companies. The results show that CSR has no influence on the financial

performance of the companies, both in short-term and long-term for the selected companies in UK.
Kanwal et al. (2013) have explained and tried to find in Pakistan whether that many organizations

had a significant interest in the corporate social responsibility. By taking the data from 15

companies listed on Karachi stock exchange they tried to explore the relationship between FP &

CSR. For social activities there must be strong financial performance of firm or organization and

reasonable fund for social activities.

McGuire, Sundgren and Schneeweis (1988) have highlighted in their study that there was a

positive relationship between corporate social responsibility and financial performance. They use

regression analysis method to analyze the data. They find out that measurement of risk and

corporate social responsibilities were interlinked. Finally their judgment is that there was positive

relationship between corporate social responsibility and the financial performance of firms.

Rapti and Medda (2010) examine in their study corporate social responsibility (CSR) related to

environmental issues. And they also use ratio analysis for some extent purpose. In theoretical

model financial performance of firm is measured. The data is taken from annual reports. They use

ten (10) top airports with branches for the sack of research and calculation. They use data over the

period of 2003-2009. Finally they find that there is positive relationship between corporate social

responsibility and industries of airlines.

Sarwar et al (2012) have conducted the research on Financial Performance linkage with the CSR

in Bangladesh banks and finds that the banks that focus on CSR practice have more ROA than

those banks who does not focus on this practice.

Khalid et al (2012) conduct the research on CSR and Firm performance and they find the positive

relationship between CSR and Firm performance. They also conclude the mediating effect of

customer satisfaction on firm performance and CSR services.

2.1 RESEARCH HYPOTHESIS

H1. There is significant relationship between the corporate social responsibility

and return on firm asset.

H2. There is significant impact on corporate social responsibility and financial

leverage.

H3. There is significant relationship between corporate social responsibility and

return on real stock.

H4. There is significant impact on corporate social responsibility and return on

equity.
Chapter: 3 Research Methodology

The practice unit explains the techniques that will be useful to solve the research

problems. The problems which explain in the first section will be solved through different models.

The second chapter gives a way to identify and literary different work of researchers in a company

societal duty also corporate presentation. This chapter presents the research methodology followed

achievement of objects. This chapter moves the research to the further by showing the ways in

which data collection method helped to prove that company societal accountability and corporate

presentation.

3.1 Data and Variables

Secondary data collected from annual reports of 100 Pakistani listed companies of KSE

which is taken from annual reports of the companies.

3.2 Conceptual Model

Independent Dependent
variable variables

Social responsibility
 Return on Asset
 Financial Leverage
 Economic
 Real Stock
 Ethical
 Return on equity
3.3 Sampling Method
To understand of the firm’s the research has concentrated only on the companies that stand

registered going on the Pakistan stock exchange.

The study is based on the probability sampling method. Out of the Probability sampling method

random sampling has been used. Because in the case of knowing the effect of business societal

accountability on the organization’s profitability. There is an equal and known chance of being

selected for each number of populations.

3.4 Regression Model

This research uses the simple linear regression model popular a database SPSS trendy

training to observe a correlation amongst CSR and four dependent financial variables. A simple

linear regression remains usually cast-off as per numerical technique toward size the connection

among single dependent variable and single independent variable (Yan and Su, 2009). This one

can likewise estimate the way (positive/negative) besides the power of the relationship among the

two variables (Nolan andHeinzen, 2014). The track of the variables is denoted through the Beta

importance which defines in what way considerable the self-governing flexible variations the

reliant on variable (Nolan andHeinzen, 2014).

3.5 Research Design

The research’s objective is to find out CSR has significant impact on corporate presentation

or not of manufacture firms, so this is a causal research. This study applied Co-relational research.

The procedure of study dimension stands the essential toward measurable study since that one

delivers the important linking among experiential remark and precise look of numerical affiliation.
3.6 Statistical Model
Y (Economic, Ethical) = C + β1 (ROA) + β2 (LEV) + β3 (REAL STOCK) + β4

(ROE) + ε

Draw abbreviations in a table given below

Table 3.1 Abbreviations of Study Model

Abbreviation Variable

ROA Return on asset

FL Financial leverage

RS Real Stock

ROE Return on equity

3.7 Study Variables

3.7.1 Independent Variable
The variable that’s the variation does not depend on that of another.The study selects

the following independent variables to check the relation among corporate societal accountability

then firm economic presentation .These variables remain most appropriate variables toward

quantity to the firms of the financial performance.

3.7.1.1 Ethical Responsibility

Several writers have recognized corporate social responsibility as having a helpful

inspiration on consumer ID and expectation to establishments. CSR permits establishments to be

related with a answerable and proper appearance, which signs consistency and inspires a trust-

based correlation between culture (Martínez and Rodríguez del Bosque, 2013). This is one article
nowadays is called the public accountability of big business. Even if there have been a lot of papers

on this issue, no one decided meaning of CSR (Armstrong and Green, 2013,).This study reflect

that CSR is still substance discovering as it is a tough idea that has been hypothesized in a sum of

fields such as finances, managing, trade principles, radical concept, sociology and even lawful

thinking (Richter, 2011).

CSR (Ethical) = TOTAL ACCRUALS (TAC)

3.7.1.2 Economic Responsibility

The concern of an established stockholders and forecasters (Dhaliwal, Tsang, and Yang,

2011). But, these discoveries cannot be global as imperfect care has been rewarded to the corporate

social responsibility exposé policies of organizations categorized by less-favorable reputes

(Mishina and Devers, 2012).

CSR (Economic)= Stock on return (Return) I / sales growth (∆s)

3.7.2 Dependent Variable

The variable whose value depends on that ofanother. Dependent variables go on

variables that stand used toward ration the monetary presentation of the organizations. To measure

the firm’s ethical and economic influence happening organizations’ monetary presentation;

profitability stands selected as a dependent variable. Financial performance measured as a proxy

of return on assets. Profitability is measured through return on assets. Profitability ratios measure

a firm overall efficiency and effectiveness in generating profit.

3.7.2.1 ROA
ROA remains deliberate through in-between a corporation's remaining revenue

(typically yearly revenue) through that one whole asset, and stays shown by way of a ratio. Its

quantity company monetary performance through return on equity, return on asset, and Tobin’s Q.

return on equity too return on asset might be recycled by way of an effectiveness display, although

Tobin’s Q often used such by way of size of a company worth. It’s invention optimistic and

important influence among company economic performance plus stakeholder-weighted corporate

social responsibility guide. M.S.Ak. (2013) studied experiential sign almost the factors of exposé

of corporate social responsibility (CSR).

Return on Asset= Net income / Total assets×100%

3.7.2.2 ROE
ROE stays designed through captivating a year’s value of incomes then in-between them

through the average shareholder equity aimed at that year, then remains said by way of a

percentage.

ROE = Net income / Total Equity×100%

3.7.2.3 Financial Leverage

Mentions toward the usage of obligation toward obtain extra resources. Financial

leverage remains similarly recognized by way of exchange proceeding equity. The investigation

similarly establish that influence, panel of official size, organization profile, organization age,

administration possession, then development chances must not at all impact to CSR Rahmavati et

al., (2014) considered the affiliation among corporate financial performance besides social

responsibility trendy a research titled “the impact of corporate social responsibility on financial

performance and real operation as a regulating variable”. Results submitted that real operation in
cash flows leaves a bad influence on the affiliation among corporate social responsibility and

financial performance.

FL= Total Debt / Total Asset

3.7.2.4 Real Stock

Inventory Turnover

Similar a characteristic income relation, record income particulars how abundant catalog

remains vended finished a dated of period. It stands intended for example:

Cost of Goods Sold / Average Inventory

Sales / Inventory
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