Received: 28 March 2020 Revised: 19 June 2020 Accepted: 7 July 2020

DOI: 10.1002/csr.2018

RESEARCH ARTICLE

Corporate social responsibility's influence on firm risk and firm

performance: the mediating role of firm reputation

Zia ur Rehman1 | Asad Khan1 | Asim Rahman2

1
Department of Management Sciences,
University of Haripur, Haripur, Pakistan Abstract
2
Department of Management Sciences, The aim of the article is to analyze the influence of corporate social responsibility
Abbottabad University of Science and
(CSR) initiatives by firm on firm performance and firm risk. Moreover, the mediating
Technology, Abbottabad, Pakistan
role of firm reputation in CSR/performance and CSR/risk relationship is also exam-
Correspondence
ined. Data were collected from European and Asian firms listed on Fortune's Most
Zia ur Rehman, Department of Management
Sciences, University of Haripur, Haripur, Admired Countries for the period 2014–2018. Using logit regression model and OLS
Pakistan.
regressions, we find that CSR has a significant positive influence on firm reputation
Email: zia.rehman@uoh.edu.pk
and firm performance whereas on firm risk it is negative. Based on our results, we
also confirm that firm reputation does mediate the relationship between CSR-firm
performance and CSR-firm risk. This study adds to CSR related literature by providing
more reliable and objective evidence on the role of firm reputation in CSR engage-
ment and also provides direction for future studies in this context.

KEYWORDS

CSR, firm performance, firm reputation, firm risk

1 | I N T RO DU CT I O N
Inclination by corporations to indulge in corporate social responsibility
(CSR) practices has received greater attention during the past decade
or so from businesses and academicians (Kechiche & Soparnot, 2012).
CSR popularity has considerably increased among corporations during
this time but poses a question in the minds of the individuals that is
why businesses deviates from their pure profit maximization objective
by choosing to be socially responsible also (Liang & Renneboog, 2016;
Nan & Heo, 2007). Both empirically and theoretically, researchers
have attempted and still continue to attempt and analyze the influ-
ences of CSR led practices on firm performance (Inoue & Lee, 2011;
Oeyono, Samy, & Bampton, 2011; Deng, Kang, & Low, 2013;
Jia, 2020; Zhu, Sun, & Leung, 2014, Youn, Hua & Lee, 2015) and firm
risk (Albuquerque, Durnev, & Koskinen, 2010; Godfrey, Merrill, &
Hansen, 2009; Minor & Morgan, 2011). Therefore, it is important to
analyze the economic benefits arising from a firm's CSR practices and
its fundamental mechanisms.
In the current literature, CSR engagement is commonly explained
through “doing well by doing good,” which basically means that firm
profitability improves as a result of CSR activities thus increasing
value creation by the firm (Lins, Servaes, & Tamayo, 2016; Orlitzky,
Schmidt, & Rynes, 2003). Considering the managing risk aspect of
firm's strategy, the stability of firm's cash flow improves with CSR
activities (Luo & Bhattacharya, 2006), reduces the chances of bank-
ruptcy (Lee & Faff, 2009), and also during adverse events CSR activi-
ties act as an insurance for the firm (Minor & Morgan, 2011).
Recently, most of the studies have focused on the factors that moder-
ate or mediate CSR's relationship with a firm's financial performance.
For example, Surroca, Tribo, and Waddock (2010) concluded that a
firm's intangible resources mediate CSR-performance relationships.
Other mediators that have been identified in empirical studies include
brand loyalty (Pivato, Misani, & Tencati, 2008), managerial interpreta-
tion by Sharma (2000) and customer satisfaction by Luo and
Bhattacharya (2006). Apart from mediators, certain moderating fac-
tors have also been identified in empirical studies that moderate CSR
relationship with firm performance. These moderating factors include
ethical leadership (Zhu et al., 2014), pledge to ethics by supervisor
(Muller & Kolk, 2010) and the discretion of each individual employee
(Bansal, 2003).
Although numerous studies have focused on CSR and its impact
on firm performance, there are still four significant issues that further

Corp Soc Responsib Environ Manag. 2020;1–15. wileyonlinelibrary.com/journal/csr © 2020 ERP Environment and John Wiley & Sons Ltd 1
2 REHMAN ET AL.
needs to be addressed. First, though most of the empirical studies
have predicted a positive CSR impact on firm performance yet the
empirical evidence is mixed. The advocators of CSR's positive influ-
ence on firm performance argue that CSR enables a firm to achieve
the twin objectives of maximizing shareholder wealth and achieve the
goal of being socially responsible also (Orlitzky et al., 2003; Inoue &
Lee, 2011; Youn, et al., 2015). However, the opposing argument
claims that CSR only depicts the managerial agency problem
(Benabou & Tirole, 2010; Masulis & Reza, 2015). Moreover, there are
other studies that found no significant CSR effect on firm perfor-
mance (Kang, Lee, & Huh, 2010; Lin, Yang, & Liou, 2009). Therefore,
the inconclusiveness in the findings of empirical studies in this regard
presses the need for further investigations in this area to a better
understanding of the CSR-performance relationship.
Second, although CSR activities do result in certain positive eco-
nomic outcomes for the business (e.g., Inoue & Lee, 2011; Youn, et al.,
2015), the issue of the underlying mechanism of CSR and how it
works is still unresolved. In this regard, some empirical studies did
attempt to explain the logic behind CSR activities and their benefits.
For instance, CSR positively affects firm performance through cus-
tomer satisfaction (Luo & Bhattacharya, 2006), managerial interpreta-
tion (Sharma, 2000), and brand loyalty (Pivato et al., 2008). However,
most of these studies have used CSR from a very narrowly defined
perspective and have failed to capture the whole picture. Therefore,
there is a need for further research in the area to help us better
understand by opening the black box between CSR practices and its
influence on a firm's economic performance. Particularly, firm reputa-
tion, a more comprehensive indicator for measuring the effects of
CSR plays a key role in improving firm performance and reduction in
firm risk (Zhu et al., 2014). On the one hand, in the prior empirical lit-
erature, we find one consistent finding that advocates that firms' rep-
utation gets improved as a result of CSR initiatives by the firm (Lii &
Lee, 2012; Orlitzky et al., 2003; Turban & Greening, 1997). On the
other hand, firm reputation an important resource for the firm creates
an opportunity for sustained profitability (Zhu et al., 2014), provides
goodwill to the firm and moral capital which reduces negative valua-
tions by stakeholders (Godfrey, 2005). Therefore, we consider
engagement in CSR activities important for improving the image and
reputation of a firm among its stakeholders. The good reputation of a
firm earned through its CSR activities will not only lead to positive
evaluations from stakeholders but will also have a positive impact on
firm profitability as customers generally prefer to buy products of
firms that are socially responsible. Moreover, satisfied and loyal cus-
tomers resulting from firm CSR engagement will help mitigate firm risk
particularly in economic downturns when the firm depends on a loyal
customer base. Firms having bad reputations will suffer the most dur-
ing economic downturns.
Third, some studies have highlighted the risk management related
implication of CSR but the extent to which and how CSR affects firm
risk is comparatively inconclusive and under explored also in the
empirical literature. On one side, companies focusing on CSR related
activities directed at the well-being of its stakeholders are experienc-
ing higher profits sensitivity due to economic shocks (Becchetti,
Solferino, & Tessitore, 2014). In other words, a firm's risk increases
while giving extra care to stakeholders. On the other, corporations
showing good social performance are less exposed to unfavorable
economic shocks due to their ability to respond to stakeholder's
expectations efficiently and effectively (Albuquerque et al., 2010). Lins
et al. (2016) also supported the argument that investment in CSR
activities pays off in times when the organization suffers from unfa-
vorable economic shocks. The main findings of these studies highlight
the fact that CSR activities have insurance like effect for organiza-
tions, especially during economic downturns. Hence, further explor-
ative studies are needed for a better understanding of CSR's influence
on firm risk.
Fourth, due to the unavailability of sufficient data, usually, it is
not easy to measure firm reputation and more care is needed while
measuring firm reputation. In the prevailing literature, we find that
firm reputation has been mostly measured through collective surveys
and interviews conducted within the organization (e.g., Rodrigo and
Arenas (2008)), which may be highly interpretative but there is a pos-
sibility that it might be biased up to a certain level. Hence, an objec-
tive measure like firm reputation ratings published by third parties can
significantly increase the validity and reliability of research outcomes
and broadening the scope of CSR studies.
Considering the limitations mentioned above, this study aims to
analyze the outcomes and fundamental mechanisms of CSR. The basic
objectives of the study include: (a) to analyze how firm performance is
influenced by CSR activities; (b) to analyze how firm risk is affected by
CSR activities; and (c) to analyze the underlying mechanism of CSR-
performance relationship and CSR-risk relationship. More importantly,
we are examining firm reputation's mediating role in both CSR-risk
and CSR-performance relationship (see Figure 1). This study is based
on the earlier study of Liu and Lu (2019) taking his future directions
on conducting similar studies in different context. Hence, in this study
we have followed Liu and Lu (2019) methodology to analyze the out-
comes and fundamental mechanisms of CSR. To the empirical litera-
ture, this study contributes in three ways. First, we analyze CSR
engagement's influence on firm risk and performance and give more
valuable information for a better understanding of the mixed results
in the prevailing literature (Becchetti et al., 2014; Cheng, Hong, &
Shue, 2013). More precisely, our findings support the stakeholder's
theory assumption that CSR activities positively influence firm perfor-
mance. Also, we provide valuable evidence on CSR's negative influ-
ence on firm risk consistent with the model presented by
Albuquerque et al. (2010). Second, the underlying mechanism
between CSR-performance relationship and CSR-risk relationship was
further explored in order to open up the black box surrounding the
engagement in CSR activities and its impact on the economic out-
comes (Jones, 2005; Zhu et al., 2014). Not only was the important role
of firm reputation highlighted but also its significance with respect to
its role as a mediator between the two relationships. Third and most
importantly, this is probably the second study after Liu and Lu (2019)
that has used and measured firm reputation through an objective pub-
lished measure to analyze its role as a mediator in CSR related studies.
Hence, this study adds to CSR related literature by providing more
REHMAN ET AL.
F I G U R E 1 Proposed model Adopted from Liu
and Lu (2019) [Colour figure can be viewed at
wileyonlinelibrary.com]
CSR
reliable and objective evidence on the role of firm reputation in CSR
engagement and also provides direction for future studies in this
context.
1.1 | Literature review
1.1.1 | CSR-firm reputation
European Commission defined CSR as “a concept whereby companies
integrate social and environmental concerns in their business opera-
tions and in their interactions with their stakeholders on a voluntary
basis” (European Commission, 2001, p. 8). Carroll (1979) divided social
obligations into four broad categories that a socially responsible orga-
nization would like to perform. These include legal, economic, philan-
thropic, and ethical responsibilities. CSR activities depict the social
preferences of an organization in order to show good behaviors and
also capture the efforts of the business to deal with certain externali-
ties. Kitzmueller and Shimshack (2012) argued that CSR has now
become a mainstream activity for many organizations. According to
Lai, Chiu, Yang, and Pai (2010), firm reputation is “the overall impres-
sion reflecting the perception of a collective stakeholder group.” Firm
reputation enhances as a result of the collective recognition of the
ability of the firm to successfully meet the interest of all its stake-
holders (Zhu et al., 2014). Rindova, Williamson, Petkova, and
Sever (2005) argued that several stakeholders considered firm reputa-
tion as the ability of the firm to provide good quality goods and ser-
vices. Overall, firm reputation increases if it is not only doing good for
its stakeholders but also perceives to be doing so.
Generally, it is believed that involvement in CSR activities by the
firm is one of the ways through which a firm builds its reputation (Lai
et al., 2010; Luo & Bhattacharya, 2006). In prior literature, we find evi-
dence of improvement in firm reputation as a result of its involvement
in CSR activities (see Brammer & Pavelin, 2006; Fombrun &
Shanley, 1990). Furthermore, a review of a meta-analysis of CSR rela-
tionship on firm outcomes indicates that firm reputation and goodwill
increases with CSR activities initiated by the firm (see Aguinis &
Glavas, 2012; Brammer & Pavelin, 2006; Orlitzky et al., 2003). Doney
and Cannon (1997) argued that a firm can successfully improve its
reputation and gain trust from consumers if it acts in a socially respon-
sible way. From employees' perspective, involvement in CSR activities
by the firm enhances the pride of employees, increases their commit-
ment towards the organization (Lee, Park, & Lee, 2013), and also
increases ratings of the reputation of the firm (Stawiski, Deal, &
Gentry, 2010). Moreover, in buyer-suppliers' relations, supplier
3
Firm Performance
Firm Reputation
Firm Risk
reputation is affected by the perception of the buyer regarding the
supplier's engagement in CSR activities (Park, Lee, & Kim, 2014). Con-
sidering the findings of the studies mentioned above, we also believe
that CSR activities improve firm reputation. Firm reputation is best
understood as a collective and subjective evaluation, perception, and
recognition of an organization over a period of time among all groups
of stakeholders that is based on certain aspects of the firm like com-
munication, past behavior, quality, and so on. Here, the role of CSR is
important in achieving and maintaining good firm reputation which
can become a competitive advantage for the firm as it is considered
as a key strategic resource. Therefore, we proposed the following
hypothesis:
H1 Firm reputation is positively influenced by CSR activities.
1.2 | CSR-performance literature
First of all, it is important to explore and understand whether firms
can engage in CSR activities in an economically efficient and effective
manner or not and also to find out how firm performance is affected
through CSR engagement by the firm (Borisov, Goldman, &
Gupta, 2016; Deng et al., 2013; Lins et al., 2016; Naseem, Shahzad,
Asim, Rehman, & Nawaz, 2020). According to Stakeholder's theory,
firm performance improves due to its engagement in CSR activities
(Deng et al., 2013; Magill, Quinzii, & Rochet, 2015; Singal, 2014;
Tsoutsoura, 2004). Strong social performing firms are in a better posi-
tion to interact on favorable terms with their stakeholders than weak
performing firms which in a way translates into a competitive advan-
tage for strong social performers thus improving the performance of
the firm (Saeidi, Sofian, Saeidi, Saeidi, & Saaeidi, 2015). Furthermore,
engagement in CSR activities by the firm positively influences the atti-
tude of stakeholders towards the firm in the short-run and also
increases the advocacy behaviours of stakeholders in the long-run
(Du, Bhattacharya, & Sen, 2010). Sen and Bhattacharya (2001) argued
that consumers generally prefer to buy products and services of those
firms that are socially responsible thus leading to a positive influence
on firm performance. Also, encouraging its suppliers to observe CSR
standards and its own commitment to CSR engagement improves its
performance and image in the market (Mishra & Suar, 2010). Jia (2020)
concluded that increased CSR engagement by firms in highly competi-
tive industries improve CSR engagement as compared to industries
where the level of competition is low. Considering the outcomes of
the above-mentioned studies we also believe that CSR activities will
lead to a positive impact on profitability. The reason being,
4 REHMAN ET AL.
engagement in CSR activities creates a positive image of the organiza-
tion in the minds of the customers and other stakeholders and builds
a loyal customer base for the organization. Therefore, we propose the
following hypothesis:
H2 Firm performance is positively influenced by CSR activities.
1.2.1 | Firm reputation's mediating role in
CSR-performance relationship
Based on empirical evidence and our discussion mentioned above we
can say that firm reputation and firm performance enhances as a
result of firm engagement in CSR activities. In this study, we assume
that firm reputation mediates the CSR-performance relationship. On
one side, Fombrun (2005) argues that CSR engagement is instrumen-
tal in creating and improving the reputation of the firm, whereas on
the other, following resource based view, firm reputation is an impor-
tant resource for the firm that significantly affect consumer loyalty
(Cabral, 2012; Davies, Chun, da Silva, & Roper, 2003), positively influ-
ence the willingness of stakeholders to exchange resources (Pfarrer,
Pollock, & Rindova, 2010), and creates an opportunity for the firm to
sustain its profitability in the future as well (Roberts
Dowling, 2002). CSR initiatives by the firm improve its reputation by
responding to stakeholders expectations (Jones, 2005;
et al., 2010) including employees (Aguinis & Glavas, 2012;
Edmans, 2011, 2012 Turban & Greening, 1997), customers (Rindova
et al., 2005; Sen & Bhattacharya, 2001), and investors (Pfarrer
et al., 2010), which ultimately leads to improvement in firm perfor-
mance. Additionally, enhancement in firm reputation due to its CSR
engagement can create indirect economic benefits for the firm like
new market opportunities (Fombrun, Gardberg, & Barnett, 2000).
Considering empirical evidence, we also believe that firm reputation
will positively affect the CSR/firm performance relationship for the
reason that engagement in CSR activities significantly improves firm
reputation, builds a positive perception and enhances the goodwill of
the organization among its stakeholders thus leading to a positive
impact on firm profitability. Therefore, the following hypothesis is
proposed:
H3 Firm reputation mediates CSR-performance relationship positively.
1.2.2 | CSR/Firm risk literature
As modern businesses face a variety of risks, one proper way to man-
age exposure to such risks is to exploit insurance products available in
the market or self-insure (Minor & Morgan, 2011). We believe and
consider CSR activities by the firm as an effective strategy for self-
insurance. Cash flow stability enhances with a firm's CSR engagement.
The majority of the studies during the past few years provides
increasing evidence of the negative relationship between CSR and
firm risk. Studies from Oikonomou, Brooks, and Pavelin (2010) and
Salama, Anderson, and Toms (2011) provide strong evidence of a
firm's CSR initiatives' negative impact on a firm's systematic risk.
Improvement in environmental risk management leads to a reduction
in the cost of capital as well as cost of equity thus reducing the finan-
cial risk of the firm (Sharfman & Fernando, 2008). Attig, El Ghoul,
Guedhami, and Suh (2013) concluded that good CSR activities posi-
tively influence credit ratings of the firm thus reducing its riskiness.
Moreover, CSR engagement also acts as an important element of
insurance during scandal or adverse events being faced by the firm
(Godfrey, 2005; Minor & Morgan, 2011). Similarly, CSR protects firms
during economic downturns by building greater visibility and familiar-
ity (McAlister, Srinivasan, & Kim, 2007). Naturally, firms engaged in
CSR activities are less affected during economic fluctuations because
there are more stakeholders who support the firm. For instance,
engagement in CSR activities by the firm arouses the emotional per-
ceptions of the customers about the products of the firm (Lai
et al., 2010) and also helps in reducing the blame expected to come
from consumers during an event of a crisis (Klein & Dawar, 2004).
Firms enjoying greater consumer loyalty tend to have stable profits
and are comparatively less affected during economic downturns
(Albuquerque et al., 2010). From the employees' point of view, a CSR
oriented firm creates an ethical working culture within the organiza-
& tion that leads to lower turnover and lower absenteeism (Sims &
Keon, 1997) and also diminishes the knowledge spillovers associated
Lai risks (Flammer & Kacperczyk, 2016). Considering the above-
mentioned discussion, we also believe that engagement in CSR activi-
ties improves the image of the organization as a socially responsible
organization that may come in handy particularly during economic
downturns and adverse scandals when the organization in need of
support from its stakeholders. Moreover, engagement in CSR activi-
ties helps in reducing financial risk and improves credit ratings thus
lowering the cost of capital. Therefore, we also proposed the follow-
ing hypothesis:
H4 Firm risk is negatively influenced by firm CSR activities.
1.2.3 | Firm reputation mediating role between
CSR/risk relationship
While analyzing the CSR-risk relationship, we also put emphasis on
firm reputation's mediating role in this relationship. Specifically, we
believe that firm risk is reduced through CSR engagement via promi-
nent reputation. For improving firm reputation, CSR acts as an impor-
tant and effective investment. Better firm reputation leads to positive
attitudes from the stakeholders towards the firm and also affects the
behavior of stakeholders (Bhattacharya, Korschun, & Sen, 2009). For
example, customers are likely to give benefit of doubt to prominent
firms to redress rather than turning to lawyers to protect their inter-
ests (Minor & Morgan, 2011). Moreover, the better reputation of the
organization helps in enhancing the commitment of employees
towards their organization which in turn helps in improving the stabil-
ity and sustainability of the organization. Firm reputation as an
REHMAN ET AL.
intangible asset is invaluable and provides the much needed support
to its stock prices during unfavorable economic conditions (Minor &
Morgan, 2011). Considering the above-mentioned discussion, we also
believe that firm reputation will act as a moderator between CSR/firm
risk relationship primarily for the reason that improvement in firm rep-
utation as a result of its social obligations will be crucial particularly in
overcoming economic downturns and adverse scandals. The positive
perception and emotional attachment of stakeholders developed
through good CSR activities will help stabilize earnings during down-
turns thus reducing the risk of default. Therefore, based on our argu-
ments and discussion mentioned above, we propose the following
hypothesis:
H5 Firm reputation mediates CSR-Risk relationship.
2 | D A T A A N D M E T H O D O LO G Y
For this study, data for the period 2014–2018 are collected from mul-
tiple sources. Data concerning CSR were collected from the Environ-
mental, Social and Governance (ESG) database of MSCI. Firm
reputation data was collected from the list of World's most admired
companies available on Fortune's Global 500 database. The full sam-
ple is obtained by matching Data Stream and ESG database of MSCI.
The full sample comprised of 1,193 firms. The reputation rated sample
consists of the top 94 firms listed on Fortune's Most Admired Compa-
nies (FMAC). Both full and reputation rated sample consists of
30 countries from Europe and Asia (list of countries included in this
study is attached in Appendix 2). Firm risk related data was collected
from Data stream return index and each country's respective stock
exchanges. In the full sample, only those firms were selected for
which data was available in data stream and MSCI's ESG database.
Whereas in reputation rated sample, only those firms were selected
for which Fortune reputation scores were available for all firm years.
Financial data was collected from the data stream database.
2.1 | Measurement of variables
2.1.1 | CSR
The measure for CSR is constructed from the ESG database of MSCI.
ESG database consists of seven dimensions on the basis of which the
social performance of the firms is measured. These dimensions com-
prise of safety, employee relations, product quality, human rights, cor-
porate governance, environment, community, and diversity. Each
dimension consists of positive and negative indicators. If the indicator
is positive it is a strength otherwise a concern for the firm. If a firm
does something good, it is listed as a strength and gets one point and
if it does some harm then it is listed as a concern and the firm losses
one point. Following Deng et al. (2013) methodology, CSR score cal-
culation was also adjusted in this study for ESG rating attributes
where higher CSR scores indicated superior CSR performances by the
5
firms. More specifically, the CSR scores were calculated following Liu
and Lu (2019) by “dividing each dimensions' strength and concern
score with the respective number of strengths and concern indicators
in order to derive an adjusted score for strength or a concern for that
particular dimension. After doing this the difference between the
adjusted total strength score and the adjusted total concern score is
taken.” This adjustment helps us in overcoming the comparison issue
faced while assessing the CSR scores across the years as each year
the total strength/concern indicators will vary considerably for most
dimensions (Manescu, 2009). In addition to overall CSR score, we
also focused specifically on employee related CSR covering the
dimensions of employee relations, diversity and human rights. The
reason for including employee related CSR is that employees play
an important role in the success of an organization. Satisfied and
committed employees are essential for improving the performance
of an organization. Ali, Rehman, Ali, Yousaf, and Zia (2010) argued
that employee-related CSR can help build a strong bond between
the employee and the organization and increase employee commit-
ment toward the organization thus leading to improved financial
performance. Similarly, Servaes and Tamayo (2013) also concluded
that employee related CSR enhances employee satisfaction, com-
mitment and performance which ultimately translates into superior
financial performance.
2.1.2 | Firm reputation
For measuring firm reputation FMAC lists ranking were used. The rankings
of firms on the FMAC's list is done through an extensive effort involving
surveys from directors, executives, and trade analysts on their assessments
of firms pertaining to their own respective industries. Firms are basically
appraised on nine points. These nine points criteria include managing peo-
ple, quality of product or services, innovation, quality of management, use
of corporate assets, long-term investment, social responsibility, global com-
petitiveness, and financial soundness using a rating scale from 0 to
10, 0 being poor and 10 being excellent. Top companies based on their
overall reputation scores generated through these points are listed every
year. FMAC's list is one of the most comprehensive measures for measur-
ing the reputation of the firm (Luo & Bhattacharya, 2006). However,
FMAC Global list, being an international ranking, covers limited interna-
tional firms each year; therefore, a dummy variable in the name of “reputa-
tion dummy” was created which equals the value of one if a firm is listed
in the current FMAC global list and zero otherwise.
2.1.3 | Dependent variables
ROA is used as a measure of firm performance. Firm risk is measured
through beta values. Beta values are estimated using a market regres-
sion model that considers the factors identified by Fama–French and
a short run correction for autocorrelation in market returns (Scholes &
Williams, 1977). For estimating beta, we used methodology similar to
“Liu and Lu (2019)
6 REHMAN ET AL.
1
ri,s − r f,s = hi + β1i ðr M,s −r f,s Þ + β i ðr M,s −1 −r f,s − 1 Þ + hi SMBs
2
+ h2i HMLs + εi,s
Where ri, s is the weekly return for stock i at week s, rf,
one-month T-Bill rate at week s transformed into a weekly rate, rM, s is
the return on return index(respective stock exchanges) value-
weighted index at week s, and SMBs and HMLs are the Fama–French
factors at weeks. We adjust the estimate for autocorrelation in market
returns by including both current and lagged excess market returns in
the regression. Therefore, the value of firm β for stock i at year t used
in the subsequent analysis is calculated as”
β^i,t = β^1i,t + β^2i,t :
2.1.4 | Control variables
We control profitability (ROA), tangible assets, firm size, sales
growth, research and development costs, book leverage, and the
dummy of dividend payments in all regressions. Furthermore, in firm
risk related tests we also control “sin” industries. These are some of
the common variables that are identified as motivating factors for
companies that provides encouragement to them to participate in
various CSR activities (McWilliams & Siegel, 2001). For instance, the
control of book leverage will help us in capturing the slack resources
hypothesis. The slack resources hypothesis assumes that corporate
social performance is influenced by the previous financial perfor-
mance. Additionally, for controlling firm's growth opportunity sales
growth is included and the “sin” dummy use to control the influence
of “sin” stocks on firm risk and takes the value of 1 if it has one of
the sin concerns and zero otherwise (Hong & Kacperczyk, 2009).
Moreover, the reason for using sin dummy is to control the higher
risk already associated with sin industries. Sin stocks generally carry
higher risk because of their associated social taboos as being
immoral, harmful for health, dangerous for human beings, etc.
Socially responsible investors tend to avoid investments in sin stocks
as they are considered to be socially undesirable. This effect is also
known as social norm effect makes sin industries unattractive for
investment purposes thus increasing the risk of such industries. Fur-
thermore, commenting on CSR activities by controversial firms,
Hill (2001) argued that CSR activities of such firms may be perceived
as unethical or unsustainable and “alienate the organization from the
rest of society, resulting in reduced reputation, increased costs, and
decreasing shareholder value through erosion of its license to oper-
ate.” Controlling firm size is important it can significantly influence a
firm's capacity to carry out social actions. Large firms are expected
to be involved in more CSR activities as compared to small firms
(Crisostomo, de Souza Freire, & de Vasconcellos, 2011). Controlling
R & D expenses is also important as they influence CSR engagement
by the firm. An increase in R & D expenses may affect CSR engage-
ment activities. We control firms' dividends because dividend policy
also affects firm CSR engagement as high payout ratio means less
spending on CSR activities. Variables measurement and definitions
are presented in Appendix 1.
s is the
2.2 | Descriptive statistics
Descriptive statistics presented in Table 1 are divided into two panels.
Panel A consists of descriptive statistics of the full sample whereas
panel B comprises reputation rated sample. In this study, from the
ESG database, two CSR measures are constructed. The first measure
is overall CSR (OCSR) whereas the second measure is employee-
related CSR (ERCSR). In the full sample, a reputation dummy variable
representing whether a firm is rated by Fortune or not is used to mea-
sure firm reputation. Whereas for Panel B Fortune's actual rating
score is used.
The mean value of OCSR in full sample is −0.497 whereas its
median is −0.391. The mean value of ERCSR in full sample is −0.212
and its median is −0.199. The mean value of OCSR in the reputation-
rated sample is 0.218 whereas its median is 0.127. The mean value of
ERCSR in reputation rated sample is 0.133 and its median is 0.087.
The mean and median values of both overall and employee related
CSR has comparatively higher mean and median value in the
reputation-rated sample than the full sample. A possible explanation
for this variation can be that in terms of firm reputation, top-rated
firms are included in the reputation rated sample. This provides solid
justification for the positive relationship between firm reputation and
CSR stated in Hypothesis 1. Moreover, from Table 1 we can see that
ROA is higher and firm risk (β) is lower in the reputation-rated sample
(Panel B) as compared to full sample (Panel A). This outcome to certain
extent supports CSR's positive influence on firm performance and also
supports negative CSR's impact on firm risk as mentioned in hypothe-
sis 2 and hypothesis 4.
3 | RE SU LT S
3.1 | CSR/firm reputation
First, following Liu and Lu (2019) methodology, we examined the
impact of CSR on firm reputation. Hypothesis no 1 is tested by apply-
ing the following Logit regression model.
Reputation Dumi,t = α + βCSRi,t −1 + Controli,t −1 + Industry FE + Year FE + μ
ð1Þ
where the value of Reputation Dumi, t is one if the ith firm is on
FMAC's list at time t otherwise zero, CSRi, t−1 represents employee-
related and overall CSR scores collected from the database of ESG for
the ith firm at time t-1. Control variables that include tangible assets,
firm size, book leverage, profitability, sales growth, R & D expenses,
and dividend payer (dummy). Moreover, in order to control
unobserved year and industry-related heterogeneity, we included year
fixed effects and industry fixed effects. Firm-level clustered standard
REHMAN ET AL. 7

TABLE 1 Descriptive statistics

Mean Median Std. Dev Min Max
Panel A: Full Sample
ERCSR −0.212 −0.199 0.387 −3.231 3.991
OCSR −0.497 −0.391 0.517 −0.416 5.128
Reputation dum 0.053 0.000 0.112 0.000 1.000
ROA 0.121 0.118 0.112 −0.232 0.477
Firm Risk 1.011 1.006 0.601 −1.899 4.887
Leverage 0.213 0.195 0.211 0.000 0.781
R&D 0.041 0.030 0.046 0.000 0.423
Firm Size 6.982 6.872 1.396 4.025 12.876
Sales Growth 0.101 0.061 0.175 −0.314 1.624
Dividend payer (dum) 0.499 1.000 0.422 0.000 1.000
Tangible assets 0.248 0.139 0.312 0.000 0.712
Panel B: Reputation rated sample
ERCSR 0.133 0.087 0.413 −1.222 3.991
OCSR 0.218 0.127 0.674 −2.998 5.128
Reputation Score 6.121 6.113 0.515 0.000 9.120
ROA 0.182 0.171 0.091 −1.953 0.477
Firm Risk 0.998 0.992 0.498 −0.612 3.781
Leverage 0.178 0.141 0.128 0.000 0.781
R&D 0.015 0.002 0.021 0.000 0.311
Firm Size 8.456 8.332 1.112 4.919 12.876
Sales Growth 0.081 0.070 0.142 −0.337 1.624
Dividend payer (dummy) 0.688 1.000 0.327 0.000 1.000
Tangible assets 0.223 0.196 0.283 0.000 0.712

Note: The full sample contains 1,193 firms (5,965 firm-year observations) obtained through the matching
of Data Stream and MSCI's ESG Database. The reputation rated sample consist of 94 firms (470 firm-year
observations) listed in the Fortune MAC list.

errors provide the basis for statistical inferences. Therefore, CSR's
coefficient value measures the effect of CSR activities by the firm on
the firm reputation that normally cannot be determined or measured
by the characteristics of the firm, year and industry fixed effects.
FMAC is a relatively small sample of firms from across the globe
enjoying high reputation levels each year. In order to analyze CSR's
impact on the listed firm's actual reputation scores, the following
equation is used on the reputation rated sample.
Reputation Scorei,t = α + βCSRi,t −1 + Controli,t −1 + Industry FE + Year FE + μ
ð2Þ
where the value of Reputation Scorei, t represents actual reputation
score of the ith firm is on FMAC's list at time t otherwise zero, CSRi, t
−1 represents employee-related or overall CSR scores collected from
the database of ESG for the ith firm at time t-1, and control variables
that include tangible assets, firm size, book leverage, profitability, R &
D expenses, sales growth, and dividend payer (dum).
The Results of Model 1 and 2 are presented in Table 2. For
both models, CSR effects are estimated through the use of two
CSR measures, that is, employee-related CSR(ERCSR) and overall
CSR (OCSR). The coefficients of both overall and employee related
CSR shown in Model 2 are both positive and significant. This shows
that there is a greater possibility that better CSR performance leads
to a firm being inducted in Fortune's reputation list. Regression
estimations for the reputation rated sample indicate that though
CSR engagement positively impacts firm reputation scores, the
coefficient of overall CSR is less significant whereas for employee
related CSR it is significant. The insignificant result for overall CSR
can be attributed to the limited distribution of the sample. Gener-
ally, stakeholders appreciate the investment in CSR initiatives by
the firm, resulting in higher reputation ratings thus providing sup-
port to Hypothesis 1.
Among control variables, firm size and ROA have a significant
positive influence on firm reputation. An increase in firm size and
ROA strengthens the financial position of the firm, having more
financial resources to spend on CSR activities thus improving firm
reputation. On the other hand, leverage, sales growth, tangible
assets, and R & D expenses all have a negative impact on firm
reputation.
8 REHMAN ET AL.

T A B L E 2 CSR's influence on firm

Model 1 Model 2
Full Sample Reputation-rated sample
reputation (Dependent variable: Firm
reputation)
Reputation dummy Reputation score

ERCSR OCSR ERCSR OCSR

Constant 12.648** 12.012** 5.231** 5.116**
(0.000) (0.000) (0.000) (0.000)
CSR 0.624** 0.377* 0.203* 0.818*
(0.000) (0.000) (0.021) (0.033)
Firm Size 1.724** 1.812** 0.192** 0.211**
(0.000) (0.000) (0.010) (0.020)
ROA 6.657** 6.855** 3.122** 3.243**
(0.000) (0.000) (0.000) (0.000)
Leverage −1.417** −1.431** −0.433 −0.442
(0.000) (0.000) (0.663) (0.711)
Sales Growth −0.523 −0.547 −0.212 −0.209
(0.057) (0.611) (0.732) (0.814)
Tangible Assets −1.361* −1.299 −0.451 −0.399
(0.652) (0.774) (0.834) (0.766)
R&D −0.727 −0.693 1.023 1.227
(0.772) (0.674) (0.624) (0.557)
Dividend payer (dum) −0.232 −0.334 0.144 0.147
(0.074) (0.081) (0.096) (0.097)
Industry FEs Yes Yes Yes Yes
Year FEs Yes Yes Yes Yes
R-Square 0.478 0.476 0.299 0.268

Note: The full sample contains 1,193 firms (5,965 firm year observations) obtained through the matching
of Data Stream and MSCI's ESG Database. The reputation rated sample consist of 94 firms (470 firm year
observations) listed in Fortune Global MAC list.
**denotes significance at the 0.01 level.
*denotes significance at the 0.05 level. In all regressions industry and year effects were controlled.

3.2 | Influence of CSR on firm performance and role in the CSR-Performance relationship, the following regression
firm reputation's mediating role equation is used.

Stakeholder theory assumes that good social performance leads to
value creation for the shareholder as well as superior financial perfor-
mance. To estimate CSR activities impact on firm performance, we
follow Liu and Lu methodology by using the following equations:
FPi,t = α + βCSRi,t −1 + Controli,t −1 + Industry FE + Year FE + μ
where ROA is used to measure firm performance(FP), CSRi, t − 1 repre-
sents employee-related or overall CSR score collected from the data-
base of ESG for the ith firm at time t-1 and control variables remain
similar to that used in Model 1. CSR's coefficient shows CSR's extent
of influence on firm performance. From Table 3, we can see that CSR
has a strong positive influence on firm reputation. Here also we pro-
pose that CSR initiative's positive influence on ROA is partly due to
firm reputation. In order to analyze the firm's reputation mediating
FPi, t = α + β1CSRi, t − 1 + β2Reputation Dumi, t − 1 + Controli, t − 1 +
Industry FE + Year FE + μ …(4)
where Reputation Dumi is equal to 1 if the ith firm is on FMAC's
list at time t otherwise zero. Firm reputation's mediating role is mea-
ð3Þ sured through the comparison of coefficients of CSR presented in
model 3 and model 4 presenting in Table 3. More specifically, the
downward trend of CSR value shown in model 4 in comparison to
model 3 presented in Table 3 shows the firm reputation's level of
mediation in the CSR-performance relationship.
CSR's impact on firm performance and as well as firm reputation's
mediating role in CSR/performance relationship is depicted in Table 3.
For measuring financial performance ROA is used. Both measures of
CSR, that is, overall and employee-related CSR are used in estima-
tions. The results depicted in Table 3 show that those firms that
REHMAN ET AL. 9

TABLE 3 CSR influence on firm performance (Dependent variable: ROA)

Model 3 Model 4
Chow Test Chow Test
ERCSR OCSR ERCSR OCSR Model 3&4 ERCSR Model 3&4 OCSR
CSR 0.114* 0.081* 0.092* 0.071* 0.022* 0.010*
(0.000) (0.000) (0.000) (0.062) (0.000) (0.010)
Reputation Dummy 0.082* 0.088*
(0.000) (0.000)
Firm Size 1.004** 1.141** 0.233** 0.317**
(0.000) (0.000) (0.000) (0.000)
Leverage −0.987** −1.001** −0.332* −0.341*
(0.000) (0.000) (0.032) (0.011)
Sales Growth −0.523 −0.547 −0.212 −0.209
(0.057) (0.611) (0.732) (0.814)
Tangible Assets −1.143 −1.184 −0.451 −0.399
(0.062) (0.066) (0.088) (0.079)
R&D −4.213 −4.401 1.413 1.427
(0.112) (0.094) (0.077) (0.082)
Dividend payer (dum) −0.032 −0.036 0.126 0.128
(0.097) (0.102) (0.068) (0.075)
Industry FEs Yes Yes Yes Yes
Year FEs Yes Yes Yes Yes
R-Square 0.492 0.498 0.297 0.301

Note: The full sample contains 1,193 firms (5,965 firm-year observations) obtained through the matching of Data Stream and MSCI's ESG Database. The
reputation rated sample consist of 94 firms (470 firm-year observations) listed in the Fortune Global MAC list.
**denotes significance at the 0.01 level.
*denotes significance at the 0.05 level. In all regressions, industry and year effects were controlled.

TABLE 4 Conditional Indirect CSR's influence on performance through firm reputation

CSR Performance Measure Observed Indirect effects coefficients Bootsstrap S.E. P- value Z- value
ERCSR ROA 0.008* 0.001 0.002 9.43
OCSR ROA 0.010** 0.000 0.000 12.64

Note: **Significant at the 0.01 level.

*Significant at the 0.05 level.

perform better socially both in terms of employee-related CSR and
overall CSR, tend to have comparatively higher profits thus supporting
the stakeholder perspective. These findings are similar to the findings
of earlier studies by Tsoutsoura (2004), Deng et al. (2013),
Singal (2014), and Magill et al. (2015).
Furthermore, to analyze the mediating role of firm reputation, the
Chow test is used for coefficient comparisons. In both panels related
to model 4, CSR effects and firm reputation is incorporated concur-
rently. The results depicted in Table 3 indicate that both firm reputa-
tion and CSR have a significant and positive effect on firm
performance. Moreover, we can also see that both the significance
and level of CSR influence tends to decline when firm reputation
effects are included. χ2 statistics reported in the lasted two columns
of Table 3 show the differences in CSR coefficients between model
3 and model 4 indicate a significant decline. This shows that firm rep-
utation partly improves the effect of CSR on firm performance thus
validating our Hypothesis 3. Furthermore, bootstrap analysis was car-
ried out following Efron and Tibshirani (1993) model to analyze firm
reputation's mediating role in CSR -performance relationship. The
Bootstrap analysis is depicted in Table 4. From Table 4, we can see
that there is a strong indirect influence of CSR on ROA when firm rep-
utation is included as a mediator as all the p-values shown in the table
are significant. These results also support our hypothesis 3 which
states that firm reputation partly mediates the CSR/performance
relationship.
Among control variables, firm size has a significant positive influ-
ence on ROA, whereas leverage has a significant negative impact on
firm performance. An increase in firm size increases the profitability of
the firm. An increase in leverage increases the finance cost and finan-
cial risk of the firm thus depressing profitability. All other control vari-
ables have a negative influence on firm performance, but the strength
of their relationship is weak.
10 REHMAN ET AL.

3.3 | Influence of CSR on firm risk and firm
reputation's mediating role
Next, we measured CSR's influence on firm risk. Majority of the stud-
ies in the empirical literature point to a negative influence of CSR on
firm risk (see Albuquerque et al., 2010; Godfrey et al., 2009; Minor &
Morgan, 2011); however, there are some studies that point to a posi-
tive effect of CSR on firm risk (see Becchetti et al., 2014). Following
Liu and Lu (2019) methodology, the following equation is used to esti-
mate CSR's impact on firm risk.
FRi,t = α + βCSRi,t − 1 + Controli,t − 1 + Industry FE + Year FE + μ
control variable “dummy sin” is added to model 5 as compared to
model 1. The reason for including a sin variable is that sin industries
like tobacco, nuclear power, etc. may significantly influence firm risk
(Albuquerque et al., 2010). Here CSR coefficient measures CSR effect
on firm risk. Furthermore, we also suggest that a higher firm reputa-
tion as a result of its superior social performance lowers firm risk. To
analyze a firm reputation's mediating role in CSR-firm risk relationship,
a reputation dummy variable is added to model 5 and the relationship
is estimated through running the following regression;
Firm Riski , t = α + β1 CSRi, t −1 + β2 Reputation Dumi, t −1 + Controli, t −1
ð6Þ
ð5Þ + Industry FE + Year FE + μ

where β value of firm i at time t is used to measure firm risk (FR), CSRi, where Reputation Dumi is equal to 1 if the ith firm is on FMAC's list at
t−1 represents employee-related or overall CSR scores collected from time t otherwise zero. Firm reputation's mediating role is measured by
the database of ESG for the ith firm at time t-1. Also an additional comparing the coefficients of CSR presented in model 5 and 6. More

TABLE 5 CSR's influence on firm risk (Dependent variable: Firm beta)

Model 5 Model 6
Chow Test Chow Test
Full Sample Reputation-rated sample
Model 5&6 Model 5&6
ERCSR OCSR ERCSR OCSR ERCSR OCSR
Constant 0.856** 0.844** 0.823** 0.819** 0.033** 0.025**
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
CSR −0.037* −0.047** −0.032* −0.043*
(0.043) (0.000) (0.031) (0.000)
Reputation Dum −0.067** −0.061**
(0.000) (0.000)
Firm Size 0.029** 0.028** 0.031** 0.030**
(0.000) (0.000) (0.000) (0.000)
ROA −0.811** −0.942** −0.802** −0.901**
(0.000) (0.000) (0.000) (0.000)
Leverage 0.515** 0.529** 0.502** 0.509**
(0.000) (0.000) (0.000) (0.000)
Sales Growth 0.066** 0.068** 0.067** 0.068**
(0.020) (0.020) (0.010) (0.020)
Tangible Assets −0.021 −0.024 −0.022 0.025
(0.067) (0.073) (0.081) (0.125)
R&D 0.527* 0.532** 0.542* 0.557**
(0.000) (0.000) (0.000) (0.000)
Sin Dum −0.233 −0.347 −0.412 −0.512
(0.090) (0.120) (0.087) (0.062)
Dividend payer (dum) −0.095** −0.092** −0.088** −0.084**
(0.000) (0.000) (0.000) (0.000)
Industry FEs Yes Yes Yes Yes
Year FEs Yes Yes Yes Yes
R-Square 0.186 0.182 0.191 0.192

Note: The full sample contains 1,193 firms (5,965 firm year observations) obtained through the matching of Data Stream and MSCI's ESG Database. The
reputation rated sample consist of 94 firms (470 firm year observations) listed in Fortune Global MAC list.
**denotes significance at the 0.01 level.
*denotes significance at the 0.05 level. In all regressions industry and year effects were controlled.
REHMAN ET AL.
TABLE 6 Conditional Indirect CSR's influence on Firm risk: firm reputation as a mediator
CSR measure Firm Risk measure Observed Indirect effects co-efficients
ERCSR Beta −0.009**
OCSR Beta −0.006*
Note: **Significant at the 0.01 level.
*Significant at the 0.05 level.
specifically, the downward trend of CSR coefficient shown in model
6 in comparison to model 5 shows firm reputation's level of mediation
in CSR-performance relationship.
Table 5 shows the results of model 5 and model 6. χ2 statistics
reported in the lasted two columns of Table 5 show the differences in
CSR coefficients between models 5 and model 6. According to our
results depicted in Table 5, it is evident that firm risk is lower for those
firms having higher OCSR scores and ERCSR scores. These results
indicate that both CSR and firm reputation negatively impacts firm
risk. However, the significance and absolute value of CSR both decline
when firm reputation effects are included. Our findings are consistent
with the findings of Sharfman and Fernando (2008), Oikonomou
et al. (2010), Salama et al. (2011), and Attig et al. (2013). A possible
explanation for CSR's negative influence on firm risk can be attributed
to customer loyalty as customers are willing to support organizations
in economic downturns that are socially responsible (McAlister
et al., 2007; Minor & Morgan, 2011). Firms engaged in CSR activities
are less affected during economic fluctuations because there are more
stakeholders who support the firm (Albuquerque et al., 2010). The
negative effect of sin dummy on firm risk shows that even controver-
sial firms can reduce firm risk through CSR engagement. Chow test
value presented in the last two columns shows the differences in CSR
coefficients between model 5 and model 6 indicate a substantial
decline. This shows that firm reputation partly reduces CSR's influ-
ence on firm risk thus validating our Hypothesis 4.
Among control variables firm size, leverage, R & D expenses, and
sales growth have a significant positive influence on firm risk whereas
ROA has a significant negative impact on firm risk. The reason being,
an increase in profitability improves the ability of the firm to pay off
its debts thus decreasing financial risk. An increase in leverage
increases the financing costs of the firm thus leading to a positive
effect on the firm. An increase in R & D expenses leads to an increase
in firm risk because the success of new product development or
improvement as a result of R & D cannot be determined accurately.
Moreover, to incur R & D expenses firms might have resorted to
external borrowings to support R & D expenses thus leading to an
increase in financial risk.
Next bootstrapping analysis was carried out to examine CSR's
indirect influence on firm risk caused through firm reputation. Table 6
presents bootstrap analysis and from here we can see that CSR has a
strong negative indirect influence on firm performance when firm rep-
utation as a mediator is used as all the p-values shown in the table are
significant. These results also support our hypothesis 5 which states
that the firm reputation partly mediates CSR-firm risk relationships
though negatively.
11
Bootsstrap S.E. P- value Z- value
0.003 0.001 −4.43
0.001 0.001 −4.14
4 | CONC LU SION
The main purpose of this study is to measure CSR's impact on firm risk
and firm performance and also emphasize the mediating role of firm
reputation while measuring this relationship. Based on empirical
results we can conclude that CSR activities have a positive effect on
firm performance whereas on the firm risk it is negative. More specifi-
cally, our results indicate five important outcomes. First, CSR posi-
tively impacts firm performance; second, CSR positively effects firm
reputation; third, firm reputation partly mediates CSR-performance
relationship; fourth, CSR negatively affects firm risk, and finally, there
is a partial influence of CSR on firm risk when the mediation of firm
reputation is implied. Apparently, three important theoretical implica-
tions can be derived from the findings of the study. First, the firm-
level empirical literature on CSR-outcomes relationship is enhanced
with the addition of this study. This study not only analyses the CSR-
performance linkage and supports the stakeholder's perspective of
CSR's positive influence on firm performance but also focusses on
and adds to the debate on CSR-firm risk linkage. Second, the basic
mechanisms of CSR-risk and CSR performance relationships were also
analyzed with a specific focus on firm reputation's mediating role in
both these relationships. Although there are some empirical studies
that have attempted to investigate the underlying mechanisms of CSR
relationship with performance (see Luo & Bhattacharya, 2006; Pivato
et al., 2008; Sharma, 2000), but most of them have defined and
looked into CSR effects from a very narrow perspective. Additionally,
limited efforts have been carried out to explore the fundamental
mechanisms between CSR practices and firm risk relationships
(e.g., Albuquerque et al., 2010). In this study, firm reputation has been
identified as a comprehensive indicator for measuring CSR effects and
also signifies its role as a mediating factor while measuring CSR's influ-
ence on firm risk and performance. Third, this study helps in improving
the reliability of results and also adds to empirical literature of CSR
effects by using an objective and comprehensive estimate for firm
reputation. Earlier studies on CSR involving firm reputation have
mostly used interviews or questionnaires to collect data with respect
to firm reputation (e.g., Rodrigo & Arenas, 2008), where there is a pos-
sibility that firm reputation measured through questionnaires and
interviews can be biased to a certain extent. As far as this study is
concern, we have used firm reputation through firm reputation ratings
published by Fortune. Additionally, for managers, this study has
important practical implications. First, the influential role of CSR activ-
ities by the firm in improving its performance and mitigation of risk
helps in encouraging managers to participate in CSR activities. Due to
positive outcomes, firms are encouraged to invest more in CSR
12
activities, especially for those firms that are exposed to negative
events and economic fluctuations as it will help in responding to unex-
pected events and risks. Second, a firm reputation's mediating role
helps and gives practical guidance to managers with respect to CSR
promotions. Especially for firm CSR strategies, managers must pay
attention to the “halo effect” that will be created a through firm repu-
tation, thus increasing the economic benefits derived from investment
in CSR activities.
Like any other, this study also has certain limitations. The first lim-
itation of the study is Fortune provides reputation ratings for firms
only from 34 countries. Other countries may have different standards
for CSR activities (Park et al., 2014). Therefore, future studies should
focus on CSR practices across countries for a comparison study. Sec-
ond, although the study highlighted the potential benefits of CSR yet
it neglects the potential costs associated with CSR particularly in the
short-run. A benefit/cost trade-off analysis may provide more mean-
ingful insights for CSR-risk and CSR-performance relationships.
ORCID
Zia ur Rehman https://orcid.org/0000-0001-5937-9105
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Corporate social responsibility's influence on firm risk and firm
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REHMAN ET AL. 15

APPENDIX A.

Variable Definition
ERCSR Sum of adjusted CSR scores from employee relations, human rights, and diversity attributes
OCSR Sum of CSR scores for yearly adjusted community activities, corporate governance, diversity, employee relations,
environmental record, human rights, and product quality and safety from MSCI's Environmental, Social, and Governance
(ESG) database.
Book Leverage Book value of total debts (sum of current liabilities and long-term debt) divided by book value of total assets
Firm β It is referred to as firms' systematic risk and is defined as the sum of estimation coefficients on market excess returns and
lagged market excess returns in the regression of firm weekly excess returns on market excess returns, lagged market excess
returns, and the SMB and HML Fama–French factors.
Firm Size Natural log of total assets
ROA Profit before interest and taxation divided by total assest
R&D expenses R&D expenses over total assets
Reputation Dummy Dummy variable with a value of 1 if a firm has a reputation score on Fortune's World's Most Companies list in the current year
otherwise zero
Reputation score Actual rating scores by Fortune according to nine major attributes: innovation, people management, use of assets, social
responsibility, management quality, financial soundness, long-term investment, product quality, and global competitiveness.
Sales Growth Annual growth rate of total sales.
Sin Dummy Dummy variable with a value of 1 if a firm is involved in at least one controversial industry, and has a value of 0 otherwise.
Tangible assets Net property, plant, and equipment over total assets.
Dividend payer Value 1 if common stock dividends are positive otherwise zero
(dummy)

APPENDIX B .

Europe Asia
Austria China
Belgium India
UK Indonesa
Netherlands Japan
Denmark Saudi Arabia
Finland Singapore
France South Korea
Germany Taiwan
Luxemberg Thailand
Sweden Turkey
Ireland UAE
Italy Malaysia
Poland
Russia
Netherlands
Norway
Spain
Switerland