Abstract

The fulfillment of corporate social responsibility (CSR) initiatives today suggests that corporate perceptions of CSR have shifted from irrelevant business features to a critical business function. The purpose of this investigation is to examine the relationship between CSR and financial performance. That is, “does CSR impact a firm’s financial performance, especially profitability?” This paper hypothesizes that CSR positively impacts a firm’s financial performance. It also suggests that there is a simultaneous relationship between CSR and financial performance. The unique contributions of the study are the theoretical framework and empirical analysis. The theory incorporates CSR into a consumer’s utility function and a firm’s production function. The empirical analysis creates an ordinary least squares regression model and a duel causation model, which uses a two-stage least-squares regression technique. The results of the OLS empirical models suggest that prior corporate social performance (CSP), a proxy measure for CSR, positively affects future firm financial performance, more specifically return on assets (ROA) and return on equity (ROE). There is also evidence that prior firm financial performance positively affects a firm’s CSP. However, the simultaneous relationship between CSR and financial performance is much weaker than the results of the traditional statistical techniques. While there is no universal agreement on the relationship between CSR and financial performance, this paper concludes that in the long-term it pays to be socially responsible.

Advisor

Sell, John

Department

Business Economics

Disciplines

Business

Publication Date

2014

Degree Granted

Bachelor of Arts

Document Type

Senior Independent Study Thesis

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© Copyright 2014 Jonathan E. Huisel