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Corporate social (ir)responsibility towards employees and financial performance: using time to solve the chicken-egg problem

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  • Raja Abid

    (University of Montreal)

Abstract

In a context where companies are increasingly paying attention to their financial performance, but also to their social responsibility towards employees (e.g. work-family balance, diversity management, employee retention practices), we attempt to answer the following question: is it the financial performance that determines the level of corporate social responsibility towards employees undertaken within a firm or is it the other way around? Analyzing a sample of 28,932 firm-year observations between 1991 and 2015, this paper explores the bidirectional relationship between corporate social responsibility and irresponsibility towards employees (CSRE/CSIRE) and financial performance, and the way this relationship unfolds over time. Stakeholder theory and the resource-based view, as well as the slack-resources hypothesis constitute the theoretical foundation of this relationship. These theories model CSRE as an investment that needs resources but that also has financial benefits. Using a vector autoregressive model for panel data, we show that there is a bidirectional relationship between CSRE/CSIRE and financial performance. However, contrary to what we expected, both CSRE and CSIRE are negatively related to financial performance. Additionally, we find that financial performance increases CSIRE, which means that firms adopting practices harming employees are not necessarily doing so because of financial constraints. Our findings also show that the impact of CSRE/CSIRE on financial performance is more spread over time than the relationship in the reverse direction. In order to see the benefits of CSRE (if any), managers should not only be patient but should also adopt practices that are aligned with the company’s needs.

Suggested Citation

  • Raja Abid, 2023. "Corporate social (ir)responsibility towards employees and financial performance: using time to solve the chicken-egg problem," Review of Managerial Science, Springer, vol. 17(2), pages 635-659, February.
    • Handle: RePEc:spr:rvmgts:v:17:y:2023:i:2:d:10.1007_s11846-022-00541-9
    DOI: 10.1007/s11846-022-00541-9
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    More about this item

    Keywords

    Corporate social responsibility towards employees; Corporate social irresponsibility towards employees; Financial performance; Granger causation; Time effect;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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