Corporate Social Responsibility And Financial Performance: New Evidence From Europe

Nowadays, corporations are facing an increased demand not only to achieve robust economic growth, but also to operate in a more ethical and responsible manner. But as long as the majority of economic agents place their own welfare above that of society, the question is: Which incentives does a company have to engage in CSR activities? Will companies benefit financially from their activities, or will they face mainly constraints by increased non-profitable spending? To answer this question, this paper examines the link between Corporate Social Responsibility (CSR) and Corporate Financial Performance (CFP). By using recent data from European companies, our paper extends prior large-scale Anglo-American research and tries to shed some light on the causal relationship between CSR and CFP as well as on country effects. We further introduce of a new measure for CSR to reduce the few-measure bias that has plagued the current body of research. By employing this new measure to established empirical methods, our approach allows for direct comparison with results from previous studies. Consistent with past studies, we find a positive relationship between CSR and CFP when we use traditional regression analysis. However, our results fail to lend support to the idea of a business case for CSR since we could not find a positive relationship between lagged CSR measures and current CFP when we use the Granger causality approach. Instead, our findings suggest that strong financial performance leads to more CSR activities (especially in the environmental field) as stated by the slack resources theory. Hence, companies who can afford CSR activities are good at being green/social. Our results indicate further that the institutional environment of the United Kingdom might be more favorable to honor responsible activities compared to other European countries.