Should Companies Increase Size or Improve their CSR Profile in order to Improve their Performance?

This study proposes an empirical model to investigate the inter-relations among Corporate Social Responsibility (CSR), Corporate Financial Performance (CFP) and size, while accounting for liquidity and exposure to financial default risk. The analytical focus lies on potential endogeneity issues, which are investigated employing a system of equations, estimated using the Generalized Method of Moments (GMM) technique. A non-industry-specific sample is employed, consisting of 233 companies included in FTSE 250, from 2003 to 2010. The main findings strongly indicate that UK market is sensitive to firms' social profiles, which are found to be endogenous related to both size and performance. Furthermore, CSR is asymmetrically related to performance, where excessive or no investment in CSR are the most rewarding financially. This supports the hypothesis in Barnett and Salomon (2012) that the relationship between corporate social performance and corporate financial performance follows a U-shaped pattern. We also find larger and more profitable companies are more likely to invest in CSR, which in turn further contributes to both, probably due to increased visibility. This is a strong indication that size might be a significant determinant of the shape of the CSR-CFP relationship and that CSR activities constitute a long term investment.