Abstract
Profitability is the main goal of business organizations. This study focused on the effect of previous-year CSR practices on current-year financial performance, and then its effect on subsequent-year CSR practices. This study also investigated the mediating effect of current-year firm reputation on the relationship between previous-year CSR practices and current-year financial performance, and on the relationship between current-year financial performance and subsequent-year CSR practices. Using a random sampling technique, 200 public listed firms on Bursa Malaysia were selected as the study’s sample. Content analysis of their annual reports for year 2013, 2014 and2015, and company websites was carried out to determine their CSR practices disclosure, ROA and firm reputation. Partial least squares – structural equation modelling was used to analyse the samples. Findings showed that previous-year CSR practices lead to significant and positive effect on current-year reputation and corporate financial performance. Current-year firm reputation mediates the relationship between previous-year CSR and current-year corporate financial performance. However, current-year corporate financial performance does not lead to subsequent-year CSR practices disclosure. This study showed that CSR practices have immediate positive effect on corporate financial performance, but the profitability did not lead to more disclosure in subsequent-year CSR practices. Hence, further study might explore the relationship on a wider time gap between current-year corporate financial performance and subsequent-year CSR practices. Conclusively, CSR practices are critical success factor that must be effectively and efficiently implemented by firms.
Keywords: Corporate social responsibility, Corporate financial performance, ROA, Firm reputation, PLS-SEM.
Received: 21 November 2019 / Revised: 30 December 2019 / Accepted: 3 February 2020/ Published: 9 March 2020
Contribution/ Originality
This study originates measurement scales for CSR and firm reputation disclosures. This is one of the few studies to have investigated the virtuous cycle of CSR and financial performance. The primary findings are on the immediate effect of CSR on performance but delayed reciprocal effect of profitability on CSR.
1. INTRODUCTION
Corporate social responsibility (CSR) has become a buzzword in the business world of today as it is associated with the sustainable success of business firms (DiSegni, Huly, & Akron, 2015; Ditlev‐Simonsen & Midttun, 2011). This is evidenced by the fact that 93 percent of world’s largest companies are disclosing their CSR practiced formally (KPMG, 2013). According to Esa and Ghazali (2012) the pressing question that merits attention is how a firm contributes to the environment and community, and how CSR can be executed and should not be the reasons as to why it is done. The implementation of CSR has swerved the traditional notion of profit maximization as an organizational goal to a paradigm that emphasizes on fulfilling the expectations of all stakeholders (Anas, Rashid, & Annuar, 2015; Jitaree, 2015; Yusoff & Adamu, 2016). Empirical evidence supports the contribution of CSR practices to organizational performance, particularly, in financial aspects (Abd Mutalib, Jamil, Zuriana, & Wan Hussin, 2014; Ahamed, Almsafir, & Al-Smadi, 2014; Saeidi, Sofian, Saeidi, Saeidi, & Saaeidi, 2015). Additionally, empirical evidence also indicates that organizational performance provides resources, thus enabling the implementation of more and better CSR practices (Fauzi & Idris, 2010; Ghelli, 2013; Surroca, Tribó, & Waddock, 2010). Therefore, there is an indication that CSR has a cyclical pattern or a virtuous cycle with CSR practices enhancing financial performance and in return, financial performance provides slack resources to implement more CSR practices (Ahmadi, 2014; Fauzi & Idris, 2010; Palmer, 2012; Waddock & Graves, 1997). The presence of the virtuous cycle prompted companies to commit seriously to implementing CSR for its obvious benefits, particularly in relation to profitability (Dian, Made, Djumahir, & Eko, 2014; Ghelli, 2013; Wissink, 2012).
1.1. Problem Statement
CSR has often been regarded as a mechanism for building good relationship with stakeholders so that accessibility to a firm’s resources is established (Mwangi & Jerotich, 2013). Hence, companies are motivated to implement CSR due to profitability (Ahamed et al., 2014). Many studies have investigated the relationship between CSR and financial performance (Ahamed et al., 2014; Amran, Zain, Sulaiman, Sarker, & Ooi, 2013; Crowther, Abdaless, Oubrich, & Barzi, 2015; Ehsan & Kaleem, 2012; Hirigoyen & Poulain-Rehm, 2015). There are also many studies which proved that a two-way relationship or a virtuous cycle exists between CSR and financial performance (Jiao & Xie, 2013; Palmer, 2012; Surroca et al., 2010; Waddock & Graves, 1997; Wissink, 2012). These studies focused on determining the direction of the relationship, whether positive, negative or neutral but did not consider other influential factors that could contribute to the quality of the relationship (Aguinis & Glavas, 2012; Ghelli, 2013; Peng & Yang, 2014; Robins, 2011).
The arguments on how CSR and financial performance are related have not come to any conclusive decision (Hirigoyen & Poulain-Rehm, 2015; Mwangi & Jerotich, 2013; Ramchander, Schwebach, & Staking, 2012). There is a need to carry out more research to explain the CSR loop concept (Ghelli, 2013; Quazi & Richardson, 2012; Wissink, 2012). Some researchers believed that there are some influential factors affecting the relationship between CSR practices and financial performance (Aguinis & Glavas, 2012; Alshammari, 2015; Peng & Yang, 2014; Surroca et al., 2010). Factors such as a timeline need to be included as variables in the investigation of the relationship between CSR practices and financial performance.
There are variances in the adoption of time in prior studies as well as differences in terms of methodologies and approaches (Girerd-Potin, Jimenez-Garcès, & Louvet, 2013; Peloza, 2009). Hence, it is necessary to include a time horizon and determine whether CSR practices from previous year contribute towards current financial performance, and in turn, result in more CSR practices in the subsequent year.
Another variable that should be considered in the assessment of the CSR and financial performance relationship is the firm’s reputation. CSR practices can enhance firm reputation (Alshammari, 2015; Beheshtifar & Korouki, 2013; Inoue & Lee, 2011).
Recent studies supported the notion that CSR engagement and activities strengthen the firm’s reputation which subsequently leads to financial performance (Den Hond, Rehbein, de Bakker, & Lankveld, 2014; Othman, 2012; Sur & Sirsly, 2013). Thus, this study explores the contribution of current-year firm reputation as a mediator to the relationship between previous-year CSR practices and current-year financial performance.
Although the concept of CSR has caught on with a majority of businesses globally, there are still many publicly listed companies (PLCs) in Malaysia lacking in awareness and knowledge of CSR (Ahamed et al., 2014) and the advantages of disclosure (Ahamed et al., 2014; Amran et al., 2013). Hence, conducting more studies on CSR practices and its contribution towards firm’s reputation and financial performance in a Malaysian setting is necessary.
The capability of CSR disclosures to enhance firm’s reputation and improve business performance contributes to the competitiveness of the firm and attracts more investments from both local and foreign sources (Waworuntu, Wantah, & Rusmanto, 2014).
1.2. Research Questions
The problem statement above has identified some gaps in practice and research, and thus, leading to the research questions below:
- What is the relationship between previous-year CSR practices and current-year firm reputation?
- What is the relationship between current-year firm reputation and current-year financial performance?
- Does current reputation mediate the relationship between previous-year CSR practices and current-year financial performance?
- What is the relationship between current-year financial performance and subsequent-year CSR practices?
2. LITERATURE REVIEW
2.1. Theoretical Framework
In this study, two main theories were used to support the existence of a virtuous cycle. The Stakeholder Theory was used to explain the forward relationship of previous-year CSR practices with current-year firm reputation and current-year financial performance. The Slack Resources Theory was used to explain the backward relationship of current-year financial performance with subsequent-year CSR practices.
2.1.1. Stakeholder Theory
The theory states that business organizations function to fulfil the expectations of all stakeholders. According to Murray and Vogel (1997) a stakeholder refers to any entity, mainly those external to the firm that is influenced by or influences the firm.
Inoue and Lee (2011) stated that there are many types of primary stakeholders like employees, customers, suppliers, financial institutions, communities and shareholders. This theory is in contrast to the theory of the shareholder whereby the stakeholder theory diffuses the focus of business goals on profit maximization that solely benefits the shareholders and leads to a business focus that addresses all benefits and expectations for the various stakeholders (Amran et al., 2013; Hamid & Atan, 2011).
Therefore, the disclosure of CSR performance is regarded as a strategic tool to maintain the support of influential stakeholders (Elijido-Ten, 2007).
2.1.2. Slack Resources Theory
The Slack Resources Theory is based on the availability of slack which refers to excess resources resulting from good financial performance. Bourgeois (1981) stated that slack serves as a cushion of actual or potential resources to enable the firm in adapting successfully towards internal pressures for adjustment or external pressures for policy change, as well as initiating strategic change due to pressures from the external environment.
Hence, slack is regarded as potential resources that can be used, diverted and redeployed within the organization to achieve its goals (Zhong, 2009). Slack Resources Theory posits that slack originating from financial abundance can be invested in CSR activities and programs (Fauzi & Idris, 2010; Waddock & Graves, 1997). Thus, Slack Resources Theory was used to explain how good financial performance can lead to future CSR practices in the virtuous cycle of CSR and financial performance.
2.2. Conceptual Framework and Development of the Research Hypotheses
The conceptual framework of this study identifies the interrelationship of three variables: previous-year CSR practices, current-year firm reputation, current-year firm financial performance and subsequent-year CSR practices. The interrelationships among these variables are based on the looping concept that creates a virtuous cycle of CSR and financial performance (Surroca et al., 2010).
Therefore, it is presumed that previous-year CSR practices will influence current-year firm reputation and current-year financial performance directly. There is also an indirect effect of previous-year CSR practices on current-year firm financial performance mediated by current -year firm reputation. Further to that, current-year firm financial performance results in CSR practices in the subsequent year.
2.2.1. Relationship between Previous-Year CSR Practices and Current-Year Firm Reputation
It is assumed that businesses that do not consider CSR in their endeavours will create a bad reputation that could tarnish the image and reputation of the shareholders and investors (Ghelli, 2013; Othman, 2012). Therefore, it is necessary for firms to embark on social responsibilities is to ensure that their reputation is maintained among the stakeholders (Alniacik, Alniacik, & Genc, 2011). Positive contribution to social and environmental issues is demanded by different stakeholders (Aguinis & Glavas, 2012; Melo & Garrido-Morgado, 2011). Hence, it appears that a synergistic relation exists between CSR and firm’s reputation which is evident in past studies (Beheshtifar & Korouki, 2013; Bertels & Peloza, 2008; Othman, 2012; Saeidi et al., 2015).
By taking a socially responsible action, firms can enhance their reputation and, in the process, rewarded by the stakeholders (Sur & Sirsly, 2013). Trends of disclosing CSR are intended to encourage firms in performing more and better CSR so that firm reputation is boosted (Oikonomou, Brooks, & Pavelin, 2014; Othman., Darus, & Arshad, 2011). Thus, by identifying in this study, the previous CSR practices based on firm’s disclosure of CSR in their 2013 annual report and current firm reputation in their 2014 annual report, it is hypothesized that:
H1: Previous-year CSR practices have a positive and significant effect on current-year firm reputation.
2.2.2. Relationship between Previous-Year CSR Practices and Current-Year Financial Performance
The relationship between previous-year CSR practices (based on the 2013 annual report) and current-year financial performance (based on the 2014 annual report) of the firms is based on the stakeholder theory (Freeman, 1984; Spitzeck, 2009).
Studies such as Ehsan, Kaleem, and Jabeen (2012) and Wissink (2012) posited that financial performance is influenced by CSR practices. Other studies (Ahamed et al., 2014; Chen, Feldmann, & Tang, 2015; Fauzi & Idris, 2010; Inoue & Lee, 2011; Jitaree, 2015; Trang & Yekini, 2014; Waddock & Graves, 1997; Yusoff & Adamu, 2016) consistently indicated a positive relationship between CSR practices and financial performance. Therefore, it is proposed that a hypothesis as stated below is tested in this study:
H2: Previous-year CSR practices have a positive and significant effect on current-year firm financial performance.
2.2.3. Mediation by Firm Reputation
Othman (2012) explained that a firm’s reputation is enhanced because of the implicit demand by the major stakeholders to implement CSR which subsequently leads to a positive effect on financial performance. Thus, by conforming with the demands and expectations of stakeholders, this strengthens and enhances the firm’s reputation and results in improved financial performance (Porter & Kramer, 2011; Saeidi et al., 2015).
Othman (2012) concludes that disclosure of CSR becomes a tool that can create, protect and enhance a firm’s reputation and then, turn this into advantages to ensure greater financial performance. Clearly, CSR influences firm financial performance through its reputation (Raza, Ilyas, Rauf, & Qamar, 2012; Wheelen & Hunger, 2012) thus implying a mediating role that is carried out by firm reputation. This leads to the proposal of the following research hypothesis:
H3: Current-year firm reputation mediates the relationship between previous-year CSR practices and current-year firm financial performance.
2.2.4. Relationship between Current-Year Financial Performance and Subsequent-Year CSR Practices
The relationship between current-year financial performance and subsequent-year CSR practices is supported by the Slack Resources Theory. It implies that with the availability of slack resources, the firm has the capability to invest in more CSR practices (Waddock & Graves, 1997). According to Surroca et al. (2010) financial performance and CSR practices indicate a positive synergistic relationship. Fauzi and Idris (2010) explained that the availability of slack resources enables the firm to apportion the resources to the domains of CSR and therefore, increasing CSR performance. Numerous studies (Dian et al., 2014; Fauzi & Idris, 2010; Ghelli, 2013; Palmer, 2012; Surroca et al., 2010; Wissink, 2012) provide empirical evidence to support a positive effect of current-year firm financial performance on subsequent-year CSR performance. Therefore, the following research hypothesis is presented:
H4: Current-year firm financial performance has a positive and significant effect on subsequent-year corporate social responsibility practices
3. RESEARCH METHODOLOGY
3.1. Research Design and Sample Selection
This study used a descriptive research design with content analysis method. Secondary data from the 2013, 2014 and 2015 annual reports of the participating firms were used in this study. The extraction of data from the annual reports was based on the content analysis method which according to Weber (1990) is a method employing a set of procedures to make valid inferences.
Content analysis is a commonly method used extensively to explore firms’ disclosure of their CSR activities (Ahamed et al., 2014; Aras, Aybars, & Kutlu, 2009; Kamatra & Kartiningdyah, 2015; Karagiorgos, 2010; Mwangi & Jerotich, 2013). The population of this study identified publicly listed companies on the Main Board of Bursa Malaysia.
From the population, samples of firms were drawn using the random sampling method to ensure that every firm in the population had an equal opportunity to be selected for the sample in this study. A total of 200 firms was randomly selected from the population.
3.2. Research Instrument
A disclosure checklist form was developed to compile data gathered from the annual reports. The checklist consisted of four sections: (i) CSR disclosure gathered from the 2013 annual report for each of the firms; (ii) reputation disclosure gathered from the 2014 annual report; (iii) ROA as a measure of financial performance gathered from the 2014 annual report; and CSR disclosure from the 2015 annual report.
The CSR disclosure checklist comprised of items that were divided into four dimensions: environment, community, marketplace and workplace. Table 1 shows the CSR disclosure items used to capture information regarding CSR practices in 2013 (previous-year CSR practices) and in 2015 (subsequent-year CSR practices). The checklist was developed from past studies (Abd Mutalib et al., 2014; Anas et al., 2015; Bursa Malaysia, 2006; Haji, 2013; Zainal, Zulkifli, & Saleh, 2013). A dichotomous scoring of yes/no was used to measure disclosure of CSR activities based on the four dimensions. An index score was calculated to represent each dimension of CSR (ratio of total “yes” response to the total items the dimension).
Table-1. CSR disclosure checklist.
CSR Items |
Explanation |
Environment |
|
1. Waste Management and Resources Conservation |
Information about waste management and conservation of natural resources (e.g. using recycling materials). |
2. Pollution and Emission Control |
Pollution and emission control in the conduct of business operations. A statement indicating that pollution and emission from business operations have been reduced. |
3. Effective Usage of Energy |
Conservation of energy in the conduct of business operations. Efficiently using energy resources in the business operations (e.g. renewable energy: biofuels, biogas). |
4. Prevention and Reparation Program |
Prevention or repair of damage to the environment. |
5. Environmental Concern and Commitment |
A statement about company's concern for the environment and commitment to environmental responsibility (e.g. support the green campaign and activities). |
6. Certification and Awards Achievement |
Certifications and awards achievement by the company that relate to environmental practices |
Workplace |
|
1. Human Capital Development |
Provide job training programs, graduate employment programs or giving financial assistance to employees in educational institutions; continuing educational courses. |
2. Employee Health and Safety |
Complying with health and safety regulations and guidelines. |
3. Employee Welfare and Benefits |
Concern with employees' welfare and benefits (e.g. hostel or accommodation, food and transport allowances, medical benefits, maternity leaves, financial assistance or other benefits). |
4. Employee Recognition and Appreciation |
Recognition and appreciation to employees for their excellent services and performance. |
5. Human/Labour Rights Issue |
Freedom of voice or proper communication channel for employees. |
6. Diversity and Equal Opportunity |
Having policies on gender issues, gender equality and workforce diversity. |
7. Industrial Relations |
Company's relationship with trade union and workers. |
8. Certification and Awards Achievement |
Certifications and awards achievement by the company that relate to workplace practices |
Community |
|
1. Donation/Charity/Sponsorship Programs |
Giving donation, sponsor community programs or involve in charity activities to support communities. |
2. Community Development |
Supporting the development of community programs (e.g. health, training, education or scholarships programs). |
3. Contribution to Youth Development |
Provide internship programs or industrial training for graduating students/Sponsor or organise youth activities. |
4. Public Projects/Infrastructure Support |
Supporting public projects or provide infrastructure for the benefit of communities. |
5. Employees Participation in Community Services |
Employees' services to support community activities, events, sports, arts etc. |
6. Sports and Cultural Activities |
Initiate, involve or encourage sports and cultural activities. |
7. Aids to Underprivileged |
Aiding disaster victims, disabled, orphanage or single mothers (in form of cash or in-kind benefits). |
8. Certification and Awards Achievement |
Certifications and awards achievement by the company that relate to community contributions. |
Marketplace |
|
1. Product Development |
Information on developments related to the products (e.g. packaging). |
2. Product/Service Quality |
The product or service meets applicable quality standard (e.g. ISO 9001). |
3. Product/Service Safety |
Provide information on the safety of products or services. |
4. Supplier Relation |
Recognition of rights of suppliers (e.g. information or participation in design). |
5. Customer Services |
Provide assistance and advice for customers who buy or use company products or services. |
6. Stakeholder Engagement |
Communicate with stakeholders (e.g. provide channels for stakeholders to express their concerns)/Provide efficient and friendly facilities to stakeholders. |
7. Certification and Awards Achievement |
Certifications and awards achievement by the company that relate to marketplace practices. |
Source: (Abd Mutalib et al., 2014; Anas et al., 2015; Bursa Malaysia, 2006; Haji, 2013; Zainal et al., 2013).
Table-2. Firm reputation disclosure checklist.
Reputation Items |
Explanation |
Product and Service Quality |
|
1. Has external verification or certifications |
External verification - Halal certification (e.g. MS 1500/Quality policy (e.g. ISO 9001, HCCA certification, MSQH, MS ISO 15189, GMS). |
2. Free from controversial products |
Products are non-controversial (e.g. not of correlated to alcohol or gambling)/Products listed in Kuala Lumpur Syariah Index (KLSI). |
3. Listed in the Top 30 Malaysian Brand |
Listed by The Edge |
4. Received recognition for outstanding products/services |
Awards from reputable organisation |
5. Able to penetrate overseas market |
Evidence |
6. Good value for money |
Awarded as "Excellent Fair Price Shop" by the Government/Ministry of Trade. |
7. Product evaluation |
Evaluation of product/service (e.g. suitability for use by consumers in current market trend) as to allow the company to be more creative |
Corporate Governance |
|
1. Clearly demonstrate an open, transparent and ethical practices |
Corporate Governance standards - meet the criteria for transparency and best ethical practices |
Leadership Quality |
|
1. Has strong and appealing leaders |
Chairman or CEO was conferred title "Tan Sri" or "Tun" by the Sultan/Chairman or CEO conferred an honorary Doctor of Philosophy for his or her contribution/Chairman or CEO is a founding member of a company |
2. Has excellent managers |
An experience manager (e.g. have good track record of past performance from established organisations) / Managers are or were appointed as advisor, consultant or member of an established associations (e.g. member of MIA/MACPA) |
3. Has competent and well-organized management |
Evidence (e.g. awards or certifications) |
Citizenship |
|
1. Obtained external certification for its CSR initiatives |
Evidence (e.g. awards or certifications) |
2. Has CSR initiatives with impact |
Exact words in CSR disclosure |
3. Support good causes |
Exact words in CSR disclosure |
Innovation |
|
1 An innovative company |
Awards for innovativeness / Incremental product changes or alterations (e.g. convenient packaging). |
2. Generally, first in the market |
Evidence |
3. Has ongoing research and development (R&D) |
Evidence - any ongoing R&D project by the company to develop new ideas or methods |
4. Launch new product |
Evidence - new product or service development initiatives |
Source: (Darus et al., 2014; Othman, 2012; Othman. et al., 2011).
The reputation checklist was also developed from past studies (Darus, Othman, & Arshad, 2014; Othman, 2012; Othman. et al., 2011) which includes five dimensions of product and service quality, corporate governance, leadership quality, citizenship and innovation. Table 2 presents the reputation checklist. The checklist also used a dichotomous reporting of yes/no to indicate disclosure of firm reputation. An index score was calculated to represent each dimension of firm reputation (ratio of total “yes” response to total items the dimension).
The financial performance of the firms was measured using return on assets (ROA) from the 2014 annual report of corresponding firms. ROA is an accounting-based measure of financial performance (Jitaree, 2015). ROA informs how the firm increase their profit using total assets in a defined period (Raza et al., 2012). A higher ROA indicates a firm’s ability to use the firm’s assets to benefit the stakeholders (Haniffa & Cooke, 2005). ROA has often been used in association with CSR in many studies (Ahmed, Islam, & Hasan, 2012; Kamatra & Kartiningdyah, 2015; Lee & Park, 2009; Waddock & Graves, 1997).
3.3. Data Analysis Procedures
Data extracted from the annual reports was analysed using a structural equation modelling – partial least square (PLS-SEM) approach with the employment of a statistical tool, SmartPLS3.0. Structural equation modelling (SEM) is a statistical model that can explain the relationships among multiple variables (Hair, Hult, Ringle, & Sarstedt, 2014). SEM is a combination of factor analysis and multiple regression, thus enabling the estimation of a series of interrelated causal relationships concurrently (Hair, Hult, Ringle, & Sarstedt, 2017).
4. FINDINGS AND DISCUSSION
4.1. Measurement Models Assessment
The assessment of the measurement models included the determination of indicator reliability, construct reliability and validity, convergent validity and discriminant validity. Table 3 provides the indicator reliability and the construct reliability and validity.
4.1.1. Indicator Reliability and Construct Reliability and Validity
Hair et al. (2014); Hair et al. (2017) stated that outer loading should exceed the threshold of 0.708. Three indicators (I_ENV3, I_CP and I_CG) had indicators less than 0.708 but more than 0.600. However, all Average Variance Extracted (AVE) exceeded 0.500 which was the threshold of acceptance (Wong, 2013). Therefore, all of these indicators were retained. Hair et al. (2017) stated that the deletion or retention of indicators with outer loading of more than 0.400 but less than 0.708 is subjected to the AVE value. If AVE is satisfactory as in this case, the indicators can be retained. The internal consistency based on Cronbach’s alpha and construct reliability based on composite reliability for each of the constructs were all above the threshold of 0.708 (Hair et al., 2017). Thus, the measurement models had satisfactory indicator reliability and construct reliability and validity.
4.1.2. Discriminant Validity
Discriminant validity of the measurement models was based on two measures: Fornell-Larcker criterion and Heterotrait-Monotrait (HTMT) ratio. Hair et al. (2014) stated that the square root of AVE should be higher than the correlations of the latent variables. As shown in Table 4, the discriminant validity was acceptable as the value on the top of the column (the square root of AVE) was always greater that the values below and to its left (other latent variables). From Table 5, the discriminant validity was also satisfactory based on HTMT ratio since all the values were less than 0.850. Wong (2013) stated that the cut-off value of acceptance based on HTMT ratio is 0.850.
Table-3. Indicator reliability, and construct reliability and validity.
Construct |
Indicator |
Outer Loading |
Cronbach’s Alpha |
Composite Reliability |
AVE |
Assessment |
Previous-Year CSR |
I_ENV3 |
0.628 |
0.718 |
0.826 |
0.544 |
All acceptable |
I_COM3 |
0.781 |
|||||
I_MP3 |
0.816 |
|||||
I_WP3 |
0.712 |
|||||
Subsequent-Year CSR |
I_ENV5 |
0.966 |
0.945 |
0.959 |
0.854 |
All acceptable |
I_COM5 |
0.887 |
|||||
I_MP5 |
0.905 |
|||||
I_WP5 |
0.936 |
|||||
Current-Year Reputation |
I_CP |
0.691 |
0.824 |
0.875 |
0.586 |
All acceptable |
I_PS |
0.764 |
|||||
I_CG |
0.701 |
|||||
I_INN |
0.799 |
|||||
I_LQ |
0.850 |
|||||
Current-Year ROA |
Single indicator |
1 |
1 |
1 |
Not applicable |
|
Source: Output generated from SmartPLS.
Table-4. Discriminant validity with Fornell-Larcker criterion.
Construct |
Current-Year ROA |
Current-Year Reputation |
Previous-Year CSR |
Subsequent-Year CSR |
Current-Year ROA |
1 |
|||
Current-Year Reputation |
0.473 |
0.766 |
||
Previous-Year CSR |
0.723 |
0.609 |
0.738 |
|
Subsequent-Year CSR |
0.085 |
0.108 |
0.119 |
0.924 |
Source: Output generated from SmartPLS.
Table-5 . Discriminant validity with HTMT ratio.
Construct |
Current-Year ROA |
Current-Year Reputation |
Previous-Year CSR |
Subsequent-Year CSR |
Current-Year ROA |
||||
Current-Year Reputation |
0.494 |
|||
Previous-Year CSR |
0.841 |
0.765 |
||
Subsequent-Year CSR |
0.078 |
0.129 |
0.14 |
Source: Output generated from SmartPLS.
4.1.3. Collinearity Issues
Collinearity issues were determined based on the Variance Inflation Factor (VIF). Hair et al. (2017) stated that a value of less than five indicates that there are no issues of collinearity. Therefore, as shown in Table 6, the measurement models had no collinearity issues.
Table-6. Collinearity Issues with VIF.
Construct |
Current-Year ROA |
Current-Year Reputation |
Previous-Year CSR |
Subsequent-Year CSR |
Current-Year ROA |
1 |
|||
Current-Year Reputation |
1.59 |
|||
Previous-Year CSR |
1.59 |
1 |
||
Subsequent-Year CSR |
Source: Output generated from SmartPLS.
4.1.4. Structural Model Assessment
The assessment of the structural model was done using bootstrapping analysis. Figure 1 presents the result of the analysis. The result showed that the path leading from previous-year CSR to current-year reputation was positive and significant (β = 0.609, P = 0.000). Therefore, the first research hypothesis, H1, was supported. Previous-year CSR practices positively and significantly affected current firm reputation.
It was also shown that previous-year CSR was positively and significantly related to current-year ROA (β = 0.690, P = 0.000). Therefore, the second research hypothesis was supported.
On the contrary, the direct path between current-year reputation and current-year ROA (β = 0.053, P = 0.181) was not significant. As shown in Table 7, the indirect effect of previous-year CSR via current-year firm reputation on current-year ROA was positive but not significant. Therefore, the third research hypothesis was not supported. Current-year firm reputation does not mediate the relationship between previous-year CSR and current-year ROA.
The path leading from current-year ROA to subsequent-year CSR was positive but not significant (β = 0.085, P = 0.319). Therefore, the fourth research hypothesis was also not supported. Current-year ROA does not lead to subsequent-year CSR practices.
Figure-1. The bootstrapping analysis result.
Source: Output generated from SmartPLS.
Table-7. Testing of the Research Hypotheses.
Hypothesis |
Path |
β |
CI |
T |
P |
Conclusion |
H1: pCSR -->curREP |
0.609 |
0.529-0.699 |
13.655 |
0.000 |
Supported |
|
H2: pCSR -->curROA |
0.690 |
0.627-0.770 |
18.627 |
0.000 |
Supported |
|
H3: pCSR -->curREP -->curROA |
0.003 |
-0.005-0.010 |
0.721 |
0.471 |
Not supported |
|
H4: curROA -->subCSR |
0.085 |
-0.146-0.207 |
0.997 |
0.319 |
Not supported |
|
Source: Output generated from SmartPLS.
The positive and significant correlation between previous-year CSR and current-year firm reputation was coherent with findings from past studies (Beheshtifar & Korouki, 2013; Bertels & Peloza, 2008; Othman, 2012; Saeidi et al., 2015). This study also supports the explanation provided by the stakeholder theory whereby, the implementation of CSR as a response to the needs of the stakeholders thus resulted into good firm reputation.
The positive and significant correlation between previous-year CSR and current-year ROA also agreed with past findings (Ahamed et al., 2014; Chen et al., 2015; Fauzi & Idris, 2010; Inoue & Lee, 2011; Jitaree, 2015; Trang & Yekini, 2014; Waddock & Graves, 1997; Yusoff & Adamu, 2016). It also reinforces the use of stakeholder theory to explain the CSR and financial performance association.
However, in this study, it was found that current-year firm reputation did not mediate the relationship between previous-year CSR and current-year ROA. The path between current-year firm reputation and current-year ROA was insignificant. This resulted in an insignificant indirect relationship between previous-year CSR and current-year ROA via current-year firm reputation. One of the reasons that might explain why the path was insignificant could be the short time frame used in this study which was within a year’s gap. It is assumed that it takes time to build firm reputation and although previous-year CSR contributes significantly to current-year firm reputation but its effect on ROA might need some time to develop.
Likewise, current-year ROA was not significantly correlated with subsequent-year CSR practices. The immediate availability of slack resources does not get invested straight into subsequent-year CSR practices. Other internal and external issues such as efficient decision making and socio-economic pressures among others might contribute toward the lag in transforming practice into outcome.
From the PLS algorithm analysis as shown in Figure 2, it was shown that previous-year CSR practices can explain 37.1% of variance in current-year firm reputation and 52.4% of variance in current-year ROA. However, current-year ROA can only predict 0.7% accuracy in subsequent-year CSR performance. Therefore, this showed that previous-year CSR can predict current-year ROA effectively and moderately on current-year firm reputation, but current-year ROA cannot predict subsequent-year CSR practices effectively. As shown in Table 8, the effect sizes of previous-year CSR to explain current-year firm reputation (f2 = 0.590) and current-year ROA (f2 = 0.629) were large. Hair et al. (2017) stated that an effect size of 0.35 and more is considered large while an effect size of 0.15 is considered moderate and 0.02 is small. The effect size of current-year firm reputation to predict current-year ROA was small and almost negligible. The effect size of current-year ROA to explain subsequent-year CSR was also negligible.
Figure-2. The PLS algorithm analysis result.
Source: Output generated from SmartPLS.
Table-8. Effect size of exogenous constructs to predict indigenous constructs.
Construct |
Current-Year Reputation |
Current-Year ROA |
Previous-Year CSR |
Subsequent-Year CSR |
Current-Year Reputation |
0.004 |
|||
Current-Year ROA |
0.007 |
|||
Previous-Year CSR |
0.590 |
0.629 |
||
Subsequent-Year CSR |
Source: Output generated from SmartPLS.
Figure 3 shows the result of the blindfolding analysis. The predictive relevance, Q2 is indicated as the value the circle depicting the constructs. The result showed that current-year ROA had a high predictive relevancy of 0.524, which were contributed to more by previous-year CSR (β = 0.690) compared to current-year firm reputation (β = 0.053). Current-year reputation had a moderate predictive relevancy of 0.195 while subsequent-year CSR had negligible predictive relevancy.
Figure-3. The blindfolding analysis result.
Source: Output generated from SmartPLS.
5. CONCLUSION AND RECOMMENDATION
The results showed that CSR performance from the previous year will directly contribute significantly to improve both firm reputation and financial performance. However, it may take more than a year to transform the effect of firm reputation on financial performance and from financial performance to future CSR activities. Hence, this study conferred and agreed with past findings that even in a short time period, CSR can effectively contribute towards firm reputation and financial performance. More effort and time however, is needed to ensure slack resources from good financial performance is geared towards more CSR practices. This study was limited in terms of the timeline and furthering the timeline with a longitudinal study of perhaps five to ten years might provide more concrete evidence of the virtuous cycle of CSR and financial performance.
Funding: This study received no specific financial support. |
Competing Interests: The authors declare that they have no competing interests. |
Acknowledgement: All authors contributed equally to the conception and design of the study. |
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