The Virtuous Cycle of Corporate Social Responsibility and Corporate Financial Performance: the Mediating Role of Firm Reputation

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.