The Impact of Corporate Social Responsibility on Firm Value and Financial Performance: An Empirical Study on Companies Listed in Egyptian Stock Exchange

The empirical link between corporate social responsibility (CSR) and corporate financial performance (CFP) has been steadily investigated for 35 years. The purpose of this study is to examine the relationship between corporate social responsibility (CSR) and its effect on firm performance, taking into consideration firm value and financial performance in Egypt. The paper uses content analysis to extract data from78 non-financial companies listed in Egyptian Stock Exchange for the years 2010-2015. CSR indexes and financial performance measures were calculated in order to allow the estimation of regression analysis directed to examine the relationship between CSR and CFP. The paper found a negative relation between CSR and firm value, and it did not identify any significant relation of CSR on financial performance, except for the relationship with employees was a negative effect. Also, the study found no effect of financial performance on CSR. Dr. Bassam Baroma The Impact of Corporate Social Responsibility. 111 1-Introduction The impact of companies on society represents a growing global concern; where‟s the expectations of consumers, employees, investors, and local communities on the role of businesses in society are increasing. Governments and non-governmental organisations (NGOs) are demanding increased transparency and accountability about both company‟s daily operations and the impact of these operations on society. Also, Professional organisations carry out social audits, governments legislate for mandatory social reports, rating agencies rank corporations, and companies themselves publish an increasing number of reports on their social performance. This focus towards the impact of companies on society has led to the emergence of an important concept in business literature over the last three decades, i.e., corporate social responsibility (CSR). Most definitions of corporate social responsibility describe it as constituting actions whereby companies integrate societal concerns into their business policies and operations. These societal concerns include environmental, economic, and social concerns. For companies to survive and grow, they have to undertake various socially desirable actions, and it is important that society recognises the compatibility of the behaviour of companies with its own ethical values. If companies fail to operate according to the boundaries set by the social norms, they face a threat for their survival. Corporate social responsibility (CSR) refers to business practices involving initiatives that benefit society. A business's CSR can encompass a wide variety of tactics, ranging from giving away a portion of a company's proceeds to charity, to implement "greener" business operations. It also a business approaches that contributes to sustainable development by delivering economic, social and environmental benefits for all stakeholders. While financial performance is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues, this term is also used as a general measure of a firm's overall financial health over a given period of time, and can be used to compare similar firms across the same industry, and it‟s the level of performance of a business over a specified period of time, expressed in terms of overall profits and losses during that time. Dr. Bassam Baroma The Impact of Corporate Social Responsibility. 111 The CSR concept is closely related to the concept of sustainable development which depends on three key components: environmental protection; economic growth; and social equity. If, on the other hand, this study reached to a positive relationship between CSR and CFP, then management might be encouraged to pursue such activities with increased vigor or to investigate the underlying causes of this relationship(Cochran and Wood 1984). So, the focus of this paper is on the question of whether these two factors (CSR and CFP) are related. This paper aims at addressing the impact of corporate social responsibility (CSR) on corporate financial performance (CFP) by examining the relationship between CSR and its effect on firm performance, taking into consideration firm value and financial performance for companies listed on Egyptian Stock Exchange for the years 20102015. The rest of this paper is organizing as follows: section 2 shows Definition of corporate social responsibility (CSR) and corporate financial performance (CFP), section 3 surveys the associated literature review conducted on CSR and CFP studies, section 4 shows hypotheses development, section 5 displays variables measurement and models development, section 6 reports the obtained results, while section 7 presents the conclusions. 2. Definition of corporate social responsibility (CSR) and corporate financial performance (CFP) In the Stakeholder Theory framework, argument is given that attention to the interests of the various stakeholders of the corporation may improve firm paying and reputation, and that firm‟s concerns about such interests are able to affect positively firm‟s productivity, financial performance and value creation (Hillman and Keim 2001), (Donaldson and Preston 1995), , (Wood 1991). On the other hand, Friedman (1970), despite recognizing the importance of clients and employees as legitimate and important stakeholders of corporations, argues that CSR is not able to increase firm value. 2.1 corporate social responsibilities (CSR) CSR is a concept with many definitions and practices and a very broad concept that addresses many and various topics such as human Dr. Bassam Baroma The Impact of Corporate Social Responsibility. 111 rights, corporate governance, health and safety, environmental effects, working conditions and contribution to economic development. Corporate social responsibility (CSR) refers to business practices involving initiatives that benefit society. A business's CSR can encompass a wide variety of tactics, from giving away a portion of a company's proceeds to charity, to implement "greener" business operations(Dobers and Halme 2009, Carroll 2015). While, (McWilliams 2000) definition of CSR is a business approach that contributes to sustainable development by delivering economic, social and environmental benefits for all stakeholders. CSR is a corporation's initiatives that assess and take responsibility for the company's effects on environmental and social wellbeing. The term generally applies to efforts that go beyond what may be required by regulators or environmental protection groups. CSR may also be referred to as "corporate citizenship" and can involve incurring short-term costs that do not provide an immediate financial benefit to the company, but instead promote positive social and environmental change (Allouche and Laroche 2005). However, (Visser 2008) showed that corporate social responsibility (also called corporate conscience, corporate citizenship or responsible business) is a form of corporate self-regulation integrated into a business model. CSR policy functions as a self-regulatory mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards and national. A firm's implementation of CSR goes beyond compliance and engages in "actions that appear to further some social good, beyond the interests of the firm and that is required by law (Carroll 1979, Lin, Yang et al. 2009, Tai and Chuang 2014). So, CSR strategies encourage the company to make a positive impact on the environment and stakeholders including consumers, employees, investors, communities, and others. While, (Lima Crisóstomo, de Souza Freire et al. 2011)showed that Corporate Social Responsibility (CSR) is associated to an ample spectrum of relations among the corporation and its various stakeholders, as well as to the environment. Firm relations with several stakeholders, clients and with the society in general, and even with shareholders, are part of the CSR scope. So, CSR is considered as a response of social pressures, relative to stakeholders‟ demands and expectations, Dr. Bassam Baroma The Impact of Corporate Social Responsibility. 111 environmental concerns, and social demands which characterize the dimensions of CSR. The stakeholder dimension relates to for example, how the firm interacts with its employees, suppliers and customers. The environmental dimension refers to how business operations worries about natural environment. While the social dimension of CSR is related to how the enterprise contributes to a better society by integrating its business with social concerns. Moreover, Corporate Social Responsibility (CSR) is the responsibility of an organization resulted from the impacts of its decisions and activities on society, the environment and its own prosperity, known as the “triple bottom line” of people, planet, and profit. In general there are two accepted methods for measuring CSR. The first method is the reputation index. This method knowledgeable observer‟s rate firms on the basis of one or more dimensions of social performance. The second method is content analysis. Usually, in content analysis the extent of the reporting of CSR activities in various firm publications and especially in the annual report is measured. This can be consisted of simply noting whether or not a particular item (such as pollution control) is discussed either qualitatively or numerically, or it can mean actually counting a number of items(Cochran and Wood 1984). This study will use the first method, reputation index, to measure CSR. 2.2 financial performances Financial performance is a subjective measure of how well a firm can use assets from its primary mode of business to generate revenues. This term is also used as a general measure of a firm's overall financial health over a given period of time, and can be used to compare similar firms across the same industry or to compare industries