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The fit between corporate social responsibility and corporate governance: the impact on a firm’s financial performance

Abstract

This study asserts that the relationship between corporate social responsibility (CSR) and a firm’s financial performance needs to be examined with reference to the ‘fit’ between CSR and corporate governance (CG). Therefore, we develop a model to analyze the moderating effects of corporate governance characteristics (board size, ownership concentration, board gender diversity and board independence) on the CSR-firm’s financial performance link (measured by Tobin’s q). The model is tested on a sample of 17,500 observations over an 11-year period and mainly finds support for the moderated hypotheses. The findings indicate that while board size and gender diversity moderate the CSR-firm’s financial performance link positively, CSR interacting with ownership concentration negatively impacts a firm’s financial performance. In addition, we find no support that board independence moderates the CSR-firm’s financial performance link. We advance CSR research by demonstrating the moderating effects of corporate governance characteristics on the CSR-firm’s financial performance link.

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Notes

  1. Further description of the Thomson Reuters ASSET4 dataset is available online at: https://extranet.datastream.com/data/ASSET4%20ESG/Index.htm.

  2. We note that these articles use the KLD database instead, but we think the concept of equal weights can be used interchangeably. However, we have to admit that there is a need for further research to develop a more fine-grained weighting scheme. A possible approach, which is also often used with KLD data, might be to address the same weight to activities of each stakeholder group.

  3. Due to limited data availability of R&D expenditure, we set missing values equal to zero. Similarly, to Walls et al. (2012), we conduct a robustness check by including a binary variable for imputed variables to ensure that these do not affect our results. Further results are available upon request.

  4. The findings are available upon request.

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Appendices

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Table 3 Sample distribution across countries

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Appendix 2

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Table 4 Sample distribution by year

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Pekovic, S., Vogt, S. The fit between corporate social responsibility and corporate governance: the impact on a firm’s financial performance. Rev Manag Sci 15, 1095–1125 (2021). https://doi.org/10.1007/s11846-020-00389-x

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Keywords

  • Corporate social responsibility
  • Corporate governance
  • Moderating effect
  • Firm’s financial performance

JEL Classification

  • M14
  • G34
  • L25
  • C23