Does Corporate Social Performance Really Improve Corporate Financial Performance?

Recent extensive literature reviews show that it remains numerous contrasting results that shed doubts on the robustness of the positive relationship found between Corporate Social Performance (CSP) and Corporate Financial Performance (CFP). Our study aims to revisit this relationship using four measures of CFP and three measures of CSP to better control for potential measurement errors. We used a large set of data from the European social rating agency, VIGEO. Our sample is composed of 591 European firms over 1,405 firm-year observations from 2008 to 2011. As omitted variables and reverse causality could also explain the previously observed contrasting results, we proceeded to several additional checks including panel regression models and generalized method of moments (GMM). Our results demonstrate a highly significant and positive link between CSP measures and market-based measures of CFP but no link between CSP measures and accounting-based measures of CFP.
Keywords: Corporate Social Performance; Corporate Financial Performance; Endogeneity; Reputational theory; Stakeholder theory; Substantive Theory.
JEL Codes: M14 ; G30.