Corporate social responsibility and financial performance: A non-linear and disaggregated approach

The present paper examines the relationship between Corporate Social Performance (CSP) and Corporate Financial Performance (CFP), using both accounting-based (Return on Assets and Return on Capital) and market-based (Excess Stock Returns) performance indicators. We use Bloomberg's Environmental Social Governance (ESG) Disclosure score covering the S&P500 firms in the period 2007-2011 which allows for the examination of both linear and nonlinear relationships to be considered. The results of the linear model suggest that there is a significant negative relationship between CSP and Return on Capital. However, the non linear models provide evidence of a U-shaped relationship between CSP and the accounting-based measures of CFP, suggesting that in the longer run CSP effects are positive. Most prominent among our results is that fact that by disentangling the ESG Disclosure score into its environmental, social and governance sub-components, we find that a U-shaped relationship exists only between the governance sub-component and CFP. A straightforward implication of our findings suggests that in order for CSR to serve the interests of the shareholders, a long-run planning and considerable resources should be dedicated at this direction, given that CSR expenditure pays off only after a threshold of CSP has been reached. Furthermore, the fact that governance is the key driver affecting the CSP-CFP relationship suggests that CSR investments should be directed to this component.