Impact of Corporate Social Responsibility on Financial Performance of Corporations: Evidence from Pakistan

Abstract

This paper estimates the relationship of corporate social responsibility, financial performance, market value of the share and financial leverage . In this particular study, 156 listed companies on Karachi Stock Exchange (KSE) from textile sector, chemical sector, cement sector and the tobacco sector are taken. The observations are taken for the entire period of 2010 and 2011 from the published resources of state bank of Pakistan. In aggregate, the results of the study conclude that corporate social performance (CSR) has no effect on financial performance (CFP) . It is obvious from the results that CSR has negative effect on the market value of the share but no relationship to D/E behavior of the firm, significantly. Moreover, the investors do not have the same level of information as the information is captured by the management about the company affairs. In addition, the debt singling hypothesis indicates that the further incorporation of debt into capital structure should influence the behavior of the investor, regarding to the investment in the shares positively, but due to information asymmetry, it is negative. This study further provides the room to test the model of effect of CSR on stock returns in a portfolio construction.

Key words: Corporate Social Responsibility, Financial Performance, Market Performance, Market Value.