The purpose of this research was to study the relationship between Corporate Social Responsibility (CSR) and Corporate Financial Performance (CFP) in terms of return on assets (ROA), return on equity (ROE), return on sales (ROS), and return on invested capital (ROIC). Besides, The research is uniquely studying whether or not a significant relationship exists between organizational CSR activities and SP in terms of market capitalization, market value to book value ratio (MV/BV) and price/earnings ratio (P/E ratio). Further, this research studies whether or not a significant relationship exists between CFP activities and SP.
The study's population is the listed companies in the Egyptian Stock Exchange. Whereas, the study's sample is the listed companies in the Egyptian Stock Exchange that constitutes the Egyptian CSR Index (S&P/EGX ESG Index), excluding banks, insurance companies and investment firms due to the different nature of the activity and therefore the financial statements items.
The study was conducted during the period from the beginning of 2007 until the end of 2014. The study's secondary data (i. e. stock prices, financial reports and CSR index) are gathered from Egypt for the Dissemination of Information Company (egID) and The Egyptian Institute of Directors (EIoD).
The study used Structural Equation Modeling (SEM) in testing hypotheses which enables to specify, estimate, assess and present models to show hypothesized relationships among variables, build models more accurately than with standard multivariate statistics techniques, and allow building attitudinal and behavioral models that reflect complex relationships.
The results demonstrated a positive relationship between CSR and their corresponding CFP in terms of ROA, ROE, ROS, and ROIC. Moreover, a positive relationship between CSR activities and their corresponding SP in terms of market capitalization, market value to book value ratio (MV/BV), and price/earnings ratio (P/E ratio). Besides, there is a positive relationship between CFP, as a latent variable, and their corresponding SP. The results also demonstrated that there was an association with CSR and CFP but not a directional causal relationship. In addition, more CSR activity did not necessarily result in greater profits; however, more CSR is not associated with fewer profits.
The implications of these findings can add to the practice of incorporating CSR into corporate strategy to improve firm profitability as well as to contribute to gains for societies and communities, especially in developing countries. The findings will not only add credibility to the existing literature but also provide evidence based management research in the current investments environment