Corporate social responsibility and financial performance: correlation or misspecification?

Author
Abagail McWilliams, Donald Siegel
Source
Strategic Management Journal
Publisher
Wiley-Blackwell
Publication date
April 2000
Type
Academic Articles
Category
SRI/Sustainable Finance
Sustainability and the Business Case
Discipline
Finance
Language
English
Free/Pay for content
Free
 
Researchers have reported a positive, negative, and neutral impact of corporate social responsibility (CSR) on financial performance. This inconsistency may be due to flawed empirical analysis. In this paper, we demonstrate a particular flaw in existing econometric studies of the relationship between social and financial performance. These studies estimate the effect of CSR by regressing firm performance on corporate social performance, and several control variables. This model is misspecified because it does not control for investment in R&D, which has been shown to be an important determinant of firm performance. This misspecification results in upwardly biased estimates of the financial impact of CSR. When the model is properly specified, we find that CSR has a neutral impact on financial performance.