Financial and corporate social performance in UK listed firms: the relevance of non-linearity and lag effects

Adegbite, Emmanuel; Guney, Ylmaz; Kwabi, Frank; Tahir, Suleiman

Abstract

Using environmental, social and governance (ESG) scores compiled by Reuters Datastream for each company’s corporate social performance (CSP), we examine the relationship between CSP and corporate financial performance (CFP) of 314 UK listed companies over the period 2002 to 2015. We further evaluate the relationship between prior and subsequent CFP and prior and subsequent CSP. Based on the system-GMM estimation method, we provide direct evidence that suggests that while CFP and CSP can be linked linearly; however, when we examine the impact of CSP on CFP, the association is more non-linear (cubic) than linear. Our results suggest that firms periodically adjust their level of commitment to society, in order to meet their target CSP. The primary contributions of this paper are testing i) the non-monotonous relationship between CSP and CFP, ii) the lagged relationship between the two and the optimality of CSP levels, and iii) the presence of a virtuous circle. Our results further suggest that CSP contributes to CFP better during post-crisis years. Our findings are robust to year-on-year changes in CFP and CSP, financial versus non-financial firms, and the intensity of corporate social responsibility (CSR) engagement across industries.

Citation

Adegbite, E., Guney, Y., Kwabi, F., & Tahir, S. (2019). Financial and corporate social performance in UK listed firms: the relevance of non-linearity and lag effects. Review of Quantitative Finance and Accounting, 51(1), 105-158. https://doi.org/10.1007/s11156-018-0705-x

• Journal Article Type: Article
• Acceptance Date: Feb 19, 2018
• Online Publication Date: Feb 19, 2018
• Publication Date: Jan 2, 2019
• Deposit Date: Aug 29, 2018
• Publicly Available Date: Feb 20, 2019
• Journal: Review of Quantitative Finance and Accounting
• Print ISSN: 0924-865X
• Electronic ISSN: 1573-7179
• Publisher: Springer Verlag
• Peer Reviewed: Peer Reviewed
• Volume: 51
• Issue: 1
• Pages: 105-158
• DOI: https://doi.org/10.1007/s11156-018-0705-x
• Keywords: Corporate social responsibility; Corporate financial performance; Corporate social performance; Slack resources theory; UK firms
• Public URL: https://nottingham-repository.worktribe.com/output/1051525
• Publisher URL: https://link.springer.com/article/10.1007/s11156-018-0705-x
• Additional Information: This is a post-peer-review, pre-copyedit version of an article published in Review of Quantitative Finance and Accounting. The final authenticated version is available online at: http://dx.doi.org/10.1007/s11156-018-0705-x
• Contract Date: Aug 29, 2018