Corporate Financial Performance and Corporate Social Performance: An Update and Reinvestigation

For some time, researchers have been investigating the relationship between a firm's corporate financial performance (CFP) and its corporate social performance (CSP. Although most studies indicate that CSP is a determinant of CFP, other aspects of this research have been inconsistent. Some studies are criticized for using unreliable CSP measures; others for missing control variables; and still others for assuming linearity without valid testing. This paper responds to these issues with an updated study of the CSP-CFP relationship, testing two approaches to measuring CSP, controlling for key variables identified in the literature, and testing for nonlinearity of certain independent variables. Chief among our findings is a positive CSP-CFP relationship, which supports proponents of stakeholder theory. We also determine that empirical models specifying two CSP component measures are stronger than those using a fully aggregated measure. Lastly, we find that control variables must be properly specified to avoid bias and that some of these measures are quadratically related to CFP.