The Moderating Role of Drought in the Relationship between Corporate Social Responsibility and Financial Performance

Document Type : Research Paper

Authors

1 Assistant Prof., Faculty of Management and Accounting, College of Farabi, University of Tehran, Qom, Iran.

2 MSc., Department of Accounting, Faculty of Management and Accounting, College of Farabi, University of Tehran, Qom, Iran.

3 PhD Candidate, Department of Accounting, Monash University, Melbourne, Australia.

Abstract

Objective
The geographical conditions of Iran have contributed to the occurrence of diverse natural hazards. Among these hazards, drought emerges as one of the most significant, persisting over the Iranian plateau for several years. This study aims to investigate the moderating role of the phenomenon in the relationship between corporate social responsibility (CSR) and financial performance among listed companies in the Tehran Stock Exchange (TSE).
Methods
The hypotheses of this study were tested using a sample of 225 companies listed on the Tehran Stock Exchange from 2011 to 2021, employing multivariate regression models. The Standardized Precipitation Index (SPI) was utilized to measure drought in various provinces of Iran, while financial performance was measured using two indicators i.e. return on assets and return on equity. CSR was measured based on the KLD index.
Results
The findings of this research demonstrated that corporate social responsibility has a positive and significant impact on the financial performance of companies, and drought strengthens this relationship.
Conclusion
Drought, as one of the main consequences of climate change, is a significant and tangible issue in Iran. Exploring its consequences in the capital market is of considerable importance. The results of this research indicate that the positive impact of corporate social responsibility on financial performance is more pronounced among companies affected by drought. The moderating role of this variable in the relationship between CSR and financial performance has not been extensively studied in the domestic and international literature. Therefore, this study contributes significantly to the extant literature, providing valuable insights for various stakeholders. The obtained results suggest that companies operating in drought-affected regions, facing unique challenges and severe risks associated with water scarcity, resource depletion, and environmental degradation, attempt to mitigate the adverse effects of drought on their operations effectively. By engaging in CSR activities that address specific issues such as water conservation initiatives, sustainable resource management, and community support programs, these companies strive to reduce the formation of a negative perception (stemming from drought conditions) by stakeholders regarding their performance. This strategy, embraced by companies grappling with drought, could amplify the influence of corporate social responsibility on the financial performance of drought-affected businesses, particularly those striving to bolster environmental and social sustainability while fortifying their adaptability and resilience in the face of demanding climate conditions. The research findings provide valuable insights for investors and financial analysts in evaluating the relationship between corporate social responsibility and financial performance, especially in drought-affected regions. They indicate that companies with strong corporate social responsibility exhibit better financial performance, and this positive relationship is even more pronounced when facing challenges arising from drought. These results can help investors and analysts make informed investment decisions.

Keywords

Main Subjects

References

 
Acemoglu, D., Carvalho, V. M., Ozdaglar, A. & Tahbaz-Salehi, A. (2012). The Network Origins of Aggregate Fluctuations. Econometrica, 80(5), 1977-2016. https://doi.org/10.3982/ECTA9623
Achour, Z. & Boukattaya, S. (2021). The Moderating Effect of Firm Visibility on the Corporate Social Responsibility-Firm Financial Performance Relationship: Evidence from France. In Corporate Social Responsibility [Working Title]. IntechOpen.
Adeneye, Y.B. & Ahmed, M. (2015). Corporate social responsibility and company performance. Journal of Business Studies Quarterly, 7(1), 151-166.
Adrian, C., Garg, M., Pham, A. V., Phang, S. Y. & Truong, C. (2023). Do natural disasters affect corporate tax avoidance? The case of drought. Journal of Business Ethics, 186(1), 105-135. https://doi.org/10.1007/s10551-022-05250-7
Akben-Selcuk, E. (2019). Corporate Social Responsibility and Financial Performance: The Moderating Role of Ownership Concentration in Turkey. Sustainability, 11(13), 3643. https://doi.org/10. 3390/su11133643
Ali, H.Y., Danish, R.Q & Asrar-ul-Haq, M. (2020). How corporate social responsibility boosts firm financial performance: The mediating role of corporate image and customer satisfaction. Corporate Social Responsibility and Environmental Management, 27(1), 166-177. https://doi.org/10.1002/csr.1781
Amatulli, C., De Angelis, M., Korschun, D. & Romani, S. (2018). Consumers’ perceptions of luxury brands’ CSR initiatives: An investigation of the role of status and conspicuous consumption. Journal of Cleaner Production, 194, 277-287. https://doi.org/10.1016 /j.jclepro.2018.05.111
Amiri, A., Shahabi, S., Rusta, A. & Esmaili, M. (2019). The effect of social responsibility on financial performance with the mediating role of the company's political activities in South Pars Gas Complex. Quarterly Journal of New Research Approaches in Management and Accounting, 4(44), 15-39. (in Persian)
Amorelli, M.F. & García - Sánchez, I.M. (2021). Trends in the dynamic evolution of board gender diversity and corporate social responsibility. Corporate Social Responsibility and Environmental Management, 28(2), 537-554. https://doi.org/10.1002/csr.2079
Anjos, F. & Fracassi, C. (2015). Shopping for Information? Diversification and the Network of Industries. Management Science, 61(1), 161-183. https://doi.org/10.1287/mnsc.2014.2060
Arab Salehi, M., Sadeghi, Gh. & Moeinodin, M. (2013). The relationship between social responsibility and financial performance of companies listed in the Tehran Stock Exchange. Empirical Research in Accounting, 3(9), 1-20. (in Persian)
Atkins, J., Maroun, W., Atkins, B.C. & Barone, E. (2018). From the Big Five to the Big Four? Exploring extinction accounting for the rhinoceros. Accounting, Auditing & Accountability Journal, 31(2), 674-702. https://doi.org/10.1108/AAAJ-12-2015-2320
Bacha, S., Ajina, A. & Ben Saad, S. (2021). CSR performance and the cost of debt: does audit quality matter? Corporate Governance. The International Journal of Business in Society, 21(1), 137-158. https://doi.org/10.1108/CG-11-2019-0335
Bani Mahd, B., Arabi, M. & Hassanpour, Sh. (2016). Experimental research and methodology in accounting. Terme publications. (in Persian)
Barnea, A. & Rubin, A. (2010). Corporate Social Responsibility as a Conflict Between Shareholders. Journal of Business Ethics, 97(1), 71-86. https://doi.org/10.1007/s10551-010-0496-z
Barnett, M. L. & Salomon, R.M. (2006). Beyond dichotomy: the curvilinear relationship between social responsibility and financial performance. Strategic Management Journal, 27(11), 1101-1122. https://doi.org/10.1002/smj.557
Chakroun, S., Salhi, B., Amar, A. B., & Jarboui, A. (2019). The impact of ISO 26000 social responsibility standard adoption on firm financial performance: Evidence from France. Management Research Review, 43(5), 545-571.
Cho, S., Chung, Ch. & Young, J. (2019). Study on the Relationship between CSR and Financial Performance. Sustainability, 11(2), 343. https://doi.org/10.3390/su11020343
Choi, J.S., Kwak, Y.M. & Choe, Ch. (2010). Corporate social responsibility and corporate financial performance: Evidence from Korea. Australian Journal of Management, 35(3), 291-311. https://doi.org/10.1177/0312896210384681
Dai, A. (2011). Drought under global warming: a review. WIREs Climate Change, 2(1), 45-65. https://doi.org/10.1002/wcc.81
Dakhli, A. (2021a). Does financial performance moderate the relationship between board attributes and corporate social responsibility in French firms? Journal of Global Responsibility, 12(4), 373-399. https://doi.org/10.1108/JGR-02-2021-0016
Dakhli, A. (2021b). The impact of corporate social responsibility on firm financial performance: does audit quality matter? Journal of Applied Accounting Research. https://doi.org/10.1108/JAAR-06-2021-0150
Das, J., Jha, S. & Kumar Goyal, M. (2020). Non-stationary and copula-based approach to assess the drought characteristics encompassing climate indices over the Himalayan states in India. Journal of Hydrology, 580, 124356. https://doi.org/10.1016/j.jhydrol.2019.124356
Foroughi, D., Amiri, H. & Javanmard, M. (2018). The effect of corporate social responsibility on cash retention through the simultaneous effect of selected variables. Financial Accounting Research, 10(1), 19-36. (in Persian)
Franco, S., Caroli, M.G., Cappa, F. & Del Chiappa, G. (2020). Are you good enough? CSR, quality management and corporate financial performance in the hospitality industry. International Journal of Hospitality Management, 88, 102395. https://doi.org/10.1016/j.ijhm.2019.102395
Franks, D. M., Davis, R., Bebbington, A. J., Ali, S. H., Kemp, D., & Scurrah, M. (2014). Conflict translates environmental and social risk into business costs. Proceedings of the National Academy of Sciences, 111(21), 7576-7581. https://doi.org/10.1073/pnas.1405135111
Freeman, R. E. (1994). The Politics of Stakeholder Theory: Some Future Directions. Business Ethics Quarterly, 4(4), 409-421. https://doi.org/10.2307/3857340
Freeman, R.E. (1984). Strategic Management: A Stakeholder Approach. Pitman.
Friedman, M. (1970). Comment on Tobin. The Quarterly Journal of Economics, 84(2), 318. https://doi.org/10.2307/1883017
Gherghina, S. C., Vintila, G., & Dobrescu, D. (2015). An empirical research on the relationship between corporate social responsibility ratings and US listed companies' value. Journal of Economics Studies and Research, 1-11. https://doi.org/10.5171/2015.260450
Govindan, K., Kilic, M., Uyar, A. & Karaman, A.S. (2021). Drivers and value-relevance of CSR performance in the logistics sector: A cross-country firm-level investigation. International Journal of Production Economics, 231, 107835. https://doi.org/10.1016/j.ijpe.2020.107835
Grassmann, M. (2021). The relationship between corporate social responsibility expenditures and firm value: The moderating role of integrated reporting. Journal of Cleaner Production, 285, 124840. https://doi.org/10.1016/j.jclepro.2020.124840
Hajiha, Z. & Sarfraz, B. (2015). Investigating the relationship between corporate social responsibility and the cost of equity in companies listed on the Tehran Stock Exchange. Experimental Accounting Research, 4(14), 105-123. (in Persian)
Hasasyegane, Y. & Barzegar, Gh. (2015). A model for disclosing corporate social responsibility and sustainability and its current status in companies admitted to the Tehran Stock Exchange. Stock Exchange Quarterly, 8(29), 91-110. (in Persian)
Heydari Kurdzanganeh, Gh., Noravesh, I. & Jafari, M.H. (2017). Social responsibility and financial performance in companies admitted to the Tehran Stock Exchange. Economic magazine - monthly review of economic issues and policies, 17(3), 53-78. (in Persian)
Hillman, A.J. & Keim, G.D. (2001). Shareholder Value, Stakeholder Management, and Social Issues: What’s the Bottom Line? Strategic Management Journal, 22(2), 125-139.
Hoang, T. V. H., Dang, N. H., Tran, M. D., Van Vu, T. T. & Pham, Q. T. (2019). Determinants influencing financial performance of listed firms: Quantile regression approach. Asian Economic and Financial Review, 9(1), 78. https://doi.org/10.18488/journal.aefr.2019.91.78.90
Hull, C.E. & Rothenberg, S. (2008). Firm performance: the interactions of corporate social performance with innovation and industry differentiation. Strategic Management Journal, 29(7), 781-789. https://doi.org/10.1002/smj.675
Huynh, T. D., Nguyen, T.H. & Truong, C. (2020). Climate risk: The price of drought. Journal of Corporate Finance, 65, 101750. https://doi.org/10.1016/j.jcorpfin. 2020.101750
Islam, T., Islam, R., Pitafi, A. H., Xiaobei, L., Rehmani, M., Irfan, M., & Mubarak, M. S. (2021). The impact of corporate social responsibility on customer loyalty: The mediating role of corporate reputation, customer satisfaction, and trust. Sustainable Production and Consumption, 25, 123-135. https://doi.org/10.1016/j.spc.2020.07.019
Javed, M., Rashid, M.A. & Hussain, Gh. (2016). When does it pay to be good – A contingency perspective on corporate social and financial performance: would it work? Journal of Cleaner Production, 133, 1062-1073. https://doi.org/10.1016/j.jclepro.2016.05.163
Javed, M., Rashid, M. A., Hussain, Gh. & Ali, H.Y. (2020). The effects of corporate social responsibility on corporate reputation and firm financial performance: Moderating role of responsible leadership. Corporate Social Responsibility and Environmental Management, 27(3), 1395-1409. https://doi.org/10.1002/csr.1892
Jensen, M. C. & Meckling, W.H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
Kachouri, M. & Jarboui, A. (2017). Exploring the relation between corporate reporting and corporate governance effectiveness. Journal of Financial Reporting and Accounting, 15(3), 347-366.
Khoshtinat, M. & Rai, H. (2004). The effect of providing social accounting information on investors' decision making. Accounting and Auditing Reviews, 37(11), 73-92. (in Persian)
Kim, W., Park, K. & Lee, S. (2018). Corporate Social Responsibility, Ownership Structure, and Firm Value: Evidence from Korea. Sustainability, 10(7), 2497. https://doi.org/10.3390/su10072497
Lahouel, B. B., Bruna, M. G., & Zaied, Y. B. (2020). The curvilinear relationship between environmental performance and financial performance: An investigation of listed french firms using panel smooth transition model. Finance Research Letters, 35, 101455. https://doi.org/10.1016/j.frl.2020.101455
Laskar, N. & Maji, S.G. (2016). Disclosure of Corporate Social Responsibility and Firm Performance: Evidence from India. Asia-Pacific Journal of Management Research and Innovation, 12(2), 145-154. https://doi.org/10.1177/2319510X16671555
Li, Q. He, P., He, Y., Han, X., Zeng, T., Lu, G. & Wang, H. (2020). Investigation to the relation between meteorological drought and hydrological drought in the upper Shaying River Basin using wavelet analysis. Atmospheric Research, 234, 104743. https://doi.org/10.1016/j.atmosres.2019.104743
Liu, Y., Saleem, S., Shabbir, R., Shabbir, M. S., Irshad, A., & Khan, S. (2021). The relationship between corporate social responsibility and financial performance: a moderate role of fintech technology. Environmental Science and Pollution Research, 28(16), 20174-20187. https://doi.org/10.1007/s11356-020-11822-9
Long, W., Li, S., Wu, H. & Song, X. (2020). Corporate social responsibility and financial performance: The roles of government intervention and market competition. Corporate Social Responsibility and Environmental Management, 27(2), 525-541. https://doi.org/10.1002/csr.1817
Lu, J., Javeed, S. A., Latief, R., Jiang, T., & Ong, T. S. (2021). The Moderating Role of Corporate Social Responsibility in the Association of Internal Corporate Governance and Profitability, Evidence from Pakistan. International Journal of Environmental Research and Public Health, 18(11), 5830. https://doi.org/10.3390/ijerph18115830
Mahmood, F., Qadeer, F., Sattar, U., Ariza-Montes, A., Saleem, M. & Aman, J. (2020). Corporate Social Responsibility and Firms’ Financial Performance: A New Insight. Sustainability, 12(10), 4211. https://doi.org/10. 3390/su12104211
Mashayekh, Sh., Parsaei, M. & Korani, A. (2021). The relationship between corporate social responsibility and the quality of accounting information and auditor's report. Financial Accounting and Audit Research, 13(51), 41-64. (in Persian)
McGuire, J.B., Sundgren, A. & Schneeweis, T. (1988). Corporate social responsibility and firm financial performance. Academy of Management Journal, 31(4), 854-872. https://doi.org/10.2307/256342
McWilliams, A. & Siegel, D. (2001). Corporate Social Responsibility: a Theory of the Firm Perspective. Academy of Management Review, 26(1), 117-127. https://doi.org/10.5465/amr.2001.4011987
McWilliams, A., Siegel, D. S. & Wright, P.M. (2006). Corporate Social Responsibility: Strategic Implications. Journal of Management Studies, 43(1), 1-18. https://doi.org/10.1111/j.1467-6486.2006.00580.x
Miller, S.R., Eden, L. & Li, D. (2020). CSR Reputation and Firm Performance: A Dynamic Approach. Journal of Business Ethics, 163(3), 619-636. https://doi.org/10.1007/s10551-018-4057-1
Namazi, M. & Moghimi, F. (2018). The effect of innovation and the moderating role of social responsibility on the financial performance of companies in different industries. Accounting and Auditing Reviews, 25(2), 289-310. (in Persian)
Nelling, E. & Webb, E. (2009). Corporate social responsibility and financial performance: the “virtuous circle” revisited. Review of Quantitative Finance and Accounting, 32(2), 197-209. https://doi.org/10.1007/s11156-008-0090-y
Nguyen, M., Bensemann, J. & Kelly, S. (2018). Corporate social responsibility (CSR) in Vietnam: a conceptual framework. International Journal of Corporate Social Responsibility, 3(1). https://doi.org/10.1186/s40991-018-0032-5
Okafor, A., Adeleye, B.N. & Adusei, M. (2021). Corporate social responsibility and financial performance: Evidence from U.S tech firms. Journal of Cleaner Production, 292, 126078. https://doi.org/10.1016/j.jclepro.2021.126078
Petersen, M. A. (2009). Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches. Review of Financial Studies, 22(1), 435-480. https://doi.org/10.1093/rfs/hhn053
Porasadi, M. & Madani, J. (2016). The effect of social responsibility components on the quality of providing police services. Social Order Quarterly, 8(1), 161-188. (in Persian)
Ramzan, M., Amin, M. & Abbas, M. (2021). How does corporate social responsibility affect financial performance, financial stability, and financial inclusion in the banking sector? Evidence from Pakistan. Research in International Business and Finance, 55, 101314. https://doi.org/10.1016/j.ribaf.2020.101314
Rashid, M.M. (2020). Ownership structure and firm performance: the mediating role of board characteristics. Corporate Governance: The International Journal of Business in Society, 20(4), 719-737. https://doi.org/10.1108/CG-02-2019-0056
Rodriguez-Fernandez, M. (2016). Social responsibility and financial performance: The role of good corporate governance. BRQ Business Research Quarterly, 19(2), 137-151. https://doi.org/10.1016/j.brq.2015.08.001
Sarlak, A., Khodakarami, M., Hesarzadeh, R., Nazari, J. & Taghimolla, F. (2023). Drought Risk and Audit Pricing: A Mixed-Method Research in an Emerging Market. Working Paper, SSRN.
Senobar, N., Khalili, M. & Thaghafian, H. (2011). Examining the relationship between social responsibility and financial performance of companies. Business Management Studies Quarterly, 2(4), 28-52. (in Persian)
Shabbir, M. S. & Wisdom, O. (2020). The relationship between corporate social responsibility, environmental investments and financial performance: evidence from manufacturing companies. Environmental Science and Pollution Research, 27(32), 39946-39957.
Shabbir, M.S., Shariff, M., Yusof, M.S., Salman, R. & Hafeez, S. (2018). Corporate Social Responsibility and Customer loyalty in Islamic Banks of Pakistan: A Mediating Role of Brand Image. Academy of Accounting and Financial Studies Journal, 22, 1-6.
Shin, M. & Eun, K. S. (2011). The Effects of Corporate Social Responsibility Expenditure on Firm Value. Korean Journal of Financial Engineering, 10(1), 99-125. https://doi.org/10.35527/kfedoi.2011.10.1.005
Singh, D. & Delios, A. (2017). Corporate governance, board networks and growth in domestic and international markets: Evidence from India. Journal of World Business, 52(5), 615-627. https://doi.org/10.1016/j.jwb.2017.02.002
Tangngisalu, J., Mappamiring, M., Andayani, W., Yusuf, M., & Putra, A. H. P. K. (2020). CSR and Firm Reputation from Employee Perspective. The Journal of Asian Finance, Economics and Business, 7(10), 171-182.
Truong, C., Garg, M. & Adrian, C. (2020). Climate Risk and the Price of Audit Services: The Case of Drought. Auditing: A Journal of Practice & Theory, 39(4), 167-199. https://doi.org/10.2308/AJPT-18-097
Wang, Q., Dou, J. & Jia, Sh. (2016). A Meta-Analytic Review of Corporate Social Responsibility and Corporate Financial Performance: The Moderating Effect of Contextual Factors. Business & Society, 55(8), 1083-1121. https://doi.org/10.1177/0007650315584317
Wang, Y., Li, J., Feng, P. & Hu, R. (2015). A Time-Dependent Drought Index for Non-Stationary Precipitation Series. Water Resources Management, 29(15), 5631-5647. https://doi.org/10.1007/s11269-015-1138-0
Ye, Y. & Li, K. (2021). Impact of family involvement on internal and external corporate social responsibilities: Evidence from Chinese publicly listed firms. Corporate Social Responsibility and Environmental Management, 28(1), 352-365. https://doi.org/10.1002/csr.2053
Accounting and Auditing Review
Volume 31, Issue 1
2024
Pages 123-153

Files

Share

How to cite

Statistics