The value of corporate social responsibility in times of economic uncertainty

This paper reviews the relationship between corporate social responsibility (CSR) and corporate financial performance (CFP). The ultimate objective is to find out whether CSR can strengthen the financial performance of a company in general as well as during times of unexpected economic uncertainty. Due to incoherency in the literature regarding the relationship, this paper focuses on endogeneity issues in quantitative research and provides insight into potential reasons for the previous ambiguous findings. As a groundwork, an economic motivation for investing in CSR is presented through commonly used theoretical frameworks. Based on the previous empirical research reviewed in this paper, the overall outcome does not deny CSR from having a positive effect on CFP. The results suggest a significant positive correlation between CSR and CFP, with exceptions of some weak or insignificant results for market-based measures such as excess stock returns and firm value. However, during times of increased uncertainty and more precisely during the global financial crisis, such a relationship with market-based financial measures seems again to be significant and positive. Nevertheless, the findings must be considered with caution, since empirical studies on the CSR–CFP relationship suffer from limitations mainly due to endogeneity issues. The endogeneity stems especially from errors in CSR measurement, but also from omitted variable bias and potential simultaneous causality. The researchers have not been able to determine the relationship in question to be causal. Finally, the paper provides an overview of these various limitations and gives suggestions for further research