Previous studies have proposed a virtuous circle between corporate social performance (CSP) and corporate financial performance (CFP). However, a key challenge researchers face when empirically examining this virtuous circle is endogeneity. In this paper, we apply a well-developed method—dynamic panel data (DPD) estimation—to account for endogeneity and conduct two studies to reexamine the causal relationship between CSP and CFP. Study 1 relies on KLD ratings from 1997 to 2012 as the measure of CSP. According to the results of Study 1, although CFP measured as ROE may have a causal impact on CSP, it is doubtful whether there is a causal influence of CSP on CFP. Study 2 relies on the sustainability scores provided by Sustainalytics from 2009 to 2018 as the measure of CSP. Study 2 reports that CSP does not causally influence CFP and that CFP does not have a causal impact on CSP. Together, Study 1 and Study 2, using different measures for CSP, suggest that a virtuous circle between CSP and CFP may not exist. Our study suggests that doing good may not necessarily lead to doing well and that doing well may not naturally result in doing good. Thus, our study implies that future studies should seriously consider the causal mechanisms through which CSP may influence or may be influenced by CFP. Our paper also discusses the implications for CSP research and for management and organization research. The limitations of applying DPD estimation to empirically examine the causal relationship between CSP and CFP are also discussed.
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In addition to the three sources discussed above, endogeneity may potentially exist when the sample is truncated and a sample-selection bias is present (Clougherty et al. 2016). We argue, however, that sample-selection bias may not manifest in our study because our sample is constructed based on a large dataset of third-party CSP ratings (i.e., KLD ratings). Firms are unable to decide whether they are selected to be rated by KLD; instead, KLD ratings cover over 3000 large US firms. Thus, we argue that the sample is unlikely to be truncated.
Our sample contains 992 firms, so we could argue that the number of firms is not extremely small.
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This research was funded by the David Berg Center for Ethics and Leadership at the University of Pittsburgh, Katz/CBA School of Business. This research was also supported by National Natural Science Foundation of China (No. 71632007).
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Zhao, X., Murrell, A. Does A Virtuous Circle Really Exist? Revisiting the Causal Linkage Between CSP and CFP. J Bus Ethics (2021). https://doi.org/10.1007/s10551-021-04769-5
- CSP–CFP relationship
- Virtuous circle
- Bidirectional causality
- Dynamic panel data (DPD) estimation