Whether Companies Need to be Concerned about Corporate Social Responsibility for their Financial Performance or Not? A Perspective of Agency and Stakeholder Theories

Abstract

Present study used the theoretical framework of both the Agency and Stakeholder theories in order to empirically investigate the importance of Corporate Social Responsibility (CSR) for the financial performance (FP) of firm both in the short and long run. According to the agency theory approach core motive of the company’s existence is to maximize their owner’s wealth and therefore spending on other stakeholders in the form of CSR is an additional cost that leads to decrease in the FP. Contrary to this, Stakeholder theory argues that firms should satisfy the social needs of various stakeholders and perform CSR as it protects the firm from negative confrontations and boycotts of their stakeholders that reduces the operating cost and boosts the financial performance. A sample of 76 Pakistani manufacturing firms listed at Karachi Stock Exchange has been used for the time period ranged from 2009-2012. A series of tests like F-test, LM-test and Hausman-test have been applied to identify optimum panel data model and Random model found to be the appropriate one. Results of Generalized Least Square Regression results revealed that CSR has a positive impact not only on the short term financial performance of Pakistani manufacturing firms but also helped them to maintain the sustainable long term financial performance.