Corporate Social Responsibility and Its Financial Implications. Evidence from Non-Financial Firms of Pakistan

Abstract

Corporate Social Responsibility (CSR) is now part of corporate strategy, especially in emerging economies whereby stakeholders’ expectations and regulatory environment are changing. This paper analyses how stakeholder-related Corporate Social Responsibility practices affect the financial performance of non-financial Pakistan firms. As compared to the previous reports, which assume that CSR is an aggregated construct, the research disaggregates CSR into five dimensions which include responsibility to the employees, to the shareholders, to the lenders, to the customers, and to the government. Accounting based indicators are used to evaluate financial performance; these are Return on Assets and Return on Equity. The research design is quantitative research design, founded on the secondary panel data of the non-financial firms listed on Pakistan Stock Exchange in the years 2020 to 2024. The techniques are panel regressions that are also known as Fixed Effects and Random Effects models employed to estimate the relationship between CSR dimensions and financial performance with the Hausman test being used to determine the most suitable model. The diagnostic tests are carried out to promote the soundness of the findings. According to the empirical findings, five CSR dimensions are positively and statistically significant in influencing both Return on Assets and Return on Equity. The responsibility towards shareholders and customers is a stronger dimension of CSR that can have impact on financial performance, whereas responsibility towards employees, lenders, and government plays significant role in profitability as well. The results endorse the stakeholder theory since they affirm that proper management of the various stakeholder groups improves the performance of the firm. The analysis offers empirical data that is powerful enough to demonstrate that Corporate Social Responsibility is a value-creating process and not a cost liability. The results have significant implications to the managers, policymakers, and investors who might wish to facilitate sustainable financial performance by means of responsible corporate practices in the non-financial sector of Pakistan.