The Financial Trade-Offs of Corporate Social Responsibility: A Simultaneous Equation Approach in the Nigerian Context

Olabamiji Atanda, Abiodun Aikomo, Idorenyin John Okon

Abstract


This paper examines the bidirectional relationship between corporate social responsibility (CSR) and non-financial firms’ performance in an emerging economy using Nigerian non-financial firms from 2010 to 2022. Since CSR has been shown to have mixed evidence on profitability and there is little research in resource constrained environments, this study seeks to clarify how CSR influences profitability (return on assets) and vice versa. To deal with endogeneity and heterogeneity, the study uses the System Generalized Method of Moments (System GMM) to estimate the simultaneous equation model. The result of a negative effect of CSR disclosure on firm profits implies that substantial costs of CSR imposed on firms that may decrease short term returns. In addition, lower profitability forces firms to increase CSR efforts, perhaps as a strategic response to increase reputation and stakeholder support. The results of this study imply that CSR engagement largely entails financial trade off characterized by short term cost and future reputational upside; the relevance in this context is in that CSR is not really backed by regulation as in the case of Nigeria. This study provides a valuable contribution to the CSR-profitability dynamics in an emerging market context with insights that are actionable for managers, policymakers and investors on the terrain of CSR in financially constrained settings.

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DOI: http://dx.doi.org/10.31000/jast.v5i2.13576

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