Corporate Social Responsibility and Corporate Financial Performance: An Empirical Literature Review

This study aims to present a literature review of recent studies on the relationship between environmental, social and governance (ESG) performance, corporate social responsibility (CSR) and corporate financial performance (CFP) and to provide a path for future researches. Using content analysis method, a total of 88 papers published in renowned journals, over the period 2015-2021, were selected in the review. Several findings have been made: first, the majority of researches have focused on the CSR’s “social impact” hypothesis on CFP; the reverse relationship seems to have been overlooked. Second, the contested results are likely to be attributable both to differences in research contexts and CSR’ laws but also to biases relating to the operationalization of CSR concept and CFP proxies retained. Finally, several arguments are advanced arguing for an indirect link between CSR and CFP. Future research should, therefore, pay attention to the different contingent variables that are likely to affect the studied relationship.


Introduction
Facing a series of financial scandals and declining stakeholder confidence, several reforms have been launched worldwide aiming at advancing environmental, social and corporate governance (ESG) issues. The motivation was to move from a shareholder perception of values to a more global perception including the interests of all the stakeholders. As a result, CSR has emerged as a significant dimension for the development of sustainable strategies that affect any given firm performance (Eccles and Serafeim, 2013). In the same way, a large number of academic studies have analyzed the financial implications of CSR. However, the relationship between CSR, firm performance and profitability remains one of the most debated topics in this field since the implications of such a link are not without interest for managers and policymakers but also for shareholders.
CSR-CFP relationship is ambiguous. Although a majority of empirical studies are in favor of a positive link (Jeong et al. 2018;Chuang and Huang, 2018;Ghaderi et al. 2019;4 other than maximizing the shareholder value (Friedman, 1970). The agency model supports the hypothesis that a company engaging in low CSR is more efficient and profitable. In fact, it would not incur the same financial expenses as a company that invests in several forms of social responsibility, such as employee well-being, environmental protection and charitable donations.
From the agency theory perspective, a socially responsible investing may waste resources that can weaken, rather than strengthen, a business, with the shareholders' loss of wealth. Opting for investing in CSR is a decision based on principles that expose the company to a risk in relation to the objective of maximizing financial value (Jensen, 2001).
Consequently, the firm is more exposed to the opportunistic behavior of managers who choose to overinvest in CSR so as to improve their image and their social legitimacy. For example, if a firm invests in equipment that reduces pollution to a greater degree than that required by law, the costs of this equipment may exceed the financial benefits granted to the investors. This situation goes against the good management practices.
The second, the stakeholders' theory claims that social responsibility is a duty for the company through which it improves the satisfaction of all stakeholders and therefore the economic and financial performance of the company. From the stakeholders' theory perspective, companies depend on stakeholders to survive since they provide the essential tangible or intangible resources necessary for their success (Hill and Jones, 1992). If stakeholders withdraw resources in whole or in part, a business may not be able to continue operating or endure financial disaster (Clarkson, 1995;Harjoto et al. 2015). The concept of stakeholders has been defined as "any group or individual who can affect or is affected by the achievement of the goals of an organization. In the broad sense, the term includes suppliers, customers, shareholders, employees, communities, political authorities (national and territorial), the media, etc. (Freeman, 1984). According to Freeman (1984), the stakeholder theory identifies the generation of value as a central engine of business, but similarly asserts that this value must be shared by a group of stakeholders that includes not only shareholders and managers but also all the actors who may have an interest in the activity of the company. This is the theoretical framework currently used by most research on social responsibility.
The positive effect of social responsibility on financial performance is best explained by the social impact hypothesis, which is itself based on the theory of stakeholders (Freeman, 1984). This hypothesis suggests that by meeting the demands and expectations of different stakeholders, companies are reforming their financial performance (Perrini et al. 2011). CSR International Journal of Innovative Research and Publications www.ijirp.com 5 is considered a strategic tool for obtaining financial advantages by means of competitive advantages on the market (Porter and Kramer, 2002), an improved reputation (Fombrun and Shanley, 1990), a better brand image (Murray and Montanari , 1986) and more legitimacy (Hart and Christensen, 2002). For Cornell and Shapiro (1987), a company which ignores the preferences of interest groups will suffer a negative effect on its own reputation, thereby increasing its risk premium and, consequently, reducing its profitability. Regarding this aspect, Cornell and Shapiro (1987) argue that the cost of CSR is almost negligible compared to its potential benefits.
The third, the Resource-Based View (RBV) theory (Barney, 1991), provides enough arguments to support the hypothesis of creating competitive advantage from the exercise of CSR (Barney, 1991). This approach deals with the link between the internal characteristics of the company and its performance. Indeed, according to this theory, the performance differentials are mainly explained by the existence of company-specific resources supposed to be precious, scarce, difficult to imitate by rivals and not easily tradable on the markets (therefore hardly substitutable). For Barney, (1991); Bowman and Ambrosini, (2003), these resources must be "ambiguous" that is to say that the processes of their creation, are not completely known; they are also "complex" insofar as certain resources such as reputation , corporate culture are difficult to change in the short term, as they are "inimitable". Furthermore, the resource-based approach defends the idea that CSR is used strategically by companies to create and consolidate a sustainable competitive advantage (McWilliams and Siegel, 2001;Zhao and al. 2019). Indeed, this approach suggests that CSR is one of the heterogeneous resources and skills whose mobility between firms remains imperfect, especially if we consider that these resources remain scarce, inimitable and non-substitutable.
Thus, CSR and its perception by the different stakeholders can constitute a sustainable competitive advantage, a kind of "intangible" capital. For example, McWilliams and Siegel (2001) have shown that the addition of a social attribute to a product has an impact on demand and subsequently on the profitability of the company. Werner (2009) argues that CSR as an "intangible" resource is increasingly integrated into the various business processes and that, when well designed and adapted to the needs of the community and society, it may become a source of opportunities, innovation and a competitive advantage for companies.
The previous discussion suggests that corporate engagement in CSR could serve as a control mechanism to balance the interest of multiple stakeholder groups (Mason and Simmons, 2014). In addition, the satisfaction of all stakeholders tends to increase the reputation International Journal of Innovative Research and Publications www.ijirp.com 6 of the company, which in turn has a positive impact on financial performance. Conversely, disappointment of stakeholders may have a negative impact on financial performance. This theoretical framework is at the center of the strategic management given the development of CSR and sustainability concepts that make the company better take into account the consequences of their activities on all stakeholders on the one hand, and the environment, on the other (Donaldson and Preston, 1995).

Metrics of Profitability and Firm Value
Largely, it is complicated to establish a complete definition and clear methodology for firm performance. However, scholars have suggested several definitions and methodologies. Zahay and Griffen (2004) defined firm performance as the firm ability to achieve its goals while meeting the needs of its stakeholders. Ramezan et al. (2013) referred to firm performance as the ability to effectively gather and manage their assets in terms of human, financial or physical assets in order to accomplish their desired goals.
Firm performance can be measured by financial or non-financial indicators. In the literature, it is agreed that the use of the term firm performance is generally related to the Other authors used questionnaires to construct a performance measure based on the items valuation. Third, the accounting measures are subject to a lot of criticism. In particular, the accounting standards still differ from one country to another. Therefore, these measurements do not allow for a reliable international comparison. On the other hand, questionable practices and accounting fraud can be practiced so that the evaluation of the performance is no longer credible.

CSR Metrics
We can suggest that the concept of CSR is self-defined; firms are encouraged to behave in a "socially responsible" way. However, such simplistic clarity is illusory. In partnership with financial and ethical organizations, the Vigeo Eiris agency generates indices and ratings to rank the best performing companies in terms of CSR. The Vigeo agency notes the performance of companies on the basis of 38 ESG issues grouped into six areas: Environment, Social commitment, Human rights, Human resources, corporate governance, and behavior on the markets. Ratings in terms of absolute performance range from 0 to 100. This score is used to assign a performance rating from --to + +. Sustainalytics which is an agency specializing in ESG research and rating, assesses the ESG performance of companies using 70 specific indicators weighted according to the sector of activity. It assesses CSR performance using the best of the sector approach, called "Best in class" or even "Best of Sector", making it possible to identify the leaders and red lanterns of each sector of activity. This agency also provides analyses on the firms involvement degree in controversial sectors (tobacco, alcohol, weapons, fur, gambling, nuclear) as well as the assessment of the exposure of States to the main ESG risks (natural risks, their level of human development, respect for freedom such as freedom of the press, etc.

CSR, Profitability and Firm Value Link: Empirical Literature
Although the relationship between CSR and financial performance was widely examined empirically, the results are still inconclusive. A number of authors have found a negative or insignificant effect Duque-Grisales and Aguilera-Caracuel, 2019). This negative association is explained by the waste of precious resources by an overinvestment in CSR. As a result, companies can improve their performance and reduce their risk by reducing CSR investments. On the other hand, the negative association can be explained by mandatory CSR reporting in several contexts e.g. Chinese firms are required to report CSR information.
Mandatory CSR reporting alters the firm behavior and generates positive externalities at the expense of shareholders ). Moreover, a negative or insignificant relationship is explained by the time horizon of the analysis. Yang (2016) argues that there may be a shortterm negative relationship, but the long-term positive relationship will eventually dominate.
Other studies confirm that a socially responsible behavior has a positive impact on a firm profitability and value (Jeong et al. 2018;Chuang and Huang, 2018;Ghaderi et  disclosure of good practices interacts with the disclosure of bad practices. In case the company has a high social performance, a revelation of high ESG information weakens the positive valuation effect of good practices. One possible explanation for this conclusion is that markets can interpret an increased disclosure as the company's attempt to justify overinvestment in ESG activities. On the other hand, disclosure weakens the negative effects of bad ESG practices, because disclosures help companies justify their irresponsible behavior by explaining to investors the relevance of their ESG operations and policies or because they persuade investors that they have made credible commitments to overcome these bad practices. We may note that the distinction between CSR strengths and concerns is a major distinction in various social or sustainability indices. We may also note the recent literature tendency to emphasize this distinction and the relationship between these different components on the firm value (Youn et al. 2015;Price and Sun, 2017;Fatemi et al. 2018;Al-Hadi et al. 2019;Kim et al. 2018;Walker et al. 2019 (Ioannou and Serafeim, 2015), which leads to greater accuracy in the analysts' forecasts (Dhaliwal and al. 2012). In addition, CSR improves communication with shareholders on financial matters and encourages more effective corporate governance and greater corporate value (Jo and Harjoto, 2012). These studies can be considered as the starting point for a deeper research into other mediating and moderating effects of the CSR-firm performance relationship.

Conclusion
In this study, we presented a literature review of the recent studies that have investigated the relationship between corporate social responsibility and firm performance. We showed that studies on this relationship have evolved and covered a wide variety of topics such as the effect of the CSR different components on financial performance, distinction between strengths and concerns in the analysis, dependence on the industry relationship to which the company belongs and the possible mediators and moderators of the relationship. In spite of this growing body of literature on this relationship, there are still many questions that have not received adequate replies yet. First, given the mixed results of the relationship between CSR and firm value, it would be interesting to seek an optimal CSR level and the shape of the relationship. It means that investing below or above this optimal level can have a negative effect on financial performance. From an agency perspective, managers tend to over invest in CSR and shareholders set up mechanisms to control the intensity of investment in CSR so as not to negatively affect the company value. At this point, it would also be relevant to study the impact of the ownership structure on the optimal CSR level. Second, another interesting research path could be the examination of the reverse causality in the CSR-Firm performance relationship.
In fact, the studies on the financial performance impact on CSR are rather scarce. Third, It International Journal of Innovative Research and Publications www.ijirp.com 25 would be interesting to intensify the future research following the steps of (Liao et al. 2018;Hawn and Ioannou, 2016;Walker et al. 2019;Bajic and Yurtoglu, 2018;Aouadi and Marsat, 2018; García-Sánchez and Martínez-Ferrero, 2019) how adopted a meta-analysis research and apply it to establish an international comparison between companies from different countries and carry out an analysis by industry to identify the dependence of the relationship on the context analyzed and the characteristics inherent in the meaning and intensity of the impact.
Fourth, in the study of the impact of the different components of the CSR index on the value of the company, some authors made the difference between strengths and concerns. On the other hand, Price and Sun (2017) made the exception of studying the intensity and sustainability of the impact of strengths which reflect both responsibility and concerns. These authors concluded that corporate irresponsibility has a greater and longer lasting impact than corporate social responsibility on the value and risk of companies. One interesting question in this context could address the kind of mechanism through which irresponsibility is more influencing than responsibility on the firm value. Finally, the underlying mechanisms through which CSR affects the firm value and profitability are not well understood. Several papers in our suggested literature review assumed that the relationship is not direct and tried to find channels through which CSR affects the firm value. We may note that most of the mediators such as the reputation, competitive advantage and innovation performance of the company are intangible.
We can conclude that this relationship has attracted a great deal of research and will still attract a great deal of research ever in the future.