Impact of corporate social responsibility on corporate financial performance: Evidence from the Maldives stock exchange

Abstract

BACKGROUND:

Although CSR has been studied extensively based on developed countries, very few studies has been done on developing economies. Likewise, the field of CSR is still uncovered ground, at an early stage of development in the Maldives.

OBJECTIVE:

The objective of this study is to examine the impact of overall CSR ranking, and individual CSR dimensions on the financial performance of the listed companies in the Maldives.

METHODOLOGY:

Secondary data related to CSR, financial variables have been collected from the Maldives Stock Exchange, and through content analysis, a CSR index was developed.

RESULTS:

Findings demonstrated a significant relationship between overall CSR ranking and financial. However, among the dimensions of CSR, only the community and governance have a significant positive association with financial measures, where else the dimensions of employees and environment do not have any significance with financial performance.

CONCLUSION:

The paper includes implications to control the effect of CSR on company performance strategically and to revise their business philosophies to a socially responsible approach. It also contributes to helping the decision-makers to come up with concepts to initiate and provide a social performance rating for the Maldives listed companies.

Keywords

Corporate social responsibility corporate financial performance responsibility corporate governance stakeholder theory community development

Anitha Moosa, is a Ph.D. research scholar at the School of Economics and Management, University of Science & Technology Beijing, China. She holds a Masters’ Degree in Business Administration, from Staffordshire University, United Kingdom. Her research interests are in CSR, sustainability development, environmental management studies, emerging economies, and strategic management.

Feng He, is a Professor of Business and Economics Studies at the School of Economics and Management, University of Science & Technology Beijing. His research interests are CSR, green productivity, and industry development. He has published dozens of papers in many English and Chinese journals such as Technovation, Journal of Cleaner Production, Journal of the Operational Research Society.

Tsitaire Jean Arrive, is a Ph.D. research graduate at School of Economics and Management, University of Science & Technology Beijing, China. Since 2015 till now, he published more than ten academic research papers in high quality SSCI, EI, and international journals on technology innovation and CSR.

1 Introduction

CSR is described as a business concept in distinctive ways, and numerous theoretical methodologies exist in the context of CSR. According to Lu et al. [1], the discussion of social responsibilities of business by researchers began in the late 1920s, although Bowen is usually credited with inventing the modern phrase for CSR [2]. Considering the CSR from the stakeholder theory standpoint, comparatively more emphasis is placed on society or the community or the employees [3]. As stated by McGuire et al. [4], the concept of CSR acknowledges the capabilities of a business to look beyond fulfilling its financial and legal responsibilities by voluntarily considering socially responsible behaviors to confirm the improvement and development of the community in which it operates. Therefore, increased responsiveness towards societal as well as environmental implications of various business undertakings has put many corporations under immense pressure from numerous stakeholder groups to be enthusiastically involved in and report CSR activities.

Consequently, the mandate for firms achieving CSR has become a global standard agreement, expecting firms to be precautious about maintaining a balance between corporate growth and social and environmental progress when ensuring their financial performance. Stakeholders are more conscious about how businesses operate their activities for the betterment of the society, environment, economy. This has convinced both academic and trade analysts to examine the relationship between CSR and financial performance, in determination to evaluate the legitimacy of arguments regarding a compromise between investment in CSR and corporate financial performance. Hence, contemporary studies regarding the context are focusing on investigating the interconnection of the CSR and CFP associations. Although most research shows a direct association, this direct impact seems to be unpredictable and open-ended; therefore, the analysis of CSR is still progressing, and theoretical frameworks, measurements, and empirical methods have not yet been unraveled.

Besides, past studies that studied the nature of the relationship between CSR and financial performance are mostly based on developed economies. Besides, very few have been done from the perspective of emerging economies,although all around the world, socially responsible issues, and environmentally related problems are extensively and realized in the developing countries [5]. Accordingly, in developing economies, both positive and negative impacts of social and environmental movements are probably most affected by globalization, investment patterns, business commotion, and on economic growth [6]. Hence, in a developing country like the Maldives, it is vital to study CSR and its impacts on the corporate financial performance of firms, especially listed companies that significantly contribute to economic growth. Most importantly, CSR has not yet been adequately studied in the context of the Maldives context; hence, there is an extreme need to explore and study this important issue and understand the socially responsible behavior of companies.

Nevertheless, this study aims to investigate and contribute to fill the research gap and to examine the impact of CSR on CF in all the companies listed in the Maldives Stock Exchange (MSE). For this research purpose, a CSR index is developed based on four main dimensions, i.e., community, employees, environment, and governance. The concept to construct the CSR index is derived from CSRHub [7], which is the world’s prevalent and most comprehensive database of CSR and sustainability-related information. Since, this is the very first empirical study based on the Maldives on the context of CSR and financial link, it provides comprehensive knowledge on to what degree listed companies engaged in CSR dimensions over the years. Furthermore, it will add significantly to the corporate world as longitudinal data is used, hence the study will help the academics, business investors, and managers to direct resources and identify areas to improve overall corporate performance.

The remaining structure of this research has been organized as follows. The second section provides an overview of CSR in the Maldives, while the third segment develops hypotheses. The fourth segment describes the methodology of the study, which includes the illustration of sample and data collection, variables, and model specification. In contrast, the fifth and sixth segments will present the results and discussion, followed by a final section of conclusions and implications for further research.

2 The concept of CSR in Maldives

CSR is taking robust measures in developing countries, including the Maldives. Stakeholder groups such as communities, consumers, employees, and investors put extraordinary pressure on corporate entities to obey, especially to community and environmental principles. In 2006, an independent institution was established in the name of Capital Market Development Authority (CMDA), under the Maldives Securities Act (2/2006) responsible for regulating and developing the Maldives capital market [8]. Eventually, in 2008, the corporate governance code was introduced, to ensure companies listed on the MSE are well-governed, upholding the core principles of corporate governance in conducting business.

Existing literature regarding CSR and financial performance connection is almost non-existence in the context of Maldives. Since understanding CSR signifies, one of the most advanced developments in the private sector, CSR in the Maldives is still at its infant stages of development. A baseline study on CSR practices in the Maldives conducted by Shareef et al. [9] suggested that there is an average level of CSR practices in businesses and lukewarm responses regarding CSR activities from non-business stakeholders in the Maldives. There is a difference between what companies consider ought to be CSR practices and their actual CSR practices. Corporations, especially in the private sector, prefer to keep their CSR practices discreet as publicity may cause increasing demands from local communities for financial and other assistance. While CSR is a complex multi-dimensional concept, it is often understood by Maldivian businesses in its external social dimension alone.

Thus, from the standpoint of Maldives, the concept of CSR is often reduced to acts of philanthropy and donations, though few companies practice CSR in its broader sense. A study by [10] indicated that most of the SAARC countries operated their CSR activities on a voluntary basis even though every country of SAARC follows the GRI guideline for CSR reporting. The “Global Compact” is virtually unheard of by many in the business sector or any other stakeholder groups in the Maldives, and very few private corporations adhere to the GRI [9]. In light of the above information and because CSR in the Maldives is an untouched and unexplored area in terms of theory as well as empirically, the main objective of this study is to analyze the relationship between CSR and financial performance of the listed companies in the MSE.

3 Theory and hypotheses

Empirically, studies that investigated the relationship between CSR and financial performance have shown mixed results such as positive correlation, negative correlation, or no significant correlation between both constructs. Thus, the subject matter has produced remarkable discussions among researchers, although previous literature is yet unsettled [11]. According to both modern stakeholder theory and agency theory, there is generally expected to be a constructive association between CSR and financial performance, especially in developing economies. Considering Asian markets, various outcomes have been identified, such as Hu and Scholtens [12] specified that CSR activities in developing countries have a positive and significant association between CSR policies and financial performance. Similar emerging market studies reported positive relationship such as for Korea [13], for Pakistan [14], for Taiwan [15], for Malaysia [16], for India [17] and for Nigeria [18].

Contrarily, more studies on emerging economies have found a negative association between CSR and financial performance, including [19] for Indonesia and by [20] for Malaysia. Moreover, Scholtens and Kang [21] stated that Asian firms with relatively good CSR engagement, as well as investor protection, have a significantly lower connection with earnings management. Although most of the CSR related literature is grounded on developed economies, research-based on emerging and developing economies is on a rising trend as well. Based on the discussions above, we develop the following hypotheses to examine if CSR practices impact financial performance among the listed companies in the Maldives.

Several meta-analyses have been conducted, such as by Margolis and Walsh [22], reported that CSR is positively related to corporate financial performance. Respectively, CSR policies of corporations could make an impact on the bottom line of corporations as consumers and investors become more civic conscious, thus making it positively related to corporate financial performance [23]. Moreover, studies by [24 –26] also presented the effect can be positive, indicating that companies can improve financial performance by incorporating CSR activities. However, one of the most significant and an earlier study by Friedman [27] reported that generating funds and wealth for the stockholder is the only primary and core liability of the firm’s management rather than wasting economic resources in socially related obligations. Earlier studies that supported these findings include [28, 29], which revealed a negative impact of CSR on financial performance. Thus, we posit the first hypothesis:

There is a positive relationship between CSR and CFP.

Businesses have to be responsible against their communities, beyond the constraints imposed by the law [30]. Further studies such as Schnietz and Epstein [31] stated that as there are both internal and external stakeholders and to satisfy their social demands and avoid their harmful confrontations like boycotts, complaints, and protests, firms have to consider social commitments. Contrastingly, a study by Kraft and Hage [32] stated that community services do not affect profit goals, while the empirical evidence shows a negative relation between CSR practices addressed to the local communities and financial performance [33]. Similarly, Brammer et al. [34] argued that decisions regarding community activities lead to severe conflict between management and their potential shareholders which further may cause the disturbances in the financial performance, while any other social and moral deliberations and intentions of a firm are unrelated to the firm’s profit [35]. Hence, the following hypothesis is developed:

There is a positive relationship between community-related CSR practices and CFP.

According to Luo and Bhattacharya [36], it is easier for firms that have close relations with their employees to recruit better employees, which in turn may raise the productivity of firms alongside incurring the lower cost and lead to improved financial performance. Correspondingly, employees may take a good sense of belonging besides developing corporate citizenship with a company that values them [37]. Hence enhancing employee commitment, product competitiveness [38], boosting employee productivity, loyalty, and commitment [39], will eventually reflect positively on financial performance. Consequently, the following hypothesis is developed:

There is a positive relationship between employee-related CSR practices and CFP.

With gradually increasing consciousness about environmental protection and social responsibility, the problem of whether an investment in CSR results in a favorable financial performance for a company has become a significant issue for both academia and corporates. One of the studies by Montabon et al. [40] found a positive and significant relationship between firm performance and the environmental management practices, similar to the meta-analysis conducted by Orlitzky et al. [41] which also confirmed that improving environmental performance will improve overall business performance. Moreover, proactive environmental management increases the market value of a company [42], likewise, Yang et al. [43] also underlined the effect of environmental sustainability significance with corporate reputation and financial performance. Therefore, the following hypothesis is developed:

There is a positive relationship between environment-related CSR practices and CFP.

Corporate governance is mechanisms such as board compilation, leadership ethics, and executive compensation, which are intended to ensure that management teams act in the best interest of shareholders, which in turn influences the firm’s financial success. Respectively, McGuire et al. [4] stated that better performance along various governance dimensions of CSR results in better financial outcomes because it improves relationships with key stakeholder groups. However, a firm’s investment in improving corporate governance generally does not benefit a firm and its shareholders and eventually will increase a firm’s costs because of a shift in focus from the maximization of shareholder value to the advancement of the interests of a broader set of stakeholders [44]. Therefore, the following hypothesis is developed:

There is a positive relationship between governance-related CSR practices and CFP.

4 Methodology

4.1 Sample description

As the purpose of the study is to analyze the relationship between CSR and financial performance of Maldives public listed companies. Sample selection did not exclude any company currently registered and have chosen to include all the companies despite the industry it operates. The sample consists of companies in assorted industries such as banking, housing, and finance, insurance, telecommunications, tourism, transportation and construction, shipping and logistics, as well as general trade. The study period ranges from 2004 to 2017, for which data was readily available when the study was conducted. The primary method used to collect data is a quantitative research approach since it is more objective, relatable, acceptable, and generalizable to the given subject of hypotheses the study aims to test. Data used were gathered manually from the published annual reports from the Maldives Stock Exchange [8] database and as well as from the listed company’s annual reports and CSR reports. The accuracy of the data collected is confirmed since this information is audited and used by companies to communicate with financial markets. All the variables used are evaluated at the end of the fiscal year. We used the SPSS program to analyze the hypotheses proposed.

However, before collecting quantitative data for the study and the development of the CSR index, a brief focus group discussion was held to grasp and understand the subject matter from the scope of the Maldives. This approach was considered to have a preliminary estimation and distinct opinion from the experts in the field, while adding complementary value to the quantitative research approach used in the study [45, 46]. Besides, it was deemed essential to include the opinion of the experts since the lack of studies on CSR in the context of Maldives. Hence, a total of eight, including six well-known business specialists and two academic research experts were requested who are conveniently available to participate in the discussion. The discussion was conducted with unstructured questions.

The outcomes derived from the discussions recognized the need for a study on CSR practices along with the importance of developing a CSR index suitable for businesses given the expansion of the stock market. Furthermore, the regulatory stand of reporting CSR and the aspects of CSR dimensions such as community, employees, environment, and governance were mainly suggested as most applicable for the current business setting. These findings were considered in developing the CSR index for the study. Moreover, the discussion offered an opportunity for a significant contribution to the advancement of knowledge and a more in-depth understanding of CSR before conducting the study, which added value to the quantitative analysis. Besides, it provided implications in general and for regulatory authorities and managers in advancing the subject of CSR in the Maldives, which are highlighted in detail in the conclusion section.

4.2 Measurement of CSR

CSR is the independent variable of this study, and content analysis is used to measure CSR ranking for reasons such as, once the variables have been chosen, the procedure is reasonably objective, and therefore, the results are independent of the particular research. A binary score was assigned to each dimension, and then an integrated score was determined, and this technique has been adopted in many recent studies [47]. Likewise, we also developed the CSR index by taking a dichotomous approach. After collecting reports, each report was converted to extractable text; keywords were developed based on the CSR index used by CSR Hub [7]. The number of CSR items and keywords adopted was counted using the text mining package and the statistical computing program, R Version 3.3.1. Keyword counts were standardized by document size. This approach allowed us to correct for biases that could occur based upon document length. Thus, the data points in each stage’s analysis are presented as keyword percentages calculated by total keyword count divided by the document’ s total word count.

All the CSR items are given equal importance; thus, the number of items adopted by a company has been computed by adding the score of each item while developing a scoring scheme to determine the degree of CSR activities conducted by the company. The CSR index data set contains binary-item measures of a company’s engagement along various social responsibility dimensions. Each dimension is further categorized and subcategorized into additional aspects, which are elaborated in the Table 1. The CSR index includes 47 items, covering the domains of community, employees, environment, and governance. CSR has been measured in terms of CSR scores (in percentage) using the following formula:

Table 1
The framework of CSR index

# Dimensions Measurements Subcategories

1 Community Community Development &Philanthropy Community citizenship

2 Charitable giving

3 Donations

4 Volunteerism

5 Protection of public health

6 Land use

7 Building design

8 Products Protection of public health

9 Environmental costs

10 Market opportunities

11 Sustainable technologies

12 Integrity of products and sales practices

13 Safety and quality of products and services

14 Human Rights &Supply Chain Human rights conventions

15 Freedom of association

16 Transparency in overseas sourcing disclosure

17 Employees Compensation &Benefits Compensation

18 Financial benefits

19 Promotion practices

20 Lay-off practices

21 Diversity &Labor Rights Diversity policies

22 Labor-management relations

23 Equal employment opportunities

24 Work-life balance

25 Training, Health &Safety Healthy and safe workplace

26 Accident and safety performance

27 Safety standards and training

28 Workplace policies and programs

29 Environment Energy &Climate Change Climate change policies

30 Renewable energy

31 Environmental technologies

32 Energy use

33 Environment Policy and Reporting Environmental policies

34 Environmental reporting performance

35 Compliance data

36 Resource Management Supply chain management

37 Resource materials management

38 Waste and recycling performance.

39 Governance Company Board Compliance to governance

40 Board structure and composition

41 Management compensations

42 Leadership Ethics Stakeholder relationship management

43 Culture of ethical decision making

44 Transparency &Reporting CSR reporting compliance standards

45 Stakeholders information’s and engagement

46 Signatory of Global Compact

47 Third-party auditing of reports

#	Dimensions	Measurements	Subcategories
1	Community	Community Development &Philanthropy	Community citizenship
2			Charitable giving
3			Donations
4			Volunteerism
5			Protection of public health
6			Land use
7			Building design
8		Products	Protection of public health
9			Environmental costs
10			Market opportunities
11			Sustainable technologies
12			Integrity of products and sales practices
13			Safety and quality of products and services
14		Human Rights &Supply Chain	Human rights conventions
15			Freedom of association
16			Transparency in overseas sourcing disclosure
17	Employees	Compensation &Benefits	Compensation
18			Financial benefits
19			Promotion practices
20			Lay-off practices
21		Diversity &Labor Rights	Diversity policies
22			Labor-management relations
23			Equal employment opportunities
24			Work-life balance
25		Training, Health &Safety	Healthy and safe workplace
26			Accident and safety performance
27			Safety standards and training
28			Workplace policies and programs
29	Environment	Energy &Climate Change	Climate change policies
30			Renewable energy
31			Environmental technologies
32			Energy use
33		Environment Policy and Reporting	Environmental policies
34			Environmental reporting performance
35			Compliance data
36		Resource Management	Supply chain management
37			Resource materials management
38			Waste and recycling performance.
39	Governance	Company Board	Compliance to governance
40			Board structure and composition
41			Management compensations
42		Leadership Ethics	Stakeholder relationship management
43			Culture of ethical decision making
44		Transparency &Reporting	CSR reporting compliance standards
45			Stakeholders information’s and engagement
46			Signatory of Global Compact
47			Third-party auditing of reports

Notes: This table shows the dimensions of CSR along with measurements and subcategories of CSR dimensions.

$\begin{matrix} CSR score of a company (%) \\ = \frac{No . of CSR items adopted by a company}{total No . of items in the CSR measurement instrument} \\ \times 100 \end{matrix}$

4.3 Measurement of financial performance

In this study, both market and accounting-based measures are taken into consideration. Moreover, these two techniques have been widely used in business research to measure corporate financial performance [48]. Some of the previous analyses have suggested diversified results between CSR practices and firms’ accounting and market-based financial performance, where for example a positive association between social responsibility and firm performance appeared to be partially supported because it showed a significant impact on market-based performance, but not on accounting-based performance [49]. Therefore, in this study, both ROA and Tobin’s Q will be used to measure CFP.

Furthermore, motivated by prior researches [50, 51], we also included several control variables to isolate the effect of CSR on financial performance better. Hence, we included the firm’s size, firm’s age, liquidity, advertising intensity, and growth rate as the controlled variable. Descriptions of the main variables used in this study are shown in Table 2.

Table 2
Variable description

Category Variable name Description

Corporate Financial Performance Return on Asset Net income/total assets

Tobin’s Q (MVE + PS + debt)/total assets

Corporate Social Responsibility Community Community related CSR activities practiced

Employees Employees related CSR activities

Environment Environment related CSR activities

Governance Corporate Governance related CSR activities

Control Variables Age Number of years since listed

Size Total assets

Liquidity Current assets/current liabilities

Advertising intensity Advertising expenses to Total Assets

Growth rate Current year revenue - Prior year revenue/Prior year revenue

Category	Variable name	Description
Corporate Financial Performance	Return on Asset	Net income/total assets
	Tobin’s Q	(MVE + PS + debt)/total assets
Corporate Social Responsibility	Community	Community related CSR activities practiced
	Employees	Employees related CSR activities
	Environment	Environment related CSR activities
	Governance	Corporate Governance related CSR activities
Control Variables	Age	Number of years since listed
	Size	Total assets
	Liquidity	Current assets/current liabilities
	Advertising intensity	Advertising expenses to Total Assets
	Growth rate	Current year revenue - Prior year revenue/Prior year revenue

Notes: This table shows the relevant information related to models’ dependent and independent and control variables.

4.4 Model and estimation method

We developed a model to predict both ROA and Tobin’s Q as a function of the variables described in the previous section. The models used to test the proposed hypotheses are given below. The regression analysis technique is used to authenticate the impact of CSR on financial performance. $\begin{matrix} (i) \\ {ROA}_{it} = α + β_{1} {CommCSR}_{it} + β_{2} {EmpCSR}_{it} \\ + β_{3} {EnvCSR}_{it} + β_{4} {GovCSR}_{it} + β_{5} Firm {age}_{it} + \\ β_{6} Firm {size}_{it} + β_{7} {Liquidity}_{it} + β_{8} Adv . int {ensity}_{it} \\ + β_{9} Growth {rate}_{it} + \in_{it} \\ (ii) \\ {Tobin}^{'} s Q_{it} = α + β_{1} {CommCSR}_{it} + β_{2} {EmpCSR}_{it} \\ + β_{3} {EnvCSR}_{it} + β_{4} {GovCSR}_{it} \\ + β_{5} Firm {age}_{it} + β_{6} Firm {size}_{it} \\ + β_{7} {liquidity}_{it} + β_{8} Adv . {intensity}_{it} \\ + β_{9} Growth {rate}_{it} + \in_{it} \end{matrix}$ where i indicates a firm, t indicates a year; Tobin’s Q and ROA are the financial performance metrics, CommCSR is the total community-related CSR score, EmpCSR is the total employee-related CSR score EnvCSR is the total environment-related CSR score GovCSR is the total governance-related CSR score, and ɛit ∼ i.i.d.N(0, σ2).

5 Results

Descriptive statistics of the variables are shown in Table 3, including the overall CSR score and individual dimensions of CSR (Panel A) along with financial performance measures (Panel B) and controlled variables (Panel C). Meanwhile, Table 4 depicts the pairwise correlations between each variable. As shown in Table 4, CSR has a positive but insignificant correlation with Tobin’s Q ratio (0.207) and ROA (0.006). This positive association between financial performance and CSR reveals that any increase in any one of these leads to an increase in the other variable. Among the main dimensions of CSR, the community (0.272) has the highest positive significant correlation to Tobin’s Q. In contrast, other dimensions such as employees (0.028), environment (0.063), and governance (0.219) have a positive but insignificant correlation. Besides, ROA has a positive and significant correlation with the community (0.323), and a positive yet insignificant correlation with employees (0.062), however, it has a negative and insignificant correlation with the environment (–0.195) and governance (–0.183) dimensions of CSR.

Table 3
Summary statistics

Minimum Maximum Mean St. Deviation

Panel A: Independent variable and dimensions

CSR Rankings (%) 25.53% 80.85% 52.24% 12.27%

Community 2.13% 25.53% 15.76% 4.79%

Employees 6.38% 23.40% 14.96% 3.74%

Environment 0.00% 17.02% 8.33% 5.38%

Governance 4.26% 19.15% 13.20% 3.62%

Panel B: Dependent variables

Q RATIO –0.3 3.2 0.584 0.713

ROA –0.2 0.3 0.092 0.0917

Panel C: Control variables

Age 10 54 31.333 16.007

Size 2513982 22,364,967,000 3,500,442,034 4,739,605,981

Liquidity 0 3.3 1.063 0.7586

Adv Intensity 0 0.1 0.015 0.0271

Growth Rate –1.9 5.9 0.21 1.1127

	Minimum	Maximum	Mean	St. Deviation
Panel A: Independent variable and dimensions
CSR Rankings (%)	25.53%	80.85%	52.24%	12.27%
Community	2.13%	25.53%	15.76%	4.79%
Employees	6.38%	23.40%	14.96%	3.74%
Environment	0.00%	17.02%	8.33%	5.38%
Governance	4.26%	19.15%	13.20%	3.62%
Panel B: Dependent variables
Q RATIO	–0.3	3.2	0.584	0.713
ROA	–0.2	0.3	0.092	0.0917
Panel C: Control variables
Age	10	54	31.333	16.007
Size	2513982	22,364,967,000	3,500,442,034	4,739,605,981
Liquidity	0	3.3	1.063	0.7586
Adv Intensity	0	0.1	0.015	0.0271
Growth Rate	–1.9	5.9	0.21	1.1127

Notes: This table shows the main descriptive statistics of the variable.

Table 4

Pearson correlations matrix between the dependent variables and independent variables

	CSR Rankings	Community	Employees	Environment	Governance	Q RATIO	ROA
CSR	1	0.754^**	0.664^**	0.699^**	0.667^**	0.207	0.006
Community		1	0.391^**	0.332^**	0.335^**	0.272^*	0.323^**
Employees			1	0.186	0.426^**	0.028	0.062
Environment				1	0.253^*	0.063	–0.195
Governance					1	0.219	–0.183
Q RATIO						1	0.240^*
ROA							1

Notes: This table shows pairwise correlations between the dependent variables and independent and control variables. ^*Correlation is significant at the 5% level (2-tailed). ^**Correlation is significant at the 1% level (2-tailed).

Table 5 shows the results of the regression model used to test the proposed hypotheses. Model 1 and 2 are used to test H1 by presenting the impacts of overall CSR ranking of firms on both ROA and Tobin’s Q, respectively. Looking at models 1 and 2, we see that the R square is 0.444 and 0.355 for ROA and Tobin’s Q, respectively. Meanwhile, the correlation coefficient for ROA is 0.667, and Tobin’s Q is 0.595, which indicates that there is a solid linear relationship between overall CSR ranking with the two dependent variables. We see that the F- significance test is 0. 000 for ROA and 0.001 for Tobin’s Q, and hence, our models are statistically significant and thus confirms the first hypothesis for both financial measures.

Table 5

Impact of CSR rankings and CSR dimensions on the financial performance of firm’s: ROA and Tobin’s Q

	Overall CSR rankings		CSR dimensions
	ROA	Tobin’s Q	ROA	Tobin’s Q
Variables	model 1	model 2	model 3	model 4
CSR Rankings	0.292^**(2.366)	0.395^***(2.968)	-	-
Community	-	-	0.509^***(4.463)	0.542^***(4.523)
Employees	-	-	–0.009(–0.085)	–0.125(–1.078)
Environment	-	-	–0.018(–0.163)	–0.148(–1.277)
Governance	-	-	–0.126(–1.129)	0.276^**(2.359)
AGE	0.327^*(1.711)	0.003(.016)	0.359^**(2.028)	–0.005(–0.029)
SIZE	–0.271^**(–2.077)	–0.505^***(–3.589)	–0.299^**(–2.522)	–0.569^***(–4.566)
Liquidity	0.539^***(4.200)	–0.272^**(–1.967)	0.413^***(3.399)	–0.383^***(–3.001)
Adv Intensity	–0.466^***(–2.696)	–0.273(–1.466)	–0.529^***(–3.280)	–0.323^*(–1.906)
Growth Rate	–0.003(–0.029)	–0.061(–0.537)	0.017(0.175)	–0.072(–0.717)
Intercept	–0.108^**(–2.043)	0.036(0.082)	–0.084^*(–1.709)	–0.055(–0.136)
R	0.667	0.595	0.757	0.728
R-squared	0.444	0.355	0.573	0.530
Sig.	0.000	0.001	0.000	0.000

Notes: This table shows impact of CSR rankings and CSR dimensions on the financial performance of firm’s: ROA and Tobin’s Q. ^*p < 0.10 significant at the 10% level, ^**p < 0.05 Significant at the 5% level.

The beta coefficient for overall CSR ranking is (β= 0.292, p < 0.05) for ROA and (β= 0.395, p < 0.01) for Tobin’s Q; meaning that for one standard deviation increase in an additional activity of CSR related activity, leads to a corresponding standard deviation increase in the firm’s financial performance. Moreover, firm age (β= 0.327, p < 0.10), and liquidity (β= 0.539, p < 0.01) has positive significant association with ROA, while firm size (β= –0.271, p < 0.05) and advertising intensity (β= –0.466, p < 0.01) is negatively associated with ROA. While none of the controlling variables has a significant positive association with Tobin’s Q, both firm size (β= –0.505, p < 0.01) and liquidity (β= –0.272, p < 0.05) has a significant negative association with Tobin’s Q. Nevertheless, from both models, it can be concluded that H1 is supported; overall, CSR ranking has a positive and significant relationship between CSR and CFP for the companies listed on the MSE.

Model 3 and 4 are used to test the H2 through H5 to examine whether there is a positive relationship between CSR dimensions. The R values stated in model 3 and 4 are the correlation of the model with the outcome variables, and since we have a combined set of four dimensions as predictor variables, the models suggest that there is 75.7% correlation of overall CSR-related dimensions of companies with its ROA and 72.8% correlation of overall CSR-related dimensions of companies with its Tobin’s Q ratio. Furthermore, the F- significance test is 0.000 (p < 0.05) for both models, and hence, our models are statistically significant. Observing at the beta coefficient’s values for CSR dimensions, only community (β= 0.509 and β= 0.542 p < 0.01) has a significant positive relationship with both ROA and Tobin’s Q respectively, meanwhile governance (β= 0.276, P < 0.05) has a significant positive relationship with Tobin’s Q.

Furthermore, firm age (β= 0.359, P < 0.05) and liquidity (β= 0.413 p < 0.01) have a positive significant association ROA, where else both firm size (β= –0.299, P < 0.05) and advertising intensity (β= –0.529 p < 0.01) has a negative association with ROA. Comparably, firm size (β= –0.569 p < 0.01), liquidity (β= –0.383, P < 0.01) and advertising intensity (β= –0.323 p < 0.10) as well as have a significant negative association with Tobin’s Q. Accordingly, H2 is supported for both ROA, and Tobin’s Q and H5 is supported only related to Tobin’s Q. This study does not support the rest of the hypotheses; the impact of individual CSR dimensions of employees (H3) and environment (H4) on financial performance.

6 Discussion

Based on the results presented in the above evaluation, yield the following discussion. The study results indicated that there is a positive and significant relationship between CSR and financial performance. This result is consistent with research done by [52]. This indicated when the companies invested in CSR related activities, they became more efficient in terms of asset management, which increases the overall ROA of the firm. Besides, the studies that resulted in a positive and significant result between CSR and financial performance include; [53, 54] where CSR is considered as an investment of the businesses which can be transformed into positive financial performance. Among the hypotheses that evaluate the relationship between CSR dimensions and financial performance, community-related CSR activities have a positive and significant relationship with ROA; similarly, both community and governance dimensions have a positive and significant relationship with Tobin’s Q.

These findings are similar to studies where community-related CSR activities such as community involvement, charity, and donations have a positive impact on both ROA as well as Tobin’s Q [55, 56]. The result reveals that the management considers that it is essential to recognize and support community programs and benevolent activities for the development of society. More importantly, companies should disclose all their community activities in the annual reports as it also enhances CFP when they are involved in community programs. A similar outcome has been found by Jo and Harjoto [57] where governance and community-related CSR activities play a significantly positive role in enhancing CFP in terms of both ROA and Tobin’s Q. Comparing both financial measures, it is demonstrated Tobin’s Q has a higher significant association with both CSR ranking as well as among CSR dimension than with ROA.

On the other hand, the dimensions of employees and the environment do not provide a significant relationship with any measures of financial performance. Our finding is also in line with the study byUadiale and Fagbemi [18], where it is indicated that both the environmental management system and employee relations do not have any statistically significant impact on ROA. Correspondingly, Fan, and Lo [58] also found that adoption and compliances to occupational health and safety management might cause a strain on a company’s financial position and thus cause a negative impact on ROA. The reason behind the insignificant association with environmental CSR and financial performance may be due to increased capital expenditure to implement environmental management plans [57].

Considering the results of the control variables, it is understood from the analysis that, age and liquidity has a positive and significant relation with ROA.Similarly, (Arshad et al. [59] have found comparable findings related to age as a control variable; however, an insignificant relationship with Tobin’s Q. Moreover, firm size and advertising intensity have a negative and significant association with both ROA and Tobin’s Q. A similar finding has been revealed by Hafez [60] indicated where firm size measured in terms of total assets does not have a significant impact on both ROA and Tobin’s Q. Moreover, age and revenue growth have insignificant relations with Tobin’s Q. Likewise is indicated by Jiang et al. [61], when using Tobin’s Q as a measure of financial performance, most control variables used in regressions are not significant in majority cases, indicating that age and size of a company are not the main factors affecting the company’s performance.

7 Conclusions, limitations, implications and research direction

The field of CSR is still uncovered ground, at an early stage of development in the Maldives. Hence the study outcomes provide significant contributions to the CSR-CFP literature with regards to this topic in the context Maldives. Based on the discussions presented above, it can be confirmed that listed companies in the Maldives should fulfill their overall CSR, which leads to creating a healthy CFP in terms of both ROA as well as Tobin’s Q. Although, among the dimensions of CSR, only the community and governance-related CSR activities have a significant positive association with financial measures, where else the dimensions of employees and environmental-related CSR activities does not have any significance with firm’s financial performance. The time factor and capital investment cost in employees and environmental-related CSR activities might be the reason behind the insignificant association with financial performance.

As the focus of this study is only on the listed companies in the Maldives, it is a limitation for the generalizations of the findings. Hence, the inclusion of medium-sized corporations and industry characteristics in future research might improve the sample size and study results. Moreover, further research can be done in other areas like service sector organizations and precise industry areas such as the tourism and hospitality industry. Furthermore, to represent a careful consideration of the subject, future research can focus on a comparative study between two or more developing markets to understand the impact and generalize the findings on the CSR-CFP link.

The study findings propose and guide managers to allocated their CSR funds on certain activities that generate higher financial performance, and plans business strategies to accommodate stakeholder’s welfare along with business financial performance. The CSR index developed in this study is practically applied to any given businesses, industry, and sector in the Maldives. Moreover,it will be a guide for researchers and business analysts to further study various dimensions of corporate social responsibility aspects of businesses operating in the Maldives.

Accordingly, employees and environmental CSR is an area that needs to be further investigated to find out the weight of the time factor between investing in related CSR activities and its effect on the firm’s performance. Likewise, future research is needed to analyze the perception of internal stakeholders such as investors and especially employee’s perceptions regarding CSR activities practiced by firms. Moreover, it is highly recommended that future researchers employ other variables that were not considered in this research, such as the cost of investments, the market value of shares, investment efficiency, etc. to capture different aspects of managerial and financial performance.

Since the current study has focused on CSR, it would be worth studying more individual dimensions of CSR such as environmental management practices, from the perception of various stakeholders, and its impact on corporate environmental performance. Besides, the Maldives economy highly depends on the service industry and is operating in vulnerable ecological condition, to study the effect of corporate environmental responsibility on corporate sustainability will be note worthy to be considered in future research. Although sustainability reporting is encouraged by the corporate governance code of the CMDA, it is voluntarily left for the company to disclose the CSR activities, and there is no standard rule of the regulator, which can be used as a reference to measure CSR. While the majority of the companies highlighted CSR activities in the annual reports, very few companies have followed internationally accepted reporting guidelines. This study provides a preliminary guideline for the development of an index, although a thoroughly defined CSR aspects need to be incorporated, which accommodates businesses operating at distinctive scales in various industries. Hence, this could be an area that could be further explored in the context of developing countries such as in the Maldives.

Footnotes

Acknowledgments

We would like to offer our sincere thanks to the reviewers for their contribution through suggestions and comments that guided the improvement of the manuscript.

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