Effect of Corporate Social Responsibility on
Financial Performance of Listed Companies in Nigeria
OKECHUKWU UMEANO, UMAR ABBAS IBRAHIM, FAIZA MAITALA
Department of Business Administration,
Nile University of Nigeria,
Plot 681, Cadastral Zone C-OO, Research & Institution Area, Airport Rd, Abuja 900001,
NIGERIA
Abstract: - This study investigates the effect of corporate social responsibility (CSR) on financial performance
of companies listed on the Nigerian Exchange (NGX). It addresses the problem of whether engaging in CSR
activities helps companies improve their financial performance. Employing an ex-post facto research design,
adopting a quantitative approach that rests on a positivist philosophical world view, it applies panel data
analysis on CSR expenditure, ROA, ROE, and Tobin's Q, covering 124 companies from 2011 to 2020.
Empirical results demonstrate that CSR had no significant influence on financial performance of listed
companies when performance was measured as ROA and Tobin's Q but had a significant positive effect when
measured as ROE. The implication is that engaging in CSR activities may not always lead to improvement in
financial performance. It therefore recommends that companies consider their motivations for engaging in
CSR activities and temper such expenses if the motivation is improving financial performance.
Key-Words: - Corporate Financial Performance, Corporate Social Responsibility, Nigerian Exchange, Return
on Assets, Return on Equity, Tobin’s Q
Received: August 29, 2021. Revised: June 26, 2022. Accepted: July 18, 2022. Published: September 5, 2022.
1 Introduction
Corporate Social Responsibility (CSR) is said to
occur when a company voluntarily does well over
its legal obligations to stakeholders and society.
CSR constitute a voluntary corporate conduct that
is acceptable, even beneficial, to the different
social constituencies surrounding business
organizations [1].
Business organizations engage in various forms
of CSR aimed at achieving certain objectives, one
of which is good corporate financial performance
(CFP). For example, Following the confirmation of
the COVID-19 index case in Nigeria on February
27, 2020, listed Companies led by the Nigerian
Securities and Exchange Commission contributed
to community’s effort in mitigating the medical
and economic impact of the pandemic on the
vulnerable and the less privileged as part of its
CSR.
Profit-making business organizations are in
business to increase shareholder wealth and
profitability is an important objective. CFP is
important to the survival and growth of companies,
and therefore a subject of concern to the
management of for-profit companies. CFP involves
achieving set financial objectives, targets, and
benchmarks. In working towards the achievement
of such financial goals, firms may act in certain
ways and deploy certain strategies, one of which is
to engage in CSR activity. As [2] pointed out, CSR
is one of the ways companies around the world
have tried to achieve better financial performance.
Many companies believe that CSR activity has
helped improve performance because it gives them
a good reputation in the eyes of key stakeholders
[3].
Many firms around the globe take on one form
of CSR activity or the other. The case is the same
in Nigeria where some Nigerian companies have
sponsored school science, technology, engineering,
and mathematics competitions. Oil companies
operating in the Niger Delta provide power, water,
and other social amenities to the host communities.
They build schools, hospitals, and playgrounds for
these communities. They also award scholarships
and provide vocational training and skill
acquisition opportunities to host communities [4]
and [5].
Most businesses do these with the ultimate aim
of enhancing profitability such as these oil
companies who expect that better relationships
with host communities and the Nigerian society at
large will help improve profitability [6].
The purpose of this study is to investigate the
effect of corporate social responsibility on the
financial performance of listed companies in
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Nigeria. The study is motivated by the need to use
the CSR framework to resolve this question in
Nigeria. It seeks to find out if engaging in CSR
activities, and expending corporate budgets on
such activities ultimately lead to improvement in
financial performance. In investigating this, this
study looks at all the companies listed on the
Nigerian Exchange (NGX). Herein lies the gap this
study seeks to plug. There is no consensus in the
literature in relation to the response of financial
performance to CSR activities. As observed by [7]
and [8], there is no overarching consensus in the
extant literature concerning the relationship
between CSR and CFP.
This is important because it will contribute a
more holistic view of the problem than had
previously been done by other studies, examining
this effect in all companies and sectors of the
economy. Previous studies had investigated the
effect in some individual companies or a sector and
studying the entire spectrum of companies will
show the entire picture in one frame. It tries to find
out if CSR improves, or even plays any significant
role in, corporate financial performance in
Nigerian companies, with listed companies used as
representative of all companies. This study
therefore contributes to the body of literature in
this area.
Many studies have been conducted on the effect
of CSR on CFP but the question is whether CSR
improves CFP? Is the answer to this the same in all
markets, sectors, and industries? Does the financial
performance of companies engaged in CSR
activity justify the cost of such activity?
Information on CSR expenditures is not widely
available for unlisted companies, therefore, in
studying the CSR-CFP link in Nigeria, use is made
of listed companies whose CSR expenditure
information is available. The objective of this is to
narrow down any effects CSR may or may not
have on CFP and ensure that these effects are
thoroughly observed and brought out for better
corporate decision-making.
This study plugs the gap in the literature on the
link between CSR and CFP for Nigerian
companies by building on existing empirical and
theoretical literature and methodologies used in the
study of the subject in other jurisdictions to the
Nigerian business environment. The significance
of this study lies in the fact that it helps localize the
argument over the value of CSR activities to
companies in Nigeria. Recent studies have looked
at the effect of CSR on CFP of Nigerian banks (see
for example [9] and [10] and other companies [11],
[12], and [13]), but these works did not address
this from all the same angles as this study and did
not also go into as much depth, nor study as many
companies. A holistic view of the problem is
therefore important.
The current study employs panel data analysis
to present new empirical insights into the analysis.
The study will enable Nigerian firms, especially
listed companies, to know the extent to which their
CSR activities and initiatives impact on their
financial performance. CSR activities often involve
carrying out work that would otherwise have been
done by the government, and sometimes attract tax
incentives. This study adds to knowledge with
which the decision by the government to, or not to,
give these incentives may be made. It also helps
investors see whether CSR is a worthwhile use of
their resources by companies' management.
As a preview of the empirical findings, results
from the Panel Analysis suggest CSR had no
significant influence on financial performance of
listed companies when performance was measured
as ROA and Tobin's Q but had a significant
positive effect when measured as ROE.
The paper is structured in five sections,
following this introduction Section 2 presents the
review of literature; Section 3 comprises data and
methodology; Section 4 will present and discuss
the results of the study while the final section
presents the conclusions and policy
recommendations.
2 Literature Review
The concept of corporate social responsibility CSR
stands for when a business bears responsibility
beyond just its shareholders but to society and a
wider group of stakeholders [14]. It involves
ethical and responsible treatment of all
stakeholders in the entity's activities [15]. CSR
activities promote social good, going beyond legal
requirements and the firm's interests [16].
The concept of corporate financial performance
covers how much a firm achieves its objective of
profitability and maximization of shareholder
wealth. These are believed to be the overarching
objectives of business organizations [17], and why
entrepreneurs make the effort to build companies.
Traditional measures of financial performance
include measures such as return on assets (ROA),
return on equity (ROE), earnings per share (EPS),
return on capital employed (ROCE), profit
margins, and return on sales (ROS) [18] have been
used for decades. Studies such as [19], [20] and
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[21] show that improvement in ROA is associated
with a rise in stock returns, and a good measure of
financial performance. [22] found that ROE is a
good measure of change in financial performance.
Tobin's Q has also been used by many scholars of
corporate profitability, particularly in the study of
the effects of a company's social performance on
its financial performance [23] and whether and
why the impact of CSR on CFP differed at various
levels of activity [24].
More contemporary measures of financial
performance, such as the value-based ones such as
economic value added (EVA), refined economic
value added (REVA), market value added (MVA)
and shareholder value added (SVA) also help
explain financial performance, especially stock
returns. They measure value created in the
company from the points of view of different
stakeholders [25].
Several researchers have studied the
relationship between CSR and CFP, with varying
results, findings, and conclusions. These studies
have looked at different companies, industries,
sectors, markets, and jurisdictions.
Studies on the CSR-CFP effect have often
shown mixed results. The dynamic relationship
between CSR and CFP is an issue of great concern
to investors and mangers. Especially given the
significance of CSR in addressing the objectives of
stakeholders other than shareholders. [7] explored
the literature investigating the response of CFP to
CSR and found that a general consensus is lacking,
as contradictory and inconclusive results are still
being reported time and again. The authors opine
that inconsistencies arise owing to either
theoretical or epistemological weaknesses,
conceptualization and obscurities in CSP and CFP
measurements as well as methodological issues
related to sampling, modeling as well as
endogeneity.
[8] utilizing a Panel Vector Autoregression
model examined the mutual dependency of CSR
and firm performance for 30 listed banks in
Bangladesh over the period 2006 through 2018.
The authors sought to establish if any the financial
merits of corporate philanthropy. Their findings
demonstrate that better CFP leads to more CSR
expenditure, but CSR expenditure does not
necessarily influence CFP.
[26] explored the influence of CSR investment
and disclosure on corporate financial performance
of banks in Nigeria. Utilizing a panel data set, their
empirical estimates demonstrate that CSR
investment without due disclosure had a small
impact on corporate financial performance. For
them, CSR activity needed to be disclosed to
stakeholders in order to have any impact on the
firm's financial performance
[27] examined the cultural dimension of the
impact of CSR activity on business and found CSR
reporting to be more prevalent in individualistic
societies, those with a low power distance.
Reviewing 452 articles covering a period of 25
years (1990-2015), [28] found that the kinds and
forms of CSR engaged in by companies in
developing countries were shaped by factors and
actors in the formal and informal governance
systems of these countries, basically by culture in
these countries. This probably accounts for the
wide differences one can observe in the different
forms of CSR activity found in different locales of
the world.
[29] investigated the relationship between CSR
initiative and firms’ performance in Ghana. His
empirical finding suggest that CSR initiative by
firms in Ghana is positively associated with the
firms’ operational competitive performance.
[30], [3], [2], [26], [31], [23], [32], [33], [34],
and [35] found that CSR had a positive effect on
CFP. Many of these studies found that these
positive effects were dependent on high CSR
results [36], company stability [37] and ownership
structure [38].
Other studies such as [39], [40], [41], and [42]
found mixed results, especially when the CSR
effect on CFP was studied across sectors and
industries. Other scholars, such as [43] also noted
differences in the effects depending on the types of
CSR activity the firm engaged in. Studies such as
[10], [44], and [45] found that CSR had no
significant effect on CFP CSR on CFP. [46] found
that this may be because the financial costs of CSR
reduces financial performance of companies who
engage in it.
In studying this effect, these studies employed
different methodologies. For instance, [47], [39],
and [14] conducted regression analyses while [23]
used Structural panel vector auto-regression, [46]
used a generalized method of moments (GMM)
panel VAR approach, and [9] did some descriptive
analysis.
The heterogeneous results found by many
scholars may be confusing and raise serious doubts
about the existence of a link between CSR and
CFP. However, one must bear in mind that these
results were from studies that examined the CSR-
CFP link in different industries in countries with
different economic characteristics and cultures. It
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is therefore important to study this CSR-CFP link
in the Nigerian environment. This will also answer
the question of whether CSR influences CFP in
Nigerian companies, whether certain findings in
this area apply to the Nigerian business
environment; whether the purchasing habits of the
Nigerian public is influenced by CSR efforts of the
companies that make and sell the goods and
services? Or whether there are other influences
such as culture, ethnicity, religion, or biases that
direct the choice of one service or product over the
other? Are Nigerian buyers generally disposed to
considering CSR efforts in making buying
decisions?
3 Methodology
3.1 Research Design
This study employs an ex-post facto research
design, adopting a quantitative approach which
rests on a positivist philosophical world view. This
philosophy depends on quantifiable observations
leading to statistical analyses [48].
Of the 161 companies listed on the NGX at the
end of 2021 [49], 37 were excluded from the study
because they did not report CSR expenditure over
the period leaving the 124 companies who reported
CSR activity over the period 2011-2020. These
include some of the largest companies in the
Nigerian economy.
This population may however, not be fully
representative of Nigerian companies, as the
market capitalization of the NGX only makes up
about 9% of Nigeria’s GDP [50], implying that a
lot of activity goes on outside the bourse. Many
large companies in Nigeria remain private, despite
efforts by the Securities & Exchange Commission
[51] and the NGX [52] to get them to go public.
3.2 Data
The study investigates the influence of CSR on
CFP of listed Nigerian companies over a period of
ten years – 2011 to 2020. CSR expenditure data of
the listed companies is sourced from the
companies’ published annual financial statements
collected from their websites, the NGX website
and annual fact books. The data was compared to
data from the SEC’s statistical database for
accuracy. Data for ROE, ROA, and Tobin’s Q
were gotten or calculated from numbers in
published financial statements. Size and growth
were calculated from total assets of the companies.
The absence of processed CSR data for Nigeria in
the mould of KLD and JSE SRI meant that raw
CSR expenditure data were used, but deflated by
dividing with total assets. According to [53], this is
the reason studies in developing countries most
often use CSR expenditure.
3.3 Model Specification
A panel regression analysis is conducted to
examine the data gathered on CSR expenditure and
ROA, ROE, and Tobin’s Q. CSR is measured by
the amount of CSR expenditure incurred by a
company over the period. The generated data were
analyzed using a panel regression technique,
estimating a pooled regression, then the fixed and
random effect model. This approach was used by
researchers such as [47], [39], [14], [54], and [55].
A drawback of this methodology is the possibility
of the effect of endogeneity on the study. This is a
situation where the explanatory variables are
correlated with the error terms. Some studies use
methods such as dynamic modeling of the CFP-
CSR relationship with GMM to overcome the
endogeneity problem [38]. However, this study has
tried to specify the variables in such a way as to
overcome the problem.
Mean CSR expenditures of the listed companies
were calculated over the period and deflated by
dividing by total assets. The mean ROA, ROE, and
Tobin’s Q over the period, of the companies and
sectors were also calculated and used in the
regression models. These were controlled for the
effects of company size and growth.
Company size is measured as the natural log of
total assets of the company. It is necessary to
control for size since larger companies tend to have
better financial performance that smaller ones [40].
Company growth is measured as the yearly
increase in total assets of the company over the
ten-year period. Therefore, it is calculated as the
current total assets less the previous year’s divided
by the previous year’s.
In conducting the analysis, the study considered
two methods – panel regression and GMM, and
opted for panel regression. Panel regression was
chosen because it yields the best regression results
given the kind of data collected for the variables.
GMM was not chosen because of the type and
quantity of data used in the study. GMM is best
estimated where there is a small T (time span) and
Large N (number of cross sections). In this study,
T is 11 and N is 12. The pooled and fixed or
random effect panel regression was therefore
thought more appropriate.
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In a Pooled Panel regression method all the
observations are pooled ignoring the dual nature of
time series and cross-sectional data. Pooled
Regression does not control for heterogeneity bias,
and is known to generate inconsistent and biased
estimates because it does not capture sector
specific heterogeneity across units. However, using
a Fixed Effect model, all the individuals or time
periods are allowed to have their own intercepts.
The method captures sector heterogeneity using the
constant terms which is fixed over time. In the
random model it is assumed that the sample has
been drawn randomly from a large population. Or
sector heterogeneity is assumed to be random and
is captured by a random error term.
The regression model has CSR expenditures as
independent variable, and ROA, ROE, and Tobin’s
Q as dependent variables.
H01: CSR expenditure has no significant effect on
ROA of companies on the NGX
H02: CSR expenditure has no significant effect on
ROE of companies on the NGX
H03: CSR expenditure has no significant effect on
Tobin’s Q of companies on the NGX
This is applied as follows:
ROEit = b0 + b1CSREXPit + b2Sizeit + b3Growthit
+ e (1)
ROAit = b0 + b1CSREXPit + b2Sizeit + b3Growthit
+ e (2)
Tobin’sQit = b0 + b1CSREXPit + b2Sizeit +
b3Growthit + e (3)
4 Data Presentation and Analysis
Observation of collected data showed that larger
companies did tend to spend larger amounts on
CSR. This is reasonable and logical, but also
means that the results could be skewed by outlier
CSR expenditure figures from very large
companies. To deal with this, the study divided
CSR expenditure by total assets and also controlled
for company size in the regression model, as did
[39] and [40].
Table 1 shows the distribution of listed
companies who engaged in CSR activities
Table 1. Listed Companies with CSR Expenditures
2011 – 2020
Industrial Sectors
Number of
unique
companies
Percentage
of unique
companies
Agriculture
4
3.2%
Conglomerates
5
4.0%
Construction/Real
Estate
3
2.4%
Consumer Goods
16
12.9%
Financial Services
45
36.3%
Healthcare
6
4.8%
ICT
6
4.8%
Industrial Goods
11
8.9%
Natural Resources
2
1.6%
Oil and Gas
9
7.3%
Services
17
13.7%
All Companies
124
100.0%
Table 2. Descriptive Statistics of the variables
Table 2 presents the common sample descriptive
statistics. A cursory look at the table reveals that
the mean ROA and ROE are a high 37.71 and
48.58 percent, respectively indicating that these
companies performed quite well over the period.
The disparity in performance ranged from 0.00 to a
maximum of 1341.281 and 1378.402 for ROA
and ROE respectively. Also it is shown that the
standard deviations of ROA and ROE are larger
than the means, showing the marked deviations in
size and profitability of companies listed on the
Exchange. This is not the case with Tobin’s Q.
There is evidence of significant skewness and
leptokurtosis. The positive skewness in ROA, ROE
and EPS is as expected because the companies had
a positive performance over the period. The
Jarque-Bera probability suggests that all the
variables are not normally distributed.
Table 3. Result of Correlations analysis
between the variables
ROA
ROE
TOBINQ
GROWTH
SIZE)
37.71062
48.57511
1.587298
1.341469
19.02017
3.523670
8.520455
1.531079
0.086539
18.91798
1341.281
1378.402
4.341976
71.60272
27.36432
-162.9019
-468.1971
0.327378
-0.387161
14.36569
191.8349
222.4951
0.800327
8.577792
2.077104
5.714115
4.169588
0.614118
7.228759
0.661708
34.99818
22.29715
3.077982
55.02732
6.400064
5291.404
2025.475
6.942113
12027.93
61.01274
0.000000
0.000000
0.031084
0.000000
0.000000
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Table 3 presents correlations of the independent
and control variables. The correlation result
revealed a strong positive relationship between
ROA and ROE (0.81). This is expected, as both
measures of profitability use the same numerator –
net income. However, there is low negative
correlation between ROA and ROE and Tobin’s Q
(0.26 and 0.11, respectively). This points to the
value inclusion of Tobin’s Q brings as one of the
proxies of CFP as it shows performance from a
different perspective than ROA and ROE. The
result also shows reasonably low correlations
between company size and the explanatory
variables. This suggests that larger size may not
necessarily mean better performance, just as
growth in total assets also does not mean better
financial performance.
Table 4. Coefficient estimates & T-statistics of
regression of effects of CSR on CFP
Note: (Two-tailed test, 5% significance, T-statistics
in parenthesis)
Table 4 presents results of the Panel estimation for
ROA, ROE and Tobin’s Q. The study employs a
fixed effect model panel regression model which
allows differing intercepts across sectors but
assumes the effects are fixed over time. This is in
agreement with [40]. A random effect model is
also estimated to capture industry heterogeneity
(see Appendix). Both Pooled regression, Fixed
effect and Random effect were thus estimated
followed by the Redundant Fixed effect and
Hausman Test to compare between the models.
While the Redundant Fixed effect test
demonstrated preference for the fixed effect
regression over the pooled regression. The
Hausman test showed the fixed effect model was
preferred.
The coefficient of determination, R2 shows the
explanatory power of the Tobin Q model was
higher explaining 72% of variation in the
dependent variable while the ROA an ROE were
22% respectively. To choose between fixed effect
and random effect model, the Hausman test was
employed. To choose between a fixed effect and
pooled regression, the study utilized Wald test and
examined significance of the dummy variables.
Using the Chi-Square test p-value, the study
rejects H0 suggesting that fixed effect was better
than the pooled regression, thus confirming
heterogeneity bias.
It is expected that CSR expenditure has a
positive and statistically significant influence on
ROE.
However, it is also observed that CSR
expenditure has a negative albeit insignificant
impact on ROA and Tobin’s Q. Empirical results
demonstrate a negative relationship between CSR
and ROA. The value is -1128.14 and indicates that
a one percent change in CSR expenditure will lead
to a 1128 decrease in ROA.
This relationship is however not statistically
significant. Results show a t-statistic of -0.101092
for ROA, meaning that CSR had no statistically
significant effect on ROA of companies listed on
the NGX. R2 of 0.225889 indicates that the model
explains on 22.59 percent of the variability in ROA
of these companies. Table 4 also shows a t-statistic
of 2.445000 which indicates that CSR had a
statistically significant effect on ROE of the
companies. However, an R2 of 0.216241 indicates
a low explanatory power of the model.
Finally, Table 4 shows t-statistics of -1.472488
for Tobin’s Q of the companies, indicating that
there CSR had no statistically significant effect on
their Tobin’s Q. An R2 of 0.724399 indicates that
the model had a relatively strong explanatory
power on CFP as measured by Tobin’s Q.
The findings show that CSR only had a
significant effect when CFP was measured as ROE
and no effect when it was measured as ROA and
Tobin’s Q. These mixed results are in agreement
with the findings of [39], [40] and [42].
Findings in this study showed that CSR had no
statistically significant positive effect on financial
ROA
ROE
TOBINQ
GROWTH
SIZE
ROA
1.00
ROE
0.81
1.00
TOBINQ
0.26
0.11
1.00
GROWTH
-0.02
-0.16
0.07
1.00
LOG(SIZE)
0.12
0.05
0.09
0.06
1.00
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performance of listed companies when CFP is
measured as ROA and Tobin’s Q, but had a
significant positive effect when measured as ROE.
These mixed effects indicate the need for
companies to study the expected impact of CSR
activities on their performance before applying
company resources to them. Not doing this may
mean a waste of resources and a diminution of the
ability to fulfil the corporate objective of
maximizing shareholder wealth.
Regulation can help promote more CSR
activities among listed companies on the NGX.
Table 5. Summary of Results
5 Conclusion
The present study contributes to the analytical
literature investigating the effect of CSR, as
represented by CSR expenditure, on CFP of listed
companies in Nigeria, as represented by the
companies’ ROA, ROE, and Tobin’s Q. It found
that CSR had no statistically significant effect on
CFP as measured by ROA and Tobin’s Q but had a
positive effect on CFP as measured by ROE. This
is a mixed effect and agrees with several other
such studies in other jurisdictions. Table 5 shows a
summary of the results.
Given the result of this study, it is
recommended that listed companies in Nigeria, re-
evaluate their CSR activities and the objectives of
engaging in them. If the sole objective is financial
performance, then a re-think may be necessary,
and they may have to decide to stop expending
resources on CSR activities as the study shows that
they do not have strong positive effect on financial
performance, unless when measured as ROE.
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[3] Chernev, A., and Blair, S. (2015). Doing
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S/N
Hypothesis
Relationship
Decision
1
H01: CSR expenditure has no significant effect on
ROA of companies on the NGX
-ve
CSR had no significant
effect on ROA of listed
companies
2
H02: CSR expenditure has no significant effect on
ROE of companies on the NGX
+ve
CSR had a significant
positive effect on ROE of
listed companies
3
H03: CSR expenditure has no significant effect on
Tobin’s Q of companies on the NGX
+ve
CSR had no significant
effect on Tobin’s Q of listed
companies
Control Variables
1
Firm Growth
-ve/-ve
No significant effect on all
three measures of CFP
2
Firm Size
-ve
Had a significant effect on
only Tobin’s Q of the
companies.
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Okechukwu Umeano, Umar Abbas Ibrahim, Faiza Maitala
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Contribution of Individual Authors to the
Creation of a Scientific Article (Ghostwriting
Policy)
Okechukwu Umeano carried out the data
gathering and conducted regression
Umar Abbas Ibrahim contributed to
methodology
Faiza Maitala contributed to methodology
Sources of Funding for Research Presented in a
Scientific Article or Scientific Article Itself
We did not receive any funding from any
source(s) for this work.
Creative Commons Attribution License 4.0
(Attribution 4.0 International, CC BY 4.0)
This article is published under the terms of the
Creative Commons Attribution License 4.0
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WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2022.19.121
Okechukwu Umeano, Umar Abbas Ibrahim, Faiza Maitala
E-ISSN: 2224-2899
1352
Volume 19, 2022