Corporate Social Responsibility and Corporate Financial Performance: The Moderating Role of Absorptive Capacity

By | March 23, 2021

On different occasions, scholars have suggested that stakeholder theory is bound up with corporate social responsibility (CSR). An extension of the CSR construct is corporate social performance (CSP). In general, the CSR/CSP analyses have usually tried to understand why managers or firms engage in CSR. In this regard, the basis to formulate a CSR and corporate financial performance (CFP) argument appears to be straightforward, meaning stakeholders’ satisfaction positively influences financial performance. However, the CSR/CSP-CFP relationship has not been clear, and scholars often questioned its theoretical underpinnings. For instance, a lack of macro-level argument originally developed without giving a relevant role to the micro-foundations. These micro-foundations are based on individual actions and interactions from a particular theory. 

Absorptive capacity has captured the idea that firms need to have knowledge to be able to capture knowledge. A good example would be that knowing a language helps to learn almost anything beyond basic human functions. In its reduced form, this theory predicts that a firm’s benefit from external learning sources increases as a firm’s levels of knowledge also increases. In the last decade, there have been important developments to understand the moderating conditions of the CSR/CSP-CFP link, but how firms develop learning capacities is rarely explored in the literature. 

The CSR-CFP Link and the Knowledge Question  

The current study is more closely related to a group of studies that have begun to establish a firm’s level of CSR in terms of its knowledge characteristics. Hull and Rothenberg found that the CSR/CSP-CFP link is significant even after controlling for a firm’s level of innovation rate and product differentiation. In an interesting analysis of the CSR/CSP-CFP link, Tang et al. supports that a firm could benefit more when they adopt a CSR engagement that is consistent by starting with CSR’s internal dimensions (i.e., corporate governance and employee relationships), as opposed to an external dimension (i.e., environment and product quality) and safety dimension. Conversely, Wang and Choi explore temporal consistency as a moderator for the CSR/CSP-CFP relationship and concluded that good CSP is more important for firms with higher levels of knowledge intensity.  

How Does Absorptive Capacity Theory Affect the CSR-CFP Link? 

An absorptive capacity study of Danish firms showed that the development of human capital within the firm combined with the development of closer relationships with both vertical related actors and knowledge institutions promotes not just the ability to innovate, but also decreases the degree of imitation. A good example of these learning capacities can be found in the case of North Carolina’s hosiery industry. In the United States, different competitive pressures forced domestic producers to rethink their human resource management (HRM) practices. These manufacturing firms had to improve by increasing worker retention and adapting to new technology quicker by raising cognitive and problem-solving skills. Moreover, an OECD report finds that external institutions also played a pivotal role in the transformative process of the hosiery industry of North Carolina. In that regard, the Carolina Hosiery Association decided to initiate, develop, and support the Hosiery Technology Center to transfer the technological knowledge to new labor force entrants and experienced machine technicians. 

Recent findings in the CSR/CSP literature have shown that CSR can have different levels for different industrial contexts. Similarly, it is possible that for industries with higher R&D investments, firms rely on a centralized and/or efficient web of resources to develop human capital. In these types of competitive settings, CSR’s contributions to the knowledge question of the firm might not necessarily come from additional productivity of a firm’s operations, but from  systematic productivity of relationships. Industry R&D intensity is measured in terms of the dollar amount of the firm’s R&D expenditure scaled by total firm sales.  In these knowledge contexts, where human capital is a centralized resource to the firm, it is possible to encounter the following relationship for the CSR-CFP link:  The positive effects of CSR on CFP are stronger for firms in industries with higher R&D intensities. 

R&D spillovers are proxy to technological differences between firms and their rivals. Spillover effects are instrumental to defining absorptive capacity as the ability to recognize the value of new external information, assimilate it, and apply it to commercial ends (Cohen and Levinthal, 1989). Accordingly, three forms of R&D spillovers are tested, which follow Knott (2008)’s focus of within-industry behavior: a) Pooled, b) Leader Distance and b) Sum Above. Therefore, the study captures these forms of R&D spillovers for the CSR-CFP link: The positive effects of CSR on CFP are stronger for firms in industries with higher industry R&D Spillover.  

Empirical Methods and Results 

As one major goal of this paper was to determine how the knowledge process for the CSR-CFP link could be shaped by accounting for the influence of the firm’s human capital, firms were analyzed in endogenous conditions with respect to the knowledge links of their industries. For the financial information, COMPUSTAT North America and COMPUSTAT Global were used.  

The CSR variable used in this study was from RepRisk’s Reputational Index (RRI). RepRisk monitors more than 50,000 companies in terms of their CSR performance in the news. RepRisk defines CSR as environment, social, and governance (ESG) components, which is consistent with the U.N. Global Compact model.  RepRisk’s RRI covered the current level of media and stakeholder coverage of a company for each ESG dimension. This proxy of CSR was standardized in terms of standard deviations from the sample indicating performance relative to peers. Furthermore, a negative sign was applied to determine if the company would be moving from an adverse position to a more positive activity. The conjecture was that if a firm has achieved a risky position, it could make a CSR investment (e.g., plant equipment) that was more comparable with that of its peers. 

To measure financial performance, two indicators, i.e. ROA and Tobin’s q, are introduced. CSR scholars have proposed that accounting measures, such as return on assets (ROA), could capture internal efficiency, and usually correlate somewhat stronger than market measures of financial performance, such as Tobin’s q. Accordingly, ROA was computed as operating income before depreciation and amortization (EBITDA) divided by total assets. Tobin’s q, on the other hand, is calculated as the sum of total assets less the book value of assets plus market value of equity, divided by total assets. 

 To run these regressions, firms were dropped from the sample if they lacked the relevant financial information. This produced a sample of 21,967 firm-year observations for 17 industries in 72 countries and territories. It is possible to concentrate on results of the linear fits that contain significance of main effects as well as the interactions. The interaction is the extent to which the relationship of interest, DV, is different at different levels (i.e., values) of the independent variables. By fixing every CSR at p25 and p75 along with Moderators – Spillover (Pool, Leader Distance and Sum Above) at p25 and p75, leaving all other covariates as they are in the dataset, a predicted value for DV’s (ROA and Tobin’s q) is produced. To visualize the effects on the predicted values, graphs can be represented (see Figure 1, Figure 2, and Figure 3).  

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FIGURE 1: The Moderating Effect of Spillover – Pooled with ROA and Tobin’s q 

Note: By Fama and French’s 17 Industry Classification 

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FIGURE 2: The Moderating Effect of Spillover – Leader Distance with ROA and Tobin’s q  

Note: By Fama and French’s 17 Industry Classification 

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FIGURE 3: The Moderating Effect of Spillover – Sum Above with ROA and Tobin’s 

Note: By Fama and French’s 17 Industry Classification 


CSR has been linked to stakeholder theory, e.g. stakeholders’ satisfaction which positively influences financial performance. However, it appears that accounting-based measurements of financial performance (i.e., ROA), correlate higher than market-based measurements (i.e., Tobin’s q).[12] The current findings help to provide further evidence about the nature of these conjectures for a large sample of global firms. 

The study suggests that managers can invest in R&D to develop more productive CSR/CSP-CFP relationships. Also, these findings are congruently interconnected with absorptive capacity theory, which suggests that the ability to recognize external information is part of a firm’s organizational IQ. On the other hand, practitioners can understand that these externalities for the CSR/CSP-CFP link could vary depending on a firm’s R&D industry context. Perhaps, the absorptive capacity thesis for CSR can be better interpreted when a set of human capital conditions apply. One could interpret these data to mean that the level of organizational knowledge or firm’s IQ requires a systematic productivity of relationships, where CSR practices are an integral part of the development of human capital. 

Enrique Lacayo graduated from the Warrington College of Business, University of Florida with a Doctorate in Business Administration (DBA) in 2017. This article is an abridged version of his dissertation. Dr. Lacayo has worked in industries such as management consulting, textile manufacturing, healthcare, and academia ( 

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