Journal of Business and Social Review in Emerging Economies Vol 6, No 2, June 2020

Volume and Issues Obtainable at Center for Sustainability Research and Consultancy

Journal of Business and Social Review in Emerging Economies

ISSN: 2519-089X (E): 2519-0326
Volume 6: Issue 2 June 2020

Journal homepage: www.publishing.globalcsrc.org/jbsee

Corporate Social Responsibility and its Nexus with Firm Performance and Institutional
Ownership: An Emerging Market Context
1
Amna Noor, 2Muhammad Farooq, 3Mahwish Yamin, 4Saleh Nawaz Khan
1
Assistant Professor, School of Business Management and Administrative Sciences, The Islamia University of
Bahawalpur, Bahawalpur-Pakistan, damnanoorch@gmail.com
2
PhD student in Finance, School of Business Management and Administrative Sciences, The Islamia University of
Bahawalpur, Bahawalpur-Pakistan, alihussnain155@yahoo.com
3
PhD student in Finance, School of Business Management and Administrative Sciences, The Islamia University of
Bahawalpur, Bahawalpur-Pakistan, mahwish_yamin@hotmail.com
PhD student in Finance, School of Business Management and Administrative Sciences, The Islamia University of
Bahawalpur, Bahawalpur-Pakistan, sallehkhan@yahoo.com

ARTICLE DETAILS ABSTRACT

History Either corporate social responsibility (CSR) is paramount for the firms or not,
Revised format: May 2020 is a matter of question since long. The present study analyzes this relationship
Available Online: June 2020
in the context of moderating role of Institutional ownership (IO). Firm
performance is measured through accounting and market value measures.
Keywords Leverage, firm age, firm size, and log of sales revenue used as a control
Corporate social responsibility, variables. Through applying panel data techniques, findings demonstrate
firm performance, Pakistan insignificant positive association between CSR and firm performance. It shows
stock exchange, Institutional that stakeholder could not assign value to firms spending as a CSR. This could
ownership be the reason that customers are not much aware about firms CSR activities
JEL Classification hence, firms fail to capitalize their spending as an investment. Institutional
M0, M1 Ownership (IO) reveals negative insignificant association with all profitability
measures except Tobin’s Q where this relationship is significant. This
significant negative relationship supports the agency theory and presence of
strategic alliance hypotheses between influential institutional owners and
internal management that leads to lower firm performance. The interaction
variable of CSR and IO show positive but insignificant relationship with firm
performance by all means.

© 2020 The authors, under a Creative Commons Attribution-

NonCommercial 4.0
Corresponding author’s email address: sallehkhan@yahoo.com
Recommended citation: Noor, A., Farooq, M., Yamin, M. and Khan, S. N. (2020). Corporate Social Responsibility
and its Nexus with Firm Performance and Institutional Ownership: An Emerging Market Context. Journal of Business
and Social Review in Emerging Economies, 6(2), 845-858

1. Introduction
Traditionally, corporations are established as profit-generating entities following the free market philosophy. The
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primary focus of these entities is on maximizing their shareholders’ wealth without considering a social perspective or
the broader implications of the way they run the business (Jamali et al., 2008). As bigger corporations emerged in the
wake of the Second Industrial Revolution1, they tended to have greater power and control over various global resources,
and became increasingly subject to a regulatory framework of welfare legislation. This realized huge changes in the
practices and structure of modern business and society (Jensen, 1993). These changes constituted a new social paradigm,
which shifted the focus of organizations from merely achieving their economic goals towards understanding and
espousing social goals as well in their business strategy. Moreover, the start of various social movements in the 1960s
and 1970s such as the demand for civil rights, women’s rights, labor rights and environmentalism and consumerism
further broadened the concept of the organizations’ responsibility towards their society and workers (Carroll & Shabana,
2010; Visser, 2010). These movements made organizations realize that as change agents in a variety of organizational
practices, they wielded greater power to shape various organizational, social and economic behaviors in society as a
whole. They therefore needed to be more responsive towards social demands. In realizing their role as major change
agents in the social and economic field, they also sought to be more responsive and responsible to their society and its
demands (Hussain & Moriarty, 2016). As a result of these developments, the concept of corporate social responsibility
(CSR) emerged as a standout amongst the most key concerns for management, and has become the subject of an
academic discussion throughout the last few decades (Jo & Harjoto, 2011; Karaosmanoglu et al., 2016).

Finance theories witnesses that the only objective of the organization is to maximize the shareholder’s wealth (Arnold
and Valentin, 2013). This objective explains that to satisfy the shareholders is the prime objective of the organization
but nowadays this is not the case as firms are not only affected by stockholders but the other stakeholders as well (Singh,
2014). Stakeholders not only emphasis on financial performance (FP) but non-financial interests as well like social
welfare, improvement in community and the environment (Pirsch et al., 2006). A UN Global-Accenture CEO study in
2010 shows that 93 percent of 766 CEOs who take participate in this study considered CSR as “important” or “very
important” for the continuity of the business for the longer period of time (UN, 2010). Firm’s response and behavior
towards the relationship with society is depicts the sustainability of the firm in society. Sprinkle and Maines (2010)
remarks that in the past firms emphasis only on sales growth, but this is not the case in now a days as firms have to
focus on their other stakeholders as well to continue the business for a longer period of time. Stuebs and Sun (2015)
narrates that this relationship is based on trust and this trust is developed by attending and exceeding responsibilities to
society.
Despite plenty of work on CSR by researchers (Browen, 1953; Donham, 1972), the CSR concept remained in
deprivation from any unified supporting theory. There are two alternative explanations available in literature regarding
the existence of CSR. First, based on agency theory, Barnea and Rubin (2010) claimed principal-agent relationship is
the reason of mere existence of CSR engagements of firm and that managers are interested in overinvestment in CSR
to gain private benefits by way of rising reputation as a formal civilian, at the expense of shareholders. This will extend
their career opportunities and better negotiation power in the employee market. This overconfidence of managers
sometimes makes value destroying investment. Bertrand and Mullainathan (2003) claimed that without active
monitoring of managers, building an active empire of business is not possible. Second to appease all stakeholders are
not possible.
There is a stakeholder theory that focuses on conflict resolution among stakeholders (e.g. Jensen, 2002; Scherer et al.,
2006) by arguing that managers use effective monitoring / governance mechanisms along with CSR to resolve conflict
among stakeholders. This spending will help firms to gain support and confidence of stakeholders by the way of creating
reputation, customer satisfaction, and competitive advantage in the market (Walsh & Beatly, 2007; Salmons et al.,
2009).
The emphasis on CSR and its disclosure increases by virtue of different corporate disasters regarding the community,
environment, and human resources (Waller & Lenis, 2009). Now firms feel pressure from the customers end as well to
focus on CSR to remain in the market. To build trust-worthy relationship and social capital is an important outcome of
CSR and this social capital analyzed by different researchers in different dimensions like in connection with economic
growth (Knack and Keefer, 1997), trust building (La porta et al., 1997a), financial development (Guiso et al., 2004).

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“Is the investment in CSR increases firm's profitability” an unresolved question that has been attended by researchers
for a long time. Fisman et al., (2005) studied CSR in connection with the accounting profit and concluded that in
competitive industries, this relation worked more productively and efficiently. Goss and Roberts (2007) studied the
phenomena in the context of bank loans and concluded that firms having worse CSR rating pay a higher cost of the loan
than high rating CSR firms. Conversely, Barnea and Rubin (2010) argue that CSR activities are not value enhancing for
the firms, they merely destroy valuable resources of the firm. The discussion on CSR-value relationship continues since
long without a consensus on its direction regarding firm’s value.

“How does CSR jointly with institutional ownership (IO) effects firm value” is the second question that present study
intended to resolve. In this paper, through applying panel data techniques, we document that IO positively moderate the
CSR-firm value relationship. In firms, the discretionary power to make spending in CSR activities remains in the hands
of management. It has a significant impact on firm performance as suggested by over-investment hypothesis and conflict
resolution hypothesis. Ownership structure is a productive governance mechanism to check this over-investment and
conflict resolution behavior of the manager, as it depicts who has the ultimate decision-making power in an organization
(Zattoni, 2011). IO is one of the major components of ownership structure of any firm. Institutional shareholders are to
be considered an active monitoring device as per agency theory and institutional support theory. Active monitoring
hypotheses posit that institutions have the right combination of resources, capabilities to actively monitor the firm and
hence effective check on management and avert them from self-serving behavior (Sheifer & Vishny, 1986; McConnell
& Servaes, 1990). So influential institutional investors help to counter this overinvestment in CSR through enhanced
monitoring (Chen et al., 2007; Starks, 2009; Gillan et atl., 2010). On the other hand (Lemmon and Lins, 2003; Guiso et
al., 2015) claims that it can raise the conflict between shareholders and non-investing stakeholders, which overturn the
CSR conflict-resolution hypothesis.
This paper fulfills three objectives. First, it examines the CSR-firm performance relationship on a sample of 215
Pakistan Stock Exchange (PSX) listed firms for the period 2010-2017. Secondly, we strengthen the CSR literature by
showing that CSR value effect varies with institutional investment level. Lastly, present study provides valuable policy
implications and recommendations for companies, regulators, academics, and other shareholders in the context of CSR-
IO value relationship.
The remainder of the paper is arranged as follows. Section 2 covers CSR practices in Pakistan; Theoretical approaches
to CSR and financial performance explains in Section 3; Section 4 illustrate literature review on IO, CSR, and firm
financial performance; Methodology covers in Section 5; Section 6 presents results and discussion, conclusion and
future research perspective covers in Section 7.

2. CSR in Pakistan
CSR is mainly associated with the western world. These economies have predefined rules and regulations, mature
capital markets, adoption of corporate governance (CG) mechanism, protection of shareholder’s rights which lacks in
developing Asian economies (Chapple & Moon, 2005). Poor legislation, dominance of concentrated ownership, weak
CG system is the main hindrance in adoption of CSR in Pakistan. Since in the last few years, CSR remained a widely
discussed topic at different platforms but still looking much effort towards adoption of CSR in the practical world. In
the corporate world, there are a few organizations like Pakistan State Oil, Shell, Unilever, and ICI- that act responsibly
and disburse their earnings in society by way of CSR (Mian, 2010; Yunis et al., 2018).

Responsibilities lie at both ends regarding the present scenario of CSR in Pakistan. At one end, the public is not fully
aware of their rights and responsibilities because of lack of education and awareness. Second, due to deficiency in pre-
defined rules and regulation about CSR, corporations too not give priority in their strategic decisions. The Securities
and Exchange Commission of Pakistan (SECP) took the ownership and issued guidelines about companies regarding
disclosure of information about ‘donations’ in their financial statements in compliance with the Companies Ordinance
1984, part III, E-1 of Schedule 4. It further introduces Workers Welfare Fund Ordinance (WWF) 1971, which makes
compulsion to firms to do participate in workers welfare schemes and presents the same in annual reports. Furthermore,
there are different legislations made by regulatory authorities to promote CSR practices in Pakistan like inauguration of
IAS 19 by ICAP, Pakistan Environment Protection Act by National Environment Quality Standard board, launching of
ACCA-WWF Pakistan Environment Reporting Awards by Ministry of Environment, SECP’s general order 2009 which
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is about disclosure of CSR activities by firms. Further, in 2013 SECP issued CSR Voluntary Guidelines to enhance
accountability of the organizations. Now CSR is growing in the corporate world by accumulating efforts of government,
regulatory bodies, companies and academic researchers. However, still there is a long journey to establish a CSR
framework in organizations.

3. The Theoretical Approaches of CSR and Firm Performance

Predominantly, CSR-firm performance relationship can be well explained with the help of four theoretical approaches,
namely, trade-off hypothesis, the supply and demand theory of the company, the social impact hypothesis, and the
theory of modern corporate stakeholders (Salzmann et al., 2005; Laan et al., 2008).

The trade-off hypothesis presented by Friedman (1970) claims that firm’s only social responsibility to enhance firm FP.
Hence, the involvement in CSR activities brings additional expenses, which in turn decreases firm’s profitability.
(Salzmann et al., 2005). So this theory places a company in a disadvantageous position who involved in CSR activities
as compare to opponent firms. In this context, CSR has an inverse relationship with firm’s FP (Moore, 2001; Vance,
1975).
Supply and demand theory of the company presented by McWilliams and Siegel (2001), which narrates that demand
for the involvement of a company in CSR activities maximize company’s profits. Stegar et al., (2007) noted that in an
equilibrium condition, the level of CSR may vary; however, profit may be maximized or not changed. Hence, there is
no relationship between CSR and firm’s FP. Earlier empirical studies like Mahoney and Roberts (2007); Patten (1990);
Freedman and Jaggi (1988) support this theory and fails to link any association between CSR and FP.
The social impact hypothesis presented by Cornell and Shapiro (1987) demonstrate that firm investment in CSR
activities enhances firm’s FP. Thus the investment in CSR activities always in return provides greater reward to the firm
(Steger et al., 2007). This positive relationship could be attributed as investment made in CSR could increase firm’s
reputation, build strong binding with stakeholders and minimizes the risk of the company. The earlier studies of Simpson
and Lohers (2002); Waddock and Graves (1997); Roberts (1992) has found a positive impact of CSR on FP of respective
firms.

The stakeholder theory too constructs the relationship between CSR and FP (Barnett, 2007; Jones, 1995) through
keeping emphasis on stakeholders. Some stakeholders have explicit claims on company’s resources like shareholders,
employees and the government while some have implicit claims e.g. the continuity of supplies, on-time delivery, work
safety, gradually increase in the quality of a company’s product etc as demanded by the customers, suppliers, and
employees etc. The price that must be paid by stakeholders for this claim depends on the company’s situation, including
the financial policy applicable to the company.
This section provides the theoretical linkages between CSR and firm performance. The theories presented in this section
concur that there exist a mere relationship between CSR and FP. Like, trade-off theory witnesses the prevalence of
CSR-firm value association but it is an indirect relationship. In addition, stakeholder theory is widely accepted in
literature is more relevant to theorize the relationship between CSR and FP.

4. Literature Review
4.1. CSR and Firm Value
Corporate social responsibility concept has been in academic debate since 1970s. Different authors have explored CSR
in different dimensions. One of the oldest definition of CSR explained by Friedman (1970) as CSR is all about to
conduct business as per shareholders desire, to make as much money but confronting the basic rules of society both
expressed in law and those embodied in ethical custom. In economic development history, CSR is to be considered as
a key ingredient to accomplish economic goals and wealth generations. Therefore, a number of studies tried to bridge a
link between CSR and FP (Galbreath & Shum, 2012; Lin et al., 2009).

Overinvestment hypothesis recommends negative relationship between CSR and FP (Cespa and Cestone, 2007; Barnea
and Rubin, 2010). In organizations, there is an agency issue because resources are not in the hands of real investors but
rather these are trusted to corporate managers who are suppose to work for the best interest of these resource providers
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i.e. shareholders. Based on this agency issue, managers are interested to goes beyond the rational limit of CSR
investment to build its reputation and enhance its image as a socially responsible manager at the cost of stockholders.
In other words, it is to be considered as diversion of valuation organization’s resources due to conflict of interest between
managers and shareholders. Barnea and Rubin (2010) noted that managers have an incentive to move beyond the
optimum level in term of expenditure in CSR. As such, this overinvestment in CSR can destroy firm value. They also
found that higher insider’s shareholdings negatively associate with CSR activity. In the same way, Kruger (2015) found
that there is substantial cost attached to social irresponsible behavior.

Contrarily, conflict resolution hypothesis predicts that CSR investment enhances FP (Freeman, 1984; Makni et al.,
2009; Jo and Harjoto, 2011, 2012). According to this hypothesis, manager uses CSR as a weapon to minimize this unrest
situation between shareholders and non-equity holders. Further, Jo and Harjoto (2011, 2012) argues that CSR activities
are the better mechanism to communicate between insiders and outsiders, thus in this way mitigate the conflict of
interest between the two and raised firm value. Guenster et al., (2010) and jiao (2010) found that corporate social
performance is positively associated with firm value. Cui et al., (2018) narrates that CSR activities help to minimize
the information asymmetry issue between manager and non-investing stakeholders which in turn reduce the conflict of
interest between them; hence raise firm value.
Although, majority of existing studies suggested a positive association between CSR and FP. But literature also
witnesses a number of studies that document otherwise. Brammer et al., (2006) suggest higher social performance leads
to lower shareholder’s value. Nelling and Webb (2009) found no association between CSR and firm’s financial
performance. Crisostomo et al., (2011) studies the non-financial Brazilian firms and found inverse relationship between
CSR and Tobin’s Q.

4.3. Institutional Shareholdings, CSR, and Firm Value

Institutional ownership (IO) can impact on CSR-firm value relationship in two different ways. On the one hand, IO can
positively interest with CSR-firm value association by minimizing the agency cost and overinvestment behavior of the
manager through effective monitoring and efficient allocation of firm’s resources. IO is to be considered an active
monitoring device that advocates the agency theory and institutional support theory. Researchers like (Shleifer &
Vishny, 1986; McConnell & Servaes, 1990; Pound, 1988) support the active monitoring hypothesis by claiming that
institutions have right combinations of resources, expertise, and capability to monitor firm’s management and prevent
them from opting self-serving behavior. Mitra (2002) claims that IO is an effective mechanism to counter principal-
agency information asymmetry hence, increase the value of the firm. Significant relationship observed between IO and
firm performance by the number of researchers like Al-Malkawi and Pillai (2018), Lee and Chen (2011), Gugler et al.,
2008. According to active monitoring hypotheses, it is expected that IO significantly supports CSR positively (conflict
resolution hypothesis) rather than negatively (overinvestment hypothesis). Literature witnesses that presence of
blockholders or institutional investors helps to mitigate overinvestment CSR by way of effective monitoring (Chen et
al., 2007; Starks, 2009; Gillan et al., 2003). Contrarily, the presence of Institutional investors can exacerbate the conflict
between equity holders and non-equity holders stakeholders (Lemmon and Lins, 2003; Guiso et al., 2015), which
resultantly overshadows the CSR conflict-resolution hypothesis. Thus, effective monitoring mechanism of an
institutional investor can shield shareholders against value-destroying activities related to CSR engagement.

On the other hand, IO can suppress this positive CSR-firm value relationship by raising the unrest situation between
shareholders and non-equity stakeholders. Further, institutional investor can negatively impact on information
disclosure, thereby raising information asymmetry between shareholders and non-equity stakeholders. High institutional
shareholdings decrease management incentives and integrity (Burkart et al., 1997; Guiso et al., 2015), which in turn
reduces firm’s productivity and firm value (Tobin’s Q). Moreover, institutional shareholders can extract own private
benefits and not shared the same with minority shareholders and CSR-related stakeholders (Edmans, 2014).

Recently, a very similar study made by Buchanan et al., (2018) in the context of U.S. in which they studied CSR-firm
value relationship in the context of influential IO. They conclude that CSR-firm value association depends upon
influential IO and economic conditions. By employing difference-in-difference method, they found that CSR oriented
firm enjoys higher profit than the opponent before the 2008 crises but after these results are quite opposite that CSR

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oriented firm experience more losses than the counterpart. So the direction of CSR-firm value association depends upon
the dominance of either conflict-resolution hypotheses or overinvestment hypothesis.

5. Methodology
5.1 Data Collection and Sample Selection
The present study aims to investigate the CSR-FP relationship with a moderating effect of IO on non-financial PSX
listed firms for the year 2010 to 2017. The selection of non-financial sector is based upon two reasons i.e. it is the third
largest sectors of the economy that contribute 13.5 per cent of gross domestic product (GDP) and provide 14% of the
total employment. Second, financial firms skipped from the initial sample because of different tax and accounting rules
and regulations. Moreover, financial firms are under strict scrutiny by the state-owned enterprises and restructuring of
financial sector since 1990 resulted inconsistency and wobbly financial sector data (Shahab et al., 2018). As a result
126 financial firms skipped from the initial sample. This brings down the sample to 473 non-financial firms. In addition
205 non-financial firms skipped from sample due to non-availability of financial reports as well as merger, discontinuity
in operation, and continued operating losses. Our final sample consists of 268 non-financial firms, representing 45% of
total population of PSX listed firms during the study period. This study uses secondary data that gathered from different
sources like annual reports of respective firms, SBP financial statement analysis data, brecorder.com, and from SECP
website for the period from 2010 to 2017. The collected data organized in a panel for analysis. According to Baltagi et
al., (2005), panel data is suitable for data analysis as it provides both time-series and cross section dimensions.

After collecting the data of relevant variables, the initial data screening process depicts the presence of outliers which
could create a disturbance in the generalization of the empirical results. To overcome this problem, we winsorized all
continuous variable at 1% as this technique is helpful in order to control the influence of extreme values and outliers
(Shahab et al., 2018).

5.2 Measurement of Variables and Data Analysis

The measurement and operationalization of studied variables shown in table below

Table 1. Description of Variables Used in Study

Variable Measurements Notation
Dependent Variables
Return on Assets Ratio of Net income to total assets ROA
Return on Equity Ratio of Net income to average shareholder's equity ROE
Tobin's Q Market value of equity/Book value of assets Tobin's Q
Net profit margin Ratio of Net income to sales NPM
Return on sales Ratio of EBIT to sales ROS
Earning Yield Ratio of EPS/MV per share EY
Independent Variables
Investment in CSR Expenditures made in Donations, Charity etc ICSR
Institutional Ownership Fraction of shares held by Institutions IO
Control Variables
Firm size Log of Total assets Fsize
Firm Age Present year-Incorporation year Fage
Leverage Debt/Total Assets Lev
Log of Sales Revenue Log of Annual sales LSR
2.
The relevant variable data collected and arranged in a panel for analysis. To summarize and pattern of data,
descriptive statistics used such as measures of central tendency, measures of dispersion. Further, STATA version
11used for regression analysis.

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5.3 Empirical Model Specification

In this study, we investigate the impact of CSR on FP and secondly we evaluate the impact of IO on CSR-FP
relationship. To furnish these objectives, we used two regression models i.e. equation 1 diagnoses the primary affect of
CSR on FP while equation 2 shows the moderating effect of IO between CSR and FP relationship. Owning to data is
panel in nature, panel fixed effects or panel random effects are the modeling techniques that used to observe the findings.
The Hausman tests are conducted; the results support the use of the fixed-effects models as p-value <0.00 in all
performance measures.

FPit = β0 + β1ICSRit + β2IOit+β3 FSizeit+β4Fageit+β5 LVRGit+β6LSRit+ε ……………………… (1)

FPit = β0+ β1ICSRit + β2IOit + β3 (ICSR*IO)it + β4FSizeit+ β5Fageit + β6LVRGit + β7LSR6it+ ε .. (2)
Where
FPit =Firm performance measures through ROA, ROE, Tobin’s Q, NPM, ROS, and EY for firm i for time t;
ICSRit = Investment in Corporate Social Responsibility for firm i for time t;
IOit = Institutional ownership for firm i for time t;
FSizeit = company size as a control variable for firm i for time t;
LVRGit = Leverage ratio of sample firm for firm i for time t;
FAgeit = Firm age of sample firm for firm i for time t;
LSRIT = Log of sales revenue for firm i for time t;
εit = residual.

6. Results and Discussion

6.1. Descriptive Statistics and Correlation Analysis
Table 2 presents the descriptive statistics of studied variables. Investment in CSR is measured through the expenditures
made by the organization in donations and charity etc.

Table 2: Descriptive Statistics of Variables

Variable Obs Mean Std. Dev Min Max

ROA 2136 0.059 0.1122 -0.2336 0.4353
ROE 2136 0.138 0.375 -1.366 1.901
Tobin's Q 2136 0.785 1.245 0.018 7.762
NPM 2136 0.015 0.368 -2.713 0.960
ROS 2136 0.078 0.291 -1.64 1.100
EY 2136 -0.039 0.823 -4.322 2.165
ICSR 2136 7.247 21.827 0 154.081
IO 2136 11.714 11.319 0 53.000
Fsize (Million PK
2136 19542.88 41691 22.195 395943.000
Rupees)
LVRG 2136 0.274 0.228 0 0.997
F Age 2136 35.625 17.654 6 102
LSR 2136 9.556 0.802 6.888 11.245
Note: This table reports the descriptive statistics of return on assets (ROA), return on equity (ROE), Tobin’s Q, net profit margin (NPM), return on
sales (ROS), earnings yield (EY), investment in corporate social responsibility (ICSR), institutional ownership (IO), firm size (Fsize), leverage
(LVRG), firm age (Fage), and log of sales revenue (LSR). Sample period is from 2010-2017 and composed on 268 non-financial PSX listed firms.

Result shows that, on average the ROA of sample data is 5.96 % with a minimum and maximum value of -23.36% and
43.53% respectively. Mean value of ROE is 13.76% with a standard deviation of 0.375. The range of ROE is from -
136.65% to 190.06%. Tobin’s Q ranges from 0.018 to 7.762 with a mean value of 0.785. The average net profit margins
of sample firms are 1.45% with a standard deviation of 0.368 and a minimum and maximum value of -271.3% and 96
% respectively. Sample firms have on average 7.79% of Return on sales with a range from -164%% to 110% of sales.
The average earning yield of data is -3.91% with a minimum value is -432.2% and maximum value is 216.50%. On
average contributions in CSR of sample firms are 8.378 million with a minimum of 0 and maximum value of Rs.
586.293 million. The range of IO is from 0 to 53% with a mean value (standard deviation) is 11.714 (11.320). The mean
value of IO is quite close to standard deviation which show there is not much deviation regarding IO in sample data.
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The average firm size 19542.88 million PKR with a minimum and maximum total assets are 22.195 million PKR and
395943 million PKR respectively. On average, firms have 27.35 % leverage with standard deviation of 0.228. The
minimum and maximum leverage among sample firms is 0% a d 99.7% of total assets respectively. Firm’s age on
average is 35 years with a maximum age of sample firms are 102 years.

Table 3. Correlation Matrix Results

Variable ICSR IO ICSR* IO FS F Age Lev LSR

ICSR 1
IO -0.0155 1
ICSR* IO 0.535*** 0.203*** 1
Fsize 0.337*** 0.0573* 0.276*** 1
Fage -0.0814*** -0.0246 -0.0270 0.00710 1
LVRG -0.00974 0.0449 -0.0328 0.0380 -0.189*** 1
LSR 0.262*** 0.0543* 0.228*** 0.488*** 0.0470 -0.0456 1

Note: The correlation matrix is presented for investment in corporate social responsibility (ICSR), institutional ownership (IO), firm size (Fsize),
leverage (LVRG), firm age (Fage), and log of sales revenue (LSR) for the year 2010 – 2017.

Table 3 presents the correlation between independent and controlled variables. Following Andersen et al., (1990), any
correlation coefficient value above 0.7 witnessed presence of multicollinearity among explanatory values. As result
shows, there is not any value above 0.7, so there is no multicollinearity issue present in our model.

6.2 Panel Model Regression Results

To select which panel effects (fixed effect and random effect) model is appropriate for the analysis, a Hausman test is
conducted with a null hypothesis that a random effect model is appropriate. The results of the Hausman test with all
profitability measures are less than significance level i.e. 0.05. Hence fails to accept the null hypothesis that the random
effect model is appropriate, rather fixed effect model is appropriate to observe the relationship between CSR and firm
value.

Table 4 shows the panel regression results with CSR and IO used as an independent variable and firm profitability
measures i.e. ROA, ROE, Tobin’s Q, NPM, ROS, and EY used as a dependent variable along with firm size, firm age,
leverage, sales revenue as control variables. As per Hausman test results, fixed effect model panel data analysis
conducted to empirically examine the impact of CSR and IO on firm’s profitability. Results reveal that investment in
CSR has significant positive impact on profitability in term of ROA and Tobin’s Q while it remains insignificant with
other profitability measures.
Table 4: Fixed Effect Panel Regression Results (for primary effect)

ROA ROE Tobin’s Q NPM ROS EY

(FEM) (FEM) (FEM) (FEM) (FEM) (FEM)
ICSR 0.0004*** 0.0004 0.0038** 0.0005 0.0007 0.0001
(2.69) (0.66) (2.38) (0.88) (0.17) (0.13)
IO 0.0007 -0.0001 -0.0067* -0.0012 0.0003 -0.0021
(0.01) (-0.04) (-1.77) (-0.96) (0.02) (-0.66)
Fsize -0.0196 0.1067** -0.0060** -0.0280 0.0093 -0.3825***
(-1.58) (2.04) (0.005) (-0.63) (0.26) (-3.67)
LVRG -0.1842*** -0.4278*** -0.9946*** -0.2523*** -0.1689*** -0.4782***
(-11.59) (-6.23) (-5.90) (-4.39) (-3.64) (-3.54)
Fage -0.0070*** -0.0303*** 0.1125*** -0.0120*** -0.0045* -0.0069***
(-7.70) (-7.76) (0.000) (-3.66) (-1.72) (-0.91)
LSR 0.0695*** 0.1917*** 0.1933** 0.2554*** -0.0154 0.3116***
(7.64) (5.02) (2.04) (7.89) (-0.59) (4.11)

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_cons -0.1149*** -1.5269*** -4.8148** -1.6413*** 0.3523*** 1.0759*

(-0.94) (-3.00) (-3.81) (-3.85) (1.02) (1.06)
N 2136 2136 2136 2136 2136 2136
adj. R2 0.1564 0.0740 0.1811 0.0612 0.0113 0.0299
Note: We estimate fixed effect model as a panel data analysis technique for entire profitability measures as a dependent variables and investment in
corporate social responsibility (ICSR) and institutional ownership (IO) used as an independent variables; while firm size (Fsize), leverage (LVRG),
firm age (Fage), and log of sales revenue (LSR) used as a control variables. Sample period is from 2010-2017 and finally composed of 268 non-
financial PSX listed firms.

The participation of CSR activities not only ensures higher accounting profit but also it enhances the reputation of the
firm in the market which in turn may leads to higher Tobin’s Q. This positive relationship between CSR and profitability
support the earlier findings including Kanwal (2013), Nadeem and Malik (2014), Mahoney and Roberts (2007), Wu
and Shen (2013), Kang et al., (2010). IO shows insignificant negative association with profitability but in relation with
Tobin’s Q, this relationship is significant. It shows that presence of IO in equity structure negatively perceived by the
market participant as presence of IO can subdue the value enhancement of CSR by stimulating the conflict between
shareholders and non-investing stakeholders. Hence assign lower market value. This negative association support the
argument that presence of IO in PSX listed firms brings an agency issue between influential IO and minority
shareholders and further it support the strategic alliance hypothesis which is presented by pound (1988), that IO make
a strategic alliance with insiders which is harmful other shareholders. Jensen and Meckling (1976) too claims that in an
organization shareholders having majority stake can expropriate the rights of minority shareholders which ultimately
loss firm value. Moreover, Pound (1988) contended that IO build a strategic alliance with the management, which leads
a negative relation between IO and firm value as suggested by Craswell (1997), Navissi and Naikder (2006), Afza and
Salahudin (2007), and Alipour and Amjadi (2011).

Table 4 also presents the impact of control variables on profitability. Firm size shows significant positive association
with entire measures of profitability. Large size firms have economies of scale and economies of scope benefits along
with experience, technical expertise which in turn enhance firm’s profitability. Increased debt ratio not only increased
burden on firm’s paying capacity but also a negative impression of firm into capital market which reduces market value.
Firm’s age has shown a significant negative relationship with the firm's profitability. Sales revenue shows a significant
positive relationship with the firm's profitability.
Table 5: Regression Results (for Moderated effect of Institutional ownership)
ROA ROE Tobin’s Q NPM ROS EY
(FEM) (FEM) (FEM) (FEM) (FEM) (FEM)
ICSR 0.0002 0.0001 0.0042** 0.0002 0.0001 0.0000
(0.97) (0.17) (1.96) (0.36) (0.19) (0.02)
IO -0.0001 -0.0002 -0.0065* -0.0013 0.0000 -0.0021
(-0.36) (-0.15) (-1.65) (-1.03) (0.09) (-0.66)
ICSR* 0.0001 0.0001 0.0001 0.0002 0.0084 0.0090
IO (1.55) (0.49) (0.28) (0.45) (0.49) (0.12)
Fsize -0.0195 0.1069** 0.0062 -0.0280 -0.0095 -0.3825***
(-1.58) (2.04) (0.05) (-0.63) (0.27) (-3.67)
LVRG -0.1844*** -0.4284*** -0.9961*** -0.2525*** -0.1692*** -0.4784***
(-11.60) (-6.23) (-5.90) (-4.39) (-3.65) (-3.54)
Fage -0.0071*** -0.0305*** 0.1127*** -0.0121*** -0.0047* -0.0070
(-7.78) (-7.78) (11.69) (-3.68) (-1.75) (-0.91)
LSR 0.0694*** 0.1917*** 0.1935** 0.2554*** 0.0155*** 0.3116***
(7.64) (5.01) (2.04) (7.89) (0.59) (4.10)
_cons -0.1107 -1.5212*** -4.8246** -1.6372*** -0.3796 1.0792
(-0.90) (-2.98) (-3.82) (-3.84) (-1.02) (1.07)
N 2136 2136 2136 2136 2136 2136
2 0.1579 0.0742 0.1812 0.0614 0.0115 0.0299
adj. R
Note: We observe the moderating effect of institutional ownership in the context of CSR-FP relationship. For this purpose, we estimate fixed effect
model as a panel data analysis technique for entire profitability measures as a dependent variables and investment in corporate social responsibility
(ICSR), institutional ownership (IO), and an interaction variable of ICSR and I0 (ICSR*IO) used as an independent variables; while firm size (Fsize),
leverage (LVRG), firm age (Fage), and log of sales revenue (LSR) used as a control variables. Sample period is from 2010-2017 and finally composed

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of 268 non-financial PSX listed firms.

Moderating effect of IO in CSR-firm performance relationship presented in Table 5. The interactive variable of CSR
and IO shows positive but insignificant relationship with firm performance in all measures. Although the results are
insignificant but positive sign support the conflict resolution hypothesis that increases in CSR-expenditures having
majority institutional holding firms resolve the issues among stakeholders and hence positively linked with firm’s
profitability by way of mitigating agency cost and overinvestment behavior of the management. Results support the
findings of (Gillan et al., 2003; Starks, 2009) who corroborate positive impact of IO in CSR-firm value relationship.

7. Summary and Conclusions

This study examines the role of expenditures of CSR on FP by observing the moderating role of IO on a sample of 268
Pakistan stock exchange listed firms for the period 2010-2017. CSR is measured through the expenditure made by the
organization in donations, charity etc. Firm’s profitability is captured through ROA, ROE, Tobin’s Q, NPM, ROS, and
EY. Panel data techniques are employed concludes the findings of the study. The prime focus of the study is to observe
the role of IO in the context of CSR-FP relationship. Particularly present study seeking whether the presence of IO
mitigates agency conflict and overinvestment behavior of the management or it subdue this positive relationship by
raising agency conflict and information asymmetry between shareholders and stakeholders?

The interaction between CSR-FP measures in first equation reveals that CSR has not impact on profitability in all
measures except Tobin’s Q. CSR concept is not longevous in Pakistan and still a large chunk of firms are ignoring this
area deliberately. This could be the reason that in Pakistan, CSR is in a state of deprivation because stakeholders do not
pay heed to this issue. Hence this does not affect the profitability of the firm. These results are in line with the findings
of McWilliams and Siegel (2001), Lin et al., (2009), Singh (2014). Further, IO shows insignificant association towards
firm profitability except Tobin’s Q that has significant negative relationship. This negative association witnesses the
agency issue and the strategic alliance hypotheses between large shareholders and the management at the expense of
minority shareholders which ultimately destroy firm value. Moderating role of IO shows positive but insignificant
association with firm’s profitability. This positive association supports the conflict resolution hypothesis that IO through
effective monitoring mitigating overinvestment and agency problems; hence positively associate between CSR-firm
value relationship. Leverage, firm age, firm size and sales revenue show significant association with profitability in
both equations. The outcome of this study shows concrete findings for top level managers, policy makers, supervisors,
investors and future researchers in restructuring the governance mechanism that suit best in the context of Pakistan.
There is a need to promote the CSR culture in Pakistan and create awareness regarding its role towards the betterment
of community in general and society as a whole. This will not only increase its adaptability but linked positively with
profitability as well. Future research may be carried out in the perspective of family ownership and foreign ownership
alike and discuss their effect in the connection between CSR-profitability relationships.

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