Business ethic and CSR - Essay Example

The paper also maintains that positive correlation between CSR expenditure and future performance of the firm is different from what it is usually taken for because such studies usually don’t take the factor of management’s private information in consideration. And in essence these disclosures are signals by which firms communicate their private information of bright future prospects to the outside world. They maintain that charity hypothesis for CSR expenditure is not linked with the future performance of the firm though it may be linked with current period performance.

Investment hypothesis and Signal hypothesis (i.e. either CSR expenditure are investments or communications of bright future prospects) are both positively linked with the future performance of the firm. But their positive relation is of mutually different nature. Their methodological innovation to test and differentiate between investment and their cherished signaling hypothesis lies in their splitting the CSR expenditure further down in investment related and non investment related components.

If CSR spending is good investment then there should be positive relation between its investment component (optimal CSR expenditure) and its future performance. And if it’s not some investment endure but a signaling of better future prospects then there will be positive association between firm’s deviation from the optimum and its future performance. Although authors recognize that effects of optimal expenditure and deviation from it are not mutually exclusive as both can have positive association with the future performance.

Through this methodology authors come up with their first result that CSR expenditures has a positive association with the future performance of the firm measured mainly through the change in the operating cash flow and ROA. When this relation is established authors then refute the Charity hypothesis regarding CSR expenditures. For if CSR spending are charity then these should not affect the future performance of the firm. Next, authors undertake the differential impact of optimal and deviational components of CSR on the future performance of the firm.

Their striking conclusion entails that improved future performance of the firm, on average, is linked with the deviational CSR expenditure rather than optimal CSR. Further by their size adjusted returns tests they conclude that, on average, optimal CSR results in the decline of share holder value and the overall positive impact on the firm value is the result of signaling value of CSR expenditure. And with result authors refute the investment hypothesis of CSR while maintaining that for this hypothesis to hold firm it was required that optimal CSR should result in the increased performance of the firm.

With their findings authors of the paper point to a new horizon in corporate literature regarding the true purpose of CSR expenditures and disclosures. Most important breakthrough that their work offers is the signaling value of CSR expenditure. This avenue of signaling worth of CSR disclosures has been usually neglected. Thus their discovery will add new angle to the relation of CSR expenditure and future performance of the firm. Their finding also highlights the phenomena that CSR expenditures are taken by the firms when they feel that their future prospects are bright and in coming