Impact of Corporate Social Responsibility on Financial Performance of Firms in Karachi Stock Exchang - Research Paper Example

Quantitative Data Analysis Name: Tutor: Course: Date: Table of contents Table of contents 2 List of tables 3 1.0 Introduction 4 1.1 Research Methodology 5 1.1.1 Research Objectives 5 1.1.2 Research hypotheses 5 2.0 Data analysis 6 2.1 Descriptive statistics 7 Table 1: Descriptive statistics of data 8 2.2 Normal distribution 8 Table 2: One-Sample Kolmogorov-Smirnov Test 9 2.3 Correlation tests 9 Table 3: Correlation coefficients 10 2.4 Regression 11 Table 4: Regression model summary 12 Table 5: Regression coefficients 12 Table 6: ANOVA 12 3.0 Study limitations 13 4.0 Conclusion 14 References 14 Appendices 16 Appendix I: Net profits of selected firms 16 Appendix II: Total Assets of selected firms 17 Appendix III: CSR Cost of selected firms 17 List of tables Table of contents 2 List of tables 3 1.0 Introduction 4 1.1 Research Methodology 5 1.1.1 Research Objectives 5 1.1.2 Research hypotheses 5 2.0 Data analysis 6 2.1 Descriptive statistics 7 Table 1: Descriptive statistics of data 8 2.2 Normal distribution 8 Table 2: One-Sample Kolmogorov-Smirnov Test 9 2.3 Correlation tests 9 Table 3: Correlation coefficients 10 2.4 Regression 11 Table 4: Regression model summary 12 Table 5: Regression coefficients 12 Table 6: ANOVA 12 3.0 Study limitations 13 4.0 Conclusion 14 References 14 Appendices 16 Appendix I: Net profits of selected firms 16 Appendix II: Total Assets of selected firms 17 Appendix III: CSR Cost of selected firms 17 1.0 Introduction Corporate Social Responsibility (CSR) is the responsible and ethical treatment of all the firm stakeholders. While CSR activities require sacrifice in short-term profits, there is no real agreement on whether CSR affects corporate financial performance. Foote (2010) observes that CSR can affect firm’s performance but results can be positive, neutral or negative. This implies that the impact of CSR on firm performance is varied and vast. On one hand, Poddi and Vergalli (2009) found that firms that are implementing CSR have better long-term performance compared to those not involved in CSR activities. These findings resonated with those of Fasanya and Onakoya (2013) who revealed that firms use CSR as a basic tool to attain high profits and pursue community welfare at the same time. Moreover, Peloza (2009) investigated 159 studies on CSR and found that 63 percent of those studies showed a positive relationship between corporate social responsibility and firm financial performance. From these findings, firms are learning from stakeholder theory that if organizations desire to increase stakeholder wealth, they have to take into account interested parties like environment, employees and customers (Friedman, 1970). While customers are the foundation of firm profitability, employees and the management are other critical resources (Kanwal et al., 2013). From the authors above, it can be deduced that CSR positively impacts on firm’s financial performance. This is because such firms have high customer awareness and responsiveness required to maximize shareholders wealth. Some studies argue that firms implementing CSR activities are more likely to have reduced profits due to high cost of social activities (Allouche & Laroche, 2005; Backhaus et al., 2002). However, neglect to the effects of firms operations on the environment and local communities is in bad taste and will likely affect the perception of customers. Firms that invest in employee safety and health, justified returns to investors and involving stockholders in decision making are likely to experience higher performance (McWilliams & Siegel, 2001). In this analysis, we assess the impact of Corporate Social Responsibility on firm’s financial performance. This is because profitability accounts for the gain or intent of most firms based on total assets and net profits. 1.1 Research Methodology This analysis assesses the impact of CSR on financial performance of firms listed in Karachi Stock Exchange, Pakistan. The data obtained were for net profits and total assets for the period 2010 to 2014. Only firms that are socially responsible were included in the study. The data was extracted in the financial reports at the end of every financial year for the five years of investigation. The number of firms studied were 15 including both local and international companies with social responsibilities across Pakistan. Averages of total assets, net profits and CSR costs were taken for the 15 listed companies for the period stated. Total assets are combined tangible and non-tangible assets owned by the firm. Net profits are total revenue less the expenses incurred in the given year while CSR costs are company expenditure on social activities to the community within the year. 1.1.1 Research Objectives The following objectives were sought; 1. To find out the relationship between corporate social responsibility and firm financial performance 2. To establish the relationship between corporate social responsibility cost and firm benefits 1.1.2 Research hypotheses 1. There is no significant relationship between CSR Costs and firm’s financial performance 2. There is no significant relationship between CSR Costs and firm’s total assets 3. There is no significant relationship between CSR Costs and firm’s net profit 2.0 Data analysis Data was obtained from 15 companies listed in Pakistan Stock Exchange for the years 2010 to 2014. To confirm hypothesis and objectives, the data was run under the predictive analysis software, SPSS, and the statistical outcomes interpreted and presented. The following data analyses were used; Descriptive statistics Normality tests Correlation tests Regression 2.1 Descriptive statistics Descriptive statistics is a group of methods used to collect, collate and present statistical data is visual and text forms to provide a better understanding of the study sample (Singh, 2007). These methods are measures of central tendency, dispersion and distribution. Measures of central tendency define numbers that are stationed around the data and include mean, median and mode while dispersion includes variance and Standard Deviation. On the other hand, measures of dispersion include Skewness and Kurtosis. While measures of dispersion measures the disharmony and spacing between cases, distribution shows similarity of data and the peakedness of data (McNabb, 2015). The descriptions of some of the measures are discussed below; Mean (µ) is the sum of all observations divided by the total number of cases observed. Median is the middle number for odd list of numbers or cases and the average of two middle numbers for the list of cases. Variance is the mean of square distance of data from the mean while standard deviation is the square root of the variance. It shows that closeness of data from the mean. Skewness shows the symmetry of the distribution where the mean can be either at the centre of distribution or not. Kurtosis measures the peakedness or flatness of the distribution. A kurtosis factor of 3 shows a normal distribution. When kkurtosis factor is more than three, the distribution shows a sharp peak closer to the mean with heavy tails. On the other hand, a kurtosis factor of less than 3 shows a fairly flat top with low lying tails. The data on CSR costs, Total Assets and Net Profits for the 15 firms selected into the sample provided the following descriptive analysis as shown in table 1 below. Table 1: Descriptive statistics of data From table 1 above, the mean net profits were PKR 2.06 billion; total assets at PKR 25 billion while 176 million. Using N=15 cases, the standard deviation is higher for CSR costs than that of total assets and net profits showing that the data is far dispersed from the mean. This indicates that firms have no specific formula for allocation of expenditure to CSR activities because the variations are huge. The skewness factor shows all the variables; Net Profits (0.688), Total Assets (0.944) and CSR Costs (3.825) are positive which indicates a skew to the right. On the other hand, Kurtosis that measures the peakedness or flatness of the distribution shows that Net Profits (-1.341) and Total Assets (-0.021) have flat tops and less heavy tails compared to CSR Costs (14.721) with sharp peak and heavy tail. Similarly, the range for Total Assets is higher compared to Net Profits and CSR Costs. This indicated that companies were acquiring and disposing assets at different rates based on financial performance of the given year. 2.2 Normal distribution The study was also undertaken to determine if the data originated from a normal distribution. One-Sample Kolmogorov-Smirnov Test was undertaken to show if the data came from a normally distributed population. To confirm these phenomena, hypothesis was tested. H0: Data is not normally distributed H1: Data is normally distributed Table 2: One-Sample Kolmogorov-Smirnov Test From table 2 above, the asymptotic significance (p≤0.05) was used to determine the threshold if the data was normally distributed. For the variables Net Profits (0.133) and Total Assets (0.418), their level of significance was more than 0.05 indicating that the data was not significantly different from the normal distribution. However, CSR cost (0.007) shows that it is normally distributed since it is less that 0.05 indicating that the data is significantly different from normal distribution. Hence, null hypothesis is rejected for Net profits and Total Assets and accepted for CSR Costs. This means that data for Net Profits and Total Assets is normally distributed but not for CSR Costs. 2.3 Correlation tests Correlation statistics provide a means of inferring to strength of relationships between two or more variables (Mendenhall et al., 2012). This aspect measures the degree changes in values of the variables hence the level of dependence. Spearman moment correlation is one of the measures used to determine that strength and direction of relationship between two or more variables. When two variables have positive coefficients, it shows that increase in one variable has a corresponding increase in the other variable. However, a negative coefficient indicates that if a value of one variable is increasing, then the dependent variable (s) will be decreasing in values (Singh, 2007). Moreover, the coefficients of correlation are limited to values between +1 and -1 for all relationships. However, if the correlation between the variables is zero, it is an indication that there is no relationship or the data is not interrelated. Although descriptive statistics were able to establish the variation of data around a central number (mean), it does not show any relationship between variables (Singh, 2007). As a result, Pearson correlation becomes appropriate as a non-parametric measure to determine the relationships between CSR Costs, Total Assets and Net Profits. The results of the correlation are as shown in the table below. Table 3: Correlation coefficients From the table above, the level of significance is p≤0.05 is valid for Total Assets (0.467*; p Read More