Corporate Social Responsibility Contract and the Impact of the Rating on Company Performance and Risk

Abstract

In this paper, I determine the compensation component of the corporate social responsibility (CSR) contract that can improve CSR rating the most by considering two types of the contract. Based on my results, I find that for objective contracts and subjective contracts, the best-performing component is ethical conduct and social responsibility respectively. In addition, I study how the CSR performance affects firm financial performance and financial risk. From the regression results, I can conclude that both large and small firms with high CSR ratings tend to have a better financial performance, in terms of ROA, and the impact of CSR on small firms tend to be slightly higher. The relationship between CSR performance and risk is not significant, which may be explained by several reasons mentioned at the end of the paper.

Keywords: Corporate Social Responsibility, Compensation Component, CSR Contract, Firm Financial Performance, Firm Risk Measures

JEL Classification: G30