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Master of Business Administration Program
Financial Management – Fall 2018 (Term B)
The Impact of CSR Disclosures on Financial Performance
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Executive Summary
This report evaluates the impact of corporate social responsibility (CSR) disclosures on financial performance. The evaluation is based on a summary of five articles on the topic. In addition, the report evaluates CSR disclosures by Emaar Properties in the UAE. From the review of the articles, the impact of CSR is wide ranging. In some studies no significant correlation between CSR disclosure and financial performance was found. Other studies have found the presence of a positive impact in terms of improved return on assets (ROA), return on equity (ROE), sales growth and stock performance. In a few studies, mandatory CSR disclosure has been found to have a positive impact on CSR performance but impact negatively on ROA and ROE. The analysis of Emaar indicates the presence of a positive association in which case CSR disclosures have been characterised by subsequently increases in revenues, net income and ROA.
Contents
CSR disclosures by Emaar Properties and Impact on Financial performance. 6
Introduction
Engaging in sustainable business practices have in the recent times become a business imperative. Consequently, an increasing number of organisations are engaging in various corporate social responsibilities (CSR) activities (Stekelorum, Laguir, Elbaz, 2018). Examples of such activities include reducing environmental footprint, promoting infrastructure and social development of local communities and championing human rights. CSR disclosures constitute a key way through which organisations can exhibit their CSR performance to relevant stakeholders such as investors and customers (Cahan et al., 2016). The extent to which the CSR disclosures create value to the organisation has been the subject of recent research. Accordingly, this report summarises the findings of five studies that have previously investigated the relationship between CSR disclosures and financial performance. It also analyses the impact that CSR activities have on the financial performance of Emaar Properties in the UAE.
Summary of the articles
One of the main aspects of CSR is environmental sustainability. Rahman, Yusoff and Mohamed (2009) sought to investigate the extent to which environmental disclosure was associated with financial performance for companies operating in Malaysia, Thailand and Singapore. As part of the investigation the authors hypothesised that high performing firms are characterised by detailed environmental disclosure. In contrast, it was hypothesised that low performing firms have a higher tendency for engaging in superficial environmental disclosure. A sample of 250 companies that engaged in disclosures was investigated. Return on assets (ROA) was used to evaluate performance. From the study findings no significant relationship was found between environmental disclosure and the performance of the company in all three countries (Rahman et al., 2009). For instance, some companies with detailed disclosures were characterised by low performance while others with superficial disclosures had high financial performance.
The article by Qiu, Shaukat and Tharyan (2016) also investigated the impact of environmental and social disclosures on financial performance. The study was anchored on the voluntary disclosure theory (VDT). In brief, the theory suggests that firms that are characterised by superior environmental and economic performance have incentives and resources to make extensive disclosures. A sample comprising of 629 firms which are listed in the London Stock Exchange FTSE 350 index were investigated. The variables used to assess financial performance include ROA, return on equity (ROE) and return on sales (ROS). The analysis indicated the presence of a significant correlation between disclosures and performance scores. The relationship was found to be particularly high in larger firms with greater financial slack and also characterised by high levels of media exposure. Firms with high CSR disclosure were also characterised by higher stock price compared to competitors in the same industry (Qiu et al., 2016). This suggests that investors tend to place a relatively higher value on firms that engage in CSR and adequately disclose the CSR activities.
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