The relationship between CSR and firm performance could be further classified as short term and long term financial performance.
The first method which aims at short-term financial gains is called as abnormal returns where the firm engages itself in some social causes. The other is the way the firm measures its profitability by using some accounting measures.
There is some relation that is seen vividly between financial profits and corporate social responsibility. Studies show that they are positively correlated. This is basically a great tool that helps the firm promote their objectives and it is used to align the company’s business as well as social goals. This leads to a better relationship with the stakeholders and consumers and this strengthens the relationship and builds trust.
The performance of a firm based on the CSR initiatives that it takes can be based on the following theories:
Consumer interference making – This suggests that when the consumer has trust in the manufacturer and knows that the company is socially responsible then he too feels very positively about the product. This instills goodwill and turns let the consumer be loyal to the firm.
Signaling theory – When there is some irregularity or difference seen between the buyers and the sellers then consumer looks at what the attributes of the company are. Warranties given by such companies seem to look more reliable and the consumer is assured that the product quality of such a company has to be great and this makes him decide on a company. Also, potential employees look at companies who indulge in CSR initiatives as being more attractive.
Social identity theory– An employee’s self-image is important and employees distinguish themselves with the company that they work for. They thus want to be associated with brands that are socially responsible and have a good reputation in the market. This leads to the better evaluation of the company and its products and this leads to loyalty from consumers.
Any irresponsible behavior by the firm gets the shareholder agitated and they may even end up leaving the company and reducing the consumption of products from the company. The shareholders and consumers could also spread bad words about the company which ends up making the company loses its market value.
There have been companies in the past that have been boycotted because of the practices that they follow and because of them being irresponsible socially. All this affects the financial status of the company.