Impact of Corporate Social Responsibility on Financial Performance: Evidence from Pakistan's Cement Industry

This research investigates the impact of corporate social responsibility on financial performance of cement sector listed firms on Karachi Stock Exchange (Pakistan). The study concludes that there is a positive and significant relationship between corporate social responsibility and financial performance.

Abasyn Journal of Social Sciences. 8(2)
Kakakhel, Ilyas, Iqbal, & Afeef 392
Impact of Corporate Social Responsibility on Financial
Performance: Evidence from Pakistan's Cement Industry
Shahid Jan Kakakhel
Associate Professor, Department of Management Sciences, Abdul Wali Khan
University
Muhammad Ilyas
Lecturer, Department of Management Sciences, Abdul Wali Khan University,
Javed Iqbal
Assistant Professor, Department of Economics, Abdul Wali Khan University
Mustafa Afeef
IQRA National University, Peshawar
Abstract
In this research work investigated the impact of corporate social
responsibility on financial performance of cement sector listed firms on
Karachi Stock Exchange (Pakistan). Sample size of fifteen companies
selected on the basis of availability of data of companies. For data
used annual reports during time period of 2008-2014. For analysis
purpose used fixed and random effect models and on the basis of
Hausman test fixed model is best for analysis. From the results it is
concluded that there is positive and significant relationship between
corporate social responsibility and financial performance. This results
support the theoretical relation between corporate social responsibility
and financial performance. Hypotheses of positive and significant
relationship of corporate social responsibility and financial
performance has been supported. This work also support the view of all
those researchers whose empirical evidence found positive and
significant relationship between corporate social responsibility and
financial performance.
Keywords: Corporate Social Responsibility, Financial Performance, Cement
Industry
The modern concept of corporate social responsibility (CSR) has
been evolved in 1950s, in 1960s the concept has formalized and in 1970s
it was proliferated. Post (2003) given the argument that the motivational
factor for firm to make investment in corporate social responsibility
activities is driven by the stakeholder theory. The concept of stakeholder
theory explained by Pirsch, Gupta & Grau (2007) that the survival and
success of organizations are contingent to satisfy economic objectives as
well the non-economic objectives of the firms to fulfill the needs of all
stakeholders of companies. According to Jan and Baloch (2011) CSR is
set of ethical, legal, and socio-economic expectations of society towards
the business organizations operating within its premises.
Carroll (1979) is one of the early Corporate Social Responsibility
theorists explained corporate social responsibility concept “business
encompasses the economic, legal, ethical and discretionary expectations
that society has of organization at a given point in time”. The World

Abasyn Journal of Social Sciences. 8(2)
Kakakhel, Ilyas, Iqbal, & Afeef 393
Business Council for Sustainable Development (1999) suggests that: ‘‘CSR
is the continuing commitment by business to behave ethically and
contribute to economic development while improving the quality of life
of the workforce and their families as well as of the local community and
society at large’’. Crowther & Guler (2008) described that corporate
social responsibility is a concept which has become a dominant aspect of
business reporting, broadest corporate social responsibility definition is
what is? Or should be, Corporate social responsibility is the relationship
of global corporations, government of countries and as well individual as
a citizens.
Jooh et al., (2010) in their study shown that in the current
decade the sustainability approach is become one of the important area
for business researchers because, from one side the business create value
for stockholders and from another side for sustainable world provide
social responsibility obligations.
From the financial performance perspective of firms it is a
generally accepted phenomenon that the primary goal of any firm is
maximization of profit. Those firms which perform their operational in
efficient way will generate maximum profit. In modern business the
concept of social responsibility is develop to play an important role in
companies’ success therefore, in today business era companies also focus
and spend on corporate social responsibility in term of employees’
salaries, wages, pension benefits and donations and other financial help
of society.
From the common theoretical perspective it is general view of
researchers and other experts that all those firms which spend more on
different corporate social responsibility activities their financial
performance will high. From the research perspective this is concluded
from more empirical evidence that corporate social responsibility and
financial performance has positive and significant relationship. The
financial performance of firms are calculated by different proxies in
different research work.
Motivating Factors and Problem Statement of the Study
Discussed by many researchers that the corporate social
responsibility concept has evolved from 1950s as mentioned by Kiran,
Shahid & Farzana (2015) in their work. In research work of Tsoutsoura
and Margarita (2004) mentioned that from 1971 to 2001 there were 122
studies are published on the subject of corporate social responsibility and
financial performance. After comprehensively studied the available
literature, this is found that the relation of Corporate Social
Responsibility and financial performance of firms are still at a conflicting
position. Some of the studies show positive relation between CSR and
financial performance, as investigated by Waddock & Graves (1997) and
Cheruiyot (2010), but some researchers in their studies found that there is
negative relation of CSR with the financial performance such

Abasyn Journal of Social Sciences. 8(2)
Kakakhel, Ilyas, Iqbal, & Afeef 394
investigated by Cordeiro & Sarkis (1997) and Wagner et al., (2002). Still
some studies mentioned that there is no relation prevail between CSR
and financial performance as found by McWilliams & Siegel (2000).
This conflicting phenomena become the motivating factor for this study
to conduct. There is not a clear convincing approach on the relationship
of corporate social responsibility and financial performance of firms as
mentioned by Griffin & Mahons (1997) this relationship may be
negative, positive or neutral.
Conflicting nature of studies also investigated in Pakistan such
as Malik & Muhammad (2014) has found positive relation of corporate
social responsibility practices and variables of financial performance in
banking sector of Pakistan. Kiran et al., (2015) in their study conclude
that there is positive but insignificant relation between corporate social
responsibility and profitability of firms. Kanwal et al., (2013) also found
positive relation and Aga et al., (2012) conclude significant relationship
of corporate social responsibility and financial performance. Iqbal et al.,
(2012) in their study found negative and non-significant relationship of
corporate social responsibility and financial performance of firms. This is
also become a motivating factor for this current research work.
Concept of corporate social responsibility is also develop in
Pakistan, and also some researchers performed empirical work on it,
work in Pakistan available in oil and gas sector by Kiran et al., (2015).
Javed, Rashid, Rab & Qamar (2013) on KSE-30 Index, Iqbal et al.,
(2012) textile, chemical, cement and the tobacco sectors. Malik &
Muhammad (2014) on banking sector and some other studies also
available in Pakistan. Whereas, Jan & Baloch (2011) term CSR in
Pakistan’s pharmaceutical industry still at its infancy stage and short of
meeting its social obligations.
This study related with the relation of corporate social
responsibility and financial performance of cement sector in Pakistan.
Another motivating factor of this study is the utmost importance of
cement industry in Pakistan economy, as at the same time cement
demand increase in the local market due to some factors like
reconstruction after earth quick in Pakistan, floods and also due to the
infrastructure development in Pakistan in recent years. It is also
worthwhile to mention here that cement production has serious impact on
environment and all its stakeholders because it use the raw material in
the form of stone etc., and its pollution impact on society and especially
on its employees. Therefore, in this study focus on the cement sector in
Pakistan.
Objective of the Study
The objectives of this study are
 To investigate the impact of corporate social responsibility on
financial performance of cement sector companies in Pakistan.

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Kakakhel, Ilyas, Iqbal, & Afeef 395
 To examine the relationship of corporate social responsibility
and financial performance of cement sector companies in
Pakistan.
Literature Review
The review of literature in this research work is organized as: all
previous studies in other countries as supporting of positive, negative
and no relation of CSR and financial performance, and then review the
studies in Pakistan in this perspective.
Cochran & Wood (1984) investigate in their study the
relationship of corporate social responsibility and accounting measures
as proxy of financial performance and conclude that there is positive
correlation between corporate social responsibility and financial
performance. In another study Waddock & Graves (1997) investigate the
relation of corporate social responsibility and financial performance and
found that the relation of corporate social responsibility and financial
performance is positive and at the same time is significant. Tsoutsoura &
Margarita (2004) conduct the study in time period of 1996 to 2000 of S
& P 500 listed firms. Examined the relation of corporate social
responsibility and financial performance. Concluded from the analysis
that there is positive and significant relation between corporate social
responsibility and financial performance. The study of Nelling &
Elizabeth (2009) also examined the relationship of corporate social
responsibility and financial performance and mention here that there is
significant relationship between corporate social responsibility and
financial performance. Relative study performance by Cheruiyot (2010),
in this research researcher focused on the relationship of corporate social
responsibility and financial performance of firms of Nairobi stock
exchange, used cross sectional study of forty seven companies and
regression analysis for study and conclude that there is significant
relation between corporate social responsibility and financial
performance measured in term of return on equity, return on assets and
return on sales. Setiawan & Darmawan (2011) also carried the study of
relationship of corporate social responsibility and financial performance
of Indonesian Stock Exchange listed firms, used the panel data
estimation and conclude the results that there is positive effect of
corporate social responsibility on the financial performance of sample
firms. Another study performed by Mutasim & Salah (2012) on the
effect of corporate social responsibility and profitability of Jordan
industrial sector firms, they found positive relationship of corporate
social responsibility with profitability of firms selected for this study.
Amole et al. (2012) worked on corporate social responsibility and
financial performance of banks in Nigeria and from the regression
analysis results it is concluded that the relationship of corporate social
responsibility and financial performance is positive. Meanwhile Mwangi
& Oyenje (2013) examined the relation of corporate social responsibility

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Kakakhel, Ilyas, Iqbal, & Afeef 396
and financial performance of manufacturing, construction and allied
sector firms listed on Nairobi Securities Exchange in period of 2001-
2011. From the analysis result this is concluded that there is positive but
insignificant relation between corporate social responsibility and
financial performance. John, Akinyomi & Olutoye (2013) in this
research work investigate the corporate social responsibility and financial
performance relationship of Nigerian manufacturing firms, during time
period of 2002-2011 selected twenty firms and used the correlation and
regression analysis and conclude that there is significant relationship
between corporate social responsibility and financial performance of
selected firms of Nigerian firms.
Most recent studies on the same concept carried by Cornett,
Otgontsetseg, & Hassan (2014) examined the relationship of corporate
social responsibility and financial performance of listed commercial
banks of USA. From this study it is concluded that the relation of
corporate social responsibility and financial performance measured in
term of ROA and ROE are significant.
In this scenario study done by Babalola (2012) in his research work
investigate the relationship of corporate social responsibility and
financial performance of firms listed on Nigerian Stock Exchange,
results of the study explored that there is negative relationship of
corporate social responsibility with financial performance measurement.
This is not supporting study of above mention literature.
The no relation approach of corporate social responsibility and
financial performance support by the study of Fauzi (2009), in this
research work researcher investigated the relationship of corporate social
responsibility and financial performance of companies listed on New
York Securities Exchange. Selected sample size of 101 listed companies
and for analysis used regression model, from the analysis it is concluded
that there is no effect of corporate social responsibility on financial
performance of examined sample firms. Mutuku (2005) also concluded
from research work that there is no relationship of corporate social
responsibility and financial performance, in this research work
investigated the relationship of corporate social responsibility and
financial performance.
Corporate Social Responsibility and Financial Performance
As mentioned above this study is concern to examine the impact
of corporate social responsibility on financial performance of cement
sector of Pakistan. Therefore it is necessary to review the studies carried
on this aspect in Pakistan. The results from literature review is also mix
in Pakistan context as positive, negative and no relation.
Malik & Muhammad (2014) studied the impact of corporate
social responsibility on financial performance of banks in Pakistan, time
period of the study is from 2008 to 2012. Data is secondary in nature and
collected from the annual reports of banks, used variables of earnings per

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Kakakhel, Ilyas, Iqbal, & Afeef 397
share, return on assets, and return on equity, net profit margin and
corporate social responsibility. For analysis the regression model was
consider, from results it is found that there is positive relation of
corporate social responsibility practices and variables of financial
performance measurement in banking sector of Pakistan. Same aspect is
also examined by Kiran et al., (2015), investigated in this study the
impact of corporate social responsibility on the financial performance of
listed Pakistani firms, selected ten firms from the oil and gas sector for
the time period of 2006 to 2013. Variables of the study are corporate
social responsibility spending, net profit margin, net profit and total
assets of the firms, these data collected from the annual reports of these
firms. Used the regression and correlation tests in excel, from the
analysis of data it is concluded that the relation of corporate social
responsibility with net profit and net profit margin is positive but at the
same time relation of corporate social responsibility has negative relation
with total assets. Overall finding reveal that the impact of corporate
social responsibility activities is insignificant with firms profitability.
Another study conduct by Kanwal et al., (2013) in this work explored the
relation of corporate social responsibility and financial performance,
used sample of fifteen companies listed on Karachi Stock Exchange.
Model of correlation analysis used for analysis and from the results
conclude that there is positive relation between corporate social
responsibility and financial performance of firms.
In this study researchers supported negative and insignificant
relation of corporate social responsibility and financial performance,
Iqbal et al., (2012) examined the relation of corporate social
responsibility with financial performance, financial leverage and share
market value of firms. Sample of one hundred and fifty six companies
selected from chemical, textile, cement and tobacco sectors, in the period
of 2010-2011. From the results it is concluded that there is no impact of
corporate social responsibility on the financial performance of firms,
negative relation of corporate social responsibility with market value of
share and no relation with debt to equity is observed in this study.
Research Hypotheses
On the basis of previous conflicting phenomenon of relationship between
corporate social responsibility and financial performance the following
directional hypotheses were developed.
i. There is no relationship of corporate social responsibility with
financial performance of firms.
ii. There is positive/negative relationship of corporate social
responsibility with financial performance of firms.
iii. The corporate social responsibility has no impact on financial
performance of firms.
iv. The corporate social responsibility has impact on financial
performance of firms.

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Kakakhel, Ilyas, Iqbal, & Afeef 398
Research Methodology
McGuire, Sundgren & Schneeweis (1988) accounting measures
can be used for the financial performance measurement as opposed to the
market based performance measurement. The accounting measures are
used in the form of return on equity, return on assets and retune on sales,
these measure provides different information related with companies. In
this study used the accounting based method of measurement means long
run approach.
Previous studies on corporate social responsibility and financial
performance are investigated by the methods of short run and long run.
Most of researchers used the long run approach in empirical studies. The
results of these studies are mixed, means some support the view that
there is positive relationship of corporate social responsibility and
financial performance of firm while others conclude negative relation
and some studies found no significant impact of corporate social
responsibility on financial performance.
Tsoutsoura & Margarita (2004) explained that the methodology
of the studies on corporate social responsibly and financial performance
are of two types, in first the researchers used the concept of event study,
it reveal the financial performance of firms and their corporate social
responsibility relation in short run by using the abnormal return concept.
From the second aspect researchers used the long run approach of
financial performance measurement and corporate social responsibility
by using the accounting measurement. From these two methods the
researchers conclude the mixed results. First concept used by Wright &
Ferris (1997) and found positive relationship of corporate social
responsibly and financial performance, Posnikoff (1997) concluded
negative relationship of corporate social responsibility and financial
measurement, while Welch & Wazzan (1999) conclude that there is no
relation of financial performance and corporate social responsibility. The
second type of methods used by Cochran & Wood (1984) and found
positive relation of financial performance and corporate social
responsibility, Aupperle, Carroll & Hatfield (1985) conclude from their
study no significant relation of financial performance and corporate
social responsibility.
Data Source and Nature of Data
The data used in this study are collected from the annual reports
of the sample firms, nature of data is secondary and is panel.
Population and Sample of the study
Population of this study is the cement sector listed companies on
Karachi Stock Exchange, time period of this study is 2008-2014, like
some previous studies the time period of this study is also lengthy. Ding
(2014) during long run the corporate social responsibility increase the
financial performance of firms.

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Kakakhel, Ilyas, Iqbal, & Afeef 399
Population of this study is cement sector companies listed on Karachi
Stock Exchange, Out of sixteen listed companies fifteen were included in
this study on the basis of the availability of their annual reports during
the study time period, due to non-availability of the data one company is
not included in the study.
Variables of the Study and its Measurements
Independent Variable
Corporate social responsibility is use as independent variable,
proxy use for it as salaries and wages spending of employees, donation in
the form of health and education etc., employees’ welfare funds. Proxy
used by Kiran et al., (2015).
Dependent Variable
As in this study examined the impact of corporate social
responsibility on financial performance of firms, proxy used for the
financial performance is return on assets. Tsoutsoura and Margarita
(2004) used the same proxy. Return on Assets is measure by net income
divided by total assets, Iqbal et al., (2012) and Cheruiyot (2010), Hull
and Rothenberg (2008), Mahoney & Roberts (2007), Waddock &
Graves (1997), Lee et al., (2009), D’Arcimoles & Trebucq (2002), Aras
et al., (2010), Setiawan & Darmawan (2011), Bhagat & Bolton (2008),
Cornett, Otgontsetseg, & Hassan (2014) and Fernandez-Sanchez &
Sotorrıo (2007).
Control Variables
Size of firms and debt to total assets are used as control variables
of the study, Tsoutsoura and Margarita (2004). Size is measure as
measured by Tsoutsoura and Margarita (2004), natural log of total assets.
Natural log of total assets is also used by Ding (2014).
Debt to total assets is calculated by total debts divided by total
assets, Tsoutsoura and Margarita (2004), which is use as a measure of the
capital structure of firms.
Model of the Study
The regression model use for the analysis of data as used by Tsoutsoura
and Margarita (2004), Iqbal et al., (2012), Kiran et al. (2015). Nelling &
Elizabeth (2009) for the analysis of data used the panel data models.
ROAit = β0 + β1XCSRit + β2XSAit + β3XD/Ait + εit
XCSRit means corporate social responsibility spending of firm i in time t.
ROAit means return on assets of firm i at time t.
XSAit means size in form of total assets of firm i at time t.
XD/Ait means debt to equity means return on assets of firm i at time t.
εit means error term of the models
β0 is constant while β1, β2 and β3 are the coefficients of variables.
Data Analysis and Results

Abasyn Journal of Social Sciences. 8(2)
Kakakhel, Ilyas, Iqbal, & Afeef 400
Fixed Effect Results
Dependent Variable: ROA
Method: Panel Least Squares
Periods included: 7
Cross-sections included: 105
Total panel (balanced) observations: 735
Variable Coefficient Std. Error t-Statistic Prob.
C 0.046328 0.014248 3.251466 0.0012
CSR 2.02E-10 7.34E-11 2.755970 0.0060
SA -0.009936 0.014396 -0.690203 0.4903
DA -0.394006 0.036588 -10.76858 0.0000
Effects Specification
Cross-section fixed (dummy variables)
R-squared 0.527705 Mean dependent var 0.007482
Adjusted R-squared 0.447106 S.D. dependent var 0.043701
S.E. of regression 0.032494 Akaike info criterion -3.880540
Sum squared resid 0.662044 Schwarz criterion -3.204640
Log likelihood 1534.098 Hannan-Quinn criter. -3.619856
F-statistic 6.547293 Durbin-Watson stat 1.706888
Prob(F-statistic) 0.000000
For the analysis of this study researchers used the panel data
analysis procedures, from the above table of analysis this is concluded
that dependent variable of the study is return on assets it is used as proxy
for the measurement of financial performance of firms. Corporate social
responsibility is used as independent variable and used control variables
as size of firm and debt to assets. From the coefficient of corporate social
responsibility it is clear that the relationship between return on assets and
corporate social responsibility is positive and support the theoretical
view that by increasing cooperate social responsibility activities the level
of financial performance also increase. Support the view of Pakistani
researchers that there is positive relationship between corporate social
responsibility and financial performance as of Malik & Muhammad
(2014), Kiran et al., (2015) and Kanwal et al., (2013)
From t-value and ρ-value it is also concluded that the impact of
corporate social responsibility on financial performance is significant.
This is concluded from the t and ρ-values that this work support the
theoretical view that the financial performance are affected by corporate
social responsibility. It is mention here that in the cement sector of
Pakistani listed firms the corporate social responsibility is positive
relation and significant impact on the financial performance. The results
of this study also support the view of Ding (2014) that in long run due to
corporate social responsibility activities of firms the financial

Abasyn Journal of Social Sciences. 8(2)
Kakakhel, Ilyas, Iqbal, & Afeef 401
performance increase. Our results have similarities with the view of
Cochran & Wood (1984), Waddock & Graves (1997), Tsoutsoura &
Margarita (2004), Nelling & Elizabeth (2009), Cheruiyot (2010),
Setiawan & Darmawan (2011), Mutasim & Salah (2012), Amole et al.
(2012), John, Akinyomi & Olutoye (2013) and Cornett, Otgontsetseg, &
Hassan (2014) that there is positive and significant relationship between
corporate social responsibility and financial performance. It also clear
that this study also have same conclusion of significant relationship as
drawn by previous Pakistani researchers as Aga et al., (2012).
From the table it is clear that relationship of firm size and debt to
assets with financial performance are negative. The impact of debt to
assets and financial performance is significant but the impact of size of
firm with financial performance is insignificant.
From the value of R-square it is also clear that in this model independent
and control variables explain dependent variable 52.77%, which is
acceptable value according to standards.
Hausman Test Results
Correlated Random Effects - Hausman Test
Equation: Untitled
Test period random effects
Test Summary
Chi-Sq.
Statistic Chi-Sq. d.f. Prob.
Period random 23.316599 3 0.0000
The above table provide the detail of Hausman test results. This
test is applied for the decision purpose to select random or fixed effect
model. After fixed and random effect models on the basis of Hausman
test effect it is concluded that fixed effect model is best suited for this
study, because ρ-value is less than 1%. This decision of fixed effect
model is best for this study analysis is support by the view of Gujarati
and Dawn (2008).
Conclusion
In this research work researchers examined the impact of
corporate social responsibility on financial performance. Used seven
years data of cement sector listed firms, panel data models are used for
analysis purpose because data is secondary and panel in nature. From the
analysis of this study this is concluded that the impact of corporate social
responsibility and financial performance is significant and positive. This
is concluded from the analysis that the results support the theoretical
view of the relationship between corporate social responsibility and
financial performance.

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Kakakhel, Ilyas, Iqbal, & Afeef 402
Future Research Plan
From this study it is concluded that there is also possibility to
examine the relationship of corporate social responsibility and financial
performance by using the market base data of firms. It is also examined
in Pakistan there is no proper index for corporate social responsibly
measurement therefore, it is recommended to use the sustainability
annual report data of firms which is available of some firms to most
accurately measure corporate social responsibility.
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