How does corporate social responsibility contribute to firm financial performance?

This study examines the relationship between corporate social responsibility (CSR) and firm financial performance, considering the mediating role of competitive advantage, reputation, and customer satisfaction. The findings reveal that CSR has a positive effect on firm performance through its impact on competitive advantage, reputation, and customer satisfaction.

How does corporate social responsibility contribute to firm financial
performance? The mediating role of competitive advantage, reputation,
and customer satisfaction
Sayedeh Parastoo Saeidia,b,
⁎, Saudah Sofiana,b
, Parvaneh Saeidia,b
,
Sayyedeh Parisa Saeidia, Seyyed Alireza Saaeidic
a Faculty of Management, Universiti Teknologi Malaysia, UTM Skudai, 81310 Johor Bahru, Malaysia
b Department of Accounting and Finance, Universiti Teknologi Malaysia, UTM Skudai, 81310 Johor Bahru, Malaysia
c Higher Education Institute of Faran-Mehr Danesh, Valeeasr Street, Tehran, Iran
a b s t r a c ta r t i c l e i n f o
Article history:
Received 16 May 2013
Received in revised form 21 June 2014
Accepted 25 June 2014
Available online 23 July 2014
Keywords:
Corporate social responsibility
Reputation
Customer satisfaction
Competitive advantage
Firm performance
Iran
Direct relationship between corporate social responsibility (CSR) and firm performance has been examined
many scholars, but this direct test seems to be spurious and imprecise. This is because many factors indirec
influence this relation. Therefore, this study considers sustainable competitive advantage, reputation, and c
tomer satisfaction as three probable mediators in the relationship between CSR and firm performance. The
ings from 205 Iranian manufacturing and consumer product firms reveal that the link between CSR and firm
performance is a fully mediated relationship. The positive effect of CSR on firm performance is due to the p
effect CSR has on competitive advantage, reputation, and customer satisfaction. The final findings show tha
reputation and competitive advantage mediate the relationship between CSR and firm performance. Taken
together, these findings suggest a role for CSR in indirectly promoting firm performance through enhancing
reputation and competitive advantage while improving the level of customer satisfaction.
© 2014 Elsevier Inc. All rights reserved.
1. Introduction
Recognition of the direct relationship between CSR and firm perfor-
mance has garnered much interest among authors recently. The find-
ings are rather inconclusive and misleading (Margolis & Walsh, 2003;
Mishra & Suar, 2010; Vogel, 2005). This is because, while a positive as-
sociation between CSR and firm performance has been a dominant
theme in many articles,universally,(e.g.Abu Bakar & Ameer,2011;
Oeyono,Samy,& Bampton,2011; Orlitzky,Schmidt,& Rynes,2003;
Roshayani,Faizah, Suaini, Mustaffa, & Tay, 2009; Van Beurden &
Gössling,2008), others suggested a negative or no correlation (e.g.
ACCA, 2009; Aupperle, Carroll, & Hatfield, 1985; Crisóstomo, Freire, &
Vasconcellos, 2011; Malcolm, Khadijah, & Ahmad Marzuki, 2007).
Some scholars (e.g. Alafi & Hasoneh, 2012; Galbreath & Shum, 2012;
Griffin & Mahon, 1997; Margolis & Walsh, 2003; Rowley & Berman, 2000;
Wood & Jones, 1995) questioned the applied approach taken by the major-
ity of studies which have examined the direct relationship between CSR
and firm performance. They claim that positive, negative or neutral results
obtained by examining the direct relationship between CSR and firm pe
formance cannot be 100% reliable, as this link may be affected by some
other intervening factors which many studies have omitted.
Finally, it can be concluded that the relationship between CSR and
firm performance is more complicated than the results of many previous
studies indicate. Accordingly, this study attempts to extend previous re-
searches on the relationship between CSR and firm performance.In
doing so, a new question that will be asked in this study is: ‘Are compet
itive advantage, reputation, and customer satisfaction mediators in the
relationship between CSR and firm performance?’ In undertaking this
study, and in addition to verifying some predicted CSR benefits such as
customer satisfaction, reputation, and competitive advantage, the rela-
tionship between CSR and firm performance, which is more complex
than most studies showed, will be tested.
Previous studies in different environmental management domains
have predicted that customer satisfaction, reputation, and competitive
advantage are three outcomes of CSR (e.g.Mulki & Jaramillo, 2011;
Salmones, Perez, & Bosque, 2009; Walsh & Beatty, 2007). Firm perfor-
mance is also positively affected by these three interdependent vari-
ables (Li,Ragu-Nathan,Ragu-Nathan,& Subba Rao,2006; Matzler &
Hinterhuber,1998; Mulki & Jaramillo,2011; Yamin,Gunasekaran, &
Mavondo, 1999). Evidence has revealed that high levels of customer
satisfaction have two main consequences for a firm including reputation
Journal of Business Research 68 (2015) 341–350
⁎ Corresponding author. Tel.: [phone].
E-mail addresses: [e-mail], [e-mail] (S.P. Saeidi),
[e-mail] (S. Sofian), [e-mail] (P. Saeidi),
[e-mail] (S.P. Saeidi), [e-mail] (S.A. Saaeidi).
http://dx.doi.org/10.1016/j.jbusres.2014.06.024
0148-2963/© 2014 Elsevier Inc. All rights reserved.
Contents lists available at ScienceDirect
Journal of Business Research

and competitive advantage (Anderson & Sullivan,1993; Matzler &
Hinterhuber,1998; Walsh,Dinnie, & Wiedmann, 2006). Therefore,
customer satisfaction,reputation,and competitive advantage should
be included together in studies on the relationship between CSR and
firm performance.
Some authors attempted to identify the role of these variables as the
main intervening variables in the relationship between CSR and firm
performance (e.g.Alafi & Hasoneh,2012; Galbreath & Shum,2012;
Luo & Bhattacharya, 2006; Margolis, Elfenbein, & Walsh, 2008;
Margolis & Walsh, 2003; Rowley & Berman, 2000; Ullmann, 1985). For
example, Luo and Bhattacharya (2006) and Alafi and Hasoneh (2012)
examined only the role of customer satisfaction as a mediator in this
relationship.Later Galbreath and Shum (2012) expanded Luo and
Bhattacharya's (2006) and Alafi and Hasoneh's (2012) works by adding
reputation as another mediator.
This study argues that the relationship between CSR and firm perfor-
mance is more complex that previous researches have revealed. There-
fore, sustainable competitive advantage which has been omitted as the
final outcome of customer satisfaction and reputation (Awang & Jusoff,
2009) is assumed to be another effective mediator in this relationship.
Accordingly, this study tests and develops a more complex relationship
between CSR and firm performance by including three mediators
(customer satisfaction, reputation, and sustainable competitive advan-
tage) as three predicted benefits of CSR. Mediating these three variables
directs future researches away from an indefensible direct relationship
between CSR and firm performance.
It is worth noting that most studies on CSR and firm performance
have been done in developed countries based on European and US
data. Therefore, a sample from Iran as a developing country could be
helpful in demonstrating CSR outcomes in a worldwide context. This
is important as CSR has never been adequately addressed in Iranian
businesses in practical terms and in the academic environment in theo-
retical terms (Chapardar & Khanlari, 2011). Moreover, evidence shows
that expectation of CSR level among Iranian firm's stakeholders is higher
than the actual level of CSR practiced by firms (Salehi & Azary, 2009).
Therefore,sufficient ground exists for such studies in Iran which is
mainly outside the scope of international researches and is under-
utilized as a selected sample in the area of CSR (Chapardar & Khanlari,
2011; Nejati & Ghasemi, 2012).
2. Literature and hypotheses development
2.1. Corporate social responsibility (CSR)
Over the last few decades, researchers have paid considerable atten-
tion to CSR. Therefore, it has become a prominent concept in manage-
ment literature (de Bakker, Groenewegen, & den Hond, 2005; Dobers,
2009; Nejati & Ghasemi, 2012). In addition to theoretical aspects, com-
panies have also become more active in engaging CSR in practice
(Dahlsrud,2008; McWilliams, Siegel,& Wright, 2006). The driving
force behind this is an upsurge in environmentally sensitive consumers
who are demanding sustainable and more environmentally friendly
products and services (Gauthier, 2005; Van Beurden & Gössling, 2008).
Despite the large body of literature on CSR, there is still no unified
and precise definition (Scherer & Palazzo, 2007; Wood,2010).Thus,
CSR does not mean the same thing to everybody (Van Marrewijk,
2003).Wood (2010) contends that this is because CSR is difficult to
conceptualize.Talaei and Nejati (2008) also claimed that the lack of
clear conceptual boundaries has led to these diverse definitions.In
light of these claims, some authors (e.g. Lozano, 2008; Orlitzky, Siegel,
& Waldman,2011; Van Beurden & Gössling,2008) believe that the
lack of a clear definition makes it difficult to conduct empirical studies
on CSR.
Despite the lack of a clear definition, all contending definitions of
CSR agree on one thing, which is that firms must meet the expectations
of society when planning their environmental management strategies
(Gossling & Vocht,2007). According to Van Beurden and Gössling
(2008) CSR answers the uncertainties that business corporations have
to cope with in terms of the social context of the dynamic, global, and
technological business arena that we witness today. In a well-known
definition of CSR by Carroll (1979), CSR is the social responsibility of a
business which includes the economic, legal, ethical, and discretionary
expectations that society has of organizations at a given point in time.
Carroll's (1979) definition is the clearest conceptualization of CSR
because, in addition to identifying the firm's obligations toward society,
it systematically differentiates the firms'responsibilities from mere
profit making and from the socialresponsibilities ofgovernments
(Chen,Chang,& Lin,2012; Lozano,2008; Wood,2010).Proof of the
strength of this claim is the variety of scholars who have used this def-
inition in their studies (e.g. Galbreath, 2008; Galbreath & Shum, 2012;
Sheth & Babiak, 2010; Shum & Yam, 2011).
This study considers the economic and ethical dimensions of CSR as
presented by Carroll (1979).It is also argued by Turker (2009) that
while economic responsibility should be distinguished from other
responsibilities, they should be considered together in addressing CSR
because financial interests are the fundamental reason for establishing
a business,and corporate ethicalbehaviors,which are something
beyond mere financial issues, are the main factor influencing an
organization's survival (Nejati & Ghasemi, 2012).
2.2. CSR and firm performance
In the history of development economics, CSR has been thought of as
a key factor in attaining economic goals and wealth generation (Garriga
& Mele, 2004). Therefore, many studies attempted to find a global link
between CSR and firm performance (e.g.Alafi & Hasoneh, 2012;
Galbreath & Shum, 2012; Lin, Yang, & Liou, 2009; Luo & Bhattacharya,
2006; Margolis et al., 2008; Orlitzky et al., 2003; Rettab,Brik, &
Mellahi, 2009; Shen & Chang,2008; Van Beurden & Gössling, 2008).
For example, empirical findings by some (e.g. Alafi & Hasoneh, 2012;
Galbreath & Shum,2012; Luo & Bhattacharya,2006; Margolis et al.,
2008; Shen & Chang, 2008) researchers showed a positive association
between CSR and firm performance.Orlitzky et al.'s (2003) findings
further support the idea presented by Garriga and Mele (2004). Their
study, which involved a review of all 52 earlier surveys about the corre-
lation between CSR and company performance, showed that more so-
cially responsible companies had stronger economic results.Later,
survey data was adopted from 280 companies in UAE by Rettab et al.
(2009) to examine the connection between CSR operations and compa-
ny performance; the outcome indicated that CSR has a positive associa-
tion with all three determinants of company performance: monetary
performance,personnelcommitment,and corporate integrity.The
impact of CSR on firm performance among 1000 Taiwanese cases was
also examined and a positive association between CSR and monetary
performance was identified (Lin et al.,2009).Galbreath (2008) also
found strong positive links between CSR and organizational benefits
among Australian firms. Consistent with previous studies, after examin-
ing 34 previews studies on CSR and firm performance linkage by Van
Beurden and Gössling (2008), it was found that 68% of studies demon-
strated a positive association. Lastly, the positive and strong relevance
of CSR and firm performance was clearly supported by Alafi and
Hasoneh's (2012) findings which had been done based on Housing
Banks in Jordan.
Review of the available literature reveals that the majority of studies
cited use developed European or US samples (Galbreath & Shum, 2012).
Despite (1) the lack of study on CSR and firm performance in developing
countries, especially in an Iranian context; (2) being underutilized as a
selected sample in international researches (Chapardar & Khanlari,
2011; Nejati & Ghasemi,2012); and (3) the existence of a negative
gap between actual and expected level of CSR among Iranian firms
(Salehi & Azary, 2009), we predict that similar results to that of Western
countries will be found in Iran, a developing Asian country. It is worth
342 S.P. Saeidi et al. / Journal of Business Research 68 (2015) 341–350

noting that the main perspective of the current study is based on the
indirect effect of CSR on firm performance. Since the Baron and Kenny
(1986) procedure is employed in this study to test hypotheses,the
direct relationship between CSR and firm performance should be tested
in the first stage. Therefore, it is hypothesized that:
H1. CSR is positively associated with firm performance.
2.3. Sustainable competitive advantage, reputation, customer satisfaction
and firm performance
Margolis and Walsh (2003) remark that many studies focused only
on testing the direct relationship between CSR and firm performance,
while some scholars (e.g.Alafi & Hasoneh, 2012; Galbreath & Shum,
2012; Luo & Bhattacharya, 2006; Ullmann, 1985; Wood, 2010) claim
that testing the direct relationship between CSR and firm performance
only serves to obscure many influential factors in this relationship and
that the final findings will be unreliable. Therefore, in order to obtain
reliable results,influential variables which are omitted and ignored
should be considered and empirically examined. Three interconnected
variables, customer satisfaction, reputation, and sustainable competi-
tive advantage, will be included in this study as variables that should
be included in order to obtain a reliable result.
Existing literature reveals that customer satisfaction, reputation, and
competitive advantage are positively related to firm performance.
Researches on the relationship between reputation and firm perfor-
mance showed that not only financial benefits but also non-financial
advantages are outcomes ofa good reputation (Black, Carnes,&
Richardson,2000; Brown & Perry, 1994; Flatt & Kowalczyk,2011;
Roberts & Dowling, 2002; Sabate & Puente, 2003). For example, Helm
(2007) claimed that a company with a good reputation is perceived to
be ‘less risky than companies with equivalent financial performance,
but with a less well-established reputation’.From the view point of
financial advantage,Kotha, Rindova, and Rothaermel (2001) and
Roberts and Dowling (2002) found that firms with higher reputation
enjoy higher sales growth and higher return on assets (ROA). In confir-
mation of such studies,Shamsie (2003) and Fombrun and Shanley
(1990) found a positive relationship between reputation and firm
performance. Finally, Cabral (2012)claimed that a firm's performance
depends on its reputation, and that reputation depends stochastically
on the firm's efforts and strategies to maintain and improve it. An effec-
tive effort that helps firms to maintain and improve their long-term
reputation is increasing customer satisfaction (Anderson & Sullivan,
1993), a finding confirmed by Galbreath and Shum (2012) who agree
that reputation is an outcome of customer satisfaction.
Customer satisfaction is a measure of how products and services
supplied by a company meet or surpass customer expectations
(Ahmed, Gul, Hayat, & Qasim, 2001). More and more firms use satisfac-
tion ratings as an indicator of performance (Matzler & Hinterhuber,
1998). Therefore, it could be claimed that higher levels of performance
are affected by higher levels of customer satisfaction. The findings of
Anderson,Claes, and Rust (1997) indicate that customer satisfaction
leads to higher levels of return on investment (ROI) by improving pro-
ductivity. In addition, Lombart and Louis (2012) and Gallarza,Gil-
Saura, and Holbrook (2011) claimed that customer loyalty is a conse-
quence of customer satisfaction. This claim was supported by authors
who contend that increased customer satisfaction leads to increased
customer loyalty which in turn helps firms to obtain higher levels of fi-
nancial performance (e.g. Cronin, Brady, & Hult, 2000; Fornell, 1992;
Rust & Zahorik, 1993). Therefore, the findings support Galbreath and
Shum's (2012) finding that there is no direct and positive association
between customer satisfaction and firm performance, and that this rela-
tionship is mediated by reputation. In a comprehensive study, Reichheld
and Earl Sasser (1990) tried to link customer satisfaction, loyalty, and fi-
nancial performance.Their findings support the claim that loyalty
mediates the effect of customer satisfaction on financial performance
as satisfied customers are likely to buy more frequently and in greater
volume. In addition, satisfied customers will also be more likely to pur-
chase other goods and services offered by the firm, thereby becoming
increasingly loyal to the firms' products and services. All these results
show that firm performance is not directly associated with customer
satisfaction, but that performance is mediated by some intervening var-
iables. Therefore, customer satisfaction cannot be considered as the sol
mediator in the relationship between CSR and firm performance.
According to Gupta (2002), customer satisfaction and reputation are
the main components of competitive advantage. In their study, Awang
and Jusoff (2009)also found that corporate reputation has an influential
impact on competitive advantage. Gupta (2002) also showed empirical
evidence in support of the positive effect of corporate reputation on
competitive advantage by successfully differentiating it from competi-
tors. Therefore, according to previous studies, there is a positive rela-
tionship between customer satisfaction and corporate reputation,a
relationship that finally leads to competitive advantage.
Factoring in this evidence,research findings suggestthat CSR,
customer satisfaction,reputation, and competitive advantage have a
positive effect on firm performance either directly or indirectly. Howev-
er, available evidence justifies the main axis research in this study whic
is the probable mediating role that customer satisfaction, reputation,
and finally competitive advantage might have on the relationship be-
tween CSR and firm performance. Accordingly it is hypothesized that:
H2. CSR and firm performance is a mediated rather than direct
relationship.
2.4. Mediating role of customer satisfaction, reputation, and competitive
advantage
Rising sophistication of stakeholders and environment, sharp com-
petition, growing demand for corporate transparency and social respon-
sibility have gradually become the new corporate challenges of the 21st
century which have caused firms to be increasingly concerned about
corporate reputation. It is assumed by Cabral (2012) that a firm's perfor
mance depends on its reputation. Corporate reputation is a reflection of
the degree to which the public is satisfied that firms are meeting their
expectations with their products and services (Brammer & Pavelin,
2006). According to Walsh et al.(2006), and Walsh, Mitchell, and
Jackson (2009) reputation is one of the consequences of high customer
satisfaction over the long term. Gupta (2002) pointed to the firm's CSR
ability as a prerequisite of a company's reputation. This finding supports
the popular view in business literature that when customers are faced
with parity in product price and quality, they would prefer to choose
products from companies that contribute to environmental manage-
ment practices such as CSR.In this case,firms should be aware that
the best way to demonstrate a high level of CSR, and to increase custom
er satisfaction, is to do all they can to understand stakeholder expecta-
tions and to design and implement their CSR accordingly.
Carroll (1979, 2004) believed that improvement in product quality
as a socially responsible practice enhances the level of satisfaction. In
another study by Alafi and Hasoneh (2012) customer satisfaction is pos-
itively affected by CSR. In the wake of improved customer satisfaction,
financial benefit will increase through lower customer defection and
more repeat businesses because it reduces costs,increases returns,
and generates more sales (Bhote,1996; Galbreath,2002). Clarkson
(1995) also stated that the ability to build a positive reputation followed
by increasing customer satisfaction is critical to a firm's survival and
performance. Later, some authors (e.g. Davies, Chun, da Silva, & Roper,
2003; Galbreath & Shum, 2012; Walsh et al., 2006, 2009) found that cor
porate reputation and customer satisfaction are strongly correlated and
that customer satisfaction has a positive impact on corporate reputa-
tion. Nguyen and Leblanc (2001) also believed that a firm's reputation
is a reliable indicator of whether or not a firm's customers are satisfied.
343S.P. Saeidi et al. / Journal of Business Research 68 (2015) 341–350

Cabral (2012) later augmented previous studies by adding the vari-
able of sustainable competitive advantage to the final outcome or mea-
sure of customer satisfaction and reputation. Previous to that, Matzler
and Hinterhuber (1998) also found that corporate reputation gained
through long periods of high customer satisfaction is a source of sustain-
able competitive advantage for firms. They argued that in order to know
whether improvements in certain product attributes lead to competi-
tive advantage,it is necessary to compare the customers'perceived
product quality with that of competitors' products. If customers are sat-
isfied with perceived product quality, reputation will be the firms' main
reward. Davies et al.(2003) also claimed that corporate reputation
enables firms to repeatedly attract customers. More satisfied customers
means enhanced reputation, more sales growth, more competitive ad-
vantage, and finally higher levels of firm performance. All this evidence
shows that there is a tripartite relationship between customer satisfac-
tion, reputation, and gaining competitive advantage and that it can be
posited that reputation and competitive advantage are influenced by
customer satisfaction.
Since CSR is an environment-oriented approach to product/process
quality development that supports design teams in developing new
products and processes in a structured way based on further ecological
protection and assessment of customers'needs and expectations,it
could be argued that CSR could not have a direct effect on firm perfor-
mance, but is fully mediated by customer satisfaction, reputation, and
competitive advantage. Therefore, given the previous discussions it is
hypothesized that:
H3. In the mediated relationship between CSR and firm performance,
competitive advantage and reputation act as the mediating factors via
improving customer satisfaction.
3. Methods
3.1. Sample and data collection
In order to select samples and measure CSR,annual reports,
Fortune's Most Admired Companies,and Kinder, Lyndenberg and
Domini (KLD) ratings have been widely used by studies (e.g.
Backhaus,Stone, & Heiner, 2002; Hillman & Keim, 2001; Hull &
Rothenberg,2008; Mattingly & Berman,2006; Schnietz & Epstein,
2005; Scholtens & Zhou, 2008). While Fortune's Most Admired Compa-
nies and KLD are two databases dominated by United State samples, an-
nual report databases also have their own critics (Galbreath & Shum,
2012; Huse, Hoskisson, & Zattoni, 2011; Jarvis, MacKenzie, &
Podsakoff, 2003). Since the sample of this study is Iran and there is no
wide database such as Fortune's Most Admired Companies and KLD,
the survey approach is suitable for gathering data, especially when sec-
ondary sources are not available. The related survey, at the first stage, is
developed through an extensive literature review. Then, 10 executives
who are not included in the sample assessed the content validity. Final-
ly, after making some minor changes, the final and corrected version of
survey instrument was prepared. In order to reduce various biases of
survey studies, this study undertakes the suggestions of Spector and
Brannick (1995), in which we do not prepare any preferred response
in questionnaire items; the instrument is kept as short as possible;
close attention is paid to wording; and in the survey, independent and
dependent variables are placed far apart from each other.
The only firms which are included and relevant to this study are
those in industrial manufacturing and consumer products. These sectors
are chosen because among different sectors in the market,product
and consumer industries have the most influence on the environment
and society (Burritt, Schaltegger, Bennett, Pohjola, & Csutora, 2011; de
Beer & Friend, 2006; Molina-Azorín, Claver-Cortés, Pereira-Moliner, &
Tarí,2009; Schaltegger, Bennett, Burritt, & Jasch, 2009). 1250 manu-
facturing and consumer product firms are listed for this study.Top
managers are chosen as respondents because they are directly involved
in the management of organizational affairs and have first-hand knowl-
edge on organizational improvement processes.
The overall response rate was 16.4%. At first glance, the rate seems
low. However, similar response rates have been reported by various
CSR scholars who have tried to survey top managers. For instance, in a
study carried out by Mishra and Suar (2010) among manufacturing
companies in India, only 10% of respondents (top managers) returned
the questionnaire. A decade earlier, Spence and Lozano (2000) claimed
that the subject matter of CSR is likely to lead to a low response rate.
Other researchers, including Maignan and Ferrell (2001) and Simons,
Pelled, and Smith (1999) reported response rates in these kinds of stud-
ies as low as six percent.From another perspective,Welford (2005)
found that response rate is a function of how important the concept of
CSR is perceived in each country, so that high response rate in devel-
oped countries shows that CSR is an issue on the business agenda,
while lower response rates in less developed countries might imply
that it is less of an issue among business owners. Later, in response to
previous claims,Galbreath and Galvin (2008) and Galbreath and
Shum (2012) expressed that a response rate as low as 10%, is acceptable
in countries which suffer from a lack of serious survey work on CSR.
Therefore,based on the allrelated evidence,a 16.4% response rate
should be sufficient for a developing country such as Iran, where CSR
has either not been adequately addressed practically, or its managers
do not have a high opinion of CSR.Finally, after removing unusable
surveys, only 205 are engaged in the analysis.
Early versus late respondents were compared on all variables in
order to test non-response bias.The logic of such testing is that in
comparison to early respondents, late respondents are more similar to
the broad population. No significant differences between variables in
this study are revealed by independent sample t-test.It shows that
non-response bias is not a problem in this study.
Of the 205 valid responses, 57.7% came from industrial manufactur-
ing firms and 42.3% from the consumer product manufacturing sector.
The average age of the firms is 28 and the mean number of employees
is 176. The annual sales revenue of the firms ranges between $100,000
and $2,000,000, with 60% of them between $100,000 and $1,000,000.
3.2. Independent variables
Some authors (e.g. Galbreath & Shum, 2012; Montiel, 2008;
O'Shaughnessy, Gedajlovic, & Reinmoeller, 2007) state that there is no
universal and united method with which to measure CSR.There are
two types of data collection; one is based on secondary data, and the
other on primary data. The CSR conceptualization presented by Carroll
(1979) which has been frequently cited in many studies did not collect
secondary data. This instrument consists of four main dimensions of CSR
(legal, economic, discretionary, ethical) to determine the firm's CSR ori-
entation. Since the aim of this study is to assess CSR activity and Carroll's
(1979) instrument only focuses on the degree of importance of different
dimensions of CSR, this instrument is not appropriate for the current
study.
The instrument presented by Carroll (1979) was later developed by
Maignan, Ferrell, and Hult (1999) and Maignan and Ferrell(2000,
2001). The orientation of Carroll's work was changed from an instru-
ment used to assess the degree to which a firm believes it has social re-
sponsibilities or how they rank those responsibilities to an assessment
of CSR activity,which is the aim of the current study.According to
their claim, the best overall CSR fit as presented by Carroll consists of
four correlated factors. In addition, previous studies developed a very
inflexible scale and used it in multiple countries and industries. In addi-
tion, in an assessment of six competing measurement models, Maignan
and Ferrell (2000) found that the model which included all four CSR di-
mensions (ethical, economic, discretionary, and legal) provided the best
overall fit. Therefore, this study selected the CSR measurement used by
Maignan et al. to measure firms' perception of each CSR dimension as
344 S.P. Saeidi et al. / Journal of Business Research 68 (2015) 341–350

listed above. A 29 item, 5 point Likert scale was used to cover all four
CSR dimensions,where ‘1 = strongly disagree’and ‘5 = strongly
agree’.
What are the main components, or measures, of corporate repu-
tation? Lloyd and Mortimer (2006) identified image,performance,
identity, brand, ethical leadership and management as the six core
components of corporate reputation.However, Schwaiger (2004)
identified ten components of corporate reputation (employee quali-
ty, management quality, financial performance, products and service
quality, market leadership, customer orientation or focus, attractive-
ness or emotional appeal of the organization,social responsibility,
ethical behavior,reliability), while Harrison (2009) also identified
the same ten components as Schwaiger.Martin de Castro, Navas
Lopez, and Saez (2006) identified eight such components,which
are innovation, ability to gather, develop, and retain talented people,
value of long term investments, social responsibility among the
community,use of corporate assets/efficiency, product and service
quality, financial strength, and managerial quality.
As can be seen,these components are quite similar to the ones
discussed to measure CSR dimensions. Therefore, in order to avoid the
problem of cross loading of factors in CSR and reputation measurement
in data analysis, the scale developed by Weiss, Anderson, and MacInnis
(1999) seems appropriate to measure corporate reputation in the
current study,because their developed scale is based on the general
perception of a firms' reputation, not on any specific part of reputation.
Using a 5 item 5 point Likert scale where “1 = strongly disagree and
5 = strongly agree” firms were asked to determine their customers'
perception of their overall reputation based on the following items:
‘We are seen by customers as being a very professional organization’,
‘Our firm is viewed by customers as one that is successful’, ‘Our firm's
reputation is highly regarded’, ‘Customers view our firm as one
that is stable’, and ‘Our firm is viewed as well-established by
customers’.
Andreassen and Lindestad (1998) suggest that customer satisfaction
indicators should tap into the construct by addressing an overall evalu-
ation of consumption experiences of a firm. A key component of the
relationship between customers and a firm is customer satisfaction
(Ping, 1993). Based on Ping's work, Galbreath and Shum (2012) devel-
oped four items related to customer expectations and the relationship
between customers and the firm. In addition to the initial four sugges-
tions, Galbreath adopted three more items that are commonly used in
customer satisfaction researches,resulting in a seven item scale de-
signed to gauge firms' perceptions of the satisfaction of their customers.
These seven items cover three main dimensions of customer satisfac-
tion: customer satisfaction with product or service quality, customer
satisfaction with value for price, and meeting customer expectations.
Balanced Scorecard (BSC)methodology also measures customer
perspective as a fundamental aspect of measuring overall firm perfor-
mance.It measures the customer's perspective through looking at
meeting customer expectations,quality of products/services,and
increases in the number of customers. This study measured customer
satisfaction by asking about three main dimensions (including quality,
cost, and meeting customer expectations) that are normally adopted
in customer satisfaction investigation by scholars (Choi& Eboch,
1998; Galbreath, 2010; Homburg & Rudolph, 2001; Kaplan & Norton,
1996).The related questionnaire was designed with seven items to
determine perceptions of degree of satisfaction of customers by partic-
ipant companies.All items employ five-point scales anchored by
“strongly dissatisfied” (1), and “strongly satisfied” (5).
Chang (2011) derived six items for measuring competitive advan-
tage based on Barney (1991), Coyne (1986), and Porter and van der
Linde (1995). Chang (2011) measured competitive advantage by the
degree of a firms' managerial capability, profitability, corporate image,
quality of products or services, and difficulties faced by competitors in
replacing the company's competitive advantage.Chen,Lai, and Wen
(2006) considered cost of products/services,company growth,and
being the first mover in some important fields in measuring competitive
advantage. Bataineh and Zoabi (2011) in their study about the effects o
intellectual capital on competitive advantage employed eight items for
measuring competitive advantage level. These items include leadership
strategy, position in the market, resources and capabilities of the busi-
ness, generating customer value, identifying its relevant competitors,
differentiation strategy, service flexibility, and speed of offering services
Competitive advantage wasmeasured by Flynn, Sakakibara,and
Schroeder (1995) through measuring five effective items in gaining
competitive advantage. Dunk (2007)also used Flynn et al.'s (1995) in-
strument to examine the effect of product quality on competitive advan
tage. Those five items include unit cost of manufacturing, fast delivery,
flexibility to change volume, inventory turnover, and cycle time (from re
ceipt of materials to shipment). Based on the literature, quality of prod-
ucts or services, corporate image, market position, differentiation and
diversity, growth of the company, and market leadership are the most
commonly used dimensions in measuring competitive advantage
among mentioned scholars. Therefore, this study employed these items
as dimensions for measuring competitive advantage level of participant
firms based on managers' perception in five items with five-point Likert
scales, where 1 = “strongly disagree” and 5 =“strongly agree”.
3.3. Dependent variable
Firm performance as the sole dependent variable in this study will
be measured through seven items which are related to financial perfor-
mance in Balanced Scorecard (BSC) methodology. Developed by Robert
Kaplan and David Norton in 1992 the Balanced Scorecard methodology
is a comprehensive approach that analyzes an organization's overall
performance in four ways.Measuring financialperspective in firm
performance is one of the dimensions in this methodology. Since this
study chooses to adopt market share growth and growth in sales as
the growth determinant, and Return on Equity (ROE), Return on Sales
(ROS) Return on Assets (ROA), Return on Investment (ROI), and net
profit margin of the firm as monetary accounting performance con-
structs, BSC could be the best instrument to measure financial perfor-
mance.The respondents were asked to compare themselves with
competitors and then select the appropriate option about their firms
on a 5 point Likert scale where 1 = “strongly disagree” and 5 =
“strongly agree”.
3.4. Control variables
There are different ideas about the effect of firm's size, age and rev-
enue on the relationship between CSR and firm performance (see,
Galbreath & Shum, 2012; Lee, Faff, & Langfield-Smith, 2009; Orlitzky
et al., 2011; Webb, 2004; Weber, 2008). Therefore, this study considers
firm size, age, and sale revenue as control variables. Each control vari-
able is measured with only a single question. Questions which address
firm age and firm size are related to the number of years in business
and the number of full time employees, respectively.
4. Analysis and results
Mean and standard deviation (SD) as well as correlations are shown
in Table 1. According to Table 2, assessed levels of goodness offit index
(GFI), comparative fit index (CFI), and root mean square (RMR) that
should be more than 0.9 for GFI and CFI, and less than 0.05 for RMR
were in an acceptable range. Confirmatory factor analysis (CFA) through
SPSS is conducted by this study in order to evaluate the constructs' psy
chometric properties.
Sekaran (2003) and Hair, Money, Samouel, and Page (2007) opined
that an alpha value of less than 0.6 is seen as a weak reliability while an
alpha value of more than 0.7 is viewed as strong and better. Cronbach's
alpha value of a group of constructs which is calculated in Table 2 for
345S.P. Saeidi et al. / Journal of Business Research 68 (2015) 341–350

internal consistency as well is near to 1.0, which means that the reliabil-
ity is good (Sekaran, 2003).
Therefore, sufficient reliability was demonstrated for all constructs,
as all were greater than the benchmark of 0.70. Furthermore, the stan-
dardized factor loading was significant in this study (p b 0.05). It reveals
that convergent validity is supported for all the measurement items
(CSR, customer satisfaction, reputation, and competitive advantage).
In addition to convergent validity, discriminant validity is supported
as well.
In firm performance measurement, nearly 70% of the variation was
explained by ROA and ROE in factor analysis test. ROA is positively relat-
ed to the stock price. A greater ROA and ROE indicate greater value cre-
ation for financial investors (Berman,Wicks, Kotha, & Jones,1999;
McGuire, Sundgren, & Schneeweis, 1988). ROA for firms and ROE for in-
vestors and stockholders are the most important ratios in measuring
performance of a firm.
The findings of the current study about the effects of control vari-
ables are consistent with those (e.g.Galbreath & Shum,2012; Lee
et al., 2009; Orlitzky et al., 2011; Webb, 2004) who confirmed the lack
of influence of these variables in studies of CSR. According to Rowley
and Berman (2000) and Galbreath and Shum (2012), structural equa-
tion modeling (SEM) is more appropriate than traditional regression
analysis in CSR research. Iacobucci, Saldanha, and Deng (2007) also in
their study claim that the SEM technique is the superior method on
both theoretical and empirical statistical grounds. Urbach and
Ahlemann (2010) explained that the SEM is a second-generation statis-
tical technique, which simultaneously tests the causal relationship be-
tween multiple dependent variables and independent variables as
opposed to the first generation techniques like factor analysis, discrim-
inate analysis and multiple regressions, which cannot. They also claim
that the SEM is considered better than the traditional regression be-
cause it can reduce bias by taking measurement errors into account. In
addition, Iacobucciet al. (2007) proved empirically that SEM ap-
proaches consistently will be more powerful in detecting a mediation
result than regression approach. Therefore, SEM was found as a proper
statistical analysis technique for this study.
In order to test hypotheses, Baron and Kenny's (1986) procedure is
employed. They discussed four steps in establishing mediation. First, a
significant relation of the independentvariable to the dependent
variable is required. Second, a significant relation of the independent
variable to the hypothesized mediating variable is required. Third, the
mediating variable must be significantly related to the dependent vari-
able. Fourth, to establish that the mediating variable completely medi-
ates the relationship, the effect of independent on dependent variable
should be no longer significant.
According to these four steps, the results gained from the first model
(CSR-firm performance relationship) show that there is a positive and
significant relationship between CSR and firm performance with path
coefficient of 0.15 (p b 0.001), and the basic fits (CFI = 0.921; GFI =
0.951; RMR = 0.035). Therefore, followed by meeting the first condi-
tion of establishing mediation, hypothesis one is supported as well.
After entering the mediators and running the second model to test
H2 and H3, it was revealed that there is a significant relationship
between CSR and mediation variables, and between mediation variables
and firm performance. It is worth noting that there is no longer a signif-
icant relationship between CSR and firm performance (CFI = 0.908;
GFI = 0.939; RMR = 0.031). It shows that the CSR and firm perfor-
mance relationship is a fully mediated relationship through contribu-
tion of CSR to firm performance via better reputation and competitive
Table 2
CFA analysis results.
Variable Mean SD Internal
consistency
Cronbach's
alpha
GFI CFI RMR
CSR 0.92 0.93 0.04
Ethical 4.28 0.53 0.74 0.72
Economic 3.87 0.59 0.78 0.82
Discretionary 3.07 0.71 0.77 0.79
Legal 3.98 0.63 0.80 0.83
Reputation 4.12 0.59 0.90 0.90 0.96 0.97 0.02
Customer satisfaction 3.89 0.55 0.88 0.86 0.98 0.96 0.01
Competitive advantage4.76 0.59 0.85 0.87 0.96 0.97 0.01
Table 3
Main effects of variables (unstandardized beta values).
Estimate S.E. C.R. p
Customer satisfaction ← CSR 0.678 0.076 8.921 ⁎⁎⁎
Reputation ← customer satisfaction 0.382 0.067 5.701 ⁎⁎⁎
Reputation ← CSR 0.411 0.081 5.074 ⁎⁎⁎
Competitive advantage ← reputation 0.548 0.072 7.611 ⁎⁎⁎
Competitive advantage ← CSR 0.457 0.065 7.030 ⁎⁎⁎
Firm performance ← CSR −0.031 0.102 −0.304 0.86
Firm performance ← customer satisfaction−0.121 0.135 −0.896 0.72
Firm performance ← reputation 0.709 0.123 5.764 ⁎⁎⁎
Firm performance ← competitive advantage 0.822 0.103 7.980 ⁎⁎⁎
Ethical ← CSR 1.142 0.128 8.921 ⁎⁎⁎
Economic ← CSR 1.173 0.131 8.954 ⁎⁎⁎
Legal ← CSR 1.060 0.109 9.724 ⁎⁎⁎
Discretionary ← CSR 1.000
⁎⁎⁎ p b 0.001.
Table 1
Descriptive statistics and correlation for continuous variables.
Variable Mean SD Min Max 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
1. Firm size 176.23 108.16 16 305 1.00
2. Firm age 28.40 81.07 8.00 63.00 0.12 1.00
3. Firm sale revenue 2.39 5.65 1.26 8.98 0.08 0.13 1.00
4. Ethical dimension of CSR 4.28 0.53 1.50 4.80 0.11 0.07 0.39 1.00
5. Economic dimension of CSR 3.87 0.59 1.00 3.70 0.09 0.03 0.55 0.11 1.00
6. Discretionary dimension of CSR3.07 0.71 1.54 4.20 0.03 0.01 0.39 0.39 0.40 1.00
7. Legal dimension of CSR 3.98 0.63 1.20 4.50 0.10 0.04 0.46 0.58 0.38 0.41 1.00
8. Reputation 4.12 0.59 1.86 4.87 −0.10 −0.04 0.16 0.38 0.43 0.37 0.34 1.00
9. Customer satisfaction 3.89 0.55 1.00 4.49 0.01 0.02 0.39 0.41 0.39 0.46 0.43 0.63 1.00
10. Competitive advantage 4.76 0.59 1.32 5.00 0.07 0.09 0.56 0.52 0.48 0.32 0.49 0.69 0.59 1.00
11. Return on Equity (ROE) 3.87 0.92 1.00 4.21 0.18 −0.15 0.17 0.14 0.28 0.18 0.17 0.43 0.32 0.45 1.00
12. Return on Investment (ROI) 3.56 0.96 1.66 4.13 0.08 0.15 0.19 0.09 0.28 0.16 0.11 0.39 0.34 0.52 0.50 1.00
13. Return on Assets (ROA) 3.41 0.94 1.00 4.32 0.14 −0.08 0.26 0.14 0.18 0.09 0.23 0.41 0.42 0.49 0.53 0.86 1.00
14. Return on Sale (ROS) 3.78 0.93 1.83 4.00 0.16 −0.16 0.31 0.08 0.29 0.15 0.15 0.33 0.37 0.36 0.56 0.73 0.53 1.00
15. Sale growth 3.66 0.97 1.37 4.46 0.11 −0.14 0.13 0.14 0.3 0.12 0.16 0.48 0.41 0.43 0.29 0.66 0.43 0.53 1.00
16. Market share growth 3.76 0.91 1.00 4.18 0.22 0.14 0.17 0.11 0.34 0.2 0.12 0.42 0.35 0.37 0.28 0.49 0.34 0.41 0.63 1.00
17. Net profit margin 3.50 0.99 1.54 4.43 0.18 −0.19 0.07 0.09 0.16 0.10 0.15 0.32 0.27 0.42 0.39 0.53 0.56 0.52 0.69 0.62 1.00
Correlations ≥.13 are significant at p b0.05.
346 S.P. Saeidi et al. / Journal of Business Research 68 (2015) 341–350

advantage followed by higher level of customer satisfaction. According-
ly, H2 and H3 are also supported. (Table 3 and Fig. 1). It is worth noting
that all gained outputs in Table 3 (as the last step in the path model to
justify mediation effects) are based on unstandardized estimates,
while all the relations shown inFig. 1 are estimated by the standardized
beta values.
The obtained outputs in Table 3 approve the full mediated relation-
ship. According to Baron and Kenny's (1986) steps to establish a medi-
ated relationship, there is a significant relationship between CSR as the
independent variable and customer satisfaction, reputation, and com-
petitive advantage as hypothesized mediating variables (meeting sec-
ond step). Reputation and competitive advantage through customer
satisfaction are predictors of the dependent variable (meeting third
step). The final condition for demonstrating mediation has also been
met, because the relationship between CSR and firm performance in
the final model is no longer significant than the direct effect model.
The mediator may be caused by the dependent variable, which is
commonly called a feedback model. Under the Baron and Kenny defini-
tion, the feedback model would also qualify as mediation,which is
called “reverse mediation”. In reverse mediation, the partial correlation
between dependent and independent variables would be zero when
statistically controlling for their relationships with mediator (see
Baron & Kenny, 1986; Iacobucci et al., 2007). After running the reversed
mediation model (dependent → mediator → independent), the model
fits are as follows: CFI = 0.886; GFI = 0.918; RMR = 0.052. Although
two fit indices are close together, there is a slight advantage in the clas-
sic mediation model (CFI = 0.908; GFI = 0.939; RMR = 0.031) because
it has a slightly better dominance of model fit than the reverse model.
Therefore,the classic path modelis preferred to the reverse path
model in this study.
5. Discussion and conclusion
Unaware that there is no direct relationship between CSR and firm
performance, many studies attempted to examine this relationship di-
rectly. Some positive relationships were found (e.g. Maignan, Ferrell, &
Ferrell,2005; Margolis & Walsh,2003; Maron,2006; Orlitzky et al.,
2003; Stanwick & Stanwick, 1998; Waddock & Graves, 1997; Wu, Tsai,
Cheng, & Lai, 2006), while others were found to be negative or neutral
(e.g. ACCA,2009; Aupperle et al.,1985; Bromiley & Marcus,1989;
Teoh,Welch, & Wazzan, 1999; Wright & Ferris, 1997). These studies
did not clarify how CSR can be associated with firm performance posi-
tively, negatively,or neutrally. Only a few studies mentioned and
applied contingency approach in examining this relationship (e.g.
Galbreath & Shum, 2012; Luo & Bhattacharya,2006; Margolis &
Walsh, 2003; Margolis et al., 2008; Rowley & Berman, 2000). Branco
and Rodrigues (2006) also claimed that for analyzing the real effects
of CSR on financial benefits, omitted mediators and moderators should
be applied. Therefore, based on these rational and logical claims and ex
istence of this gap, this study used three associated variables (custome
satisfaction, reputation, competitive advantage) as mediators to show
why and how CSR influences firm performance positively. According
to the findings, better reputation and competitive advantage are conse-
quences of increased customer satisfaction after engaging in CSR.
Since the main goal of businesses is to achieve a higher level of finan
cial benefits, gaining a sustainable competitive advantage plays a crucia
role in achieving this fundamental aim (Ma, 1993; Majeed, 2011). In this
way, the goal of many business strategies is to achieve a sustainable
competitive advantage.As one of these business strategies,CSR at-
tempts to build a good position for firms in an extremely competitive
market (ACCA, 2009). Higher level of competitive advantage enables
the firm to create superior value for its customers (Dunk,2007).In
turn, creating superior value for customers and achieving higher level
of customer satisfaction create superior profits for itself through offering
high quality of products and services at lower cost (Chi & Gursoy, 2009;
Loveman, 1998; Roger, 1996; Simon,Gómez,McLaughlin, & Wittink,
2009; Williams & Naumann, 2011). Therefore, it could be claimed that
CSR comes along with financial benefits through gaining a higher level
of competitive advantage for firms.According to Post and Altman
(1992) and Billing and Scott (1995) organizations that address environ-
mental issues can affect the marketability of their products and their
competitive position as well as their financial performance.
Previous studies on the relationship between CSR and firm perfor-
mance omitted sustainable competitive advantage as an important me-
diator in this relationship. For example, Luo and Bhattacharya (2006)
and Alafi and Hasoneh (2012) only considered customer satisfaction
as a mediator in this relationship. The findings showed that customer
satisfaction mediates the relationship between CSR and financial perfor-
mance. Later Galbreath and Shum (2012) criticized the work of Luo and
Bhattacharya (2006) for ignoring reputation as one of the main conse-
quences and indices of measuring the level of customer satisfaction in
examining the relationship between CSR and firm performance. There-
fore, Galbreath and Shum (2012) tried to fill up this gap by adding rep-
utation in addition to customer satisfaction as mediators. Their results
showed that CSR is linked to both reputation and customer satisfaction,
but only reputation mediates the relationship between CSR and firm
Fig. 1. Framework and main effects test (standardized beta values).
347S.P. Saeidi et al. / Journal of Business Research 68 (2015) 341–350

performance.This study does not seem to be complete,because it
ignores competitive advantage which is the main goal of firms' efforts
to be reputatable.Majeed (2011) linked competitive advantage and
firm performance and found that firms with higher level of competitive
advantage have higher level of performance.Weber (2008),Wood
(2010), and Galbreath and Shum (2012) claimed that CSR provides
many potential benefits,not just a single intangible benefit such as
customer satisfaction. Accordingly, it was assumed in this study that en-
gagement in CSR affects customer satisfaction, reputation, and sustain-
able competitive advantage positively. Actually, the findings support
all three hypotheses of this study. So that: (1) CSR is associated with
firm performance; (2) the association between CSR and firm perfor-
mance is a fully mediated relationship; and (3) reputation and compet-
itive advantage followed by higher customer satisfaction are mediators
in the relationship between CSR and firm performance.
Despite evidence that shows CSR has never been adequately ad-
dressed in the Iranian business and academic environment (Chapardar
& Khanlari, 2011), and level of firms' stakeholders expectation of CSR
is higher than the actuallevel of CSR practiced by firms (Salehi&
Azary, 2009), these results are consistent with those of other studies
carried out mainly in developed countries that found positive effect of
CSR. The findings from this study make several contributions to CSR
domain. In addition to knowledge contribution, it makes a practical con-
tribution. Knowledge is contributed through overcoming some of the
ambiguity surrounding the relationship between CSR and firm perfor-
mance and extending CSR literature by providing a framework that
helps to explain how CSR might be linked with firm performance.
From a practical viewpoint,according to Papagiannakis and Lioukas
(2012) managers' values, attitudes and perceptions play a significant
role in a firm's environmental response, especially now that the envi-
ronmental concerns of stakeholders have increased. Therefore, the find-
ings enhance the knowledge of Iranian firms'executives about the
importance of the role of CSR as a strategy that creates intangible
assets such as sustainable competitive advantage, reputation, and cus-
tomer satisfaction.Taken together,these findings suggest a role for
CSR in promoting firm performance indirectly through enhancing
customer satisfaction, reputation and competitive advantage.
6. Limitations and recommendations
Since this study has focused only on Iranian manufacturing and con-
sumer industries, and was cross-sectional, further studies with a focus
on service industries or the same industries over time need to be
done. In addition, it is recommended that future studies on the current
topic are to be done in other developing countries, because the results
might not be extendable to other countries. The results gained from
different industries and countries could then be compared. Identifying
barriers which hinder Iranian and other developing countries'firms
from implementing CSR strategies might be another important issue
for future research to improve CSR literature.
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