Do equity method investments moderate the financial performance benefits of CSR?

Abstract

Corporate social responsibility is increasingly considered a business imperative, with research routinely finding a positive relation between CSR and future financial performance. This study furthers this line of research by considering the role equity method investments play as a moderating factor in the firm's ability to derive financial performance benefits from CSR. I find that the extent of equity method investments as a percentage of a firm's asset mix moderates the overall positive relation between CSR and future financial performance. Further, while CSR strengthens the link between consolidated earnings and future earnings, CSR does not significantly impact the link between equity method earnings and future earnings. These results are consistent with CSR being associated only with the operations of the parent company that directly engages in the CSR activities and the reputational benefits not extending to the parent company's equity method investments. Firms and investors deciding whether there is a business case for CSR activities should consider that the extent of their equity method investments moderates the positive financial performance benefits the firm may receive from CSR and adjust expectations accordingly.