Can the spending of corporate social responsibility be offset? Evidence from pharmaceutical industry

Abstract

This study aims to investigate whether the costs spent on corporate social responsibility (CSR) can be offset, and identify the inflection point when financial returns from CSR exceed the spending. By using Principal Component Analysis, we developed the Carroll's CSR model to measure actual CSR spending. Drawing on data of 315 listed pharmaceutical firms from China, the quadratic effect was used to examine the inflection point, and the panel data regression was employed to examine the impact of CSR spending on current and subsequent financial performance. The results show that CSR spending cannot be offset in the short-term. After two years of CSR implementation, ethical-domain and overall CSR spending positively relate to return on assets (ROA), whereas legal-domain CSR spending positively affects ROA after three years of CSR implementation, all justifying that CSR spending can be offset in the long-term. This research contributes to literature by precisely recognizing the time-based inflection point in financial performance arises, which is less discussed in existing CSR studies. The study findings imply that corporate managers need to view CSR spending as capital investment rather than operating costs, and policy makers should mandate institutional arrangements to facilitate CSR.