Sustainability for a real innovative world - the impact of innovation on the relationship between corporate social responsibility and financial performance: a temporal contingency perspective

Abstract

Despite the vast research on the link between corporate social responsibility (CSR) and financial performance (CFP), little is known about long-term implications. The overall research consensus points toward a positive relationship taking a short-term perspective. However, this study argues that CSR activities require time until the company can reap benefits from their social and environmental involvement. Moreover, this work sheds light on this link by including innovation activities as a mediator. It argues that companies can utilize the full potential of CSR by complementary investments in both CSR and innovation. A CSR score for the period from 2006 to 2011 with data provided by KLD was calculated. Additionally, data from Compustat was used to create short-term (2012) and long-term (2013-2015) financial performance indicator, as well as, an innovation activity indicator. The sample consists of 297 U.S. publicly traded firms. The results provide evidence that CSR takes effect in the long-term but not in the short-term. On the other hand, innovation improves financial performance in the short- and long-term. Another outcome from the study shows that there exists a sequential relationship between CSR, innovation and CFP. It implies that CSR should be considered an integral part of strategy development since it pays off financially in the long-run. Innovation may be an important driver in the development of specific skills and capabilities which helps to translate positive social and environmental performance into superior financial performance. In the future, companies are advised to invest in mutual value creation with stakeholders, stressing the importance of its stakeholders and society at large. By creating mutual value, companies are allowed to satisfy societal needs while exploiting business opportunities.