Title

Corporate social responsibility, financial performance and risk in Indonesian natural resources industry

Document Type

Journal Article

Publication Title

Social Responsibility Journal

Publisher

Emerald Publishing

School

School of Business and Law / Centre for Innovative Practice

RAS ID

27953

Comments

Originally published as: Devie, D., Liman, L. P., Tarigan, J., & Jie, F. (2018). Corporate social responsibility, financial performance and risk in Indonesian natural resources industry. Social Responsibility Journal. Advance Online Publication. Original publication available here

Abstract

Purpose

With an attempt to give a deeper explanation regarding the manifestation of socially and environmentally responsible cultures among Indonesian natural resources industry, this paper aims to highlight the empirical confirmation on the correlation of corporate social responsibility (CSR), corporate financial performance (CFP) and risk. Likewise, corporate risk’s role as a mediating variable in the indirect effect of CSR on CFP is also examined.

Design/methodology/approach

Kinder, Lydenberg and Domini’s (KLD) measurement approach is used as a basis to assess social responsibility activities as it gives more social rating transparency. CFP captures both accounting- and market-based measurements, whereas volatility of stock return is adopted as a proxy of firm risk. Partial least squares analysis is conducted on 40 Indonesian listed firms in natural resources sector, with observation years from 2008 to 2016.

Findings

It is revealed that CSR positively affects CFP, although the correlation is stronger in the long run. Significant negative influence to risk is also discovered. However, risk has a significant adverse correlation with CFP when two years’ lagged value is used. Hence, CSR affects CFP through risk in the long-term, both directly and indirectly.

Practical implications

The empirical result suggests that CSR serves as a tool in managing the risk of enterprises and performance, especially in the long-term. Accordingly, firms should incorporate CSR as a strategic investment and manage a strong relationship with stakeholders.

Originality/value

This report expands further prior works and contributes to CSR and financial management literature by discovering the true nature of CSR effects as an investment in the future. This is the first study which tests and proves that CSR in Indonesian natural resources industry plays a significant role as a strategic risk management instrument that leads to a sustainable and long-lasting financial performance.

DOI

10.1108/SRJ-06-2018-0155

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