The Influence of CSR Practices on Financial Performance: Evidence From Islamic Financial Institutions in Indonesia

Abstract

Purpose - The purpose of this paper is to statistically assess the relationship between corporate characteristics, environmental contribution and financial performance. To this end, the authors compare the financial performance of all US corporations making up the Dow Jones Sustainability Indexes, being the most proactive companies in providing services and goods, while maintaining ethical responsibility and environmental sustainability. Design/methodology/approach - Various performance measures are compared to the mean performance of the related industry, sector and market portfolio. We employ an analysis for several time horizons of the financial measures. Findings - Analysis by the authors suggests that firms that are proactive in supporting social responsibility and environmental sustainability (SRES corporations) are characterized by significantly higher profit measures than the industry and the sector, though not higher than the entire market. They have lower short-term liquidity measures than those of the industry and related sector, and surprisingly, their long-term leverage is significantly higher. Strong SRES corporations are characterized by significantly higher managerial efficiency ratios than the respective industry and sector. Interestingly, however, the per-worker operating efficiency ratios are significantly lower than for all of the benchmarks. Practical implications - The revealed preference of corporations can be extracted from several horizon dependent financial measures. For instance, we could infer the corporate degree of SRES from their long-term capital structure, i.e. their long-term leverages and short-term liquidity measures. Originality/value - These results illustrate the strong relation between social and environmental sustainability, and long-term business plans in respect to the corporate capital structure.