The relationship between corporate social responsibility practices and financial performance of firms in the manufacturing, construction and allied sector of the Nairobi Securities exchange

Abstract

This study sought to establish the relationship between corporate social responsibility practice and financial performance of firms listed in the manufacturing, construction and allied sector of the Nairobi Securities Exchange. The relationship between corporate social responsibility practice and firm financial performance has been studied in the past but results of these studies do not appear conclusive. Accordingly the objective of this study was to establish the relationship between the practice of corporate social responsibility and firm financial performance in the manufacturing, construction and allied sector companies listed at the Nairobi Securities Exchange. The specific objectives were to establish the effects of corporate social responsibility activities on financial performance and to also establish the corporate social responsibility activities undertaken by firms in the sector. This study is important because corporate social responsibility practice is important and fundamental to the sustainable operations of firms, good financial performance is also important for sustainability of any firm.This study was meant to be a census but due to the non-availability of complete data for some of the companies, the research covered 10 out of the 14 companies in the sector. Secondary data was obtained from the audited financial reports of the companies for the period from 2007 to 2011. The score for corporate social responsibility practice was obtained using content analysis of reports of the companies on various components of corporate social responsibility as reported in their audited financial reports. Control variables for manufacturing efficiency and capital intensity were also introduced in the regression model so as to establish whether these variables had an effect on the relationship between corporate social responsibility and financial performance. The data collected was analyzed using descriptive statistics and regression analysis.The results indicated the existence of a relationship between the independent variables (corporate social responsibility score, manufacturing efficiency and capital intensity) used in the model and the dependent variable (return on assets) with a correlation coefficient of 0.870. The results of the study also showed that there was an insignificant positive relationship between corporate social responsibility practice and financial performance. Financial performance and manufacturing efficiency was found to have a significant linear relationship which was inverse.