Corporate social performance, financial performance and market value behavior: An information asymmetry perspective

This specific study is based on the slack resource theory, good management theory, singling theory and agency theory. Moreover, this paper estimates an interactive equation structural model, based on above discussed theories that relates corporate financial performance (CFP), corporate social performance (CSP), and market performance (MP) regarding to the firm’s share value and relative debt level. The relationship of corporate social performance, financial performance, market value of the share and financial leverage is tried to justify. In this particular study, 166 listed companies on Karachi Stock Exchange from textile sector, chemical sector, cement sector and the tobacco sector are taken. The observations are taken for the entire period of 2005 and 2006 from the published resources of state bank of Pakistan. In aggregate, the results of the study conclude that corporate social performance (CSP) has no effect on financial performance (CFP) under slack resources theory and good management theory. It is obvious from the results that CSP has negative effect on the market value of the share but no relationship to D/E behavior of the firm, significantly. In addition, it is also shown that CFP does not have mediating effect in between the CSP and market value of the share and also in between the CSP and debt level of the firm. This negative relationship indicates that there exists an agency problem. Moreover, the investors do not have the same level of information as the information is captured by the management about the company affairs. In addition, the debt singling hypothesis indicates that the further incorporation of debt into capital structure should influence the behavior of the investor, regarding to the investment in the shares positively, but due to information asymmetry, it is negative. This study further provides the room to test the model of effect of CSP on stock returns in a portfolio construction.