The Nonlinear Relationship between Corporate Social Responsibility and Hospitality and Tourism Corporate Financial Performance: Does Governance Matter?

This paper is interested in examining the impact of corporate social responsibility and governance on corporate financial performance. We selected a panel of 141 worldwide hospitality and tourism firms spanning the period 2012-2018 to assess the effects (direct and indirect) of corporate social responsibility and governance on corporate financial performance (measured in terms of return on assets, return on equity and Tobin's Q). Although a few studies examine the moderating effect of certain factors, our study fills this gap by examining the moderating effect of governance practices (governance structure and institutional quality) on the nonlinear relationship between corporate social responsibility and corporate financial performance. The results of the system generalized method of moments suggest the existence of a nonlinear, U-shaped relationship between corporate social responsibility and corporate financial performance (return on equity and Tobin's Q). This nonlinearity is confirmed for corporate social responsibility and corporate financial performance (measured by return on assets). However, this relationship is inverted-U-shaped. Furthermore, our results also show that lagged corporate social responsibility, governance practices, firm-specific variables and macroeconomic variables affect current corporate financial performance. The predictions of stakeholders and agency theories are validated. Given our results, it is recommended that policy makers trade off the benefits and costs of corporate social responsibility and take appropriate financial strategies, thus enabling value creation for their companies.