The Effect of Mandatory CSR Disclosure on Corporate Profitability

EU Directive 2014/95/EU - Panel Data Analysis

Executive Summary

Main Finding

-0.1419

CSR disclosure reduces ROA by 0.14 units (p = 0.0024)

31,168
Observations
3,430
Firms
10
Years (2012-2021)

Research Question

Does mandatory CSR disclosure impact firm profitability (measured by ROA)?

Positive Theory: Enhanced reputation and stakeholder trust improve profitability
Cost-Based Theory (Supported): Compliance costs reduce short-term profitability

Methodology

Data

Panel data of European firms from Refinitiv Eikon (2012-2021)

Model

ROA = CSR_Indicator + Leverage + Market_to_Book + Log_Assets + Firm_FE + Year_FE

Variables

Variable Definition
ROA Operating Income / Total Assets
CSR Indicator 1 if CSR reported, 0 otherwise
Leverage Total Assets / Total Liabilities
Log Assets ln(Total Assets)
Market-to-Book Market Value / Total Assets

Approach

Descriptive Statistics

Variable Mean Std. Dev. Min Max
ROA -0.053 2.247 -329.25 10.70
Leverage 9.150 215.23 -1,433 26,914
Log Assets 12.06 2.53 0 20.06
Market-to-Book 0.003 0.136 0 23.4
CSR Indicator 0.237 0.426 0 1
Key Insight: 23.7% of firms disclosed CSR reports. Larger firms are significantly more likely to disclose (correlation = 0.65).

Key Correlations

Variables Correlation
Log Assets ↔ CSR Indicator 0.649
Market-to-Book ↔ ROA -0.364
Log Assets ↔ ROA 0.110

Regression Results

Fixed Effects Model (Main Results)

Variable Coefficient Std. Error p-value Sig
CSR Indicator -0.1419 0.0468 0.0024 ***
Market-to-Book -5.7206 0.3564 0.0000 ***
Log Assets 0.6708 0.2388 0.0050 ***
Leverage 0.000009 0.000009 0.308 NS

Model: R² = 0.154 | F = 74.11 (p < 0.001) | N = 31,168 | Firms = 3,430

Model Comparison

Model CSR Coefficient p-value
OLS -0.287 0.000
Fixed Effects -0.142 0.0024
Winsorized FE -0.026 0.000
Robustness: Negative effect is significant across all specifications

Key Findings

CSR Impact
-0.14
ROA Reduction
Firm Size
+0.67
ROA Increase

1. CSR Disclosure Reduces Profitability

CSR disclosure reduces ROA by 0.14 units (p = 0.0024). This supports the cost-based theory: compliance costs outweigh short-term benefits.

2. Larger Firms More Profitable

Larger firms show higher profitability (+0.67 per unit of log assets) and are more likely to disclose CSR.

3. Market Expectations vs. Reality

High market-to-book firms have lower current ROA (-5.72), reflecting growth expectations.

Why Negative?

Implications

For Policymakers

For Investors

For Firms

Limitations

Reverse Causality

Profitable firms may be more likely to engage in CSR voluntarily.

Omitted Variables

Management quality and corporate culture not observed.

Measurement

CSR indicator is binary; doesn't capture quality or intensity.

Short-term Focus

Long-term benefits (reputation) not captured in current data.

Future Research

Conclusions

Mandatory CSR disclosure imposes measurable short-term costs on firms. Strategic CSR integration, rather than pure compliance, offers the best path forward.

Main Takeaways

  1. CSR reduces short-term profitability (-0.14 ROA units, p = 0.0024)
  2. Larger firms are more profitable and better positioned for CSR
  3. Effect is robust across multiple model specifications
  4. Policymakers must balance social responsibility with economic sustainability