Carrot or Stick? CSR and Firm Financial Performance

In this study, we propose and test the relationship between CSR and firm financial performance, how this relationship differs between firms led by CEOs with political connections and those led by CEOs without political connections, and how this relationship differs between state-owned firms and nonstate-owned firms. Based on a sample of 1645 Chinese listed firms during the period 2011 and 2020 (inclusive), we find that CSR has an inverted U-shaped relationship with firm financial performance. As the level of CSR increases from slight to moderate, CSR is positively related to firm performance; as the level of CSR increases from moderate to great, CSR is negatively related to firm financial performance. Additionally, we find that this inverted U-shaped relationship differs between firms led by CEOs with political connections and those led by CEOs without political connections and differs between state-owned firms and nonstate-owned firms. That is, both the synergic effect (positive effect) of CSR on firm financial performance when the level of CSR is low and the competitive effect (negative effect) of CSR on firm financial performance when the CSR is high are more pronounced for firms led by CEOs without political connections and nonstate-owned firms than for firms led by CEOs with political connections and state-owned firms. The theoretical and managerial implications of these findings are discussed.