The adoption of CSR strategies has a signaling effect on the market because it allows each bank to gain a differentiation advantage and the trust of investors. The resource-based view assumes that corporate reputation is an intangible asset that is valued by markets, regulators, and society (Lourenço et al., 2014). Reputation is a synonym of moral capital, which stems from corporate philanthropy and community involvement (Godfrey, 2005). Banks that want to develop their reputational capital will communicate that a bank’s role in society goes “beyond profits” (Gangi et al., 2019). Scholtens and Dam (2007) report that the signaling function carries some costs that can be tolerated primarily by larger banks. Financial institutions that intend to signal their CSR commitment expect that reputational benefits will outweigh the short-term costs by enhancing brand awareness with customers and business partners (Wu and Shen, 2013). The “positive synergy hypothesis” (Preston and O’Bannon, 1997) implies that CSR practices are expected to create and strengthen the reputation of banks (Forcadell and Aracil, 2017). Reputation is also a strategic resource that is difficult to imitate (Dell’Atti and Trotta, 2016) and borrowers will even pay a premium on loan rates to banks that enjoy the reputation of being a “high-quality, low-loss” lender (Kim et al., 2005). This proves that CSR initiatives should be accompanied by a good reputation in order to generate a competitive advantage and higher financial performance (Zhu, 2014). 

 There is a stream of theory and research that has cast doubt on the positive relationship between CSR and financial performance, but not specifically related to banks. When the investors’ demand 

for short-term profitability is stronger, the management may choose to pay less attention to other categories of stakeholders (Birindelli et al., 2015). “Neutral” investors are those who form 

portfolios without a preoccupation with environmental and social policies. These investors assume that CSR practices divert company resources and increase agency problems (Callado-Mu~noz and Utrero-Gonz_alez, 2011; Chih et al., 2010). For example, insider initiated corporate philanthropy is not motivated by stakeholder demands but reflects the Chief Executive Officer’s desire to engage in philanthropy on the company’s money (Benabou and Tirole, 2010). This type of philanthropy is usually considered the dark side of CSR from the perspective of investors. The “managerial opportunism hypothesis” suggests that CSR may be a form of window-dressing for poorly managed, low-performance companies (Preston and O’Bannon, 1997). In conclusion, agency theory posits that excessive philanthropic donations are an unjustified hazard and are the cause for not finding a strong positive link between CSR and financial performance (Barnea and Rubin, 2010; Jensen, 2001). 

 

The “social impact hypothesis” (Preston and O’Bannon, 1997) is derived from instrumental stakeholder theory and predicts a higher financial performance as a result of higher CSR. Satisfying the needs and demands of different stakeholders would lead to higher efficiency, product differentiation, and competitive advantage. Data analysis from global banks in 18 countries showed that CSR-prone banks outperform non-CSR banks in terms of profitability and efficiency (Shen et al., 2016). Also, an increase in the level of CSR is strongly associated with an increase in financial performance (Wu and Shen, 2013), because banks have different levels of propensity to engage in CSR activities (Wu et al., 2017). However, these relationships do not hold for all countries and legal environments. For example, the CSR levels of banks in 34 countries are positively associated with the adoption of the Equator Principles but are not significantly related to contemporaneous financial performance (Chih et al., 2010). It is expected that smaller and less profitable banks will be less inclined to engage in CSR activities, but the CSR-financial performance relationship is still unclear for large banks. 

 

 

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 Global Reporting Initiative, 2016. GRI Sustainability Reporting Standards. Amsterdam, The Netherlands. 

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