EFFECT OF CORPORATE SOCIAL RESPONSIBILITY ON THE FINANCIAL.pdf

KOTEBE METROPOLITAN UNIVERSITY
DEPARTMENT OF ACCOUNTING AND FINANCE
EFFECT OF CORPORATE SOCIAL RESPONSIBILITY ON THE FINANCIAL
PERFORMANCE OF SELECTED LARGE MANUFACTURING COMPANIES IN
BISHOFTU TOWN
BY:
TILAHUN GIRMA KEBEDE
ID/NO. PGR/15680/12
A RESEARCH THESIS SUBMITTED TO KOTEBE METROPOLITAN
UNIVERSITY SCHOOL OF GRADUATE STUDIES IN PARTIAL FULFILMENT
OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN
ACCOUNTING AND FINANCE
Advisor: Tadele Tesfaye (Ass. prof).
June, 2021
Addis Ababa, Ethiopia.

EFFECT OF CORPORATE SOCIAL RESPONSIBILITY ON THE FINANCIAL
PERFORMANCE OF SELECTED LARGE MANUFACTURING COMPANIES IN
BISHOFTU TOWN
By:
Tilahun Girma kebede
ID/No. Pgr/15680/12
A RESEARCH THESIS SUBMITTED TO KOTEBE METROPOLITAN
UNIVERSITY SCHOOL OF GRADUATE STUDIES IN PARTIAL FULFILMENT
OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN
ACCOUNTING AND FINANCE
Advisor: Tadele Tesfaye (Ass. prof).
June , 2021
Addis Ababa, Ethiopia

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STATEMENTS OF DECLARATION
I, Tilahun Girma Kebede, the undersigned, declare that, “Effect of Corporate social
responsibility on financial performance of large manufacturing company: in case of
Bishoftu Town” is my original work. I have undertaken the research work independently
with the guidance and support of the research advisor. The study has not been submitted for
any degree or diploma program in this or any other institutions and that all source of
materials used for this thesis has been duly acknowledged.
Name: Tilahun Girma Kebede
Signature

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STATEMENT OF CERTIFICATION
This is to certify that Tilahun Girma has carried out his research work on the topic entitled
“Effect of Corporate social responsibility on financial performance: in case of Bishoftu
Town”. The work is original in nature and is suitable for the submission for the reward of
MSc Degree in Accounting and Finance.
Advisor: Tadele Tesfaye. (Ass. p)
Signature Date

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KOTEBE METROPOLITAN UNIVERSITY
DEPARTMENT OF ACCOUNTING AND FINANCE
EFFECT OF CORPORATE SOCIAL RESPONSIBILITY ON FINANCIAL
PERFORMANCE OF LARGE MANUFACTURING COMPANY: THE CASE OF
BISHOFTU TOWN
BY:
TILAHUN GIRMA
Approved by Board of Examiners:
Chairperson Signature Date
External examiner Signature Date
Internal Examiner Signature Date
Principal advisor Signature Date

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ACKNOWLEDGMENT
First and foremost, I want to thanks the Almighty Lord for bestowing me the endurance and
courage of going through in my whole life. Next to my God the completion of this thesis
involved kindly contribution, support and encouragement of many people. I am indebted to
all who encouraged me in the process and gave me the courage when I was really in need. It
is a pleasant aspect that I have now the opportunity to express my gratitude for them next to
almighty God.
Secondly my special thanks go to my advisor Ass. Professor Tadele Tesfaye for his valuable
guidance and sincere advice. His constructive comments, helpful hints, suggestions, tactful
advisory techniques and encouragement throughout the process of this thesis research work
were invaluable.
Finally, I would like also to express my gratitude to my friends, for their unlimited advisory
as well as moral support starting from the beginning up to the end. And my gratitude’s also
goes to all people involved directly or indirectly for the accomplishment of this paper.

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ACRONYMS
CSR- Corporate Social Responsibility
EU- European Union
ISO- International Standards organization
OLS- ordinary Least Square
LMC- Large manufacturing company
ROA- Return on Asset
ROCE- Return on Capital employed.
ROE- Return on Equity
WBCSD- World Business Council for Sustainable Development

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TABLE OF CONTENTS
ACKNOWLEDGMENT............................................................................................................iv
ACRONYMS..............................................................................................................................v
LIST OF TABLES.....................................................................................................................ix
LIST OF FIGURES ....................................................................................................................x
ABSTRACT...............................................................................................................................xi
CHAPTER ONE.........................................................................................................................1
1. INTRODUCTION............................................................................................................1
1.1. Background of the study...................................................................................................1
1.2. Statement of the Problem .................................................................................................4
1.3. Objectives of the study.....................................................................................................7
1.3.1. General objective ..................................................................................................7
1.3.2. Specific objectives ................................................................................................7
1.4. Research hypothesis .........................................................................................................8
1.5. Significance of the study..................................................................................................9
1.6. Delimitation/Scope of the study.......................................................................................9
1.7. Limitation of the study ...................................................................................................10
1.8. Operational definition.....................................................................................................11
1.9. Organization of paper.....................................................................................................11
CHAPTER TWO ......................................................................................................................13
2. REVIEW OF LITERATURES.......................................................................................13
2.1. Theoretical Literature Review........................................................................................13
2.1.1. Definition of Corporate Social Responsibilities (CSR) ......................................13
2.2. Theories of Corporate social responsibility (CSR) ........................................................14
2.2.1. Classical View Theory (Friedman 1970)............................................................14
2.2.2. Agency Theory....................................................................................................15
2.2.3. Legitimacy Theory..............................................................................................16
2.2.4. The Stakeholders theories (Freeman 1983) ........................................................17
2.2.5. Carroll’s CSR Pyramid .......................................................................................18
2.2.6. Source: Carroll (2016) Business ethics with little modification.........................19
2.2.7. Economic Responsibility ....................................................................................19
2.2.8. Legal Responsibility ...........................................................................................19
2.2.9. Ethical Responsibilities.......................................................................................20

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2.2.10.Philanthropic Responsibilities.............................................................................20
2.2.11.Instrumental Theory............................................................................................20
2.3. Corporate social responsibility practice in Ethiopia.......................................................21
2.4. Benefits of Corporate Social Responsibility ..................................................................23
2.5. Financial performance....................................................................................................24
2.5.1. Return on Asset...................................................................................................24
2.5.2. Return on equity..................................................................................................25
2.6. Corporate social responsibilities Practice and Financial performance...........................25
2.7. Empirical evidence on the CSR –Financial performance relationship...........................26
2.7.1. Empirical Evidence Ethiopian case.....................................................................28
2.8. Gaps in literature ............................................................................................................29
2.9. Conceptual Framework of the Study..............................................................................29
CHAPTER THREE ..................................................................................................................31
3. RESEARCH METHODOLOGY ...................................................................................31
3.1. Introduction ....................................................................................................................31
3.2. Description of the study area..........................................................................................31
3.3. Research Design.............................................................................................................32
3.4. Research Approach.........................................................................................................32
3.5. Population of Study........................................................................................................33
3.6. Sample Design................................................................................................................33
3.7. Type and Source of Data................................................................................................34
3.8. Data Collection Methods................................................................................................34
3.9. Variable Definition and Their Measurement..................................................................35
3.9.1. Dependent Variable: Financial performance ......................................................35
3.9.2. Independent Variable: corporate social responsibilities (CSR) ..........................35
3.10. Method of Data Analysis and Presentation ....................................................................37
3.11. Model Specification .......................................................................................................37
3.12. Ethical consideration ......................................................................................................38
CHAPTER FOUR.....................................................................................................................41
4. DATA ANALYSIS, PRESENTATION AND DISCUSSION ......................................41
4.1. Introduction ....................................................................................................................41
4.2. Inferential Analysis ........................................................................................................41
4.2.1. MulticollinearityTest...........................................................................................42

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4.2.2. Normality Test ....................................................................................................43
4.2.3. Heteroskedasticity Test.......................................................................................44
4.2.4. Serial (Auto) Correlation Test.............................................................................46
4.3. HausmanSspecification (fixed effect and random effect) Test ......................................47
4.4. Correlation Analysis.......................................................................................................48
4.5. Regression analysis and Hypotheses testing ..................................................................50
4.5.1. Regression analysis.............................................................................................50
4.5.2. Hypothesis testing...............................................................................................54
CHAPTER FIVE ......................................................................................................................56
5. CONCLUSION AND RECOMMENDATIONS ...........................................................56
5.1. CONCLUSION ..............................................................................................................56
5.2. RECOMMENDATIONS ...............................................................................................57
5.3. SUGGESTIONS FOR FURTHER STUDIES ...............................................................58
REFERENCE............................................................................................................................60
APPENDIX : RATIO DATA OF SAMPLED LMSC USED FOR ANALYSIS.....................69

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LIST OF TABLES
Table 1:Variables and Their Measurement.................................................................................36
Table 2:Multicollinearity test: Variances inflation factor...........................................................42
Table 3:Normality Test Jarque-Bera...........................................................................................43
Table 4: Heteroskedasticity test: Breusch-Pagan / Cook-Weisberg test.....................................45
Table 5:Serial (auto) correlation test: Durbin- Watson statistics................................................47
Table 6:Model Specification: Hausman Test..............................................................................48
Table 7: Correlation matrix of dependent and independent variables ........................................49
Table 8:Fixed effect model regression result..............................................................................50
Table 9: Summary of expected and actual signs of explanatory variables.................................55

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LIST OF FIGURES
Figure 1: The Stakeholders theories (Freeman 1983)........................................................18
Figure 2: Carroll’s Pyramid of corporate social responsibilities .......................................19
Figure 3: Conceptual framework .......................................................................................30
Figure 4: Normality Test Jarque-Bera ...............................................................................44

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ABSTRACT
This Study aimed to examine effects of corporate social responsibility on financial
performance of large manufacturing companies of Bishoftu town. Thus, study used
documented analysis of companies’ financial statement. To achieve study objective using
purposive sampling method, researcher selected a sample of fourteen companies covering
period of seven years data (2014-2020) with the total of 98 observations. The study applied
Explanatory research design with quantitative research approach and fixed effect model of
panel data were used to estimate, test a series of hypotheses and analyse collected data.
Return on asset (ROA) was dependent variable while the explanatory variables were
corporate social responsibility dimension; economic, legal, ethical and discretionary
responsibilities were used. The study conducted a correlation and regression analysis using
Stata-15 software in order to determine the relationship between corporate social
responsibilities and financial performance of sampled firms. The results show that economic
responsibility have positive and significant effects on financial performance, while legal and
philanthropic have insignificant effects. However, among the hypothesized financial
performance determinants ethical responsibility, of the firm were found to have negative
significant effect on financial performance of, large manufacturing company.
Recommendations emanating from the study are to participate in economic CSR practices
not only to survive in the business but also to earn favourable profit.
Keywords: Corporate social responsibilities, CSR dimension, financial performance

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CHAPTER ONE
1. INTRODUCTION
This chapter discusses about background of the study, Statement of Problem, objectives
and Research hypothesis that students have proved or disproved in analysis part of the
study, scope and significance of the study, Limitation of the study, operational definitions
and organization of the paper are the parts which are included on this chapter.
1.1.Background of the study
Organization is a social unit that is structured and managed to meet a need or to pursue
collective goal and have a management structure which determines the relationship
between the different activities and the members. One of the most important
organizational elements highlighted by this definition is that organizations are indeed
open systems, thus they must interact with the environment in order to survive.
Organization has to find and obtain needed resources, and act on environmental changes,
dispose of outputs, and coordinate internal activities in the face of environmental
disturbances (Morris & Woods 2001).
While the business organization operates to achieve their goals and objectives, they
cannot operate separately from the environment and societies in which they are apart.
They can need the use of factors of production and other facilities of society. The
economic efficiency of organizations is affected by governmental, social, technical and
cultural variables. In return, the society is in need of goods and services created and
supplied by organizations including creation and distribution of wealth. Organizations
survival is therefore dependent upon a series of exchanges with environment. (ibid ).
No firm can exist in loneliness; it needs a community it operates with in terms of location
for its successful operation Gunu, (2008). Moreover, Oba, (2009) notes that Corporate
Social Responsibility has been a rising dimensions in accounting theory and practice
since 1970‟s and the accounting profession has been involved in the struggle to ensure
that CSR expenditures are accounted for and adequately disclosed in the annual reports of
financial statement.

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CSR has been defined in many ways by researchers to incorporate environmental
dimension, relationship with the society, ethical and voluntary dimensions, socio-
economic aspects, and relationships with various stakeholders. While there are varying
definitions of CSR in essence, it can be considered an extension of firms‟ efforts to
ensure effective corporate governance using sound business practices.
For instance EU Official Definition of CSR refers to the voluntary integration of
companies‟ social and ecological concerns into their business activities and their
relationships with their stakeholders. Accordingly being socially responsible means not
only fully satisfying the applicable legal obligations but also going beyond and investing
„more‟ in human capital, the environment, and stakeholder relations. Similarly ISO 2600
define CSR as the responsibility of an organization for the impacts of its decisions and
activities on society and the environment, resulting in ethical behavior and transparency
which contributes to sustainable development, including the health and well-being of
society; takes into account the expectations of stakeholders; complies with current laws
and is consistent with international standards of behavior; and is integrated throughout the
organization and implemented in its relations.”
In the business area World Business Council for Sustainable Development (WBCSD)
defines CSR as "the commitment of business to contribute to sustainable economic
development, working with employees, their families and the local communities”. This
entails that businesses have not only economic responsibilities but also responsibilities to
the members of the society both within and outside the organization involving social,
environmental and ethical responsibilities. Hence the fundamental idea of CSR is that
business corporations have an obligation/a responsibility for their impact on society and
the natural environment, often beyond legal compliance and the liability of individuals.
CSR is a strategies employed by firms to conduct their business in a way that is ethical,
society friendly and valuable to community in terms of development Ismail, (2009).
Although many firms use CSR, many others still consider the society and environment to
be the smaller domain within the economy circle. Furthermore, because stakeholders and
investors demand that companies become more socially and environmentally responsible.
Top management find that they under great pressure to adopt CSR in order to attract such
stakeholders and investors (Berete, 2011).

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Mullins (2010) contributed to the debate on CSR by showing that it is a scheme that
business adopt to enable firm to attain and exceed stakeholder‟s expectations. This goes
past the common duties of profit, revenue & legitimate duties. CSR is hence assigned to
include employee relations, public investments, ecological practices, human rights &
moral behaviour.
A more comprehensive definition was obtained from Pour et al. (2010) as cited by Mary
who suggest that businesses should not only be responsible for making maximum profit,
but should also protect the environment and contribute to the wellbeing of societies .This
could only be achieved if it conducts socially responsible businesses and help solve
societal issues. Therefore, there should be some practical roles that the organizations must
play for its impact to be felt by the community where the business operates. Although it
entirely depend on the performance level of the organization (i.e. return on equity, return
on assets, net current assets, profit after tax, total turnover, earning per share, return on
investment, net asset per share, book value per share, e t c) being an indicators of
performance.
CSR can be taken as a major portion of companies business strategies which they set in
operation. For the firm paying attention for CSR activities it will be a big chance to get
both operational efficiency as well as image benefits. Societies are becoming more aware
of the social and environmental effects of their consuming habits, hence it be projected
that innovative and responsible companies will continue to do well in the future, as their
actions affect the purchasing behavior of customers.
Financial performance is a subjective measure of the responsibility of a substance for the
consequences of its approaches, operations, and exercises evaluated for a recognized
period in budgetary terms. Profitability is one of the indicators of financial performance.
Profitability of the firm is defined as the state or condition of yielding a financial profit or
gain Alshatti, (2015).
Profitability is measured by Return on Assets (ROA), Return on Equity (ROE) among
others. ROA measures gainfulness for all supporters of capital while ROE measures the
rate of profit for the proprietors value utilized in the business. It shows the rate of giving
back that the administration has earned on the capital gave by shareholders in the wake of

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bookkeeping in instalments to all other capital providers Anitha A. (2018). It has also
been the primary concern of business practitioners in all types of organizations since
financial performance has implications for organization's health and ultimately its
survival. High performance reflects management effectiveness, and efficiency in making
use of company's resources and this, in turn, contributes to the country's economy at
large.
In Ethiopian case some researcher Selam 2017, Fentaye 2018, Mathias, 2016) have
summarized that as there is limitation in understanding and application of CSR activities.
It can be concluded that in Ethiopia, there is no general aversion to the concept of CSR
and the CSR label has been applied to many initiatives and political programs without any
effective strategic discussion never having taken place this is due to the fact that the
Ethiopian‟s public policymakers have never developed a strategic concept on the topic of
Corporate social responsibilities.
The existing business environment for manufacturing firms is characterized by
considerable changes and globalized competition that occurred, among other things, due
to technological advancements frequent innovations as well as rapid developments in
supply chains and increasing trend of outsourcing of manufacturing activities to external
(specialized) entities(Bourne, et al 2003).
Thus by having the concept of CSR and understanding that it is very important to have
awareness of differences in understanding and usage of CSR definitions and concepts. By
means firm cannot function if employees and environment are affected this research have
the basic aim of summarizing the effect of CSR which can be Philanthropic, Ethical legal,
Economic on financial performance of large manufacturing companies of Bishoftu town.
1.2.Statement of the Problem
In the world, all type of business including manufacturing, merchandising, and service
business discharge several socially responsible activities, such as donations to tertiary
institutions, health institutions, promoting friendly and clean environment and developing
human capital. Whether these activities can have positive contribution to thebusiness
profitability, there are limited interests by scholars and policy makers to examine this

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question. According to Pranjali (2011), ‘The World Business Council for Sustainable
Development (WBCSD)’ described that CSR as a contribution to sustainable economic
development. It is said that there is no way to avoid paying serious attention to CSR for
the costs of failing are simply too high thus banks cannot do this alone without involving
the community who are the customers. Carroll 1979 had developed the first integrated
corporate social performance model including economic, ethical, legal and philanthropic
aspects. Wartick and Cochran (1985) later advanced Carroll’s ideas with the additional
element of social issues management. Perhaps the most significant corporate social
performance model is that of Wood (1991) who added an action component to this model.
Wood (1991) defined CSR as a business organization’s configuration of principles of
social responsibility, processes of social responsiveness and policies, programs and
observable outcomes as they relate to the firm’s societal relationships.
According to Abdurrahman, S. (2013) CSR has gained acceptance globally to the extent
that in many cases the level of implementation by companies have been positioned as a
yardstick for measuring performance and for winning international honours. CSR is
formed and defined using the three principles of social legitimacy (institution level),
public responsibility (organization level) and managerial discretion (individual level),
which link the principles of the CSR to the domains which explains and define the CSR
principle which include; economical, legal, ethical and discretionary (Wood, 1991).
Chathuranga S. and Roshan(2018) on their paper relationship between CSR and financial
performance analyse the relationship by drawing on stake-holders theory, agency theory
legitimacy theory and information asymmetric theory. Finally, they concluded that there
is positive and significant effect of CSR on firm’s financial performance by using
structural equation modelling.
Novrianty& E. Kartikanigdy 2015, khurshid 2015, Ibrahi, 2016 and other scholars
similarly agreed that CSR have positive and significant contribution to financial
performance of the firm by taking corporate social activities as dependent variable and
financial performance as independent variable. Some of those scholars express the
financial performance in financial ration like return on equity (ROE), return on asset
(ROA), and net profit margin (NPM).

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Mary (2016) undertook other study on effects of CSR on financial performance of firms
listed in the Nairobi securities exchange in Kenya with use of multiple regression models.
The study were conducted by targeting 66 publically listed companies of which complete
and data was collected from 14 companies by having the basic aim of investigating the
effect of CSR on financial performance. The finding of the research was that none of the
variables strongly correlated. The study concluded further that a positive but insignificant
relation existed between CSR and financial performance.
Mungai 2015 is researcher who conducted a research on effect of CSR on financial
performance of manufacturing companies in Kenya with use of multiple regression
models. The study was conducted by taking 68 target-manufacturing companies in Kenya
by using secondary data. Finding of his study showed that CSR has no significant effect
on the financial performance (ROE) of the manufacturing companies in Kenya.
Dakito A. (2017) is another researcher who carried out his research on impact of CSR
practices on financial performance of Ethiopian banking sector by using a mixed research
approach and multivariate econometric model targeting all banking firms in Ethiopia and
lastly concluded that there is no relationship between the CSR practices and financial
performance of banking sectors
From the literatures reviewed above there are plenty of researches conducted regarding
the effect of CSR on financial performance of the firm by taking corporate social
responsibilities as independent variable and firm’s profitability as dependent variables.
However those studies comes with different conclusion most of them ends up their
conclusion by summarizing that CSR activities are positively related with financial
performance for instance Chathuranga S. and Roshan (2018), Novrianty& E.
Kartikanigdy (2015), khurshid (2015), Ibrahi, (2016), Mary (2016)another part concludes
that it will negatively related to financial performance Mungai (2015). Additionally there
are also some scholars concluding that there is no relationship between corporate social
responsibilities and firms financial performance Dakito A. (2017).These contradictory
findings reveal that there is inconsistency among research findings on the effect of CSR
on financial performance.
A number of studies have examined the effect of CSR in different countries around the
world. For instance Safiya (2018), Marly (2016), Lorwood (2012), Mwai (2013),

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KlenJohhana (etal. 2013), Novrianty& E. Kartikanigdy (2015), Khurshid (2015), Ibrahi
(2016), Chathuranga S., and Roshan (2018) ,Birhanu M. (2018), Selam (2017) and
Kassaye (2006). Even though all these and other researchers conducted study on this
area, the effects of CSR are still unsolved issues. Evaluation of CSR, generally in the
world particularly in Ethiopia has attracted augmented attention over the past periods.
Meanwhile, little has been done.
Despite the significant consequence of the CSR in the manufacturing sector on finical
performance, adequate researches have not been conducted, particularly regarding the
effect of CSR on financial performance in developing country likeEthiopia. To the extent
of the researcher knowledge, at domestic level, only few researches have been conducted
onthis issue. Some of the researches include the Analyses the Effect of Corporate Social
Responsibility Practices on Customer Satisfaction in Addis Ababa (Selam Solomon,
2017), and the Impact of Corporate Social Responsibility Practices on Financial
Performance of Banking Sector in Ethiopia in Addis Ababa (DakitoAlemu, 2017).
However, these studies are undertaken out of Bishoftu Town. That is there is context
(geographical) gap to be filled by other studies. Furthermore, previous studies regarding
the issue did not cover all variables or factors of CSR affecting the performance of
businesses. Rather they mainly focused on economic and philanthropic
aspects.Thereforetheorygap called for other researches. Therefore, the researcher has been
motivated to consider such context and theory gaps. Regarding the theory gap, the
researcher applied all the four pillars of CSR developed by Carroll, which include
economic, legal, ethical and philanthropic responsibilities.
1.3.Objectives of the study
1.3.1. General objective
This paper have general objective of examining the effects of corporate social
responsibilities (CSR) on financial performance evidence from large manufacturing
companies of Bishoftu town
1.3.2. Specific objectives
 To study the effect of economic dimension of CSR on financial performance of
sampled large manufacturing companies.

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 To examine the effect of legal dimension of CSR on financial performance of sampled
large manufacturing companies.
 To analyse the effect of ethical dimension of CSR on financial performance of large
sampled manufacturing companies.
 To investigate the effect of philanthropic dimension of CSR on financial performance
of sampled large manufacturing companies.
1.4.Research hypothesis
Hypotheses are testable assertion about a relationships between two or more concepts, it
is not necessarily statement about reality, is something to be proved or disproved
(Matthews, 2010). Based on the literature review, there seems to be more studies
reporting a positive association between CSR and financial performance. Margolis and
Walsh’s review (2003) they did conduct studies and reported that there is a positive
relationship between financial performance and CSR. Safiya (2018) in his work effect of
CSR on profitability of listed deposit money banks in Nigeria verified the effect of CSR
on profitability by using the variable of net profit margin, return on total asset, and return
on equity to define profitability the studies summarize that CSR have significance and
positive effect on profitability. Lorwood (2012) in his study about the relationship
between Corporate Social responsibilities and financial performance of mobile telephony
firms in Kenya and concludes that there is a positive relationship between ROA and the
community, employee’s relations, environmental considerations and products
characteristics. Mwai (2013) conducted a study on the impact of the CSR on the
corporate financial performance in the corporate and NGO partnerships in Kenya. The
study tested the sign of the relationship between CSR and Corporate financial
performance in NGO-Corporate and found out a significant positive correlation between
CSR and Cash Conversion Cycle. Due to this fact, I hypothesized a positive association
between CSR and performance. In order to achieve the objectives of this research, the
following research hypotheses was formulated and tested in the study:
Hyphotheses1: Economic responsibility has positive and significant effect on financial
performance of large manufacturing companies.
Hyphotheses2: Legal responsibility has positive and significant effect on financial

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Hyphotheses3: Ethical responsibility has positive and significant effect on financial
Hyphotheses4: Philanthropic responsibility has positive and significant effect on
financial performance of large manufacturing companies.
Hyphotheses5: Liquidity has negative and significant relationship effect on financial
Hyphotheses6: Leverage has negative and significant relationship effect on financial
Hyphotheses7: Capital intensity has negative and significant relationship effect on
financial performance of large manufacturing companies
1.5.Significance of the study
The fundamental purpose of this research study is to find out the effect CSR on financial
performance by gathering evidence from large manufacturing companies found in
Bishoftu town. In turn, the findings of the research will expected to add the existing
knowledge on the area of CSR practice and its relation to performance of large
manufacturing companies of Bishoftu town Administration. The results of this study can
produce relevant material for scholars relating to CSR and profitability. This study also
fills literature gap by investigating the effects of CSR on profitability of large
manufacturing companies of Bishoftu town. The results expected to provide useful
evidence to other emerging sectors such as insurance, banking industries that are closely
operated by using societies as customers.
1.6.Delimitation/Scope of the study
It is assumed that the scope of the study must show the borderline of any research.
Moreover scope of the study of any research must indicate areas that were covered within
the study. Scope of study could also be issue specification or variables specification,
space or area specification and time reference specification.
Time period specifications: since this study is going to be carried out by researcher’s
own budget and to finalize the study within designated time this study is going to be

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conducted and restricted to analyse the effect CSR on financial performance large
manufacturing company only over the year from 2014 to 2020 G. c.
Geographical Scope: In terms of the Universe of the study, the study will be limited to
single business sector specifically by focusing on the large manufacturing firm, which is
located in Bishoftu town Administration. There are such large amounts of manufacturing
company that are found in Ethiopia but it will be difficult to induce their full information
to incorporate them within the study. Therefore, the researcher delimits this study to
Bishoftu town administration and excludes such varieties of micros and enormous
organizations. The reason for selecting Bishoftu town administration is that; a number of
manufacturing companies are formed and operating in this town. In doing so, all large
manufacturing company only found in bishoftu town administration.
Variables specification: this study will go to limit itself on evaluating only the effects of
corporate social responsibility on financial performance. There are plenty of determinants
that can hinder the financial performance of manufacturing firm for instance sales
volume, quality of product, and others. For the sake of this study, the paper will focus
only on the effect of CSR on financial performance of manufacturing companies of
Bishoftu town by taking the four pillars developed by carrol namely Economic, Legal,
Ethical and Philanthropic responsibility as independent variables and liquidity, leverage
and capital intensity was used as controlling variable
1.7.Limitation of the study
The major limitations that hamper the study were resource constraint, lack of organized
database for manufacturing companies’ annual report.
Lack of sufficient previous research studies specific to the study area in Ethiopia and
availability of sufficient current literature on the topic were some of the constraints.
Therefore, the researcher tried to solve this problem by using other country journals,
literatures and findings as supporting documents
Besides while carrying out this study, CSR measured using financial spending but CSR
can have several magnitudes and can accomplished in several ways other than just
financial spending. However, due to time and budget constraints, only financial spending
were used to measure CSR practice among the large manufacturing companies of

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Bishoftu town.. Non-financial corporate social responsibilities exertion like, man hours in
planting trees, cleaning the environment, fair employment practices adopted by
management, were not included in the study in relation to financial performance. There is
a possibility that if those aspects of CSR above taken into account, the results of the study
may probably be different.
1.8.Operational definition
Corporate Social Responsibility: it has been defined in many ways by researchers to
incorporate environmental dimension, relationship with the society, ethical and voluntary
dimensions, socio-economic aspects, and relationships with various stakeholders. While
there are varying definitions of Corporate Social Responsibility (CSR), in essence, it can
be considered an extension of firms’ efforts to ensure effective corporate governance
using sound business practices
Economic Responsibility: produce “goods and services that the society wants and sell
them at a price that society thinks represent their true values”, this eventually benefits the
company with profits.
Ethical Responsibility: behaves morally, it portrays business as being moral, and doing
what is right, just, and fair.
Legal Responsibility: obey the law, entails expectations of legal compliance. “From this
perspective, society expects business to fulfil its economic mission within the framework
of legal requirements
Philanthropic Responsibility: be a good corporate citizen, the roots of this type of
responsibility lies in the belief that business and society are intertwined in an organic way
which involves emphasis on charity, sponsorships, & employee voluntarism.
1.9.Organization of paper
This paper was organized in to five chapters. The first chapter stated the general
introduction of the topic as general including background of the study, Statement of the
problem, Objectives of the study, hypothesis formulation, Significance of the study,
Scope and limitation of the study and organization of the study.

12
Chapter two presented the literature review regarding the research area of corporate
social responsibilities and its impact on firm’s performance and standout the theoretical
foundations for the paper, concepts and theoretical framework, empirical literature, as
well as discussions on corporate social responsibility model. The third chapter outlined
the methodology part which will elaborate research design and methodology: the type and
design of the study. This chapter was also discussed about research method sampling
technique, data collection method and method of data analysis that was used in the study.
Discussion and analysis of the results was presented in chapter four. The last chapter was
drawn conclusions and recommendations.

13
CHAPTER TWO
2. REVIEW OF LITERATURES
2.1.Theoretical Literature Review
The theoretical review aims at giving the meaning of a basic terminologies, theories and
creating a comprehensive theoretical framework for the study. The following sub sections
will present definition of Corporate Social Responsibilities (CSR), review theories that
help in defining and understanding Corporate Social Responsibilities, Corporate social
responsibilities Practice and Financial performance, Benefits of CSR, objectives of CSR
empirical reviews and conceptual framework of the study.
2.1.1. Definition of Corporate Social Responsibilities (CSR)
Bowen (1953) who is recognized as the “Father of CSR” expressed a foundational
definition of the social responsibility of business as “the obligations of businessmen to
pursue those policies, to make those decisions, or to follow those lines of action which are
desirable in terms of the objectives and values of our society”. The second founder of
CSR Davis (1973) formulated the “Iron Law of Responsibility,” by stating, “Companies‟
avoidance of social responsibility leads to gradual erosion of social power” (Carroll,
2016).
According to Radu (2008) on his book, “The dynamics of CSR” disclose that discussions
about the role of business in society use the term ‘CSR’ in two different ways. On the one
hand, CSR refers to a managerial strategy through which managers voluntarily respond to
social expectations and pressures. On the other hand, CSR highlights fundamental
concerns about accountability of corporations to society. In CSR as ‘accountability’, the
focus is on corporate responsibilities that lawmakers should define and impose on all
companies. While there is no universal definition of CSR, it generally refers to
transparent business practices based on ethical values, compliance with legal
requirements, and respect for people, communities, and the environment. Thus, beyond
making profits, companies are responsible for the totality of their impact on people and
the planet. “People” constitute the company’s stakeholders its employees, customers,
business partners, investors, suppliers and vendors, the government, and the community.

14
Increasingly, stakeholders expect that companies should be more environmentally and
socially responsible in conducting their business.
According to Loew, (2004) CSR is “The principle that business should contribute to the
welfare of society and not be solely devoted to maximizing profits.” This definition
means that the highest priority of management should not only be the maximization of
profits but at the same time, and with the same consideration, the dedication to support
the society in which they operate. It is usually interpreted as “social responsibilities of the
firm had to reflect the expectations and values of the society”.
2.2.Theories of Corporate social responsibility (CSR)
There are several theories trying to figure out the company responsibilities to the society.
They are grouped in to two groups, that is, those that suggest a positive relationship
between CSR and corporate financial performance and those that show a negative
relationship. This incorporates classical view theory, agency theory, legitimacy theory,
the stakeholder’s theories, Carroll’s pyramid and instrumental theory
2.2.1. Classical View Theory (Friedman 1970)
Classical View Theory is theory that is considered as a traditional view that does not give
attention and motivates the firm to participate in CSR activities in order to maximize
profit for shareholder of business. Friedman (1970) propounded this theory and supported
this view on CSR by his statement “The responsibility of business is to maximize profits,
to earn a good return on capital invested and to be a good corporate citizenship obeying
the law no more and no less. To go further in a deliberate fashion is to exceed the
mandate of business. It is to make what amounts to an ideological stand with someone
else’s money and possibly, to engage in activities with which many stakeholders would
not agree.
This theory expresses an extreme thought in the capitalist’s economic system where
business organizations are only concerned with maximization of profit for shareholders
by conducting their activities within the limits set by the law. Accordingly, managers are
expected to focus only on profit maximization because they are the agents of the
shareholders and should strive towards maximization of shareholders wealth through
profit motive. (Falck&Heblich, 2007).A supporter of this theory Levitt, (1983) specified

15
that, as the major and primary goal of the firm is to maximize profits through hostile
competitive business strategies in whatever way that the law accepts to ensure survival of
the business, while social welfare should be left for the government to handle. The main
reasons why businesses will not participate in corporate social responsibilities is that
because of the benefit that can be gained from CSR activities hence it is benefit will not
exceed its cost to be incurred. There is small nature of direct economic benefit derived
from it at the expense of a huge amount of resource commitment to CSR activities
(Waddock&Graves, 1997).
This situation is also explained by Aupperle et al, (1985) where they came to the
conclusion that there is a negative relationship between CSR commitment and financial
performance in the short run because of additional expenditure resulting to loss.
According to Burke and Logsdon (1996) economic benefit should be the target or focus
of all CSR policies because CSR initiatives should serve as an avenue of getting profit
maximization to shareholders, where profits are unattainable CSR activities should be
stopped. Blowfield& Frynas (2005) cautioned on excessive commitment to philanthropic
responsibility, which signifies diverting shareholders wealth to non-economic activities
hence leaving the main objective of business unachieved.
Friedman’s classical view on CSR has generated a lot of interest by scholars leading to
conducting empirical studies to validate the argument been proposed. The scholars are
trying to bring a form of conformity between profit maximization (economic objective)
and CSR activities (non-economic objectives) by stating that CSR leads to increase in
financial performance at the long run (Garriga and Mele, 2004; Carroll &Shabana, 2010).
Similarly in this regard, (Margolis & Walsh, 2003) focused on the relationship between
CSR commitment and corporate financial performance and concluded that majority of the
studies showed a positive relationship.
2.2.2. Agency Theory
Ross (1973) was among the first scholars to propose the theory, which can be defined as
the association between the owners and the managers. The owners hire the manager to
perform work while owners of the company expect the agents to make decisions & act in
the principal’s interest. This theory relies on the notion that the sole responsibility of the

16
corporation is to maximize value of owners. Friedman (1962) uses this theory to explain
his criticism of CSR by arguing that managers are agents for the owners of the firm.
Gerrans and Murphy (2005) argue that managers should only accept projects that rise
stockholders wealth & reject else. From the agency theory point of view, CSR is a waste
of corporate resources Mc Williams and Siengel, (2005) & such resources can be used by
firms to involve in other profitable project by companies to maximize stockholders
wealth. Moral hazard and agency cost can also emerge when managers make decisions to
invest in CSR activities without any visible consequence.
2.2.3. Legitimacy Theory
Legitimacy theory is built upon the idea that business organizations operates in a
community through an implied or perceive agreement to perform some socially
responsible acts in order to survive within the community and achieve its objectives. This
theory require organization to continuously check whether their survival is serving the
public as they expect regarding the values they uphold and cherish. Communication is
very essential in legitimacy theory because the business organization need to provide only
what is needed and what is congruent to the norms, values and expectations of the
community, so that the organization can be an entity that is legitimately considered by the
community as a unit that serves them (Deegan, 2000).
Under this theory, communicating CSR initiatives is a source of initiating and protecting
organizational legitimacy. Pattern 1992 observed that there is a positive relationship
between disclosures of CSR initiatives and organizational legitimacy. (Deegan and
Rankin 1997; Brown and Deegan 1998) all concur to this finding. Previously, financial
performance is regarded as a yardstick for determining organizational legitimacy, but now
it is the way that the organization serves the community that determines it legitimacy to
survive.
Moir (2001) argued that legitimacy theory is a form of social contract that impliedly
exists between stakeholders and the business organization, its fulfilment determines the
survival of the organization. (Pallazo& Scherer, 2006; Dijken, 2007)expressed that
seeking for organizational legitimacy is now a critical area of concern to Multinational
corporations because the perception of NGO’s and host communities forces the MNC’s to

17
change their attitudes on human rights issues, child labor, forced labor, exposing workers
to unsafe working conditions etc.
2.2.4. The Stakeholders theories (Freeman 1983)
Earlier, a group of scholars has developed the idea that a business has stakeholders groups
and individuals who have a stake in the success or failure of the business. Stakeholders’
theory propagates that manufacturing and service companies should be socially
responsible for all their stakeholders, failure to which, can result to the stakeholders to
take actions and seek to find the legitimate claims and rights against the company actions.
The fundamental of this theory steps away from the shareholder capitalism orientations
that see business as an instrument for profit maximization (Freeman et al 1983).This
theory focus on the stakeholder of the company which include the suppliers, employees,
community, customers, shareholders and other person who contribute to the company
directly or indirectly. The theory emphasizes that the firm has a relationship with its
stakeholders and the processes and outcomes of these relationships are of interest Hillman
and Luce, (2001). It presents an alternative that has been very appropriate about the
parallel development CSR and sustainability in the business community. This theory
concerns how to manage a business effectively while creating shared value between a
company and its surroundings. This theory also support companies should be used as a
vehicle for coordinating stakeholders interest instead of maximizing the shareholders
wealth. As cited by Mary Njeri, Freeman and Reed 1983 identified two groups of
stakeholders; those that affect and can be affected by the firm and those that provide
support to the firm in form of resources. Stakeholder theory recognizes the long-term
effect that the actions of stakeholders may have on the company.
Pedersen 2004 sum-ups that value maximization of stakeholder will maximize the value
of the company and Stakeholder relationship will be enhance trade. He underlines that,
for business perform to well, they must compact with a variety of constituents other than
its owners. Stakeholders of manufacturing companies want to see the company participate
in CSR programs while shareholders of manufacturing companies would want the
company to improve financially so that the CSR activities may continue to take place.
Stakeholder theory summarizes, as it is advantageous for the manufacturing companies to
participate in CSR activities that non-financial stakeholders perceive to be important,

18
because, absent this, these groups might withdraw their support for the firm hence affect
the financial performance of the manufacturing companies (Donaldson and Preston,
1995).
Figure 1: The Stakeholders theories (Freeman 1983)
Source; Company Stakeholders, inspired by Donaldson & Preston, (1995)
2.2.5. Carroll’s CSR Pyramid
Carroll initially developed the CSP model in response to Friedman’s critique and the
overall responsibility confusion among academics and managers. The CSP model
contained a three purpose: to define the essential aspects of CSR, (2) connect them to the
relevant social issues and (3) aid practitioners to choose a responsive corporate
philosophy to address those issues (Carroll, 2016)

19
Figure 2: Carroll’s Pyramid of corporate social responsibilities
2.2.6. Source: Carroll (2016) Business ethics with little modification
2.2.7. Economic Responsibility
Be profitable, providing a ROA to owners and shareholders, creating jobs and fair pay for
workers, discovering new resources, promoting technological advancement, innovation,
and the creation of new products and services. Profits serve as return on investments to
owners and shareholders resulting in jobs and fair pay for workers. “CSR model initially
seemed to them like a pyramid, the base of which is economic responsibility. Economic
responsibility for Carroll is a basic duty of the organization to carry out its functions in
the market for the provision of services /products to society and profit”. (Firuza S
Madrakhimova, 2013).
2.2.8. Legal Responsibility
According to Carroll (2016) because society has granted companies to assume the
productive role, they must always keep in mind that expectation exists for them to fulfill
their economic mission within the framework of legal requirements. Legal Responsibility
refers to the requirements that are placed on the firms by the law next to ensuring the
Be ethical
Obey the law
Be profitable in the long
run
un
Desired by
societies
Expected by
societies
Required by
societies
Required by
societies
Be a good corporate
citizen

20
firm’s viability by following all laws range from securities regulations to labor law,
environmental law and even criminal law.
2.2.9. Ethical Responsibilities
According to Carroll (2016) ethical responsibilities overcome the limitations of law
concerning the difficulty to legislate morality. Although the two first categories shall
always embody ethical behavior, there are activities and practices that are expected by the
society but not covered by legislation. This type of responsibility is duties that a company
puts on itself because its owners believe it's the right thing to do not because they have an
obligation to do so that embodies those standards, norms, or expectations that reflect a
concern for what consumers, employees, shareholders, and the community regard as fair,
just, or in keeping with the respect or protection of stakeholders’ moral rights.
2.2.10. Philanthropic Responsibilities
According to Carroll (2016) the last obligation concern responsibilities that society has no
clear-cut message for business, it is up to the individual company’s judgment and choice.
From this perspective, business is expected to contribute to enhanced quality of life in
society. It is the highest point of the pyramid which is much more based on volunteer
activities. Some scholars have concluded that this is the inherently driven activity of
companies to build smooth relationship with stakeholders. Philanthropic Responsibilities
of CSR includes giving donations for art, culture, education, peace & stability
promotions. It is important companies to work in a manner that persistent with charitable
expectations of the society. It is necessity to assist the fine and performing arts.
(Maderakhimova, 2007).
2.2.11. Instrumental Theory
This theory looks at CSR from the perspective of a strategist aiming to take CSR practice
as an indispensable opportunity to exploit and get benefits for the business organization.
This theory emphasizes on linking CSR practices with profit maximization to benefit
different stakeholders. Burke and Logsdon (1996) noted that economic benefits derived
from implementation of CSR policies show how an organization is effective in using the
instrumental/strategic theories of CSR. When an organization utilizes CSR commitments
to support its core business activities and accomplish its missions effectively

21
accompanied by getting a substantial high yields then CSR assumes a strategic position in
the decision making process of that organization.
Classical view theory and instrumental/strategic theory are similar when it comes to
supporting wealth maximization as a sole responsibility to shareholders. The only
difference between the two theories is that classical is an extreme position on profit
motive at the expense of satisfying the community, while instrumental theory tries to
adopt or execute CSR commitments once it can be a strategic point for increase reputation
& wealth maximization (Garriga & Mele, 2004).
Therefore, instrumental theory supports engaging in CSR practices if it leads to
profitability and good image creation or reputation. Johnson (2003) noted that a positive
relationship between CSR and financial performance is achievable by having competitive
advantage, strategizing in target areas and maximizing the shareholders’ value.
Strategizing through CSR practices as a tool for enhancing corporate image is also found
to be positively related with customer’s loyalty (Lafferty et-al, 1999; Rahizah et-al,
2011).
2.3.Corporate social responsibility practice in Ethiopia
Our country is one among developing countries struggling to improve private sector role
in its progress. Being under the challenge of poverty, governance gaps, and access to
social services etc., there is desperate need for role of private firms in various sectors.
Until 1984, Ethiopia was socialistic similarly private ownership of firms were not
operating. A market oriented economy was declared during this year with in emergence
of private companies in various sectors by having basic aim of retreating a decade of
economic decline. When the economic reform were done, big private sector responsibility
is attached to create jobs, improve production, raise export and reduce poverty, which is
the challenge to the nation (Nigatu, 2015).
CSR is taking strong roots in developing countries including Ethiopia. Community
groups, consumers, investors, civil society and other actors have deposited a tremendous
pressure on corporate people to adhere to social and environmental standards. Some
larger international companies have introduced corporate social responsibility (CSR)
programs; however, most Ethiopian companies do not practice CSR. There are efforts to

22
develop CSR programs by the Ministry of Industry in collaboration with the World Bank,
U.S. Agency for International Development, and others. Source: export. Gove
Like other developing countries, corporate social responsibilities (CSR practices in
Ethiopia are guided by five recognized domains: economical, legal, ethical, philanthropic,
& environmental. However, CSR practices in Ethiopia are still in infancy, there has been
an increasing burden on the national and MNCs in countries to contemplate the
demanding integration of CSR in their actions. A number of corporations are now
following an increased pledge to CSR beyond just profit making & compliance with
regulation (Selam 2017).
Kassaye 2006, used a pioneer CSR model described by Carroll to study CSR practices in
Ethiopia argue that, CSR is practiced in a philanthropic way. There is no defined CSR
framework that exists in the countries. Hence, an observable gap exists between
developed and developing countries in regard to CSR practices. This article review
briefly examines major CSR practices, determinates and limitations of these practices in
Ethiopia context evident from theoretical and empirical literature.
In the Ethiopian context, existing literature regarding corporate social responsibility and
financial performance interconnection is limited. As cited by selam (2017) in early 2015,
the Ethiopian Chamber of Commerce & Sectorial Associations published a 'Model Code
of Ethics for Ethiopian Businesses’ that was endorsed by Ethiopia’s President
MulatuTeshomme as the model for the business community.
The study conducted by Kassaye, D. 2016 on CSR practices and understandings of
multinational companies (MNC), national companies, government organizations and
NGO regard to Ethiopian perspectives, CSR as idea is new and started off as are tort by
multinationals and NGOs to remedy the effects of their extraction activities on the local
communities. This study further indicated there are no CSR practices being integrated
into management systems and daily business operations within many companies and
organizations. But there is an enhancement of philanthropic initiatives in Ethiopia to great
amount has been institutionalized.
Birhanu M. (2018) demonstrates that the concept of CSR is new in Ethiopia and its
functioning has started by multinational companies and NGOs formally and a very few in

23
national companies informally. The study concludes that initiatives are mainly
philanthropic with practices and understanding to a large extent imported from the
developed countries. Therefore, the traditional communitarian values and religious
concepts like Idir, Iqub, Zeker and Senbete should be integrated with the international
standardization so as to bring better implementation of CSR practice in the country.
2.4.Benefits of Corporate Social Responsibility
Firms participate CSR activities for numerous motives which can range from pure
philanthropy to orthodoxy with institutional pressures from the external environment and
explicit return benefits like financial gains & solider reputation. Barnett & Salomon
(2006) summarized the benefits for a company those are socially responsible as: (1) it is
easier to attract resources; (2) it can gain quality employees; (3) it is easier to market
products and services; (4) it can create sudden opportunities; and (5) it can be an
important source of competitive advantage.
In a similar way, Weber (2008) also identified five potential benefits of CSR for
companies: (1) the positive effects on a company’s image and reputation; (2) a positive
effect on employees’ motivation, retention and recruitment; (3) cost savings; (4) increased
revenue from higher sales and market share; and (5) a reduction of CSR-related risk.
If managed properly, Corporate Social responsibilities will not only improve the
satisfaction of these stakeholders but also lead to improved financial performance Aver
&Cadez, (2009). For example, satisfied employees will be more motivated to perform
effectively, satisfied customers will be more willing to make repeat purchases and
recommend the products to others, satisfied suppliers will provide discounts, etc.
Maimunah. (2009) CSR plays great roles in community development in creating closer
ties and interdependencies between corporations and community, sharing the costs the
society has to pay due to environmental degradation, transfer of technology from
international companies to developing countries, environmental protection measures that
done together by corporation and the communities, poverty alleviation in the
communities.
Galbreath.J (2009) conclude that CSR can weakens employee turnover whereas
improving customer satisfaction Consequently practicing CSR supports to maintain

24
experienced professionals, customers create smooth relation among stake holders and
safeguard the environment generally
2.5.Financial performance
A key factor in determining commercial viability for an organization is the role of
information about performance, whether for internal or external use. Financial
performance is relevant for those aspects of business operations whose outcomes are
expressed in monetary terms Performance measurement provides information to assist
any organization in tracking whether what is done is compatible with its strategies and
goals. Performance measurement incorporates both financial and non-financial
performance indicators. (Ahmed, 2009).
Different scholars have concluded that as the word Performance is a difficult term to
define. For instance, Otley, (1999) as cited by Ahmed driven that as term Performance
does not specify to whom the organization delivers its ‘performance’. It is assumed that
any organization that performs well is one that effectively implements an appropriate
strategy. An integrated performance measurement is defined as the process of acquiring
cost and other performance knowledge and employing it operationally at every step in the
strategic management cycle.
Some financial indicators can be used for measuring the performance of companies, while
Ratios can also play important role to measure the financial performance of
manufacturing companies. This paper will consider the following financial indicators to
measure financial performance of selected large manufacturing companies of study area.
2.5.1. Return on Asset
Return on Asset (ROA) is one among financial ratio that indicates the organization ability
to acquire the deposit at wise price and invest in high profitable investment (Ahmed,
2009). This ratio expresses how much one dollar of assets generates the net income. The
company is more profitable when ROA is high. Accordingly, high ROA indicates the
more corporate efficiency of the use the resources.
Return on asset measure the profitability of firm and analyses that how much generating
return from its source of funds to produce profit (Masood, and Ashraf, 2015). Ratios are

25
normally employed when using the accounting information. Some accounting ratios used
to measure profitability include return on assets (ROA). ROA establishes how profitable a
firm is relative to its total assets and depicts how efficient management is at using
available assets to generate its earnings. It is the ratio of a firm’s annual earnings to its
total assets and overcomes the stock market price limitations. Thus, this study will
employ ROA to measure the operating efficiency of the selected large manufacturing
companies in Bishoftu town.
2.5.2. Return on equity
is another financial ratio that can be used to weigh responsibility centers and measure
corporate performance. For instance De With (2013) used this ratio in order to evaluate
the financial performance for the large Dutch companies. According to this studies the
shareholders look for return on equity (ROE) in terms of return on their investments, the
higher the return, the higher profit. He summarizes that companies with higher ROE gives
the signals because it generates more cash internally. Return on equity measure the return
for both preferred and common stockholders. It shows the ability of generating profit
from equity. Return on equity also termed as return generation from share holder‟s equity
Masood, and Ashraf (2015). ROE indicates the corporate efficiency in using the
shareholders‟ funds Khrawish, (2011). This author summarizes that better ROE, the more
effective corporate management in the use of the shareholders‟ capital. The findings were
that the most frequently used types of responsibility centers were profit canters, and the
return on investment (ROI is rarely used) and profit is absolutely important to be
determined, these two measures are most frequently used for financial performances.
2.6.Corporate social responsibilities Practice and Financial
performance
Today, more and more companies are realizing that in order to stay productive,
competitive, and relevant in a rapidly changing business world, they have to become
socially responsible. A corporate social responsibility (CSR), according to stakeholders
and agency theory, wields a positive influence on financial performance. Several studies
have supported the positive association; including, Waddock and Graves (1997) scanned
the impact from both slack resources & good management theory.

26
Kim and Kim (2014) considered Corporate social responsibilities (CSR) in tourism
industry, examines whether it enhances value for shareholders. The study used ESG
rating from 1991 to 2008, to specifically test the effect of CSR on two different types of
equity-holder risks (i.e., systematic and unsystematic risks). He suggested that social
responsibility was found to enhance shareholder value by increasing Tobin's Q, while
firms having minimal corporate social responsibilities reduced shareholder value by
increasing the risk. The main hypothesis which supports the positive relationship is CSR
enhances competitiveness of a firm.
Peloza and Papania (2008) in their assessment of CSR, discuss that “When managers
respond to issues of concern among outstanding stakeholders those who possess the
ability to impact the status and tasks of the company improved financial performance is
expected to follow”. By fulfilling stakeholder needs, a company can create a competitive
advantage. A company that incorporates CSR can have an effect on all of its stakeholders
and can yield benefits. Prior studies contain empirical evidence of a positive relationship
between CSR & employee productivity, reputation, customer loyalty, competitiveness, &
company’s share price.
According to Turker (2009), a company has four stakeholders. The 1st the society,
companies have an obligation to make sure that they are not harming the environment of
the society. The second employees, company has responsibility to make sure that their
employees are safe and content. Third set of stakeholders are the customers. The final
stakeholders are the government in which companies need to make sure they abide by
their rules.
2.7.Empirical evidence on the CSR –Financial performance
relationship
CSR could be defined as the setoff obligations and lawful and ethical commitments with
stakeholders, stemming from impacts of activities and operations of firms cause on social,
labor, environmental and human rights field. Valor et al., (2003). Some studies shows the
benefits to adopting CSR principles and how CSR initiatives play an important role in
increasing a company’s value. The CSR activities were characterized by donations like
foodstuff, building resources and education scholarships.

27
Studies CSR effects on the financial performance of enterprises and its relations includes
Margolis and Walsh’s review (2003)they did conduct 127 studies and found that CSR has
been used as a dependent variable and is influenced by the financial performance. In22
out of 127 studies researches, 22 studies, and 16 studies reported a positive relationship
between financial performance and CSR.
Safiya (2018) in his work effect of CSR on profitability of listed deposit money banks in
Nigeria verified the effect of CSR on profitability by using the variable of net profit
margin, return on total asset, and return on equity to define profitability. The studies
summarize that CSR have significance and positive effect on profitability i.e. ROA and
ROE was the accounting measurement used as the dependent variable. CSR performance
positively affects ROA, positively related to ROE.
Marly (2016) in paper the effects of CSR on financial performance has determined that
CSR is a valuable source for companies. Customers, shareholders, employees, and other
stakeholders do pay attention to the CSR activities of companies. Companies who make a
conscious effort to engage in such activities will have a competitive advantage over other
companies incorporating CSR activities.
Lorwood (2012) in his study about the relationship between Corporate Social
responsibilities and financial performance of mobile telephony firms in Kenya find a
positive correlation between return on assets and the controls indicating that when the
controls increase, so does the return on assets. This result in a positive relationship
between ROA and the community, employee’s relations, environmental considerations
and products characteristics.
Mwai (2013) conducted a study on the impact of the CSR on the corporate financial
performance in the corporate and NGO partnerships in Kenya, addressed the whether
CSR can be linked to financial performance of Corporate that engage in partnership with
NGO. The study tested the sign of the relationship between CSR and Corporate financial
performance in NGO-Corporate and found out a significant positive correlation between
CSR and Cash Conversion Cycle.

28
2.7.1. Empirical Evidence Ethiopian case
CSR is currently still in its embryonic stage in sub-Saharan Africa including Ethiopia.
The majority of initiatives result from philanthropic rather than a CSR approach. These
initiatives
are usually promoted by multi-national companies, which have a strong social and
environmental impact on local communities. The focus is on environmental aspects, the
provision of infrastructure, health and microcredit. Projects are often developed in
partnership with several actors, comprising government and local authorities,
international NGOs or multilateral organizations Safiya (2018) Marly (2016)Lorwood
(2012) Mwai (2013) (KlenJohhanaetal. 2013)
According to the empirical findings in Ethiopia, philanthropic CSR is highly rated. The
empirical findings support this statement, all the people in Ethiopia evidenced the need
for companies and organizations to engage in philanthropy since the government and
institutions not succeed to support the socioeconomic needs of the Ethiopia society. With
regard to Ethiopia and the empirical findings in the field study there is an obvious relation
between CSR activities and cultural or societal circumstances (Kassaye, D. 2016).
Selam (2017) Summarizes CSR has a positive effect on customer satisfaction. However,
the contributions of the different dimensions are somewhat different. The ethical
dimension have the weakest effect on customer satisfaction, whereas the consumer’s
protection dimension have the most effect on brand image. The philanthropically
responsibility dimension had also a significant effect on customer satisfaction
Dakito A. (2017) conducted the study on the Impact of CSR Practices on financial
Performance of Banking Sector in Ethiopia. The study targeted all banking firms in
Ethiopia and relied on both primary and secondary data collected by use of
questionnaires, Interviews and published accounts respectively. Both descriptive and
inferential statistics were used to analyze the data. The study used a mixed research
approach and applied multivariate econometric model to assess the relationship between
CSR and Banks’ financial performance in Ethiopia. The study findings revealed that,
there is no relationship between the CSR practices and financial performance of banking
sectors.

29
2.8.Gaps in literature
There are some researches that have been done on effect of on financial performance
especially in worldwide even there is limitation in our country case. In worldwide Safiya
(2018) Marly (2016) Lorwood (2012) Mwai (2013) (KlenJohhanaetal. 2013) Novrianty&
E. Kartikanigdy 2015, khurshid 2015, Ibrahi, 2016 Chathuranga S., and Roshan 2018and
other, see above literature and in Ethiopian case, Dakito A. (2017). To the best knowledge
of researcher, the research conducted in the topic of CSR and its effect on financial
performance is very limited in Ethiopia especially under current sector. Furthermore
previous studies conducted on CSR effect on financial performance were not considered
all dimension of CSR they mainly focused on economic and philanthropic aspects. Since
CSR is very important to achieve the objectives of stability and growth of the businesses
organizations and to the economy. This study will try to fill the gaps obtained above by
obtaining recent information about CSR practice by providing evidence from Bishoftu
town administration large taxpayers manufacturing companies.
2.9.Conceptual Framework of the Study
Majority of the studies did find a positive and negative correlation between the corporate
social responsibility and the financial performance of the companies. This has raised
more questions about the area of research of large manufacturing companies listed in
Bishoftu town, which was not represented in the studies.
Nowadays, social responsibility is an important factor to companies and shareholders.
Since businesses only make profit when products and services are being consumed by the
society, a business must run its activities in a socially acceptable way to maintain a long-
term relationship and long-run sustainability of the business. So consumer Protection is
now a big issue on all over the world and in our country. This study focus on Carroll’s
models although the relative importance might vary; the elements drawn by Carroll has
been applied to examine the applicability of CSR manufacturing companies which is
shown below

30
Figure 3:Conceptual framework
Source: own compilation based on previous literature and finding (2021).

31
CHAPTER THREE
3. RESEARCH METHODOLOGY
3.1.Introduction
The previous chapter opened a way to identify the theoretical and literary works of
scholars in relation to corporate social responsibilities and financial performance. This
chapter however moves a step further by showing the ways in which the relevant data and
its collection methods have helped discuss CS practice of sample firms and to prove that
indeed corporate social responsibilities is necessary for financial performance of sampled
manufacturing companies. Here the researcher perceive CSR practices and its impact on
firms performance of sampled manufacturing firms listed on Bishoftu town
Administration for a period of seven years from 2014–2020. This discussion covers the
methodology that researcher apply to conduct the study, the research design, type &
source of data, population study, sampling design, data collection methods, data Analysis
& presentation, and Ethical consideration.
3.2.Description of the study area
Bishoftu town is one of the so-called rail way towns of Ethiopia established following the
construction of Ethio-Djibouti railway in 1917. Bishoftu is located at 47 km from capital
city of the country South-East of Addis Abeba main asphalt road and 52 km from capital
city of East Shewa zone Adama and surrounded by Adea district Kebeles. In the North the
city is bordered with Yerer Silassie, in the south with Wedo and KetaJara, in East with
Kaliti and in the West with Dire town and peasant association. A name of Bishoftu is
derived from Afan Oromo which means “the land of Lakes”. Its astronomical location is
8º 43‟- 8º 45‟ North Latitude & 38º 56‟- 39º 01‟EastLongitude.
The altitude of the town ranges from 1900-1995 M above sea level. Thus it belongs to
Woinadega (Moderate Zone). According to the information obtained from Bishoftu
Agricultural Research canter, the average temperature and annual rain fall of the city are
26.9oC max and 11.280C minimum and 694 mm respectively. According to the 2017
data obtained from the Bishoftu Agricultural Research institute reveals that April is the
hottest month of the year(31.10C), while December is the coldest month(5.3 0C) in the
town. November is the driest months while August is the rainy month (209.9mm) of the

32
year in the city. The highest wind speed is registered in March (2.24m/s) and the most
common wind direction seen in the town is easterlies.
(http://www.mwud.gov.et/web/bishoftu/home).
3.3.Research Design
A research design is the arrangement of conditions for collection and analysis of data in a
manner that aims to combine relevance to the research purpose with economy in
procedure and it constitutes the blueprint for the collection, measurement and analysis of
data (Kothari, 2004).
There are three purposes of conducting research those are explorative, descriptive and
explanative. Explorative research is characterized as the looking for of new insight, the
looking around, and the asking of questions or the bringing of some phenomenon into
new light. Explanative research aims at gaining an explanation of a specific situation or
problem, generally in the form of causal relationships. Finally, Descriptive research is a
type of research that is mainly concerned with describing the nature or condition and the
degree in detail of the present situation (Robson. 2002),Descriptive method of research is
used to gather information about the present or existing condition Creswell (2003),
explanatory research design is useful for research having the basic aim of considering the
cause and effect relationship between variables (Shields2013).. Since, the objective of this
research is to determine whether there is a cause and effect relationship between CSR and
financial performance. Therefore, this study was applied explanatory research design
3.4.Research Approach
According to Creswell, (2003) research approach can be classified into: quantitative,
qualitative and mixed research approach. A quantitative approach is one in which the
investigator primarily uses for developing cause and effect thinking, reduction to specific
variables and hypotheses, use of measurement and observation, and the test of theories,
employs strategies of inquiry such as experiments and surveys, and collects data on
predetermined instruments that yield statistical data (Creswell, 2003).Qualitative
approach is one in which the inquirer often makes knowledge claims based primarily on
constructivist perspectives (i.e., the multiple meanings of individual experiences,
meanings socially and historically constructed. with an intent of developing a theory or
pattern) or advocacy/participatory perspectives (i.e. Political, issue-oriented,

33
collaborative. or change oriented) or both. It also uses strategies of inquiry such as
narratives, phenomenology, ethnographies, grounded theory studies, or case studies
(Creswell, 2003).
Mixed methods approach is one in which the researcher tends to base knowledge claims
on pragmatic grounds (e.g., consequence-oriented, problem-cantered, and pluralistic). It
employs strategies of inquiry that involve collecting data either simultaneously or
sequentially to best understand research problems. The data collection also involves
gathering both numeric information (e.g., on instruments) as well as text information
(e.g., on interviews) so that the final database represents both quantitative and qualitative
information (Creswell, 2003). Since the objectives of the study is to develop cause and
effect thinking, reduction to specific variables and hypotheses, the researcher was
implemented quantitative approach
3.5.Population of Study
A population of study refers to a total collection of elements that area of interest to the
researchers and that they wish to investigate on a particular phenomenon and make
inferences (Cooper and Schindler, 2003). The population of the present study was
consisted of manufacturing companies that have operated in Bishoftu town. Hence
According to records obtained from Bishoftu investment office; there are a total of 73
large manufacturing companies in Bishoftu town.
3.6.Sample Design
Sample design is a definite plan for obtaining a sample from a given population, which
refers to the technique, or the procedure the researcher would adopt in selecting items for
the sample (Kothari, 2004. According to Catherine Dawson (2009), the correct sample
size in a study is dependent on the nature of the Population and the purpose of the study.
Non-probability sampling technique specifically purposive/judgemental sampling
technique was used to select the required sample. As noted by Kothari (2004),
Judgmental/ purposive sampling offers the researcher to deliberately select items for the
sample concerning the choice of items as supreme based on the selection criteria set by
the researcher. Judgmental sampling techniques is a form of non-probability sampling
technique that permits the researcher to use a predefined criterion which units must
satisfy in order to be selected into the sample(Mugenda & Mugenda, 2003).

34
To select sample size, a list of the manufacturing companies formally registered at
Bishoftu tax office was obtained first. Thereafter the researcher purposively sampled 14
large large manufacturing companies. The researcher chooses to obtain 14 large
manufacturing companies as a sample, because it is often impossible due to limited time
and too much expensive to collect data from all the potential units. The selection criteria
set by the researcher is first; companies with annual turnover sales of more than Ethiopian
Birr (ETB) 37 million), second long year’s services in providing products or services to
public. Third, manufacturing companies which start their operation before and on 2014
having financial statements for consecutive seven years (2014-2020). Thus, this research
paper employed purposive sampling method to draw the sample from the population.
3.7.Type and Source of Data
While deciding about the method of data collection to be used for the study, the
researcher should keep in mind two types of data viz., primary and secondary. primary
data are those which are collected afresh and for the first time, and thus happen to be
original in character(Kothari2004) while, Secondary data means data that are already
available i.e., they refer to the data which have already been collected and analyzed by
someone else. When the researcher utilizes secondary data, then he has to look into
various sources from where he can obtain them. and which have already been passed
through the statistical process (Kothari2004). Since the researcher wants to see whether
cause and effect relationship between CSR and financial performance by taking financial
statements of sampled large manufacturing companies, the study was used Secondary
data from financial statements sampled large manufacturing companies.
3.8.Data Collection Methods
According to Koul (2006) using appropriate data gathering instruments can help
researchers to combine the strengths and amend some of the inadequacies of any source
of data to minimize risk of irrelevant conclusion. To achieve study objective Secondary
data were collected from company’s financial statements to calculate ROA as dependent
variable and firm’s specific variable like liquidity, leverage and capital intensive as
labeling variable..

35
3.9.Variable Definition and Their Measurement
A variable refers to a characteristic or attribute of an individual or an organization that
can be measured or observed and that varies among the people or organization being
studied (Creswell, 2009).
3.9.1. Dependent Variable: Financial performance
Dependent variables are those that depend on the independent variables; they are the
outcomes or results of the influence of the independent variables. Other names for
dependent variables are criterion, outcome, and effect variables (Creswell, 2009).The
dependent variable in this study is financial performance. There are different ways to
measure profitability, as shown in previous studies. In this study net income after tax to
total assets (ROA), was used to measure profitability.
Return on asset (ROA), shows the management’s effort how efficiently they can make
profit by using all the available resources in the market. ROA measures gainfulness for all
supporters of capital; it is the capacity of an association's administration to produce salary
by using organization resources available to them which shows the ability of enterprise to
get sufficient return on the resource used in operation of a business (Anitha A. 2018).
ROA= Net income
Total asset
3.9.2. Independent Variable: corporate social responsibilities (CSR)
The second main role a variable may play is that of Independent variables. They are those
can (probably) cause, influence, or affect outcomes. Independent variables include
variables purposely manipulated in an experiment and variables that are not purposely
manipulated, but are thought to possibly affect the outcome. Complete or partial
synonyms include Explanatory variable (EV), covariate, blocking factor, and predictor
variable (Creswell, 2009). The independent variable in this study is CSR which can be
economic, legal, ethical & philanthropic responsibilities
 Economic Responsibility; is the bottom responsibility of a company is to produce
“goods and services that the society wants and sell them at a price that society thinks

36
represents their true values”, this eventually benefits the company with profits.
Carroll (2016)
 Legal Responsibility: obey the law, entails expectations of legal compliance and
playing by the "rules of the game. “From this perspective, society expects business to
fulfil its economic mission within the framework of legal requirements. Carroll
(2016)
 Ethical Responsibility: behaves morally, it portrays business as being moral, and
doing what is right, just, and fair. Carroll (2016)
 Philanthropic Responsibility: be a good corporate citizen, the roots of this type of
responsibility lies in the belief that business and society are intertwined in an organic
way which involves emphasis on charity, sponsorships, & employee voluntarism.
Carroll (2016)
Table 1: Variables and Their Measurement
No. Variables Indicated by Measurement basis Expected
impact on CFP
1. Return on asset (ROA) 𝑹𝑶𝑻𝑨(𝒊𝒕)) 𝐍𝐞𝐭 𝐢𝐧𝐜𝐨𝐦𝐞
=
𝑻𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕
2. Economic Responsibility β1(Eco it)
Financial contributions made by
sampled firms to practice those
components of CSR obtained from
firms financial statement
+
3. Legal Responsibility β2(Legit) +
4. Ethical Responsibilities β3(Ethit) +
5. Philanthropic
Responsibilities
β4(Phiit) +
6. Liquidity β6(Liqit) 𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐬𝐬𝐞𝐭𝐬
=
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬
-
7. Leverage β6(Levit) 𝑻𝒐𝒕𝒂𝒍 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
=
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕
-

37
8. Capital Intensity Β7(Cintit) 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕
=
𝑻𝒐𝒕𝒂𝒍 𝒔𝒂𝒍𝒆.
-
9.
Constant Term
β0 Control variable to test the relative
impact of independent variable.
10.
Error Term
εit Error term, which is the amount which
equation may differ.
Source: Compiled by the researcher based on earlier studies (2021)
3.10. Method of Data Analysis and Presentation
Data analysis is the process of bringing order, structure and meaning to the mass of
information collected (Mugenda &Mugenda,1999). The data obtained were edited for
completeness before coding. Once coded the data entered into Stata and inferential
statistics applied in this study.
3.11. Model Specification
This research paper used the data from large manufacturing companies of Bishoftu town
that include financial statement from 2014 to 2020 for analysis. The nature of data used in
this study enabled the researcher to use a panel, which is deemed to have advantages
over, cross sectional and time series data methodology. As Brook (2008) stated the
advantages of using panel data set; first and perhaps most importantly, it can address a
broader range of issues and tackle more complex problems with panel data than would be
possible with pure time series or pure cross- sectional data alone.
Second, it is often of interest to examine how variables, or the relationships between
them, change dynamically (over time). To do this using pure time-series data would often
require a long run of data simply to get a sufficient number of observations to be able to
conduct any meaningful hypothesis tests. However, by combining cross-sectional and
time series data, one can increase the number of degrees of freedom, and thus the power
of the test, by employing information on the dynamic behaviour of a large number of
entities at the same time. The additional variation introduced by combining the data in
this way can also help to mitigate problems of multicollinearity that may arise if time
series are modelled individually.

38
Finally, by structuring the model in an appropriate way, we can remove the impact of
certain forms of omitted variables bias in regression results. Thus, the general
panel/longitudinal regression model was as follows:yi t = α + βxi t + ui t
In this study correlation and multiple regressions analysis was done with fixed effect
model and stata software was used to regress the data. The model consists of dependent
and independent variable.
The researcher was used major dependent variable of financial performance measured by
return on asset and the independent variables used are CSR components, which can be
classified as Economic, Legal, Ethical, Philanthropic Responsibilities were independent
variable, Liquidity, level of leverage and capital intensity were controlling variable of the
study. Usually, the investigator seeks to ascertain the causal effect of one variable upon
another. This relationship can be presented in the following regression model.
𝑹𝑶𝑻𝑨𝒊𝒕) = 𝜷𝟎 + 𝜷𝟏(𝑬𝑪𝑶𝒊𝒕) + 𝜷𝟐(𝑳𝑬𝑮𝒊𝒕) + 𝜷𝟑(𝑬𝑻𝑯𝒊𝒕) + 𝜷𝟒(𝑷𝑯𝑰𝒊𝒕) + 𝜷𝟓(𝑳𝑰𝑸𝒊𝒕) +
𝜷𝟔(𝑳𝑬𝑽𝒊𝒕) + 𝜷𝟕(𝑪CA𝑰𝑵T𝒊𝒕) + 𝜺𝒊𝒕
Where
𝜷𝟎 = intercept
ECO it = Economic Responsibility of Company i at time t
LEG it = Legal Responsibility of Company i at time t
ETH it = Ethical Responsibilities of Company i at time t
PHI it = Philanthropic Responsibilities of Company i at time t
LIQ it= Liquidity of Company i at time t
LEV it= Leverage of Company i at time t
CINT it= Capital intensity of Company i at time t
Β1-β5= Coefficients parameters
𝜺𝒊𝒕= Error term where i is cross sectional and t time identifier
3.12. Ethical consideration
Before writing the thesis, the researcher considered the ethical issues that can be
anticipated and described in the study. These issues relate to all phases of the research
process. The problem identified by the researcher benefits companies being studied and

39
that will be meaningful for others. The researcher wouldn’t further marginalize or
disempower the study participants; and restricts claims about groups to which the results
can’t be generalized. The purpose of the study is to describe to the sampled firms and the
researcher were not putted participants at risk, respect vulnerable populations, and
participants and their information remains confidential, if the need arise.
The data, once analysed, the researcher should keep for a reasonable period of time and
then discards so that it will not fall into the hands of other researchers who might
misappropriate it. The researcher will not also use language or words that are biased
against persons because of gender, sexual orientation, racial or ethnic group, disability, or
age. Suppressing, falsifying, and inventing findings to meet a researcher’s and/or
participants’ need will be eliminated. The researcher will try to assure that he will keep
the information confidential and the data will used only for academic purpose.
Diagnostic/Post Estimation Tests
Diagnostic/post estimation tests such as multicollinearity, normality test,
heteroskedasticity, serial (auto) correlation, , and Hausman specification (fixed effect and
random effect), were carried out to decide whether the model used in the study is
appropriate and fulfil the assumption of classical linear regression model.
Multicollinearity:
Multicollinearity (also collinearity) is a phenomenon in which two or more predictor
variables in a multiple regression model are highly correlated, meaning that one can be
linearly predicted from the others with a non-trivial degree of accuracy. In this situation,
the coefficient estimates of the multiple regression may change erratically in response to
small changes in the model or the data. Multicollinearity does not reduce the predictive
power or reliability of the model as a whole, at least within the sample data set; it only
affects calculations regarding individual predictors. That is, a multiple regression model
with correlated predictors can indicate how well the entire bundle of predictors predicts
the outcome variable, but it may not give valid results about any individual predictor, or
about which predictors are redundant with respect to others

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