Gazi, Md. Shakhawat Hossain, Shahinur Rahman Md., and Das amir. "A Structural Equation Modeling (SEM) Approach to Explore the Association between Corporate Social Responsibility and Financial Performance: A Single Mediating Mechanism." August 27, 2019. https://doi.org/10.5281/zenodo.3378207.
Abstract:
<strong><em>Abstrac</em></strong><em>t</em>: <em>The past couple of decades have seen a growing interest in Corporate Social Responsibility (CSR) research in both business and academia. It has been observed that a substantial number of studies on CSR and Financial Performance (FINP) have focused almost entirely on large firms. As pointed out earlier, the bulk number of studies on the link between CSR-firm performances is from developed countries. Thus, a limited number of studies have been conducted in developing countries and more especially in Bangladesh. We cannot generalize the findings from developed countries to developing countries without further research, therefore, requiring more research on the association between CSR and firm performance in manufacturing companies. <strong>Objective: </strong>This paper aims to exploring how CSR dimensions influence the financial performance and whether the mediating effect of selected organizational factors determine the relationship between CSR and financial performance.</em> <strong><em>Methods: </em></strong><em>A </em><em>self-administered questionnaire was used along with the simple random sampling method to collect 371 respondents’ views from medium and small scale manufacturing firms in Bangladesh. The results were analyzed by using SEM. Confirmatory Factor Analysis (CFA) was performed followed by structural model to examine the proposed model.<strong> Findings: </strong>The findings demonstrated that CSR positively affects financial performance and organizational factors fully mediate the CSR-FINP. Furthermore, this study indicates the important order of CSR dimensions which are as follows; environmental protection, social, legal and economic dimension. In addition, it was found that small and medium scale of manufacturing firms carry out moderate level of </em> <em>CSR activities. <strong>Implications: </strong>The mediation of organizational factors in CSR linkage to financial performance is a major contribution to the literature which may help to explore the relationship between CSR and firm performance.</em> <strong><em>Originality /Values: </em></strong><em>Results of the model would be practical and useful for business managers who seek a competitive solution for succeeding in a business crises and work in the settings of domestic as well as international business. <strong>Limitations and Further Research Direction: </strong>Methodologically, we used simple random sampling for data collection. Therefore, the employees may not be representative of the wider population. Thus the findings of this study cannot be generalized to other industrial sectors in Bangladesh. However, future research could be carried out on large samples. </em> <strong>1. Introduction</strong> The concept of CSR has gained a wide consideration in the academic field as well as in the business world in recent years. As a result, CSR has grown to be an issue of much concern in the 21st century for international business (Reverte, Gómez-Melero & Cegarra-Navarro, 2016; Kolk, A. & Tulder, 2010). Hence, CSR has been increasingly getting more attention in the international business studies (Park & Ghauri, 2015). Today’s organizations are using CSR to develop competitive advantage and establish congenial relations with their stakeholders. Furthermore, Multinational Corporations (MNCs) and investors in international businesses are increasingly interested in the issue of socially responsible business around the globe (Besieux <em>et al.</em>, 2015; Boehe & Cruz, 2010).Although CSR is a subjective concept, it has been a subject of extensive research over the last few decades (Jamali, 2008). Manufacturing industry is responsible for environmental pollution and social cost. Thus, CSRis used as a way to improve corporate image and increase long-term organizational performance. This study attempts to fill the gap in literature as there is lack of research on CSR in developing countries (Ralston & Egri, 2008). CSR is reflected as a western phenomenon due to the presence of social systems as compared to developing countries (Chapple & Moon, 2005). CSR has broader implications for the nation as a whole while it reduces dependency on the government for social change. The manufacturing company is selected for examining the association between CSR and financial performance. The manufacturing companies are chosen for this study due to their rapid expansion Therefore, the aim of this study is to build and test a theoretical model to identify the mediating effect of innovationtowards the relationship between CSR and financial performance in the context of developing country like Bangladesh. As per above literature review, another objectives of this study was to fill the above identified gaps by examining and evaluate the viability of the proposed model and to offer a number of recommendations for decision makers to implements CSRs program in Bangladesh, the following specific research question was formulated as “How does innovation influence the financial performance as a mediator?” The rest of the paper is organized as follows. In the next section, a theoretical framework is used to develop the model of CSR and financial performance with mediation of innovation. Likewise,later section describes the methodology of the study. It is followed by the summary of the data analysis. Then, concluded with findings together with theoretical contributions and implications for the managers, and policy makers. Finally, the limitations of the study with avenues for future research are listed. <strong>2. Theoretical Background and Hypotheses Development</strong> Using a review of prior studies on CSR and Financial Performance (FINP) from the context of manufacturing firms, we adopted the most commonly used constructs in those studies. The conceptual research model (Figure-1) developed in this study postulates the constructs in different dimensions: Environment (ENV), Economic (ECO), Social (SOC), Legal (LEG), and Innovation (INV). In the subsequent section explains the relationship among variables and the theoretical support for the hypotheses which are adopted for investigating the research question. <strong><em>2.1 CSR and Financial Performance</em></strong> Some studies have been done to investigate the relationship between CSR and Corporate Financial Performance (CFP) and between Corporate Environmental Performance (CEP) and FINP, some decades ago producing found conflicting results, although the number of the research findings indicated the positive link (see for examples Preston & O’Bannon, 1997; Orlitzky, Schmidt &Rynes, 2003; Simpson & Kohers, 2002). According to some previous researchers (Orlitzky, Schmidt and Rynes, 2003; Husted and Allen, 2001), the conflicting results had been caused by two main factors: theoretical ground and methodological aspect. To resolve the theoretical ground,Husted and Allen, (2001) andOrlitzky and Benjamin (2001)proposed the theory of corporate social performance. The effect of CSR on the firm performance has attracted quite an interesting number of researchers recently. Although, most of the studies have found positive association between CSR and FINP(Cegarra-Navarro <em>et al.</em>, 2016; Orlitzky, Schmidt &Rynes, 2003; Surroca, Tribó & Waddock, 2010), yet few other studiesfound a negative relationship(Wright & Ferris, 1997). While, some others still found no relation between the two variables(Aupperle, Carroll, & Hatfield, 1985), therefore the question still remain unsettled (Aguinis & Glavas, 2012). Such contradictory evidence has created ground to investigate this issue further and therefore, CSR effect on FINP and included factor may mediate their relationship(Aguinis & Glavas, 2012). Aupperle, Carroll and Hatfield (1985);Cochran and Wood (1984) and Ullmann (1985)found a mixed of results concerning the concurrent relationships between social responsibility and firm performance. In another study, Bhattacharya and Sen (2004) suggested that the costs of resources used in CSR activities vary among firms across industries. In environmentally sensitive industries, firms invest huge amount of money and resources in CSR activities, such as investment in Research and Development (R &D) to produce green products or building production facility and waste processing systems to improve and increase the environmental performance of products and services. These CSR activities are necessary and will help firms to create differentiated products and services which boost their sales and FINP. The above discussion led this study to posit the following hypothesis: <strong><em>H<sub>1</sub>:</em></strong><em> There is a significant positive relationship between the </em><em>CSRand the FINP.</em> According to Bitektine and Haack (2015), the growth and success of an organization depend on its relationship with several stakeholders (e.g., employees, shareholders, consumers, suppliers, government agencies, etc.) within organization and external society. As CSR issues become increasingly important in the current business environment, organizations should invest considerable efforts and resources in CSR activities to satisfy stakeholder requirements and to obtain legitimacy. <strong><em>2.2 CSR, Innovation, and Financial Performance</em></strong> Innovation related to technological advancements which are environmentally friendly is socially acceptable towards environmental sustainability and can improve firm performance (Boonkanit & Kengpol, 2010). In literature, innovation is frequently enlisted as the intensity of firm’s investments in R&D (Orlitzky & Benjamin, 2001). However, CSR literature has distinguished the verity that the linkage between CSR and firms’ FINP cannot be well comprehended without taking the role of innovation into consideration(McWilliams, Siegel, & Wright, 2006; McWilliams & Siegel, 2001).McWilliams and Siegel(2000) pointed out that if the innovation in firms is statistically controlled, the positive relationship among CSR and firms’ financial performance will disappear. There exists positive relationship between innovation and firm’s financial performance (Geroski, 1995; Geroski, Van Reenen, & Walters, 1997).Hence, it was hypothesized that: <em>H<sub>2</sub>: There is a significant positive relationship between </em><em>CSR and the INV.</em> Certain studies have found the association between CSR and innovation (Waddock, Bodwell, & Graves, 2002). Furthermore, from the literature, it may be concluded that innovation has a tendency to heave the zero-order correlation between CSR and FINP which provide relationship between innovation and CSR is statistically significant (Schwab et al., 2000). Therefore, CSR acts as a means or vehicle for the innovation (Husted & Allen, 2006, 2007) particularly in the cases where CSR is directed towards innovation (Maxfield, 2008). Indeed, innovation helps proving the business case for CSR (Maxfield, 2008). Therefore, this study postulates innovation as mediator between CSR and firm’s financial performance as per following hypotheses: <em>H<sub>3</sub>: Innovation moderates the relationship between CSR and FINP.</em> Environment Economic Social Legal CSR Innovation Financial Performance <strong>H<sub>1</sub></strong> <strong>H<sub>2</sub></strong> <strong>H<sub>3</sub></strong> <em>Figure-1: Model and the related hypothesis of the research</em> To understand the relationship between CSR and FINP, we proposed a model that integrates innovation as a mediator into the relationship between CSR and FINP. In this model, we argued that CSR is significantly associated with INV (<em>H<sub>1</sub></em>), and CSR can also enhance FINP (<em>H<sub>2</sub></em>), in other words, INV will mediate the relationship between CSR and FINP (<em>H<sub>3</sub></em>). <strong>3. Methodology</strong> <strong><em>3.1 Measurement Instruments</em></strong> In order to conduct this empirical research, the variables in theoretical model were employed using previously validated research instruments. The study adopted the instrument of Maignan and Ferrell (2001) to measure CSR in hypothesized model. Moreover, CSR measurement items are adopted from Mishra and Suar (2010). Likewise, this study used the inductive approach to determine the dimension of CSR. The variables include: environmental dimension, economic dimension, social dimension, and legal dimension. <em>Table-1: Item Source of the Construct</em> <strong>Construct</strong> <strong>Items</strong> <strong>Source</strong> Environment ENV-1 Practices recycling pollutants and wastes. Schiebel and Pöchtrager (2003) ENV-2 Manufactures eco-friendly products. ENV-3 Purchases environmentally friendly products. ENV-4 Voluntarily does recycling and re-use. Economic ECO-1 Has a strong competitive position. Balabanis, Phillips, and Lyall, (1998) ECO-2 This firm seeks a profitable business. ECO-3 Closely monitor employees' productivity. ECO-4 Maximizing our profits. Social SOC-1 Supports culture and art activities Austin (2000);Grudinschi <em>et al.</em> (2013); Davenport (2000);Hopkins (2003); Spiller (2000) SOC-2 Participate in charitable activities SOC-3 Supports educational institutions. SOC-4 Assists to enhance quality of life Legal LGL-1 Obeys state, and local regulations. Maignan and Ferrell (2001); Spiller (2000) LGL-2 This firm fulfills its legal obligation. LGL-3 Meets minimal legal requirements LGL-4 Our products meet legal standards. Innovation INV-1 Frequently tries out new ideas. Calantone, Dröge and Vickery (2002); Moore (2001); Moore (2001) INV-2 Seeks out new ways to do things. INV-3 Our company is creative INV-4 Our new product introduction has increased Financial Performance FINP-1 We had larger market share. Mishra and Suar (2010) FINP-2 Our sales growth has been substantially better. FINP-3 Return on assets has been substantially better. FINP-4 Return on investment has been substantially. <strong><em>3.2 Population and Sample </em></strong> We focused on employees of manufacturing companies in Bangladesh. The companies were selected in a stepwise process. The respondents were selected from a population that had already experienced CSR activities in Bangladesh. Therefore, the sample size was calculated with a level of significance of 0.05. Calculation of the defined sample showed that the minimum sample size to be 196. <strong><em>3.3 Sampling Method</em></strong> The sampling method used in the study was purposive sampling. Atotal of 439 manufacturing firms in Bangladesh that meet the criteria: (1) the number of workers is more than 100 people (2) the firm is active in CSR activities at least 3 years, were considered in this study. The survey questionnaire was used in the research in which employees and managers of the firms are the unit of analysis. A self-administered questionnaire was sent to each respondent. <strong><em>3.4Questionnaire Design</em></strong> The questionnaire comprised two sections: section-A was designed to extract the respondents’ demographic characteristics, and section-B measured CSR based on the antecedent variables as follows environmental dimension of CSR, customer dimension, community dimension, legal dimension, ethical dimension, employees dimension, economic dimension. All instruments were designed on a five-point Likert scale ranging from ‘strongly agree (5)’ to ‘strongly disagree (1)’, using multi-item scales. Furthermore, the questionnaires were distributed to 410 respondents, and 383 responses were received, a response rate of 93.41%. After receiving the responses, missing value analysis was performed and dropped the ones with high missing values. The remaining data included total of 371 responses, the response rate for combined sample is 90.49%. It is an acceptable response rate as per the methodological studies (Anderson <em>et al.</em>, 1988; Hair Jr <em>et al.</em> 2010). <strong><em>3.5 Data Analysis </em></strong><strong><em>Methods</em></strong> The data was analyzed through software Statistical Package for Social Sciences (SPSS) and Analysis of Moment Structures (AMOS). Reliability and correlation analysis were performed through SPSS 20 and SEM was conducted through AMOS 23 as SEM was conducted because it has the ability to estimate both direct and indirect effects of a testable model; it also has the ability to ensure the consistency of the model with the data and to estimate the effects among the constructs. In the research, further, AMOS was used for testing confirmatory factor analysis (CFA) and the structural model. Maximum likelihood method was used while testing the measurement model and the structural model. In order to test the model hypothesis, this study administered survey using self-administered instruments. <strong>4. Results</strong> <strong><em>4.1 Demographic Characteristics of Sample</em></strong> The detailed demographic attributes of the respondents are shown in Table 1. Out of 371 respondents, 67.39% were male and 32.61% were female who participated in the study. The distribution of the respondents by age, with 21.56% wasbelow 30 years old, from 31 to 39 were 57.15%, more than 40 years were 21.29%.Approximately,45.82% of respondents have taken under-graduate and post-graduate education and 14.83% of them have taken others degree from different educational background; with 50.67% of them having more than 4 years of job experience. <em>Table-2: Demographic Characteristics of the Informants</em> <strong>Variables</strong> <strong>Description</strong> <strong>Frequency</strong> <strong>Percentage (%)</strong> <strong>Gender</strong> Male 250 67.39 Female 121 32.61 <strong>Age</strong> 20-30 Years 80 21.56 31-39 Years 212 57.15 More than 40 years 79 21.29 <strong>Educational Qualification</strong> Undergraduate 56 15.09 Bachelor 90 24.26 Masters 170 45.82 Others 55 14.83 <strong>Experience</strong> 0-4 Years 183 49.33 5-8 Years 89 23.99 More than 9 Years 99 26.68 <strong><em>4.2 Descriptive Statistics</em></strong> The descriptive statistics of the sample are tabulated as below in Table 3.Table 3reports the descriptive statistics for both dependent and independent variables. It is evident that the sample is well diversified by the tests of normality for preliminary results. There have been responses from managers from different sectors, experience levels. Table 3provides the means, standard deviations, minimum, maximum, skewness, kurtosis among the model variables. <em>Table-3: Descriptive Statistics for the Dependent and Independent Variables</em> <strong>Variables</strong> <strong>Mean</strong> <strong>Std. Deviation</strong> <strong>Minimum</strong> <strong>Maximum</strong> <strong>Skewness</strong> <strong>Kurtosis</strong> Environment 3.8120 .67948 1.25 5.00 -1.504 2.579 Economic 3.7190 .61103 1.25 5.00 -1.181 3.019 Social 3.6759 .66973 1.25 5.00 -.946 1.155 Legal 3.5020 .83210 1.00 5.00 -.450 .139 Innovation 3.6152 .81271 1.25 5.00 -.194 -.197 Financial Performance 3.5539 .70504 1.25 5.00 -.371 .435 The average level of CSR in the sample was high. The differences between several means for total CSR and environmental, customer, community, employees, economic, satisfaction, innovation, reputation, motivation, productivity, financial performancewere not significant. More than two-third (2/3) of companies do not disclose any environmental information in their annual reports (median and minimum are equal to zero). Thedistribution of variables was skewed.On considering total CSR level, we found most of variables to be statistically significant: industry environmental, community and employee. The higher level of total CSR disclosure occurs in companies with higher level of innovation, motivation, productivity, satisfaction of the employees in the organization. <strong><em>4.3 Reliability Measurement</em></strong> The reliability of construct is deemed appropriate if value remains at least 0.7 for exploratory research and 0.8 for basic research (Nunnally, 1978). The Cronbach alpha was calculated for measuring reliability. A reliability analysis was conducted through Cronbach’s alpha coefficient. Therefore, Cronbach’s alpha coefficient was used to measure reliability or consistency between variables. An alpha coefficient that is higher than 0.8 implies a strong consistency, and an alpha coefficient that is higher than 0.6 implies acceptable consistency. In this analysis, all the variables scored higher than 0.8. Therefore, the respondents answered the questions consistently. Table 4summarizes the reliability analysis as follows. <em>Table-4: Reliability of the constructs</em> <strong>Variables</strong> <strong>Code</strong> <strong>Items</strong> <strong>Cronbach’s Alpha (α)</strong> Environment ENV-1, ENV-2, ENV-3, ENV-4 4 .866 Economic ECO-1, ECO-2, ECO-3, ECO-4 4 .814 Social SOC-1, SOC-2, SOC-3, SOC-4 4 .816 Legal LGL-1, LGL-2, LGL-3, LGL-4 4 .975 CSR CSR-1, CSR-2 CSR-3, CSR-4 4 .903 Innovation INV-1, INV-2, INV-3, INV-4 4 .944 Financial Performance FINP-1, FINP-2, FINP-3, FINP-4 4 .941 The seven constructs showed high internal consistency and reliability, with Cronbach alpha values of 0.866 for environmental CSR, 0.814 for economic CSR, 0.816 for social CSR, 0.975 for legal CSR, 0.903 for CSR, and 0.944 for innovation, and 0.941 for FINP. All values are greater than the recommended value of 0.7 (Nunnally, 1978). The result revealed a factor-loading index that was higher than 0.6 for all questions. This score proved the internal and external validity of the questions in this study. <strong><em>4.4 Confirmatory factor analysis summary</em></strong> Table 5 shows the summary of CFA. It shows the corresponding factors and the loading items and their scores. CFA tests the validity and reliability of all constructs that is conceived as a one-dimensional, precise, and consistent indicator in measuring its latent variables (Jöreskog & Sörbom, 1993). The cut of value for the construct reliability is recommended to be > 0.7, while the cut of the value of average variance extracted is recommended to be > 0.5, and the recommended loading factor is 0.6 or moreHair Jr <em>et al.</em> (2010). Table 5 shows the construct reliability value more than 0.7, greater than 0.5. The loadings and AVE for all items exceeded the 0.5 acceptable threshold, thus convergent validity is confirmed (Henseler, Ringle, & Sarstedt, 2015). <em>Table-5: Outcomes of Measurement Model</em> <strong>Variables (Construct)</strong> <strong>Items (Code)</strong> <strong>Estimates (Loadings)</strong> <strong>CR</strong> <strong>AVE</strong> Environment ENV-1 .79 .867 .621 ENV-2 .79 ENV-3 .81 ENV-4 .76 Economic ECO-1 .77 .815 .525 ECO-2 .69 ECO-3 .75 ECO-4 .68 Social SOC-1 .68 .819 .531 SOC-2 .75 SOC-3 .70 SOC-4 .77 Legal LGL-1 .99 .976 .910 LGL-2 .96 LGL-3 .91 LGL-4 .96 CSR CSR-1 .89 .905 .706 CSR-2 .82 CSR-3 .71 CSR-4 .93 Innovation INV-1 .93 .905 .809 INV-2 .92 INV-3 .89 INV-4 .86 Financial Performance FINP-1 .86 .942 .802 FINP-2 .95 FINP-3 .89 FINP-4 .89 <em>Note: Reference value ** p < 0.05; CR = Composite Reliability, AVE = Average Variance Extracted.</em> The loadings, AVE, composite reliability and Cronbach’s alpha (<em>α) </em>are presented in Table 5. It can be seen from the Table 5 that CR values ranged from 0.815 to 0.976, which supports strong internal reliability. Table 5 also shows that the estimated constructs loading ranged from 0.68 to 0.99 and AVE ranged from 0.525 to 0.910 are greater than the recommended levels.Therefore, the conditions for convergent validity are satisfied in this study. It is clear from results that the items on each factor met the requirements of reliability and validity (Nunnally, 1978). <strong><em>4.5 Discriminant Validity Analysis</em></strong> To determine the discriminant validity of the construct’s used in this research, we followed the criteria suggested byFornell and Larker, (1981). They suggested that the value of the square root of the AVE for each construct should exceed that of correlations between constructs. As can be seen in Table 6, the square root values of the AVE for each construct are higher in comparison with the AVEs in Table 5. This outcome confirms that discriminant validity is present. <em>Table-6: Discriminant Validity Analysis</em> <strong>Constructs</strong> <strong>FINP</strong> <strong>ENV</strong> <strong>ECO</strong> <strong>SOC</strong> <strong>LGL</strong> <strong>CSR</strong> <strong>INV</strong> <strong>FINP</strong> 0.895 <strong>ENV</strong> 0.380 0.788 <strong>ECO</strong> 0.365 0.650 0.725 <strong>SOC</strong> 0.320 0.784 0.646 0.729 <strong>LGL</strong> 0.250 0.537 0.414 0.578 0.954 <strong>CSR</strong> 0.345 0.386 0.286 0.306 0.260 0.840 <strong>INV</strong> 0.198 0.299 0.340 0.262 0.184 0.165 0.900 <strong><em>4.6 Model Testing</em></strong> The testing results of the end model of the research (Table 7) are as follow: the value of Chi Square =537.121with df = 329, probability = 0.000, Goodness of Fit Index (GFI) = 0.911, Comparative Fit Index (CFI) = 0.976, Root Mean Square Error of Approximation (RMSEA) = 0.041, Cmin/df = 1.633. The fit of measurement of hypotheses model, was good as indicated by GFI, IFI, TLI, and CFI values are higher than the threshold values suggested by Nunnally (1978). Considering all these outcomes, it was concluded that the model fits the data well given that it exceeds all the basic requirements for goodness of-fit measures. All the values of the index showed good model feasibility criteria. This means that the research data can be used to support the structural models proposed. <em>Table-7: Summary of Model Fitness indices</em> <strong>Modification Indices of Predictor Variables</strong> <strong>Desirability Range</strong> <strong>Estimated Range</strong> <strong>Level of Positions</strong> CMIN/DF 3.00 1.633 3.00>1.633 Satisfactory RMR (Root Mean Squires Residuals) 0.09 0.024 0.09>0.024 Good GFI (Goodness of Fit Index) 0.9 0.911 0.9<0.911 Good IFI (Incremental Fit Index) 0.9 0.976 0.9<0.976 Good TLI (Tucker Lewis Index) 0.9 0.972 0.9<0.972 Good CFI (Comparative Fit Index) 0.9 0.976 0.9<0.976 Good RMSEA (Root Mean Squire Error of Approximation) 0.08 0.041 0.08>0.041 Good The overall values provided evidence of a good model fit. All of the model-fit indices exceeded the respective common acceptable levels suggested in previous research, following the suggested cut-off value, demonstrating that the proposed model provided an adequate fit to the data collected. <strong><em>4.7 Hypotheses Testing Result of Generating Model</em></strong> Table 8 is used as the base in the testing of the five hypotheses proposed in the research.To examine the impact of CSR on FINP, CSR on INV, and INV on FINP over time, a longitudinal analysis was conducted using data collected in 2019. Table 8 shows the hypotheses test, in determining the significance of each path coefficient, estimate of regression weight, standard error of regression weight, and critical ratio for regression weight were used. Table 8 presents each parameter's C.R., estimate and S.E of the generating model. SEM analysis was conducted to determine the relationship of several variables in the research model. Hence, CSR has a significant positive and direct impact on Financial Performance (β =.306; C.R = 6.142; P = ***) or H<sub>1</sub> was supported. And, Corporate Social Responsibility has a significant positive and direct impact on Innovation (β=.235; C.R= 3.132; P= 0.002) or H<sub>2</sub> was supported. Finally, Innovation has a positive significant direct impact on Financial Performance (β=.0.096; C.R= 2.603; P= 0.009) or H<sub>3 </sub>was also supported. <em>Table-8: Path Analysis Summary</em> <strong>Hypothesis</strong> <strong>Relationship of Path</strong> <strong>Estimate</strong> <strong>S.E.</strong> <strong>C.R.</strong> <strong>P-value</strong> <strong>Decision</strong> IV Path DV H<sub>1</sub> CSR ---> FINP .306 .050 6.142 *** Supported H<sub>2</sub> CSR ---> INV .235 .075 3.132 .002 Supported H<sub>3</sub> INV ---> FINP .096 .037 2.603 .009 Supported These results show that innovation mediates the relationship between CSR and Financial Performance. There exists a mediatory relationship between CSR and financial performance. Hence, all the hypotheses including mediation (H<sub>1</sub>, H<sub>2</sub>, and H<sub>3</sub>) were supported. <strong><em>4.8 Mediating Effects</em></strong> The mediation effect of the mediator variables of innovation were evaluated using Baron and Kenny’s approach. To assess the significance of the mediation effect, Sobel’s test for mediation significance was conducted. The result of the Barron-Kenny mediation test (Table 9) showed that there are partial mediation effects of innovation on financial performance. <em>Table-9: Barron-Kenny’s Mediation Effect</em> <strong>IV</strong> <strong>MV</strong> <strong>DV</strong> <strong>IV - > DV</strong> <strong>SE</strong> <strong>IV -> MV</strong> <strong>SE</strong> <strong>IV + MV - > DV</strong> <strong>Mediation</strong> <strong>IV->DV</strong> <strong>SE</strong> <strong>MV->DV</strong> <strong>SE</strong> Partial Mediation CSR INV FINP 0.326 0.048 0.167 0.058 0.0375 .048 0.163 0.043 After assessing the size of the mediation effect, we proceed to evaluate the significance of these effects and based on Sobel’s test (Table 10), we found that mediation effect is significant at 0.001 levels. <em>Table-10: Sobel’s Test for Significance of Mediation Effect</em> <strong>IV</strong> <strong>MV</strong> <strong>DV</strong> <strong><em>Sobel’s Test</em></strong> <strong>t-value</strong> <strong>p-value</strong> <strong>Sig.</strong> CSR INV FINP 3.37142 0.001 Yes Besides evaluating the mediation effects, we also examine the direct, indirect, and total effects of all the exogenous variables. Table 11 shows that there were no indirect effects of CSR on INV; CSR on FINP; and INV on FINP. Other exogenous variables were found to have significant direct, indirect, and total effects on their respective endogenous variables. In terms of indirect effect on FINP, CSR (0.022) has the greatest indirect effect followed by INV (0.000). <em>Table-11: Direct, Indirect, and Total Effect</em> <strong>IV</strong> <strong>DV</strong> <strong><em>Direct Effect</em></strong> <strong><em>Indirect Effect</em></strong> <strong><em>Total Effect</em></strong> CSR INV 0.235 0.000 0.235 CSR FINP 0.306 0.022 0.328 INV FINP 0.096 0.000 0.096 <strong>5. Conclusions and Recommendations</strong> <strong><em>5.1 Conclusions </em></strong> This study was conducted to investigate an examination of the relationship between CSR and financial performance mediating by selected outcomes. This study provides imperative information for corporate decision makers who are interested to develop some competitive advantage and ensure sustainable growth in the market. The most remarkable finding of the study was that CSR has significantas well as positive influence on financial performance with mediating effect of innovation. Also analysis of this study indicated that environment economic, social, and legal dimensions aregood predictors, and play significant role in CSR. Moreover, CSR can help to create a competitive advantage by encouraging the development of a workforce that effectively carries out the firm’s business strategy, leading to improved business performance. <strong><em>5.2</em></strong> <strong><em>Recommendations</em></strong> The study recommends that business organization should engage in doing CSR activities to ensure successful financial performance in rival business environment. Therefore, the business firms need to take social and corporate collaboration initiative with stakeholders, which will lead to solve social, employee, community and environmental problems, as well as improve firm’s financial performance and the efficiency and the effectiveness of business activity. <strong>6.</strong> <strong>Implications</strong> The result of this study adds to the existing body of research literature which founda statistical significance in the relationship between CSR and financial performance. The findings also suggest that different types of CSR actions influence stakeholder’s attitudes differently and this understanding may help managers formulate effective and efficient CSR strategies. Furthermore, this study has implications for entrepreneurs, researchers and policy makers in that they should exercise the outcomes of the CSR activities in business organization. It is clear from different statistical analysis that CSR activities can increase firm performance over a period of time. <strong>7.Limitations and Further Research Direction</strong> <strong><em>7.1 Limitations</em></strong> Despite the implications of the above results, the study had certain limitations; the first limitation was the relatively low of sampled size. Methodologically, we used a convenience sample for data collection purposes. Therefore, the employees may not be representative of the wider population. Thus the findings of this study cannot be generalized to other industrial sectors in Bangladesh. Finally, this study contributes to an overall understanding of CSR level that needs to be practiced in different organizations. <strong><em>7.2Further Research Direction</em></strong> The research findings can be a basis for further research to validate and develop better models to explain firm performance in the large-scale manufacturing firms related to CSR. However, future research could examine more antecedent or factors influencing CSR in Bangladesh. In addition, external stakeholders’ perceptions could also be considered in future research using different methodological tools, such as interviews to specify their opinions on the company’s characteristics and the level of CSR practice.