Effect Of Corporate Social Responsibility On Profitability Of Listed Deposit Money Banks In Nigeria

2.2.5    Firm Size
This study recognizes that it is not only CSR that affects profitability. Some firm characteristics are associated with profitability as well. These include size (Love & Rachinsky, 2007), growth rate, dividends, liquidity (Gurbuz et al., 2010) and sales (Forbes, 2002). The firms that have better growth rate can afford better machinery, and then gradually the assets and size of the firm will increase. Large firms attract better managers and workers who in turn contribute to the profitability of the firm. Majumdar (1997), Yahaya (2006), Gurbuz et al. (2010) and Abbasi and Malik (2015) find size as an important factor that affects firm profitability.
2.2.6    Leverage
Capital structure is also an important factor that determines the profitability of a firm. Capital structure refers to the ratio of debt and equity financing. In case if more debt financing the company has to face certain bankruptcy risk, but there are also some tax and monitoring benefits associated with debt financing (Su & Vo, 2010). It also mitigates the agency conflict by reducing the free cash flow of the firm. There should be an appropriate capital structure that generates the maximum profit for the organization, as too less equity financing increases the control of the owners to a large extent (Abu-Rub, 2012). In case of internally generated finances, it is said that these have the highest opportunity cost (Lewellen & Lewellen, 2004) for the firm because retaining profits can affect shareholder trust, because it would otherwise have been distributed as dividend. Dividend announcements have a significant impact on share prices (Akbar & Baig, 2010).
As far as external borrowings are concerned they are considered to be the cheapest source of financing because of the tax benefits. But they do still have certain costs like interest payments and it is widely accepted that the cost of external funds is directly proportional to the amount of these funds also while borrowing the capital structure policy of the firm has to be kept in mind. Another important factor which influences the generation of funds is the financial position of the corporation (Havemann & Webster, 1999). Firstly, to invest through retained earnings the corporation must generate enough profit that can satisfy its owners and fulfill the investment demands. Secondly, creditors like to invest in profitable corporations and projects (Amidu & Hinson, 2006); they tend to invest in corporations that can, to some extent, ensure the payment of their liability.
2.2.7    Interest Rate
Economic condition of the country can affect a firm‘s profitability on multiple fronts. Cost of borrowings can negatively influence the firm's capability to generate finances and invest in projects (Ntim, 2009). Prices of utilities, high costs associated with plant and machinery due to either deterioration of currency or import costs, high inflation rate and low income level of people can decrease the demand for industrial goods and hence negatively impact the firm's performance (Forbes, 2002). This study uses interest rate to proxy for the general business environment under which listed deposit money banks operate in Nigeria.
2.3    Theoretical Review
The two views of corporate social responsibility are the classical view and the socioeconomic view (Robbins & Coulter, 2007).
2.3.1    The Classical View
This view says that management‘s only social responsibility is to maximize profit. The most outspoken advocate of this approach is economist, Milton Friedman (1962 and 1970). He argues that managers‘ primary responsibility is to operate the business in the best interest of the stockholders. Friedman commented that stockholders have single concern: Financial return. He also argues that anytime managers decide to spend the organization resources for ―social good‖, they are adding to the cost of doing business. These costs have to be passed on to consumers either through higher prices or be absorbed by stockholders through a smaller profit return as dividends.
2.3.2    The Socioeconomic View
Robbins and Coulter (2007) further explains that the socioeconomic view is of the view that management‘s social responsibility goes beyond making profit to include protecting and improving social‘s welfare of its stakeholders and the environment that the firm carry out its operations. This position is based on the belief that firms are not independent entities responsible only to stockholders. They also have the responsibility to the society that allow their formation through various laws and regulations and support them through purchasing their products and services. One of the major advocates of this view is Archie Carroll (Zain, 2008).
Carroll and Friedman agree on the maximization of firms' values as a core responsibility. They also advocate that such responsibility remain in-line with legal standards and therefore firms are not to engage in illegal activities. Carroll takes a firm's responsibilities further by talking about social responsibility. Under social responsibility, he outlines ethical and discretionary responsibilities. These are affectionately known as the "Should-Do's" and "Might- Do's" respectively (Zain, 2008).
Zain (2008) went further to explain that, Carroll foresees the importance of ethical standards as part of a firm's success in the long-run. By following beliefs of certain moral standards and pro-actively volunteering to search for charitable avenues, the social responsibility dimension will create a positive rapport between the firm and parties that are privy to its operations; this includes suppliers, clientele, employees and the surrounding community.