The impact of corporate social responsibility and corporate tax on the financial performance of islamic and conventional banks

Abstract

The purpose of this study is to examine the impact of corporate social responsibility (CSR) disclosure on the financial performance of Islamic and conventional banks, where corporate tax payment is considered as a moderator between CSR-financial performance nexus. Prior studies on corporate social disclosure imply lower agency costs and higher corporate value. With a wider and diverse stakeholder interest, a more resilient financial performance with social responsibility is anticipated. CSR tax incentive structure is expected to enhance further the legitimacy of the disclosure within the socially constructed norms and values of the banking relationship. Hence, this study explores the CSR phenomenon and behaviour within the context of agency, stakeholder and legitimacy theories amongst the financial performance of both conventional and Islamic banks. This study adopts a quantitative archival study with panel regression models to test research hypotheses. It is conducted based on available data of a global sample of both conventional and Islamic banks comprising of 65 full-fledged Islamic banks from 22 countries and 233 conventional banks from 49 countries for the period from 2013 to 2018. The findings of this study show that CSR disclosures significantly impacted both Islamic and conventional banks’ financial performance. In addition, the corporate tax payment significantly moderates the relationship between CSR and Islamic and conventional banks performance. This study is limited to quantitative analysis and focused only banking industry, while qualitative studies and other institution are recommended for future research. Besides, this study considered only corporate tax payment, where zakat also required to explore. The findings of the study support the agency theory, stakeholder theory and legitimacy theory. Moreover, the findings of this study have several policy implications, and it is significant for the investors, regulators, policymakers and users of the bank's annual reports. The findings also benefit regulators in implementing the policy on CSR disclosures and related taxation incentives, which may enhance top management's accountability and maintain the sustainability of banks in the long run.