Abstract: The question of whether undertaking corporate social responsibility (CSR) activities can improve firm performance has attracted increasing research attention. Most of prior research has documented a positive relation between CSR activities and firm performance. However, other literatures suggest that the relation between CSR activities and firm performance is negative, not related or different in different subsample being analyzed. Mixed results are found in prior works.
In this paper, this relation is re-examined by separating CSR score influenced by current period firm performance and clean CSR score using predicted and residual values from an OLS regression. CSR scores are obtained from Hexun.com Chinese listed firms' CSR evaluation results and accounting and stock market data are obtained from CSMAR database.After controlling the influence of firms' current period economic fundamentals to CSR performance, the regression analysis is applied on Chinese A-share market data from 2010 to 2014.
It is found that (1) undertaking CSR activities cannot increase firm's future financial performance but can generate positive stock market return, and that (2) investing in CSR activities can increase future financial performance only for firms with good current period financial performance, while for firms with bad current period financial performance, investing in CSR activities will deteriorate future performance.
Our results remain generally robust after various robustness tests are performed.Our results suggest that it is much costly for firms with bad performanceto undertake CSR activities than firms with good performance. Firms with good performance can use CSR as a signal to separate them from firms with bad performance, even if the signal (CSR) itself contributes no ways for improving firm performance.The positive relation between current period CSR activities and future financial performance documented by prior literatures may be subject to the problem of spurious regression.The empirical results of this paper impose challenges on current theoretical frameworks on issues concerning whether CSR activities improve firm performance and add to the literature on the economic consequences of CSR.

Key words: corporate social responsibility, signaling, future financial performance, future abnormal return