Hypothesis- Firm Liquidity Risk (cash flow) mediates the relationship between Corporate Social Responsibility (CSR) and Corporate Financial Performance (CFP)
Because of Mix results about CSR- CFP relationship (direct), the understanding of mediating variable is warranted. Liquidity Risk as mediating variable.
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Which Mediating Variable?
- Lots of risk factors available that are affected by CSR; market, liquidity, operation, credit.
- Choose Liquidity Risk
Why Liquidity Risk is important?
- Life of Firm depends upon liquidity instead of profit- “Cash is King”
- Even profitable firms can go out of business, the firm with superior cash base survives
- Timely Payments and fulfilling obligations
- Opportunities to take profitable venture
- OTHERS….
How does CSR influence liquidity?
- Awareness and Reputation
- Customers attachment and Revenue Increase
- CSR high bond rating
- Minimize cost of capital
- OTHERS……
Therefore, CSR helps minimize liquidity risk.
How does this reduction in liquidity risk better for firm valuation?
- Profit but no cash is not good – No insolvency issues
- Reputation increases intangible characteristics like Goodwill, which adds premium to value
- Better business opportunity
- Low cost of capital high benefit
- Better earnings and stable cash flow.
Therefore, Liquidity risk (CF) mediates the relationship between CSR and CFP.
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