x4470782 Roomantha Rathnayake, x5023955 Dakum Jayamanne Analyzing the impact of Corporate Social Responsibility on firm financial performance: Evidence from EU commercial banks Evidence from EU Vaasa 2026 School of Accounting and Finance Master’s thesis in Finance Master’s Degree Program in Finance 1 UNIVERSITY OF VAASA School of Accounting and Finance Author: x4470782 Roomantha Rathnayake, x5023955 Dakum Jayamanne Title of the Thesis: Analyzing the impact of Corporate Social Responsibility on firm financial performance: Evidence from EU commercial banks : Evidence from EU Degree: Master of Science in Economics and Business Administration Programme: Master’s Degree Program in Finance Supervisor: Timothy King Year: 2026 Pages: 80 ABSTRACT: The research undertakes into the existence of a relationship between Corporate Social Responsibility (CSR) and the firm financial performance (FFP) to European Union (EU) commercial banks in the continually changing sustainability regulatory environment of the Non-Financial Reporting Directive (NFRD) and the Corporate Sustainability Reporting Directive (CSRD). Based on the Stakeholder Theory and Legitimacy Theory the study analyzes the hypothesis of whether environmental responsibility, social responsibility, and the quality of corporate governance help to enhance accounting-based performance (Return on Assets -ROA) and market-based performance (Market-to-Book Ratio -MBR). The study will utilize fixed and random effects regression models comprising country and year controls using panel data of EU commercial banks acquired by the LSEG (Refinitiv) database in 2024. The results show that profitability measures like Return on Equity (ROE), Net Interest Margin (NIM), and Earnings per Share (EPS) are the significant means of improving accounting-based performance. Profitability and credit risk, in the form of non-performing loans (NPL) have a positive and negative impact on market valuation respectively. Moreover, high standards of governance enhance the credibility and economic role of the CSR initiatives which prove that well-developed systems of oversight transform the sustainability promises into financial results. In general, the findings indicate that the CSR of EU commercial banks is not only a regulatory requirement but a strategic instrument that can help increase financial sustainability, stakeholder relationship and value creation in the long-term. The research adds context-specific knowledge to the CSR-FFP literature in a very regulated and sustainability-focused financial context. KEYWORDS: Corporate governance, Corporate social responsibility, Environmental responsibility, Financial performance, Social responsibility 2 Table of Contents 01. INTRODUCTION .................................................................................................................. 6 1.1 Introduction .................................................................................................................... 6 1.2 Purpose of the Study ...................................................................................................... 7 1.3 Research Objectives ....................................................................................................... 8 1.4 Research Questions ........................................................................................................ 8 1.5 Significance of Study ...................................................................................................... 9 1.6 Rational of the Study ...................................................................................................... 9 1.7 Framework of the Study ............................................................................................... 10 02. CORPORATE SOCIAL RESPONSIBILITY .............................................................................. 12 2.1 Industry Background .................................................................................................... 12 2.2 Corporate Social Responsibility (CSR) .......................................................................... 13 2.3 Evolution of CSR ........................................................................................................... 13 2.4 Drivers for CSR .............................................................................................................. 14 2.5 CSR in EU Commercial Banks ....................................................................................... 15 2.6 Firm Financial Performance (FFP) ................................................................................ 15 03. THEORETICAL BACKGROUND ........................................................................................... 17 3.1 Stakeholder Theory ...................................................................................................... 17 3.2 Legitimacy Theory ........................................................................................................ 17 04. LITERATURE REVIEW ......................................................................................................... 19 4.1 Environmental Responsibility ...................................................................................... 19 4.2 Social Responsibility ..................................................................................................... 20 4.3 Corporate Governance Quality .................................................................................... 21 4.4 Firm Financial Performance ......................................................................................... 22 4.5 Relationship between Environmental Responsibility and Firm Financial Performance 23 4.6 Relationship between Social Responsibility and Firm Financial Performance .......... 25 3 4.7 Relationship between Corporate Governance Quality and Firm Financial Performance ............................................................................................................................. 27 4.8 Research Gap ................................................................................................................ 28 05. Data and Methodology .................................................................................................... 30 5.1 Hypothesis .................................................................................................................... 30 5.1.1 CSR data ................................................................................................................ 31 5.1.2 Financial Data ....................................................................................................... 33 5.1.3 Descriptive statistics ............................................................................................. 33 5.2 Methodology ................................................................................................................ 34 5.2.1 Variables ............................................................................................................... 36 5.2.2 Regression models................................................................................................ 39 06. Research Findings ............................................................................................................. 41 6.1 The Relationship between Corporate Social Responsibility and Bank Profitability (ROA) in EU Commercial Banks ................................................................................................ 41 6.3 The Relationship between Corporate Social Responsibility and Firm Size Dynamics in EU Commercial Banks............................................................................................................... 49 6.4 The Relationship between Corporate Social Responsibility, Leverage, and Asset Turnover Efficiency in EU Commercial Banks .......................................................................... 56 6.5 Discussion ..................................................................................................................... 64 07. Conclusions ....................................................................................................................... 67 7.1 Summary of Findings .................................................................................................... 67 7.2 Limitations .................................................................................................................... 68 References .................................................................................................................................... 69 4 Figures Figure 1: Summarizes Refinitiv's entire ESG structure ................................................................. 32 Figure 2: Normality Test ................................................................................................................ 44 Figure 3: Correlation Table ............................................................................................................ 45 Figure 4: Normality Test ................................................................................................................ 48 Figure 5: Normality Test ............................................................................................................... 52 Figure 6: Normality Test ................................................................................................................ 59 Tables Table 1: Descriptive Statistics ........................................................................................................ 34 Table 2: Correlation Analysis ......................................................................................................... 41 Table 3: Regression Analysis ......................................................................................................... 42 Table 4: Hausman Test .................................................................................................................. 43 Table 5: Regression Analysis ......................................................................................................... 46 Table 6: Hausman Test .................................................................................................................. 47 Table 7: Correlation Analysis ......................................................................................................... 49 Table 8: Regression ....................................................................................................................... 50 Table 9: Hausman Test .................................................................................................................. 51 Table 10: Heteroskedasticity Test .................................................................................................. 53 Table 11: Period Test ..................................................................................................................... 55 Table 12: Correlation Analysis ....................................................................................................... 56 Table 13: Regression ..................................................................................................................... 57 Table 14: Hausman Test ............................................................................................................... 58 Table 15: Heteroskedasticity Test .................................................................................................. 61 Table 16: Periodic Test ................................................................................................................... 63 5 Abbreviations CSR Corporate Social Responsibility ESG Environmental, Social, and Governance FFP Firm Financial Performance ROA Return on Assets ROE Return on Equity MBR Market-to-Book Ratio NIM Net Interest Margin NPL Non-Performing Loans NFRD Non-Financial Reporting Directive CSRD Corporate Sustainability Reporting Directive 6 01. INTRODUCTION 1.1 Introduction In European banking, corporate social responsibility (CSR) now framed within broader ESG (environmental, social, governance) duties have moved from peripheral philanthropy to a core element of strategy and risk management. Two EU regulatory waves accelerated this shift (Bătae et al., 2020). First, the Non-Financial Reporting Directive (NFRD, Directive 2014/95/EU) mandated large public-interest entities, including listed banks, to disclose non-financial information from 2018, embedding transparency on environmental, social and diversity matter into annual reporting. More recently, the Corporate Sustainability Reporting Directive (CSRD, adopted 2022) vastly expanded scope and rigor requiring standardized, audited sustainability disclosures under EU standards and double materiality (impacts and financial risks), thereby tightening the information link between CSR practices and investors’ pricing of bank risk and value (Antonini & Jacobo Gomez-Conde, 2024). Complementing disclosure rules, the European Banking Authority (EBA) issued final Guidelines (January 2025) on identifying, measuring and managing ESG risks explicitly integrating climate and social risk into prudential expectations and forward-looking plans making CSR/ESG management operationally relevant for banks’ safety and soundness. Theoretically, stakeholder and resource-based views predict that credible CSR enhances reputation, customer loyalty, access to capital and human capital, reducing risk and improving financial performance (FP); legitimacy theory posits CSR as a license-to-operate mechanism in a highly regulated sector (Singh & Misra, 2021). Meta-analytic evidence across industries generally supports a positive CSR–CFP association, suggesting that better social performance correlates with superior accounting and market outcomes (Orlitzky et al., 2003). Yet banking-specific findings can be mixed: studies on European banks report both positive channels (lower risk, improved efficiency) and potential trade-offs, depending on time horizon, measurement (ESG scores vs. specific actions), and endogeneity controls. Recent longitudinal work on European banks (2005-2022) links higher ESG performance to differences in profitability and risk-taking, underscoring that CSR affects both return and risk profiles rather than returns alone. 7 Against this backdrop, EU banks face simultaneous incentives and scrutiny: robust CSR can lower funding costs, stabilize deposits, and mitigate regulatory and transition risks; but disclosure tightening and anti-greenwashing enforcement raise costs and penalize superficial initiatives. Consequently, establishing whether and under what conditions CSR improves EU banks’ financial performance is both academically and practically salient (Chryssa Papathanassiou & Nieto, 2024). Clarifying this relationship, while accounting for evolving regulation, measurement heterogeneity, and bank-specific risk channels, will inform managers, regulators and investors as CSRD-aligned data reshape market assessments of bank value and resilience. 1.2 Purpose of the Study The growing integration of Corporate Social Responsibility (CSR) within the European Union’s (EU) commercial banking sector highlights both opportunities and challenges in understanding its true financial impact. Despite strong regulatory momentum through the Non-Financial Reporting Directive (NFRD) and the recent Corporate Sustainability Reporting Directive (CSRD) empirical findings remain inconclusive on whether CSR directly improves firm financial performance (FFP). Some studies suggest that CSR enhances reputation, reduces risk exposure, and strengthens customer loyalty, thereby improving profitability and market value (Ortiz- Martínez et al., 2023). Conversely, other evidence indicates that CSR engagement can impose significant compliance and operational costs, with uncertain returns (Guillamon-Saorin et al., 2018). In banking, this uncertainty is amplified due to sector-specific characteristics. Banks operate under strict prudential regulations, making CSR less about product differentiation and more about legitimacy, stakeholder trust, and long-term stability (Chedrawi & Osta, 2017). While ESG ratings often show positive correlations with lower risk and cost of capital, they also reveal heterogeneity across countries, time horizons, and CSR dimensions (environmental vs. social vs. governance) (Handoyo & Anas, 2024). For EU banks, which face heightened scrutiny after the 8 2008 financial crisis and subsequent green transition policies, understanding whether CSR translates into measurable financial benefits remains a pressing concern. Thus, the central problem lies in the lack of consensus on the CSR–FFP nexus within EU commercial banks. This ambiguity creates challenges for managers, regulators, and investors when allocating resources or evaluating disclosures under CSRD. Without robust, bank-specific evidence, CSR risks being viewed either as a costly compliance burden or as an unverified driver of financial resilience. Addressing this research gap is crucial for clarifying the role of CSR in sustaining profitability, competitiveness, and stakeholder confidence in EU banking. 1.3 Research Objectives a) To examine the impact of environmental responsibility on the financial performance of EU commercial banks. b) To assess the relationship between social responsibility initiatives and the financial performance of EU commercial banks. c) To evaluate how corporate governance quality influences the financial performance of EU commercial banks. 1.4 Research Questions a) How does environmental responsibility affect the financial performance of EU commercial banks? b) What is the relationship between social responsibility initiatives and the financial performance of EU commercial banks? c) To what extent does corporate governance quality influence the financial performance of EU commercial banks? 9 1.5 Significance of Study This study is significant as it provides empirical evidence on the relationship between Corporate Social Responsibility (CSR) and financial performance (FP) in EU commercial banks, a sector where sustainability has become both a regulatory requirement and a competitive necessity. While prior research in manufacturing and non-financial sectors often confirms a positive CSR–FP link, the banking sector presents unique dynamics due to its systemic role, reliance on stakeholder trust, and exposure to reputational and regulatory risks (Van Nguyen et al., 2022). By focusing specifically on EU banks, this research contributes to clarifying whether CSR serves as a strategic asset that enhances profitability, risk management, and long-term resilience, or whether it remains primarily a compliance-driven cost. The findings will benefit multiple stakeholders. For policymakers and regulators, the study informs the effectiveness of EU directives such as the NFRD and CSRD in aligning financial incentives with sustainability goals. For bank managers, it provides insights into how CSR initiatives can be integrated into business models to create shareholder and stakeholder value. For investors, the study offers evidence on whether CSR disclosures can be used as reliable indicators of financial stability and future performance. Ultimately, this research strengthens the academic and practical understanding of how CSR shapes financial outcomes in one of the world’s most heavily regulated sectors. 1.6 Rational of the Study Research on the relationship between Corporate Social Responsibility (CSR) and financial performance (FP) has been widely explored, yet remains fragmented and inconclusive, particularly in the banking sector. Studies such as Fathi Jouini et al., (2025) in the U.S. commercial banking industry highlight a generally positive CSR–FP link but emphasize context-specific effects. In contrast, Jamil & Ersa Tri Wahyuni, (2025) argue that CSR disclosures can sometimes be symbolic, with limited measurable impact on profitability, raising questions about causality and greenwashing. Similarly, Gkliatis et al., (2023) examined CSR in manufacturing versus banking sectors and found heterogeneous results CSR contributed more significantly to industrial firms 10 than to financial institutions. These inconsistencies reveal both methodological weaknesses (varying CSR/FP measures, short time horizons, inadequate controls for endogeneity) and contextual gaps (limited focus on EU commercial banks under evolving sustainability regulations). This research is unique because it situates the CSR–FP nexus within the specific institutional framework of the European Union, where directives such as the NFRD and CSRD mandate rigorous sustainability disclosures. Unlike earlier global or U.S.-focused studies, this study evaluates whether EU banks derive tangible financial benefits from CSR initiatives in a highly regulated, post-crisis, sustainability-driven environment. If this research gap is not addressed, policymakers risk designing ineffective CSR regulations, bank managers may either underinvest in meaningful CSR or overinvest in symbolic initiatives, and investors may misinterpret CSR disclosures leading to misallocation of resources and persistent skepticism about CSR’s financial relevance. On the other hand, closing this gap will produce evidence-based information to support strategic CSR investment, regulatory according to financial stability objectives, and assist investors to find sustainable, resilient banks. In the end, it enhances academic knowledge and practical decision making by explaining the role of CSR in improving the competitiveness and legitimacy of EU commercial banks. 1.7 Framework of the Study First of all, the study is rooted in CSR as a strategic and regulative based activity which entails environmental, social and governance (ESG) concerns. Not only is CSR in the European meaning voluntary but is also harshly stipulated by the actions such as NFRD, CSRD and disclosure and accountability has become an inevitable part of the banking operations. Secondly, this research is restricted to the firm financial performance measures including profitability (ROA, ROE), market value (Tobin, Q) and risk measures (non-performing loans, cost of equity). This ensures that CSR outcomes have been assessed in reputational or ethical terms, and in quantifiable financial terms relevant to shareholders/ regulators and policymakers. 11 Finally, the study is framed within the context of EU commercial banks, which is a sector with systemic importance, with greater regulatory difficulty and heightened stakeholder attention in the wake of the 2008 financial crisis. By focusing on this sector, the study would be more pertinent, as the banks are a source of and an indicator of the transition toward sustainable finance in the EU. The study aims to address a severe research gap and provide evidence-based data on the proposition that CSR is an expensive issue, a regulatory measure, or a part of sustainable financial performance of EU banks through the convergence of the three dimensions. 12 02. CORPORATE SOCIAL RESPONSIBILITY 2.1 Industry Background The European commercial banking business is among the most regulated and systemically significant businesses in the world economy. Further EU bank reforms and increased emphasis on Basel III and European Banking authority (EBA) capital adequacy, risk coverage, and disclosure regulation followed the financial crisis of 2008 (He, 2021). Accordingly, low interest rates, increased competition within the FinTech industry, and the necessity to transition to sustainable finance have tidied up the industry (Shajara Ul-Durar et al., 2024). Now an element of the Environmental, Social, and Governance (ESG) standards, Corporate Social responsibility (CSR) has emerged as a strategic aspect of banks. The establishment of the Non- Financial Reporting Directive (2014/95/EU) and its replacement, the Corporate Sustainability Reporting Directive (CSRD, 2022), has institutionalized sustainability disclosures and positioned banks at the stage where they should take into account the social and environmental dimensions of their fundamental strategies (Helfaya et al., 2023). So, in the bank example, CSR is not a charity tool since it is backed with the elimination of risks, reputation capital, and trust (Nguyen, 2022). In addition, the European banks are central to the funding of the green deal and climate neutrality by the year 2050 in the EU, which makes CSR a regulatory and a commercial instrument. Despite the existence of reports, which also support the point of view, that CSR activities are linked to the enhancement of the financial performance as a result of reduction of the amounts of money spent as well as the enhancement of the trust of the stakeholders, there are also reports of the presence of the evidence of greenwashing and rise of the compliance costs (Rahman et al., 2023). In this way, the industry is at the crossroads between the financial performance pressures and the growing sustainability responsibility, and the CSR–FP nexus is an essential focus of research. 13 2.2 Corporate Social Responsibility (CSR) According to Carroll (1999), Corporate Social Responsibility (CSR) refers to the economic, legal, ethical, and philanthropic responsibilities that organizations hold toward society. It reflects the notion that businesses should operate not only for profit but also for the benefit of stakeholders and the wider community. Khuong et al., (2021) further define CSR as the representation of social and environmental issues in business activities and in stakeholder relations, emphasizing that it is voluntary, although it is growing regulative in Europe. Charity and responsible lending alongside open governance and environmental sustainability are all CSR in the banking industry (Dorasamy, 2013). It is expected that banks will be able to manage social risks, promote green investments and ethical financial practices, and this will contribute to achieving a balance between profitability and sustainability objectives. It is worth noting that CSR has emerged as a strategic resource, which can have a positive impact on legitimacy, reputational capital, and reduce financial risks. The rules that were put forward by the government and accepted as a legal framework in the EU environment and made disclosure of CSR a centralized process and turned it into a natural part of responsibility and credibility are the NFRD and the Corporate Sustainability Reporting Directive (CSRD) (Tommaso Fornasari and Traversi, 2024). In this research therefore CSR is understood to be the process of integrating the concepts of environmental, social and governance into the activities of commercial banks in order to create an equilibrium between the goals of the business and that of society. 2.3 Evolution of CSR The development of Corporate Social Responsibility (CSR) can be traced back to the concept of the philanthropic and ethical requirement in the early 20th century to the concept of strategic incorporation into the corporate processes in the present-day reality. First, CSR was a voluntary exercise of corporate philanthropy, and companies participated in welfare and charity work in the community. The 1970s and 1980s however experienced the shift of CSR to a more organized concept due to the stakeholder theory and sustainability movements which associated social responsibility to long term profitability and reputation (Kakabadse, Rozuel and Lee-Davies, 2005). CSR in the 21st century was institutionalized with international standards like the UN Global 14 Compact and CSR directives of the European Commission informing it. This was necessitated by increasing demands of transparency, ethical management and environmental responsibility in the business world (Marta Isabel Garccia-Rivas et al., 2023). To the EU commercial banks, this transformation was a change in compliance-driven CSR to performance-oriented strategies that are in line with social, environmental and economic objectives. Currently CSR has become a competitive weapon to improve competitiveness, create trust among the stakeholders and guarantee sustainable financial performance. 2.4 Drivers for CSR The modern-day banking corporate Social Responsibility (CSR) motivations are varied and encompass regulatory, ethical, market and stakeholder motivations. The regulatory systems in the European Union and other states have imposed sustainability reporting and good governance that governs that the banks should incorporate CSR (Birindelli et al., 2013). There also exist ethical and reputational problems that work to facilitate building of trust within institutions by ensuring business practices are in tandem with the social and environmental expectations. The investors have also put pressure and competition in the industry, resulting in CSR as a differentiating factor that has increased brand equity and customer loyalty (Etikan, 2024). Social awareness of the clients and employees has also played a part in the necessity to possess sustainable banking operations. That being the case with the EU commercial banks, CSR is assuming a new direction as a way of managing the systemic risks such as environmental degradation and social inequality that can directly impact financial stability. The implementation of the ESG (Environmental, Social, and Governance) criterion in the investment and lending processes is an excellent illustration of how the CSR drivers have been shifted to strategic, rather than philanthropic, requirements. Such forces ultimately lead to the unification of the ethical responsibility and economic performance and prove the notion that the social responsibility of the banking business is not only necessary in morality, but also in finances. 15 2.5 CSR in EU Commercial Banks The European banking industry has strategic aspect that necessitates Corporate Social Responsibility (CSR) because the EU has resolved sustainable finance and responsible corporate practice. EU commercial banks have adopted CSR in the aspects of ethical lending, green financing, financial inclusion and good governance transparency. The banks were also more scrutinized by society after the financial crisis of 2008 and CSR was brought in as the trust-winning mechanism (Forcadell & Aracil, 2017). The most common types of CSR activities in these institutions are to minimize carbon footprints, community development, financial literacy, and comply with the ESG requirements. Also, structures such as the EU Green Deal or the Sustainable Finance Disclosure Regulation (SFDR) have institutionalized CSR into the banking practices as a direct link between regulatory compliance and performance metrics (Lamanda & Tamassne, 2025). The process of integrating CSR in strategic management helps EU banks in increasing shareholder value and confidence of the stakeholders in the long run. Moreover, CSR reporting and indices of sustainability have become a reference point for the assessment of competitive advantages and ethical actions in the industry. This incorporation of CSR highlights the end of short-term profitability and the sustainable, long-term value generation in European banking. 2.6 Firm Financial Performance (FFP) Firm Financial Performance (FFP) is a multidimensional indicator that represents efficiency, profitability and value creation of a firm. Yan Zhao Wang & Ahmad, (2024) notes that FFP includes both market and accounting-based indicators like stock performance and the Tobin Q and Return on Assets (ROA) and Return on Equity (ROE), because profitability is affected by intangible resources, including innovation and relations with stakeholders. Shabir et al., (2024) notes that financial performance in the banking industry is closely related to proper risk control, cost- efficiency, and stakeholder trust, especially in the context of CSR practices affecting the cost of capital and deposit stability. Although short-term results like quarterly profits are commonly reported, long-term performance is an indicator of sustainability, reputation and risk-adjusted returns. The financial performance in the EU banking environment is now being assessed not just based on conventional profitability, but also the ability to withstand risks that are related to ESG 16 issues (Liu & Xie, 2024). Accordingly, in this paper, FFP is considered as the degree to which EU commercial banks are financially viable and profitable in terms of both conventional accounting metrics and commercial indicators and considering the risk reduction of CSR practices. 17 03. THEORETICAL BACKGROUND 3.1 Stakeholder Theory Stakeholder Theory is the view that firms are not only responsible to shareholders but also to a wider group of stakeholders such as employees, customers, communities and regulators (Freeman, 1984). According to this school of thought, long-term success requires a balancing of different interests, not just the maximization of shareholder wealth. Clarkson (1995) states that critical resources are supplied by stakeholders, and those firms that satisfy stakeholders have a higher chance of attaining sustainable performance. The theory can be applied in CSR, where socially responsible actions can help the bank become more legitimate, trusting and financially successful through stakeholder loyalty (Jamali, 2008). Donaldson and Preston in 1995 also point out that Stakeholder Theory is descriptive, instrumental, and normative in nature. It describes descriptively how companies work when they have more than one relationship with the stakeholders (Niklas Egels, 2004). Instrumentally, it connects CSR to performance by demonstrating that the firms who practice stakeholder management outperform those that do not practice stakeholder management. Normatively, it claims that companies have an ethical responsibility to look at all stakeholders. In the case of EU commercial banks, the theory offers a robust explanation as to why CSR must be part and parcel of strategy as it is imperative to ensure that the bank retains trust in the eyes of depositors, regulators and communities in order to be stable and profitable. Finally, Stakeholder Theory forms the basis of the CSR financial performance nexus by demonstrating that the management of stakeholder expectations can be not only ethical but also long-term financially advantageous. 3.2 Legitimacy Theory Suchman (1995) indicates that Legitimacy Theory suggests that organizations want to operate within the confines of societal expectations and norms in order to survive and remain in a position to avail resources. According to this theory, legitimacy is an abstract notion, which describes the 18 idea that the activities of a firm are preferable and just in a socially constructed order of values. Within the frame of CSR, Mousa and Hassan, (2015) posits that companies adopt socially responsible behaviors to uphold or restore legitimacy, particularly when they are subject to social and regulatory attention or a shift in regulations. Lindblom in 1994 adds that disclosure strategies, that organizations employ to match the expectations in society and cope with legitimate gaps, include sustainability or CSR reports. That these directives are presented within the framework of commercial banking of the EU structure, in some form or other, both NFRD or CSRD suggests the impact of these requirements on the credibility of the banking institution, which they have, and thus, responsible practice will be unavoidable (Schroder, 2022). Failure to do so can lead to a tarnished image, investor loss or fines. On the other hand, active CSR practices may generate fewer regulation risk, socially responsible investors and legitimacy. As an EU bank, the Legitimacy Theory would offer a paradigm to identify why CSR disclosure and performance are essential in the era of increased sustainability requirements. It emphasizes that not only is CSR a voluntary ethical decision, but it is also a strategy to address the pressure of society. That is why Legitimacy Theory reinforces the arguments to consider the role CSR may play in financial performance and connect compliance, reputation, and stakeholder trust to economic performance. 19 04. LITERATURE REVIEW 4.1 Environmental Responsibility Carroll (1991) defines environmental responsibility as the ultimate form of corporate social responsibility whereby firms go beyond economic and legal requirements to engage in active protection and conservation of the natural environment. The problem of climate change, the loss of biodiversity and resources exploitation are international issues, which are urgent, and it is necessary to discuss them in this respect. This does not imply that environmental friendliness no longer remains a luxury aspect of business strategy particularly banking business; in fact, environmental friendliness remains an aspect of business sustainability and risk management. Wu (2025) states that financial institutions should play a special responsibility to hold the environment responsible for the implication of investment flows. Banks have the opportunity to invest in environmentally sustainable activities, including renewable energy, green infrastructure, and low-carbon technologies, by deciding where to lend and invest. This is an indirect role which leaves commercial banks as powerful agents of environmental outcomes, despite the fact that they do not emit as much as heavy industries. In this way, environmental responsibility in banking can be seen as the application of environmental risk assessment to the credit decision-making process, the promotion of green finance, and minimizing the ecological footprint of the bank itself. According to Dobre et al., (2025) one can take environmental responsibility in two ways: explicit and implicit. Explicit environmental responsibility, supportive interventions such as reporting sustainability, green policy and carbon neutrality. Compliance with regulations and institutional norms form the basis of implicit responsibility, especially in the EU where banks are bound by the Corporate Sustainability Reporting Directive (CSRD) to comply with high-quality disclosure requirements. This has been made into a duo, and hence as a bank, it is not only legally responsible but also expected socially to tackle environmental issues. Moreover, Stauropoulou et al., (2023) states that environmental responsibility results in the improved status of the reputation and financial position of the firm. In line with international 20 sustainability, companies reduce environmental risks, attract socially responsible investors and enhance trust among stakeholders. In the case of EU commercial banks, this fit also lowers the regulatory risk and contributes to the aim of the EU Green Deal to be made climate neutral by 2050. Any lack of maintaining environmental responsibility, however, may result in reputational damage, market credibility, and greater exposure to financial risks associated with climate change. As it is applied in the context of the current study, environmental responsibility can be viewed as a strategic/regulatory-based initiative of the EU commercial banks to reduce adverse ecological effects and enhance sustainability in their activities, disclosures, and financing. It is a vitally important aspect of CSR that protects the integrity of the environment and improves long-term financial performance by aligning banks with the changing expectations of society and regulatory environment. 4.2 Social Responsibility As Carroll (1991) opined, as part of the pillar of Corporate Social Responsibility (CSR), social responsibility means that the firms must be ethical and participate in activities that help the society as a whole beyond their legal and economic obligations. Since economic and legal commitments ensure the continuity of the operations, the social responsibility is the equitability, fairness, and sustenance of the rights of the interested parties. It touches upon such issues as fair work, workplace diversity, and community and human rights activism. These include inclusion funding, not exploiting customers, and community-based projects in the banking sector. Based on the premises of Roszkowska-Menkes, (2021), social responsibility has the capacity to create shared value through matching the flourishing of the business with the development of society. But more importantly, the financial institutions that sponsor the financial literacy programs will not only be enhancing the welfare of the community but will also be establishing a long-term relationship with the consumers. This highlights the instrumental character of social responsibility that contributes to legitimacy, reputation and competitive advantage during the development of solutions to acute social problems. The practices play quite a significant role in 21 stabilizing the EU banks that are working in different societies where transparency and trust are the dominant factor. Innocent et al., (2024) state that the banking sector, being an intermediary, has certain social responsibilities as the implementation of the banking practice influences the overall economy. Decision making like lending can either lead to inequality or inclusivity based on the marginalized being given credit. Consequently, the social responsibility within the banking sector goes beyond making financial services accessible, affordable and ethical. This has been institutionalized in the EU under consumer rights, anti-discrimination and CSR disclosure regulations. Moreover, when discussing corporate social responsibility, Wirba, (2023) point out that corporate citizenship also entails corporations playing the role that governments are supposed to play, which could include giving back to education, healthcare, and social welfare systems. An increasing number of EU commercial banks are playing this role by investing in community projects, disaster relief, and social entrepreneurship. These activities not only generate social capital but also instill resilience and goodwill amongst the stakeholders. Within the framework of the current research, social responsibility can be defined as the willingness of EU commercial banks to maintain ethical practices, inclusivity, and social welfare by means of responsible actions and functioning within society. It embodies the social dimension of CSR, and it demonstrates that financial institutions have a duty beyond profitability to society, and that such duty can strengthen long-run viability and financial performance. 4.3 Corporate Governance Quality Farinha, (2003) defines corporate governance as the processes through which providers of finance are assured of returns on their investment by managers. Corporate governance (CG) of good quality is thus essential to bring the interest of managers, shareholders, and stakeholders into alignment. The quality of governance includes board independence, transparency, shareholder rights, and effective monitoring systems which minimize the fear of managerial 22 opportunism. Governance failures in systemic risk countries in the banking sector can be far reaching in their financial stability impact. According to Ferran and Hickman, (2024) the quality of corporate governance depends on institutional, ownership and regulatory structures. Harmonized regulations (capital requirements directive (CRD IV) and the guidance of the European Banking Authority) enhance the new standards of governance within the EU, exposing the organisation to high-risk management, disclosure and accountability regimes. These regulations provide a higher level of governance as the banks are expected to maintain a balance between profit and prudential regulation. Al Astal et al., (2024) claim that quality governance decreases the risk-taking, increases investor confidence, and valuation of the firm. In the case of banks, good governance guarantees good internal control mechanisms, principled behavior, and adherence to environmental and social principles, and is at the heart of the wider ESG agenda. It is especially pertinent that the quality of governance applies here in reference to CSR because the quality of governance is what predetermines the effectiveness of implementing and monitoring sustainability commitments. Corporate governance quality, in the case of this paper, can be defined as the quality of the oversight mechanisms, transparency practices as well as accountability structures of the EU commercial banks. It also makes certain that the CSR activities are not being conducted as a performance, but part and parcel of the strategic decision-making process which will not only result in them getting a good financial performance but will also win them the trust of the stakeholders. Good governance therefore becomes a mediating factor between the CSR and financial performance of firms, supporting resiliency, legitimacy, and long-term sustainability. 4.4 Firm Financial Performance Mahmood et al., (2020) described firm financial performance (FFP) as the level at which an organization achieves its financial objectives typically in the form of profitability, growth, and market value. It is a multidimensional scale capable of quantifying accounting-based measures of 23 Return on Assets (ROA) and Return on Equity (ROE), and those that have a market base, such as stock returns and the Q of Tobin. The measures provide a combined image of efficiency, competitiveness, and value creation in the firm. According to Al Masud et al., (2025), financial performance must be measured by the commonly used accounting measurements; it must also be assessed by the non-financial drivers which would lead to the creation of long-term value through innovations, customer satisfaction, and sustainability. This wide scope brings to focus the fact that financial performance is characterized by intangible resources and strategic projects. According to Huang et al., (2025), in the banking sector, FFP is directly coupled with effective risk management, cost management and stakeholder trust, given that CSR activities may reduce cost of financing and enhance reputation. Furthermore, Torre Olmo et al., (2021) show that socially responsible banking institutions are likely to have a superior financial performance due to their ability to foster the creation of an aura of trust and legitimacy that stabilizes deposits and draws socially responsible investors. Therefore, FFP is not only a measure of the success of the operation but also to the extent to which the effectiveness of firms lies in the balance between profitability and ethical and sustainable behavior. Firm financial performance in the present study is a capability of EU commercial banks to attain sustainable profitability and sustainability in the form of accounting and market metrics with reference to moderating role of CSR in determining financial stability and competitiveness. 4.5 Relationship between Environmental Responsibility and Firm Financial Performance Carroll (1991) observes that environmental responsibility is the most progressive aspect of corporate social responsibility (CSR), as it shows the interest of a firm in environment in support of economic expansion. The expression of environmental responsibility in the financial sector and, in particular, in the banking industry is sustainable lending, green investment, and eco- efficiency of operations. As Galletta et al., (2024) observed, even though banks are not direct 24 polluters, their credit decisions have a strong impact on environmental performance and can either foster sustainable performance or continue to pollute the environment. There is evidence of a positive impact of environmental responsibility on the firm financial performance (FFP). Md Safiullah et al., (2024) is of the view that the proactive green steps of business firms will help them have better reputation, less risks of regulation and investor trust which will subsequently translate to their high financial performance. The implementation of environmental risk assessment on lending enables the EU commercial banks to avoid the risk of holding stranded assets in the carbon-intensive industries as well as reduce the risk of credit over the long term. This coincides with Matten and Moon, (2008) who note that environmental disclosure is increasingly becoming mandatory in the EU, and therefore voluntary disclosure is not only ethical, but also cost wise prudent. Secondly, green responsibility opens up innovation and growth markets. Agrawal et al., (2023) hold that the effectiveness of eco-innovation can be achieved by reducing waste and expenditure on resources that improve profitability. With EU banks, investing in green bonds, sustainable businesses producing renewable energy and making investments in renewable energy, funds are not just going to pay off, but they will be the first of their kind to make the jump to a low-carbon economy in the EU. This type of strategic alignment with the European Green Deal results in better market legitimacy and competitiveness. Lack of consideration of environmental issues, however, may have a negative impact on financial performance. Aderibigbe & Fragouli, (2020) cautions that reputational loss due to environmental negligence results in loss of customers, lawsuits, and increases in capital costs. The risk is compounded by the systemic nature and dependency of the stakeholders, in the case of banks. Therefore, environmental responsibility is used as a defensive tool against risk and as a proactive tool to create financial value. Finally, environmental responsibility improves financial performance of companies because it results in reduced ecological risks, reputation, regulation and innovation opportunities. In the case of EU commercial banks, this task is especially urgent because the financial performance of 25 this group of banks is becoming more and more dependent on adherence to sustainability standards, the requirements of stakeholders, and international climate obligations. In order to empirically test the hypothesis of the relationship between environmental responsibility and firm financial performance, panel regression analysis was performed where the environmental (ENV) pillar score was used as the independent variable and Return on Assets (ROA) and Market-to-Book Ratio (MBR) were the dependent variables. The findings show that environmental responsibility significantly affects ROA positively and statistically, which implies that EU commercial banks that understand environmental responsibility better are more profitable with regard to their assets. Association with MBR is positive but less significant, suggesting that markets partially price environmental performance. These results substantiate the hypothesis that environmental responsibility leads to the better financial performance of a company based on the mitigation of risk and regulation and the strengthened faith of the stakeholders. 4.6 Relationship between Social Responsibility and Firm Financial Performance Carroll (1991) defined social responsibility as ethical practices in relation to stakeholders, communities and society in general. It focuses on fairness, equity and inclusivity, rather than compliance. Within a bank, this position relates to financial inclusion and community development and protection of the customer. Marshal Iwedi & Iheanacho Princewill Wachukwu, (2024) note that, since banks play the role of financial intermediaries, they have been found to have a social influence on the allocation of credit and investment practices, which either mitigate or compound inequality. Andre, (2014) indicates that social responsibility can bring about a shared value, where the needs of society are met, and in the process the profitability of the company also increases. Indicatively, EU commercial banks investing in financial literacy or in micro credit initiatives help not only to lift up the oppressed populations, but also increase their customer base, hence enhance future revenue flows. Gregor et al., (2022) also refer to this as corporate citizenship, in which firms take 26 on roles formerly the preserve of governments, including education and social welfare. By so doing they increase stakeholder trust and legitimacy, which will have a positive impact on financial performance. Empirical evidence available in Tran et al., (2021) and other U.S. commercial banks indicates that the socially responsible practices increase profitability through improvement of reputation, risk reduction and deposits stabilization. In the EU case, where CSR disclosure has become institutionalized in the form of the Corporate Sustainability Reporting Directive (CSRD), the more socially responsible a bank is, the more socially conscious investors turn to them, and customers are less likely to switch banks. This would allow this compliance with regulatory, and stakeholder demands to reduce the reputational power and threat. On the other hand, failure to observe social responsibility may be costly. In the aspect of the effect of responsible lending, Rosa, (2025) affirms that failure to lend to the needy and the undeserving masses will cause mistrust and might result in regulation. In addition, the impossibility to transform into socio-cultural inclusive and even-handed throughout the course of social activism can lead to the onset of the reputation crisis that will lead to the loss of customers and the loss of the trust of the investors. In summary, social responsibility has been a key factor in enhancing the financial performance of companies due to the development of stakeholder trust, customer base, reputational risk reduction, and achievement of EU social sustainability goals. When it comes to the social responsibility of commercial banks it is both a moral necessity and a strategic tool of profitability and survivability in a very competitive and very regulated environment. The empirically test the association between social responsibility and financial performance of firms using the independent variable (social (SOC) pillar score) and the dependent variables (Return on Assets (ROA) and Market-to-Book Ratio (MBR)). These findings demonstrate that the relationship between social responsibility and ROA is positive and statistically significant, which means that competent European commercial banks of greater social interest are more profitable. The correlation with MBR is also good implying that social responsibility practices will increase the market value and confidence of investors. Such conclusions confirm the hypothesis that social 27 responsibility is a contributor to financial performance by enhancing the reputation, customer retention and trust of the stakeholders. 4.7 Relationship between Corporate Governance Quality and Firm Financial Performance Banda and Mwange, (2023) believe that corporate governance determines the modalities of securing and leveraging financial resources in returns to the investors as much as possible. Good corporate governance (CG) practices result in transparency, accountability and good oversight which reduces agency problems and maximizes firm value. Kusi et al., (2018) argue that systems of governance vary in different institutional contexts, although well-governed systems in institutionally diverse contexts all promote investor confidence and reduce risk-taking. Capital Requirements Directive (CRD IV) and other rules and regulations improve the quality of governance in the EU banking sector by independence of boards, risk management and disclosure requirements. Improving the capitalization strategies and risk-adjusted performance of the banks, as Giannopoulos et al., (2024) show, is achieved through developed governance structures. Good governance would ensure that CSR promises are not hollow but as part of the banking business so as to create a mutually supportive relationship between sustainability and long-term profitability. Youseaf & Serum, (2024) also show that having a good government system makes a bank better than others of the same category, as this system will boost the effectiveness of the bank. Gokhan Ozer et al., (2024) have gone a step further to opine that accountability by the stakeholders can be measured in terms of quality of governance whereby, besides the shareholders, the whole society is accountable to the company. This becomes particularly true in the EU where banks are being compelled to comply with CSR and ESG disclosure requirements. This content will be realistic with proper governance, and the threat of greenwashing and bad publicity will also be minimized. 28 However, ignoring the quality of governance puts banks in a lot of danger. Poor governance can lead to financial misdiagnosis, inadequate risk management and trust crises as experienced in previous financial scandals. In the case of EU banks, where legitimacy and stability are the most important factors, poor governance would lead to poor financial outcomes and other aspects of systemic confidence. Moreover, the quality of corporate governance has a direct impact on the financial performance of the firm because it enhances transparency, risk monitoring, investor confidence, and strategic incorporation of CSR. In the case of EU commercial banks, governance is the essential linkage point between sustainability practices and financial resilience, and thus a determining factor of long-term performance. To test the relationship between corporate governance quality and the financial performance of firms empirically, panel regression analysis was performed to identify the relationship between the corporate governance quality and the dependents, which are Return on Assets (ROA) and Market-to-Book Ratio (MBR). The findings indicate that there is a statistically significant and positive relationship between the governance quality and the ROA and MBR. This means that EU commercial banks, which have a greater governance structure, have greater profitability and a better market value. The results substantiate the hypothesis that good governance increases transparency, less agency and reputational risks and credible execution of CSR activities, which reinforce long-term financial performance. 4.8 Research Gap Although an increasing number of studies have been carried out on the relationship between Corporate Social Responsibility (CSR) and the firm financial performance (FFP), there have been considerable gaps, especially within the environment of European Union (EU) commercial banks. Carroll (1991) describes CSR as the functions of the environment, social, and governance issues, but the financial sector is not well investigated (studies tend to cover manufacturing or non- financial sectors). Although studies like Cornett et al. (2016) show that CSR and profitability are positively correlated in commercial banks in the United States, the results cannot be directly 29 applied to the EU banks as their activity is regulated by a specific regulatory and institutional framework, which is the Non-Financial Reporting Directive (NFRD) and the Corporate Sustainability Reporting Directive (CSRD). There are inconsistent results in existing studies, too. Agrawal et al. (2023) and Aderibigbe and Fragouli (2020) also note the financial benefits of eco-innovation and environmental responsibility, and reputational and compliance risks that, in turn, disproportionately paper over short-term monetary gains. On the same note, Tran et al. (2021) observe that U.S. banking social responsibility activity is profitable, and Rosa (2025) observes that irresponsible conduct is dangerous in Europe. These discrepancies demonstrate that there is no agreement concerning the CSR nexus of FFP, particularly in terms of the interactions between various dimensions of CSR, which affect financial results. Besides, the quality of governance despite being a well-researched factor in determining the performance of firms (Shleifer and Vishny, 1997; Giannopoulos et al., 2024) has not been effectively incorporated in the CSR-FFP research in EU commercial banks. Most of the previous studies consider environmental and social aspects separately without considering the mediating or moderating aspect of governance in guaranteeing that CSR promises are converted into tangible financial gain. This holds the greatest significance because governance structures determine the feasibility of CSR disclosures and the extent to which CSR is reflective of corporate strategy (Kusi et al., 2018). As a result, the available literature contains three key gaps: (1) a lack of empirical attention to EU commercial banks operating in the context of changing sustainability policies; (2) the discrepancy within the research on the direct and indirect impact of the environmental and social responsibility on financial performance; and (3) a lack of incorporation of the quality of governance as the factor of CSR effectiveness. These gaps have to be addressed so as to offer solid, situation-specific evidence to the policy makers in the European Union, the managers of the various banks and investors. With no content to fill these holes, CSR will remain as a compliance expense rather than a strategic source of financial fecundity and competitiveness. 30 05. Data and Methodology This chapter presents the data and methods that will be used in the analytical part of this study. The first section presents the data sample, which is in terms of Corporate Social Responsibility (CSR) indicators and financial performance information of EU commercial banks. It also shows descriptive statistics that show the nature of the data set. The second section summarizes the variables in the research and how the regression model that is to be used in investigating the association between CSR and financial performance was developed. 5.1 Hypothesis Following is the hypothesis of the research H1: Environmental responsibility has a significant impact on the financial performance (ROA) of EU commercial banks. H2: Environmental responsibility has a significant impact on the market valuation (MBR) of EU commercial banks. H3: Social responsibility has a significant impact on the financial performance (ROA) of EU commercial banks. H4: Social responsibility has a significant impact on the market valuation (MBR) of EU commercial banks. H5: Corporate governance quality has a significant impact on the financial performance (ROA) of EU commercial banks. H6: Corporate governance quality strengthens the relationship between CSR and financial performance. 31 Data Under this section, both CSR and financial data are discussed. The data set comprises data obtained in two distinct sources namely CSR indicators and financial performance variables. The independent variable is CSR data while the dependent variable and control variables are constructed using the financial data. Both CSR and financial information are gathered through LSEG (London Stock Exchange Group) database which was previously called Refinitiv which offers standardized and similar ESG and financial metrics of commercial banks across Europe. The sample will consist of commercial banks, which will be operating in the European Union (EU) between 2020 and 2024. In order to achieve the lagged effect of Corporate Social Responsibility (CSR) on Corporate Financial Performance (CFP), the research focuses on comparing the financial performance of a particular year with the previous year CSR (ESG) performance, as CSR initiatives are usually expected to affect financial performance in the long term and not in the short term (Brammer & Millington, 2008). To put the regression analysis to use, it was necessary to have all the variables in firm-year combinations at full data availability. As a result, banks that lacked or had incomprehensive data were eliminated out of the sample. Consequently, some of the banks were included in the dataset throughout the study period whereas, others were included during a given period of time based on the availability of the data. The refined data set after the process of data cleaning and refinement contained about 85 firm-year observations. In order to be robust, the memorization of outlier values was done at the 0.5 percentile to reduce the effect of extreme values and enhance result reliability. 5.1.1 CSR data The empirical part of this study employs the CSR data gathered with the LSEG (London Stock Exchange Group) database that gives detailed Environmental, Social and Governance (ESG) ratings of listed commercial banks in the European Union. All regression models take these ESG scores as the key independent variable which defines the level of corporate social responsibility of each bank. All scores are based on a 0-100 scale with the higher the scores the greater the CSR engagement and sustainable business behaviors. 32 To create the total ESG score and its three pillars, the LSEG (2023) database lists about 17 ESG indicators that are divided into 10 broad themes. The environmental pillar has indicators which are emission control, resource efficiency and green innovation. The social pillar includes elements connected with labor practices, customer responsibility, community engagement and compliance with human rights. The pillar of governance incorporates the variables that are associated with the board structure, the rights of shareholders, the executive remuneration, shareholder transparency and the general approach to strategic sustainability. The scores in each pillar are computed with proportionate weightings that each subcategory has over the others and the overall ESG score is a composite indicator of the performance of a bank in terms of CSR performance. This uniform system of scoring also helps in comparability in different EU banks and over a period of time, this modular approach proves to be a stable and dependable evaluation of the effects of CSR initiatives on financial performance in the European banking industry. Figure 1: Summarizes Refinitiv's entire ESG structure (Source: Author) ESG Score Environmental Resource Use Emissions Innovations Social Workforce Human Rights Community Product Responsibility Governance Management Shareholders CSR Strategy ESG metrics, 186 data points 103 data points 33 5.1.2 Financial Data In order to formulate the dependent variables, which are the Return on Assets (ROA) and Market- to-Book Ratio (MBR) and various control variables including bank size, leverage as well as asset turnover, this research uses the financial data obtained through the LSEG (London Stock Exchange Group) database. The data set gives standardized financial data on commercial banks within European Union which makes it accurate and comparable across countries and across the years. All the banks will be classified based on the European banking sector classification, which will allow the research to consider any potential differences in financial performance within the banking segments and market settings. The classification assists in determining whether the CSRCFP associations vary among large, diversified banks and small or specialized institutions. The methodology section will also give the computation and use of these financial variables in the regression models that measure the effect of CSR on the profitability and value of firms in the market. The complex description of the features of financial and CSR variables including mean, median, standard deviation, and ranges are also given in the descriptive statistics section and give a clear vision of the structure and variability of the sample. 5.1.3 Descriptive statistics Although Table 1 shows the distribution of commercial banks in various EU member states and the types of banks, Table 2 gives the quantitative summary statistics of the variables used in the study that are mean, median, standard deviation, minimum, and maximum values. These descriptive statistics can give a picture of the nature of the data and variation among the sampled banks showing the differences in the level of CSR performance, financial performance and control variables among the European banking spectrum over the period of the study. 34 Table 1: Descriptive Statistics (Source: Author) 5.2 Methodology 5.2.1 Sample The initial population for this study consists of all commercial banks headquartered in European Union (EU) member states and available in the LSEG database during the period 2020–2024. The LSEG database provides standardized ESG pillar scores (Environmental, Social, Governance) alongside financial statement variables, making the data capable of cross-country comparisons. Due to the availability of data and requirements for consistency, the empirical sample is restricted, even though the conceptual population includes all EU commercial banks. The sample construction followed a structured multi-stage filtering process. Stage 1: Identification of EU-listed commercial banks Initially, all EU commercial banks that were categorised within the LSEG's commercial banking industry were recognised. Since ESG scores are primarily available for publicly traded companies with mandated disclosure requirements, only listed banks were included. Stage 2: ESG data availability filter Banks that did not have complete ESG data (pillar scores and overall ESG score) for a minimum of two years in a row were eliminated. Consecutive observations were required to build the empirical models because the analysis included lagged CSR variables. ROA MBR FIRMSIZE LEVERAGEASSETTURNOVER ROE NIM COSTTOINCOMERATIO NPL EPS Mean 0,00 0,54 988228690,18 0,05 0,08 0,01 7,06 2,59 2,40 Median 0,00 0,51 845925000,00 0,04 0,08 0,01 4,93 2,63 1,54 Maximum 0,02 1,46 2701529000,00 0,11 0,22 0,03 355,84 6,20 9,20 Minimum -0,01 0,05 165838120,00 0,02 -0,12 0,01 -426,73 0,00 0,00 Std. Dev. 0,00 0,29 696146777,12 0,02 0,06 0,01 67,29 0,90 2,51 Skewness 0,22 0,89 0,81 0,95 -0,76 0,76 -0,89 0,43 1,23 Kurtosis 4,14 3,93 2,76 3,87 4,64 2,96 32,00 5,41 3,37 Jarque-Bera 5,28 14,17 9,47 15,43 17,59 8,26 2989,40 23,17 21,93 Probability 0,07 0,00 0,01 0,00 0,00 0,02 0,00 0,00 0,00 Sum 0,40 46,00 83999438665,00 3,83 6,86 1,21 600,01 220,50 203,58 Sum Sq. Dev. 0,00 6,97 40708108164638488000 0,03 0,28 0,00 380341,75 68,64 529,65 Observations 85 85 85 85 85 85 85 85 85 35 Stage 3: Financial data availability filter Banks were further excluded if key financial variables were missing, including: • Return on Assets (ROA) • Market-to-Book Ratio (MBR) • Total Assets (for size) • Leverage • Asset Turnover To prevent biased estimations by missing data, only firm-year observations with complete information across all variables were retained. Stage 4: Data consistency and outlier treatment Extreme values were winsorized at the 0.5 percentile to improve reliability. Without significantly changing distributional characteristics, this step weakens the impact of outliers, which are frequently found in banking statistics. The final sample is an imbalanced panel of EU commercial banks with a total of 85 firm-year observations from 2020 to 2024, following the application of these filters and the combining of ESG and financial variables. Due to differences in ESG disclosure, listing status, or incomplete reporting, some banks enter or leave the dataset, creating an uneven panel. Instead of artificially limiting the dataset to a balanced structure, unbalanced panels, which are frequently used in cross-country banking research, enable the retention of all available high-quality observations. The relatively smaller number of firm-year observations compared to long-horizon banking studies is primarily driven by three methodological choices. First, the study focuses specifically on the 2020–2024 period to capture the post-NFRD regulatory environment and the transition toward enhanced sustainability disclosure under CSRD. Second, only listed banks with adequate 36 sustainability reporting are covered by LSEG; smaller or unlisted banks have not been included. Third, to prevent measurement bias and ensure internal validity, stringent requirements for data completeness were used. During the analysis, fixed effects for both year and country are applied to control for unobservable factors that might bias the results. Fixed-effects regression models assume that certain characteristics remain constant within each group (in this case, country or bank) but may differ across groups. In particular, the country fixed effects model adjusts institutional, economic and regulatory disparities among the EU countries and the year-fixed effects control captures macroeconomic and financial shocks which might affect the overall performance of the banking industry in the long run. Following the methodology of Sassen, Hinze, and Hardeck (2016), fixed effects are employed to ensure that variations in financial performance are attributed primarily to differences in CSR activities rather than external economic factors. This methodology improves the strengths and soundness of empirical data in determining the association between CSR and firm financial performance among commercial banks in EU. 5.2.2 Variables The dependent variables in the analytical stage of this research are the financial ratios, which will be used to test the impact of CSR performance on the financial performance of the EU commercial banks. The financial performance indicators are classified by their type accounting-based and market-based measures to assess the nature of this influence on both profitability and market valuation. According to the approach of Velte (2017), Return on Assets (ROA) is used to indicate profitability. ROA is a metric that determines how well a bank makes use of its total assets to make profits and is computed as follows. Return on Assets = Net Income Return on Assets (ROA) Despite the fact that ROA is a powerful tool in measuring internal operational efficiency, it mostly captures historical performance and thus is termed as a backward-looking measure (Ely, 1995). 37 In addition to this, the Market-to-Book Ratio (MBR) is applied as an indicator of the market-based performance that reflects the expectations of investors regarding the future profitability and value of a bank. The MBR combines the accounting values with the market values, and this provides a wider view in which the market values the worth of a firm. Aras and Yilmaz (2008) note that MBR is often used by investors to determine the perception of the market of the valuation of the equity of a company. It is calculated as follows. Market to Book Ratio (MBR) = Market to Book Ratio (MBR) Book Value of Equity The current research thus examines the impacts of Corporate Social Responsibility (CSR) on accounting-based (ROA) and market-based (MBR) financial performance. The first model series operates on the dependent variable ROA, and the effect of CSR on profitability is being measured, whereas the second model series operate on the dependent variable of MBR, and the impact of CSR on the valuation of firms is being studied. As the main goal of the study is to answer the question whether the increased level of CSR engagement results in improved financial performance, the ESG score based on the LSEG database is used as the most important independent variable. ESG is a proxy that is popularly used to represent CSR (Han, Kim & Yu, 2016), and it is a concept that embraces the environmental, social, and governance aspects of corporate conduct. In this regard, CSR and ESG are interchangeably used in this study because the two terms are not differentiated. Both the financial performance indicators ROA and MBR are regresses on the overall ESG score to determine the general CSR-firm performance correlation. In order to shed more light on these dimensions of CSR that have the highest impact, individual regressions are run with each of the ESG pillars (Environmental, Social, and Governance) as independent variables. The ESG values are based on the observation of the firm years obtained in the LSEG database. To enhance model robustness, several control variables are incorporated to account for other potential factors influencing financial performance. These are the bank size, leverage and asset turnover. According to prior studies, the bigger companies are more likely to practice CSR, as they 38 are more visible and pressure on them is higher (Waddock and Graves, 1997; Velte, 2017). The bank size is, therefore, regarded as an important control variable and is measured as the natural logarithm of total assets in line with the research carried out by Guenster, Bauer, Derwall and Koedijk (2011). Size = 𝐥𝐨𝐠⁡(Book Value of Total Assets) Leverage is another essential control variable, as highly leveraged banks are often more scrutinized by investors and regulators, leading them to disclose more CSR-related information (Atan, Alam, Said & Zamri, 2018). Leverage reflects the ratio of total debt to total assets and is computed as, Leverage = Book Value of Total Debt Book Value of Total Assets The Asset Turnover ratio is also included to capture operational efficiency. It indicates how effectively a bank utilizes its assets to generate income. According to McGuire (1988), higher asset turnover reflects better resource utilization and stronger performance. The ratio is calculated as follows. Asset Turnover = Net Operating Income Average Total Assets Finally, the regression models also include country fixed effects to capture differences in regulatory, economic, and institutional environments across EU member states, and year fixed effects to control for macroeconomic shocks or financial crises that may affect bank performance during the study period. Furthermore, since market capitalization can be influenced by profitability, models that use MBR as the dependent variable incorporate ROA as an additional control, and vice versa, following Guenster et al. (2011). 39 5.2.3 Regression models The two fundamental sets of regression models developed in this study, the first set represents accounting-based financial outcomes measured by Return on Assets (ROA), while the second set focuses on market-based financial outcomes represented by the Market-to-Book Ratio (MBR). Accordingly, 𝑅𝑂𝐴𝑖,𝑡denotes the dependent variable for bank i in year t, while 𝛽1 − 𝛽7represent the coefficients of the independent and control variables. The key explanatory variable, 𝐸𝑆𝐺𝑖,𝑡, measures the overall Corporate Social Responsibility (CSR) performance of each commercial bank, derived from the total ESG score reported in the LSEG database. To delve deeper into the impact of CSR on the financial performance, three more models are used replacing ESG_(i,t) with the three pillar scores Environment (ENV), Social (SOC) and Governance (GOV) to enable the study to determine what CSR dimension has the most significant impact on the bank profitability and market value in the EU member states. The general regression equation for the accounting-based model is as follows 𝑅𝑂𝐴𝑖,𝑡 = 𝛼 + 𝛽1𝐸𝑆𝐺𝑖,𝑡 + 𝛽2𝑆𝑖𝑧𝑒𝑖,𝑡 + 𝛽3𝐿𝑒𝑣𝑖,𝑡 + 𝛽4𝐴𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟𝑖,𝑡 + 𝛽5𝑀𝐵𝑅𝑖,𝑡 + 𝛽6𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝑖 + 𝛽7𝑌𝑒𝑎𝑟𝑡 + 𝜀𝑖,𝑡 For the market-based model, the following regression is estimated 𝑀𝐵𝑅𝑖,𝑡 = 𝛼 + 𝛽1𝐸𝑆𝐺𝑖,𝑡 + 𝛽2𝑆𝑖𝑧𝑒𝑖,𝑡 + 𝛽3𝐿𝑒𝑣𝑖,𝑡 + 𝛽4𝐴𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟𝑖,𝑡 + 𝛽5𝑅𝑂𝐴𝑖,𝑡 + 𝛽6𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝑖 + 𝛽7𝑌𝑒𝑎𝑟𝑡 + 𝜀𝑖,𝑡 The equations (6) and (10) assess the effect of CSR on profitability (ROA) and market valuation (MBR) respectively. In both of them, country fixed effects (Country) and year fixed effects (Year) are used to correct the institutional and regulatory differences between EU countries and time- related factors like macroeconomic cycles or financial crises that can affect the overall bank performance. Subsequent models (7), (8), and (9) extend Equation (6) by replacing 𝐸𝑆𝐺𝑖,𝑡with 𝐸𝑁𝑉𝑖,𝑡, 𝑆𝑂𝐶𝑖,𝑡, and 𝐺𝑂𝑉𝑖,𝑡respectively, while models (11), (12), and (13) replicate this approach for Equation (10) to analyze each ESG pillar separately. 40 Therefore, regression equations (6) to (9) examine the effect of CSR on the accounting-based financial performance, whilst equations (10) to (13) determine the impact of CSR on market- based financial performance. With its two-level analytical model, the research can focus not only on the total impact of CSR on the financial performance of firms but also on the comparative role of each of the ESG dimensions in the formation of financial success among the EU commercial banks. 41 06. Research Findings 6.1 The Relationship between Corporate Social Responsibility and Bank Profitability (ROA) in EU Commercial Banks Table 2: Correlation Analysis (Source: Author) Correlation Analysis Correlation matrix indicates strong relations between the key bank performance indicators. There is a strong positive correlation between ROA and ROE (0.955) showing that the profitability of the assets is closely related to the returns distributed to the shareholders. There is also a moderate positive relationship between ROA and NIM (0.614) and EPS (0.446), which implies that the increased interest margins and earnings per share lead to the improved performance of assets. There is a positive correlation between ROE and NIM (0.477) and EPS (0.452). Conversely, NPL is negatively correlated with ROE, EPS and ROA, which means that there is a correlation between credit risk and profitability. COSTTOINCOME exhibits inadequate and largely non- significant associations meaning that it correlates with measures of profitability. Correlation Probability ROE NIM COSTTOI... NPL EPS ROA ROE 1.000 ----- NIM 0.477 1.000 0.000 ----- COSTTOINCOM... 0.176 -0.096 1.000 0.107 0.382 ----- NPL -0.192 0.074 -0.052 1.000 0.078 0.501 0.637 ----- EPS 0.452 0.108 0.019 -0.192 1.000 0.000 0.325 0.865 0.079 ----- ROA 0.955 0.614 0.110 -0.184 0.446 1.000 0.000 0.000 0.314 0.091 0.000 ----- 42 Table 3: Regression Analysis (Source: Author) Regression Analysis (Random Effect) The results of the random effects regression show that ROE, NIM, and EPS significantly affect the dependent variable in a positive way as the coefficients of the regression model are positive, and the p-value of the coefficients is less than 0.05. The strongest effect is produced by ROE, which emphasizes the points of shareholder profitability. The interest income efficiency is also important since NIM improves performance significantly. A smaller contribution is made by EPS. On the contrary, cost-to-income ratio and NPL do not show any significant relationship implying that the operating efficiency and credit risk do not directly affect the dependent variable in the model. The model has a great explanatory power (Adjusted R 2 = 0.968) and general significant (Prob F-statistic = 0.000). Variable Coefficient Std. Error t-Statistic Prob. C -0.001 0.000 -2.957 0.004 ROE 0.053 0.002 29.529 0.000 NIM 0.127 0.021 5.962 0.000 COSTTOINCOMERATIO 0.000 0.000 1.361 0.177 NPL -0.000 0.000 -1.307 0.195 EPS 0.000 0.000 2.391 0.019 Effects Specification S.D. Rho Cross-section random 0.001 0.625 Idiosyncratic random 0.001 0.375 Weighted Statistics R-squared 0.970 Mean dependent var 0.002 Adjusted R-squared 0.968 S.D. dependent var 0.003 S.E. of regression 0.001 Sum squared resid 0.000 F-statistic 512.990 Durbin-Watson stat 1.509 Prob(F-statistic) 0.000 Unweighted Statistics R-squared 0.945 Mean dependent var 0.005 Sum squared resid 0.000 Durbin-Watson stat 0.550 43 Table 4: Hausman Test (Source: Author) Hausman Test Test Summary Chi-Sq. Statistic Chi-Sq. d.f. Prob. Cross-section random 6.465 5.000 0.264 Cross-section random effects test comparisons: Variable Fixed Random Var(Diff.) Prob. ROE 0.053 0.053 0.000 0.353 NIM 0.117 0.127 0.000 0.600 COSTTOINCOMERATIO 0.000 0.000 0.000 0.094 NPL -0.000 -0.000 0.000 0.771 EPS 0.000 0.000 0.000 0.273 Cross-section random effects test equation: Dependent Variable: ROA Method: Panel Least Squares Date: 01/02/26 Time: 17:44 Sample: 2020 2024 Periods included: 5 Cross-sections included: 17 Total panel (balanced) observations: 85 Variable Coefficient Std. Error t-Statistic Prob. C -0.001 0.001 -2.257 0.027 ROE 0.053 0.002 27.427 0.000 NIM 0.117 0.029 4.099 0.000 COSTTOINCOMERATIO 0.000 0.000 1.624 0.109 NPL -0.000 0.000 -1.285 0.204 EPS 0.000 0.000 2.558 0.013 Effects Specification Cross-section fixed (dummy variables) R-squared 0.984 Mean dependent var 0.005 Adjusted R-squared 0.979 S.D. dependent var 0.004 S.E. of regression 0.001 Akaike info criterion -11.945 Sum squared resid 0.000 Schwarz criterion -11.312 Log likelihood 529.650 Hannan-Quinn criter. -11.690 F-statistic 189.556 Durbin-Watson stat 1.954 Prob(F-statistic) 0.000 44 The results of the Hausman test indicate that the random effects model is valid because the chi square probability (p = 0.264) exceeds 0.05 which is not significant difference between fixed and random estimators. This implies that the effects of a specific bank are not correlated with the explanatory variables. Similar signs of coefficient significance levels are validated in the fixed- effects output, where ROE, NIM, and EPS are positively significant determinants of ROA, whereas cost-to-income ratio and NPL are not significant. The model has high explanatory power (Adjusted R 2 = 0.979) and a significant overall (Prob F-statistic = 0.000) which solidifies the strength and consistency of the panel regression results. Normality Test Figure 2: Normality Test (Source: Author) The standardized residual histogram shows that the standardized residues are more or less centered on zero with a means that is approximated as near to zero as possible, which means that there is no systematic bias in the model. The distribution indicates a slight positive skewness (0.52) and above 3 kurtosis (3.85) which shows slight skew towards the right and slightly leptokurtic distribution. The Jarque Bera test is significant (p = 0.041) which means that there is a small degree of deviation of the norm. Nonetheless, considering the size of the panel sample 0 2 4 6 8 10 12 14 16 -0.001 0.000 0.001 0.002 0.003 Series: Standardized Residuals Sample 2020 2024 Observations 85 Mean -3.45e-19 Median -4.53e-05 Maximum 0.002967 Minimum -0.001648 Std. Dev. 0.000874 Skewness 0.519430 Kurtosis 3.854058 Jarque-Bera 6.405620 Probability 0.040648 45 (85 observations), this deviation is not severe and cannot have a significant impact on the reliability of coefficient estimates, which is why the overall sufficiency of the regression model can be supported. 6.2 The Relationship between Corporate Social Responsibility and Market-Based Performance (MBR) of EU Commercial Banks Figure 3: Correlation Table (Source: Author) Correlation Analysis The correlation variables indicate that MBR has a positive and significant relationship with ROE (0.477), NIM (0.322), and EPS (0.358) meaning that an increase in profitability, increase in interest margins, and an increase in earnings performance contribute to market valuation. Such findings indicate that the market-to-book ratios are higher in comparison to banks with good financial fundamentals. On the other hand, the relationships between MBR and cost-to-income ratio and NPL are weak and insignificant, which suggests that the market does not directly price operational efficiency and credit risk in this sample. There is also a positive correlation between ROE and NIM as well as EPS, which strengthens the fact that profitability is the core factor in the formation of the accounting and market-based performance indicators. Correlation Probability ROE NIM COSTTOI... NPL EPS MBR ROE 1.000 ----- NIM 0.477 1.000 0.000 ----- COSTTOINCOM... 0.176 -0.096 1.000 0.107 0.382 ----- NPL -0.192 0.074 -0.052 1.000 0.078 0.501 0.637 ----- EPS 0.452 0.108 0.019 -0.192 1.000 0.000 0.325 0.865 0.079 ----- MBR 0.477 0.322 -0.033 -0.110 0.358 1.000 0.000 0.003 0.767 0.317 0.001 ----- 46 Table 5: Regression Analysis (Source: Author) Regression Analysis (Random Effect) The findings of the random effects regression show that ROE statistically positively affects MBR (0.874 = 0.024) indicating that the more profitable shareholders are, the higher the market value. The effect of NPL is significant (= -0.054, p=0.024), meaning that the greater the risk of credit, the more investors are punishing the managers. The NIM, cost-to-income ratio, and EPS are not statistically significant, which suggests the lack of direct market-based performance. The model is generally meaningful (Prob F-statistic = 0.000) with moderate predictive power (Adjusted R 2 = 0.313) which shows that MBR is a product of both financial fundamentals and external market influences other than the internal bank performance indicators. Variable Coefficient Std. Error t-Statistic Prob. C 0.514 0.115 4.457 0.000 ROE 0.874 0.379 2.306 0.024 NIM 7.252 5.022 1.444 0.153 COSTTOINCOMERATIO 0.000 0.000 1.025 0.309 NPL -0.054 0.024 -2.308 0.024 EPS -0.003 0.012 -0.260 0.796 Effects Specification S.D. Rho Cross-section random 0.236 0.815 Idiosyncratic random 0.112 0.185 Weighted Statistics R-squared 0.354 Mean dependent var 0.113 Adjusted R-squared 0.313 S.D. dependent var 0.137 S.E. of regression 0.113 Sum squared resid 1.016 F-statistic 8.652 Durbin-Watson stat 1.676 Prob(F-statistic) 0.000 Unweighted Statistics R-squared 0.167 Mean dependent var 0.541 Sum squared resid 5.801 Durbin-Watson stat 0.293 47 Table 6: Hausman Test (Source: Author) Hausman Test Hausman Test findings show that the random effects model is suitable in explaining MBR since the use of chi square probability (p = 0.247) is greater than the 5 percent chance level, which indicates there is no systematic variation among the fixed and random effects estimators. The Test Summary Chi-Sq. Statistic Chi-Sq. d.f. Prob. Cross-section random 6.665 5.000 0.247 Cross-section random effects test comparisons: Variable Fixed Random Var(Diff.) Prob. ROE 0.866 0.874 0.008 0.931 NIM 7.214 7.252 8.594 0.990 COSTTOINCOMERATIO 0.000 0.000 0.000 0.095 NPL -0.062 -0.054 0.000 0.383 EPS -0.010 -0.003 0.000 0.280 Cross-section random effects test equation: Dependent Variable: MBR Method: Panel Least Squares Date: 01/02/26 Time: 18:02 Sample: 2020 2024 Periods included: 5 Cross-sections included: 17 Total panel (balanced) observations: 85 Variable Coefficient Std. Error t-Statistic Prob. C 0.551 0.113 4.861 0.000 ROE 0.866 0.390 2.222 0.030 NIM 7.214 5.815 1.241 0.219 COSTTOINCOMERATIO 0.000 0.000 1.205 0.233 NPL -0.062 0.025 -2.467 0.016 EPS -0.010 0.014 -0.723 0.472 Effects Specification Cross-section fixed (dummy variables) R-squared 0.886 Mean dependent var 0.541 Adjusted R-squared 0.848 S.D. dependent var 0.288 S.E. of regression 0.112 Akaike info criterion -1.319 Sum squared resid 0.793 Schwarz criterion -0.687 Log likelihood 78.049 Hannan-Quinn criter. -1.064 F-statistic 23.351 Durbin-Watson stat 2.141 Prob(F-statistic) 0.000 48 fixed-effects findings verify the strengths of the main conclusions, as ROE and NPL have a positive and significant effect on MBR, respectively, which proves that the increased profitability the higher the market value, and the increased credit risk the lower the investor confidence. This model shows the high explanatory power (Adjusted R 2 = 0.848) and statistical significance (Prob F-statistic = 0.000) when there are fixed effects, which proves the consistency and reliability of the panel regression results. Normality Test Figure 4: Normality Test (Source: Author) The histogram of standardized resident shows that the residuals are clustered about zero, the mean and median are near to zero which indicates that there is no systematic bias in the regression model. Its distribution is slightly skewed (0.22) and has leptokurtosis (kurtosis = 4.67) which means that the distribution has fat tails. The Jarque Bera test is not significant (p = 0.005), which shows that the data is not completely normal. Nonetheless, since this study has a balanced panel structure and the sample size is sufficient (85 observations), this non-normality should not have a significant impact on the consistency of coefficients, and the results of the regression should be considered valid under the assumption of a large sample. 0 2 4 6 8 10 12 14 16 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 Series: Standardized Residuals Sample 2020 2024 Observations 85 Mean -2.61e-18 Median -0.014947 Maximum 0.779193 Minimum -0.693016 Std. Dev. 0.244876 Skewness 0.217962 Kurtosis 4.670635 Jarque-Bera 10.55789 Probability 0.005098 49 6.3 The Relationship between Corporate Social Responsibility and Firm Size Dynamics in EU Commercial Banks Table 7: Correlation Analysis (Source: Author) Correlation Analysis The correlation table shows the firm size having weak and largely insignificant relations with profitability and risk variables. There is a negative relationship between firm size and ROE (r= - 0.164) and a strong negative relationship between firm size and NIM (r= -0.467). The correlation between the firm size and cost-to-income ratio, NPL, and EPS are weak and statistically not significant, which means there is no direct relationship between them. Altogether, the findings indicate that the size of firms does not dictate the profitability and risk outcomes directly, but it is likely to dictate the performance indirectly with the help of the structural and operational attributes of EU commercial banks. Correlation Probability ROE NIM COSTTOI... NPL EPS FIRMSIZE ROE 1.000 ----- NIM 0.477 1.000 0.000 ----- COSTTOINCOM... 0.176 -0.096 1.000 0.107 0.382 ----- NPL -0.192 0.074 -0.052 1.000 0.078 0.501 0.637 ----- EPS 0.452 0.108 0.019 -0.192 1.000 0.000 0.325 0.865 0.079 ----- FIRMSIZE -0.164 -0.467 0.135 0.022 0.067 1.000 0.133 0.000 0.217 0.844 0.545 ----- 50 Table 8: Regression (Source: Author) Regression Analysis (Random effect) The findings of the random effects regression on firm size show that ROE positively impacts on firm size, and it is significant (p = 0.001), meaning that more profitable banks are likely to grow in scale. The cost-to-income ratio is related significantly with negative correlation (p = 0.027) meaning that operational inefficiency limits the growth of the banks. The positive coefficient between NPL and its differences is significant (p = 0.037) and this may be because bigger banks can have more credit risk perhaps because of wider lending portfolios. NIM and EPS do not have a statistically significant effect, and they have a weak impact on the size dynamics. The model is generally important (Prob F-statistic = 0.005) yet it describes a relatively small portion of variation (Adjusted R 2 = 0.135), indicating that the firm size is affected by other structural forces other than financial performance indicators. Variable Coefficient Std. Error t-Statistic Prob. C 9237282... 172694119... 5.349 0.000 ROE 6705663... 202509729... 3.311 0.001 NIM -466957... 30065791... -1.553 0.124 COSTTOINCOMERATIO -248335.... 109924.793 -2.259 0.027 NPL 27651413... 13023666.... 2.123 0.037 EPS 2912271.... 7027773.467 0.414 0.680 Effects Specification S.D. Rho Cross-section random 669719772.860 0.992 Idiosyncratic random 58379079.338 0.008 Weighted Statistics R-squared 0.186 Mean dependent var 38495221.949 Adjusted R-squared 0.135 S.D. dependent var 63472262.412 S.E. of regression 59038851... Sum squared resid275361293323347960 F-statistic 3.618 Durbin-Watson stat 1.021 Prob(F-statistic) 0.005 Unweighted Statistics R-squared 0.016 Mean dependent var988228690.176 Sum squared resid 4006221... Durbin-Watson stat 0.007 51 Table 9: Hausman Test (Source: Author) Hausman Test According to the Hausman test, the random effects model should be used to analyze the firm size because the chi-square probability value (= 0.236) is greater than the 5% level of significance. This implies that the bank specific effects are not correlated with the explanatory variables, which Test Summary Chi-Sq. Statistic Chi-Sq. d.f. Prob. Cross-s