The impact of corporate social responsibility as a marketing investment on firms' performance: A risk-oriented approach

Ibrahim, Mohamed M.; Frargy, Mohamed M. El; Hussainey, Khaled Article The impact of corporate social responsibility as a marketing investment on firms' performance: A riskoriented approach Journal of Risk and Financial Management Provided in Cooperation with: MDPI – Multidisciplinary Digital Publishing Institute, Basel Suggested Citation: Ibrahim, Mohamed M.; Frargy, Mohamed M. El; Hussainey, Khaled (2021) : The impact of corporate social responsibility as a marketing investment on firms' performance: A riskoriented approach, Journal of Risk and Financial Management, ISSN 1911-8074, MDPI, Basel, Vol. 14, Iss. 11, pp. 1-17, https://doi.org/10.3390/jrfm14110515 This Version is available at: https://hdl.handle.net/10419/258618 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Journal of Risk and Financial Management Article The Impact of Corporate Social Responsibility as a Marketing Investment on Firms’ Performance: A Risk-Oriented Approach Mohamed M. Ibrahim 1,*, Mohamed M. El Frargy 1and Khaled Hussainey 2   Citation: Ibrahim, Mohamed M., Mohamed M. El Frargy, and Khaled Hussainey. 2021. The Impact of Corporate Social Responsibility as a Marketing Investment on Firms’ Performance: A Risk-Oriented Approach. Journal of Risk and Financial Management 14: 515. https:// doi.org/10.3390/jrfm14110515 Academic Editor: Thanasis Stengos Received: 27 September 2021 Accepted: 25 October 2021 Published: 27 October 2021 Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. Copyright: © 2021 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). 1Department of Marketing, University of MTI, Cairo 12055, Egypt; dr_mohamedelfarar[email protected] 2Department of Marketing, University of Portsmouth, Portsmouth PO1 3DE, UK; [email protected] *Correspondence: [email protected] Abstract: In light of the growing interest in corporate social responsibility (CSR), there is still controversy regarding its impact on firms’ performance. In this paper, we examine the impact of CSR initiatives, as a marketing investment, on firms’ performance. We treat CSR initiatives as investment and, consequently, the returns appear over the long term. We use the stochastic frontier analysis (SFA) approach which is a forward-looking financial market-based metric that captures the firm’s long-term performance. We focus on the banking industry as it confronts a variety compound of risk. We find that CSR implementation is positively reflected in profit efficiency, regardless of the strategic commitment to implementing CSR and bank size, as these variables do not influence the CSR–performance relationship. However, we find that bank age and competitive positioning have a significant impact on the CSR–performance relationship. Our study provides valuable insights to CSR practitioners and researchers, especially in the banking sector. We provide empirical evidence on the importance of CSR and its positive impact on bank performance in Egypt as one of the emerging markets. Keywords: corporate social responsibility; profit efficiency; stochastic frontier analysis; banking sector; Egypt 1. Introduction Several companies have implemented corporate social responsibility (CSR) strategies, which involves adherence to improving community welfare through voluntary business exercises and corporate resource contributions (Kotler and Lee 2005), as well as company policies for the defense of human rights, to strive against corruption, and to achieve transparency in the notification of CSR initiatives (Hategan et al. 2018). CSR is often considered the most efficient way to address social problems (Gatti et al. 2019). It is noteworthy that CSR initiatives use different names, classifications, and definitions (Sanclemente-Téllez 2017;Vilanova et al. 2009). Accordingly, (Hamidu et al. 2015) suggested several stages. The first refers to volunteering and involvement in social wellbeing. The second is the duration of increasing interest and consciousness of employees’ rights, stakeholder satisfaction, relationship management, organized CSR exercises, and consumer protection. The third is the instrumentality and sustainability duration which deals with CSR as a strategic tool in fulfilling organizational objectives. CSR is robustly institutionalized and standardized presently by various international indicators of accountable investing and sustainability. The literature indicates that CSR provides numerous corporate strategic utilities, which reduce share price and systematic risks (Albuquerque et al. 2019), as well as the cost of funding (Chava and Purnanandam 2010). It increases sales and price premiums (Loose and Remaud 2013), customer motivation and satisfaction (Lacey et al. 2012), the trust in companies’ efforts (Du et al. 2013), and the good image and reputation of firms (Fombrun et al. 2000;Koh et al. 2014;Schnietz and Epstein 2005). Similarly, CSR can J. Risk Financial Manag. 2021,14, 515. https://doi.org/10.3390/jrfm14110515 https://www.mdpi.com/journal/jrfm J. Risk Financial Manag. 2021,14, 515 2 of 17 enhance employees’ performance and productivity (Li et al. 2021), encourages them to take risks without fear of failure (Tonin and Vlassopoulos 2015), positively affects customer attitude and purchase intention (Uhlig et al. 2020;Van Doorn et al. 2017), stimulates corporate sustainability (Han et al. 2020), and gains a competitive advantage for firms (Du et al. 2007). In addition, CSR can create shared value (Agudelo et al. 2019;Slavova 2013), reinforce potential cash flows for firms (Luo and Bhattacharya 2006), foster the wellbeing of stakeholders (Strotmann et al. 2019), produce moral capital or goodwill (Godfrey 2005), and positively impact environmental outcomes (Úbeda-García et al. 2021;Wu et al. 2021). Important changes have arisen in both practitioners and researchers. These changes have required that each function, activity, and initiative in the organization has a role in maximizing both firm and shareholder value (Gruca and Rego 2005). Indeed, changes have led to a recognition that the relationship between marketing and finance must be managed systematically (Hyman and Mathur 2005). No longer can managers tolerate relying on traditional assumptions that positive marketing initiatives, activities, and efforts will be mechanically reflected in the best financial results (Srivastava et al. 1998). Therefore, managers are required to provide greater accountability for marketing expenditure (Hanssens et al. 2012) and adopt a perspective that considers intellectual capital as assets that must be cultivated and leveraged through initiatives, activities, and efforts that may help companies to measure the financial effect of the decisions pertaining to those forms of intellectual capital. However, many firms that have adopted and invested in programs based on such drivers have run into financial difficulties (Srivastava et al. 1998) because they spent too lavishly on initiatives that were not ready to pay extra fees; thus, several firms went bankrupt as a result of these experiences. Thus, common sense makes it clear that expenditure on managerial initiatives and orientation programs is subject to the diminishing returns law (Rust et al. 2004) , and the companies provided an incorrect assessment of their ability to benefit from such initiatives to generate sustainable positive cash flows (Hogan et al. 2002a). The most important lesson to be learned from these experiences is that firms require more dynamic ways to understand the bonds between marketing expenditure drivers such as CSR and both firm and shareholder value. The importance of being able to understand and evaluate the expenditure drivers has become widely acknowledged. However, the main problem is represented in the following question: How can we measure the return on CSR investment to leverage the firm’s performance? CSR as a strategic management tool (Porter and Kramer 2006) or as a marketing tool (Astara et al. 2015) is both frittered away and disconnected from business and strategy, concealing many of the greatest opportunities for corporates to benefit society. Many companies deal with investment in social issues as a short-run investment strategy to strive against loss both of image and reputation. Consequently, they practice CSR activities as a random, reflective response to short-run challenges (Werbel and Wortman 2000). It is noteworthy that many companies fail to take into account the economic aspects of CSR initiatives and assess them as expenditure drivers, not as an investment that can generate long-term profits (Murray and Montanari 1986;Rust et al. 2004). To gain a long-term competitive advantage, Porter and Kramer (2006) suggest focusing on the interdependence of corporate financial goals and CSR activities and, as a result, recommend implementing CSR initiatives in the company’s strategies and operations. Measuring the financial impact of CSR initiatives is still an ambiguous matter, due to the paucity of a clear set of metrics, which makes the debate on CSR controversial, and it remains a conflicted issue (Fiori et al. 2015;Izzo and di Donato 2012). Consequently, managers have been unable to rationalize the associated investments and the allocation of rare resources in that area. Studies concerned with the relationship between CSR and profitability have demonstrated conflicting results, whether they found a negative (Aupperle and Van Pham 1989;Jensen 2010 ;Marcoux 2000;Waddock and Graves 1997) or positive (Acharyya 2008;Alexander and Buchholz 1978;Jo and Harjoto 2011;Mahajan and Golahit 2019) relationship between the two factors. Moreover, even when it is practicable J. Risk Financial Manag. 2021,14, 515 3 of 17 to set up a connection between CSR and financial performance, the relationship between cause and effect between them is not apparent; subsequently, an extra investigation is required (Preston and O’bannon 1997;Waddock and Graves 1997). In this context, we identified four potential reasons regarding the conflicting results. First, it is necessary to manage these practices as an avoidable cost decreasing shareholders’ dividends and firms’ value, as well as recognize them as a negative market premium (Fiori et al. 2015), rather than managing them as an investment. Second, inconclusive findings may stem from measurement errors; the nature of the metrics used in measuring firms’ performances are gauges that swing between traditional financial measures concentrating on short-term performance and market-based measures which are more suitable because they concentrate on the long term. Third, there may be model misspecification and an insufficient scope of the dataset (Igalens and Gond 2005); the relationship between social and financial performance is affected by different factors represented in moderator variables (Krasnikov et al. 2009) , which help to activate the previous relationship and should be integrated into model specification according to the type of industry. Fourth, the relationship between CSR and firm performance may be U-shaped in nature (Udayasankar 2008). In other words, an increase in CSR may push cost resources to be more enlarged, thereby reducing the financial performance. On the other hand, an increase in CSR may align with the other stakeholders (Mints et al. 2020), thereby increasing financial performance. Overall, the literature has indicated that there are two opposite theoretical perspectives to explain the relationship between CSR and firm performance; the first is based on agency theory, which indicates that there are no direct ties with firm performance, and suggests it may decrease shareholder wealth, while the second perspective adopts stakeholder theory, which points out that CSR positively correlates with stakeholder satisfaction and can generate positive cash flows (Mishra and Modi 2016). However, the studies regarding this point have not resulted in solid feedback (Izzo and di Donato 2012;Margolis and Walsh 2003;McWilliams and Siegel 2001;Vogel 2005). This lack of consensus on the nature of the relationship and the limited number of such studies motivated our research. Consequently, with the current study, we attempted to fill a gap and derive this relationship with a new set of variables and profit efficiency of the banks, in addition to addressing CSR as a marketing investment as suggested by Crane and Desmond (2002). The key challenge we address in this article is measuring the financial impact of CSR on profit functions via a solid metric that helps the banks’ decision-making support system, as well as activating marketing accountability (Rust et al. 2004). At the same time, because a limited understanding of CSR in the developing economies poses a pressing challenge for both practitioners and researchers (Li et al. 2010), our study is conducted on an emerging market (Egypt), especially as there has been a dramatic increase in controversial issues associated with CSR in emerging markets (Bogdanich 2008), in one of the most important sectors (the banking sector) that plays a predominant role in the economy (Belasri et al. 2020). The paper is organized as follows: Section 2reviews prior research and develops our research hypotheses; Section 3discusses the conceptual framework; Section 4discusses the research method; Section 5reports our findings; Section 6discusses the findings; Section 7 concludes the study. 2. Relevant Literature and Hypothesis Development In input–output models, the input function consists of a set of variables represented in the cost of deposits, labor, marketing, and purchased funds, which are measured as ratios. Thus, the cost of deposits is computed as the interest payable divided by the total amount of deposits, the cost of labor is computed as the salary expenses divided by the total number of personnel, the cost of marketing is computed as the marketing cost divided by total assets, and the cost of purchased funds is computed as the total expenses of such funds divided by the total amount of purchased funds. J. Risk Financial Manag. 2021,14, 515 4 of 17 Meanwhile, banks process these elements to generate preferable outputs including loans, securities, and services, calculating the outputs as prices. The price of loans is calculated as interest income from loans divided by the loan portfolio, the price of securities as revenues from securities divided by securities portfolio, and the price of services revenues from fees divided by total assets. Moreover, we employ both financial equity capital as the total shareholder equity and fixed assets as the total fixed assets, while we measure profit as the difference between a bank’s operating revenues and expenses. According to the literature, we propose a model where we adopt the perspective of stakeholder theory that acknowledges the positive impact of CSR on firm performance. According to behavioral theory, we determine the moderating factors of the model, and, consistent with portfolio theory, we incorporate the risk factor in the body of the model. 2.1. CSR Initiatives and Firm Performance The literature indicates that traditional marketing and accounting studies are interested in static profit metrics, such as return on investment, equity, and assets (Hogan et al. 2002b). In this context, managers are concerned about whether the organizations boost their performance, and how far they do this compared to their competitors having adopted CSR initiatives. Therefore, our study deals with profit efficiency, which measures the extent to which the organization is close enough to generate maximized profits under specific price inputs and outputs, compared with the best practice frontier. Profit efficiency means the percentage of profits that an organization could have achieved compared with the profits it generated (Krasnikov et al. 2009). In other words, this means the largest percentage of profits the most efficient bank could have achieved, compared with the actual profit of the bank (Maudos and De Guevara 2004). Previous studies have suggested that CSR is a driver of both tangible benefits, represented, for instance, in better financial performance, an increase in share price, a price premium, and superior performance (Reinartz et al. 2004), and intangible benefits, represented in stakeholder satisfaction, investor trust, enhanced brand image, and a source of competitive advantage (Slavova 2013). Even if organizations adopting CSR initiatives suffer rising costs, their power to deliver offers that satisfy their stakeholders ensures that they can generate higher levels of profitability (Krasnikov et al. 2009). According to stakeholder theory, we, therefore, formulate our first hypothesis as follows: Hypothesis 1 (H1). CSR initiatives have a positive impact on profit efficiency. 2.2. Moderating Factors of the Effect of CSR on Profit Efficiency In line with the behavioral theory of the firm, the motivation of a firm to follow a specific strategic action and its ability to take advantage of the action may influence the impact of the action on its performance (Jayachandran and Varadarajan 2006). The literature states that there are two important types of factors—firm-level factors and adoption-related factors (Krasnikov et al. 2009)—which may influence the impact of CSR initiatives on firms’ performance. 2.3. CSR Strategic Commitment (Firm-Related Factor) It appears that firms that endorse a formal approach to strategic commitment are likely to develop deep sound into the request of social responsibility, thus achieving empowerment and boosting CSR policy and practice (Kalyar et al. 2013). Companies that adopt CSR initiatives differ in their level of commitment to using the CSR strategy. Implementing CSR with the proper strategic focus is important for companies, so that they can take advantage of building a strong image and reputation (Jia 2020) , as well as generating value for various stakeholders (Sanclemente-Téllez 2017). Moral duty aside, this increasing commitment to CSR is motivated, at least partially, by the growing sense that consumers—a key stakeholder group—reward good corporate citizens through greater, more sustained sponsorship (Du et al. 2007). J. Risk Financial Manag. 2021,14, 515 5 of 17 The literature suggests that, when firms connect their CSR initiatives to stakeholders’ potential preferences (Mints et al. 2020) and channel resources to these initiatives, they become qualified to maximize CSR efforts in order to improve firms’ performance (Peloza 2006). We, therefore, set our second hypothesis as follows: Hypothesis 2 (H2). Banks that are committed to CSR initiatives receive a higher increase in profit efficiency. 2.4. Firm Age (Adoption-Related Factors) It is widely recognized that involvement in CSR initiatives increases as firms become older, given that CSR initiatives lead to improvements in a firm’s image on the market, increasing sales, profitability, and financial performance (Badulescu et al. 2018). This is because of the increasing learning and experience curve, and the fact that long-established firms are constantly under stakeholder scrutiny (Gautam et al. 2016). On the other hand, some authors claim that older firms may depend on their reputation instead of CSR campaigns and are, subsequently, less involved in CSR, while young firms may need to build their reputation through CSR involvement and, consequently, try to benefit from CSR initiatives (Withisuphakorn and Jiraporn 2016). It is worth mentioning that research results indicate that a firm’s age affects CSR; in other words, firms that have a long enough experience in the business pay attention to aspects of CSR, due to improvements in business reputation which are reflected in firms’ profitability (Michelon et al. 2015;Waluyo 2017) On the basis of this discussion, we set our third hypothesis as follows: Hypothesis 3 (H3). Older banks feature a higher effect of CSR initiatives in increasing profit efficiency. 2.5. Competitive Positioning (Firm-Related Factor) Effective CSR initiatives need to take into consideration the competitive context in which a particular set of CSR actions are likely to be executed. Meanwhile, a key element of the competitive context is the relative firm positioning along the CSR dimension (Bhatnagar and Ghose 2004). It is noteworthy that competitive positioning plays an important role in both the formation of consumers’ CSR beliefs about these brands, in other words, the belief that the company or brand is socially responsible, and the extent to which these beliefs are linked to both brand choice and the set of longer-term brand advocacy behaviors, such as positive referral behavior and elasticity concerning negative brand information (Du et al. 2007). Weber (2008) also identified one of the greatest potential benefits of CSR for companies as increased revenue from higher sales and market share. Therefore, we set our fourth hypothesis as follows: Hypothesis 4 (H4). A higher increase in competitive positioning of banks which adopt CSR initiatives leads to a higher increase in profit efficiency. 3. Conceptual Model: Linking CSR Initiatives to Financial Performance Figure 1shows a broad overview of the conceptual model that we used to evaluate the influence of CSR on profit efficiency. CSR is viewed as a marketing investment (Du et al. 2010;Crane and Desmond 2002;Srivastava et al. 1998) that produces an improvement in profit efficiency. We consider three important types of factors that represent CSR drivers: firm-level factors (strategic commitment and competitive positioning), adoption-related factors (firm age), and control variables (size, foreign or local, mergers and acquisitions, and economic conditions). These factors are likely to drive CSR and activate the relationship between CSR and profit efficiency. J. Risk Financial Manag. 2021,14, 515 6 of 17 J. Risk Financial Manag. 2021, 14, x FOR PEER REVIEW 6 of 17 lated factors (firm age), and control variables (size, foreign or local, mergers and acquisitions, and economic conditions). These factors are likely to drive CSR and activate the relationship between CSR and profit efficiency. Figure 1. Conceptual model of CSR effects and its drivers on profit efficiency. Notes: Solid lines represent measured constructs and empirically tested relationships; dotted lines represent theorized constructs and control variables. 4. Research Method The testing of hypotheses included a sample of listed banks from the Egyptian commercial banking sector and was carried out by employing the frontier efficiency analysis (FEA) approach to estimate profit efficiency by measuring to what extent a bank’s outputs or profit are distant from the efficient frontier or “best practice” for a given set of banks (Bauer et al. 1993). Applying FEA in estimating profit efficiency is becoming increasingly popular in the marketing literature streams (Grewal and Slotegraaf 2007; Luo and Donthu 2006). Overall, we implemented three steps to explore the effects of CSR on profit efficiency. First, we estimated profit function for listed banks. Second, we employed the residuals from the regression equations to calculate efficiency scores. Third, we estimated the impact of CSR implementation on profit efficiency. The literature has indicated that many bank characteristics should be taken into consideration when examining the CSR–profitability relationship (Luo and Bhattacharya 2009). Therefore, we incorporated this into the analysis of different control variables, which, in theory, express the construct of both financial metrics and social performance. In this context, we included various bankand country-level controls in the analysis known to affect the CSR–profitability relationship. We took into consideration bank size because of its potential impact on the CSR–efficiency relationship. We also considered whether the bank being foreign or local may reflect on the cost of funds, and whether it operates in mergers and acquisitions (M&As), where successful merger-and-acquisition Figure 1. Conceptual model of CSR effects and its drivers on profit efficiency. Notes: Solid lines represent measured constructs and empirically tested relationships; dotted lines represent theorized constructs and control variables. 4. Research Method The testing of hypotheses included a sample of listed banks from the Egyptian commercial banking sector and was carried out by employing the frontier efficiency analysis (FEA) approach to estimate profit efficiency by measuring to what extent a bank’s outputs or profit are distant from the efficient frontier or “best practice” for a given set of banks (Bauer et al. 1993). Applying FEA in estimating profit efficiency is becoming increasingly popular in the marketing literature streams (Grewal and Slotegraaf 2007;Luo and Donthu 2006). Overall, we implemented three steps to explore the effects of CSR on profit efficiency. First, we estimated profit function for listed banks. Second, we employed the residuals from the regression equations to calculate efficiency scores. Third, we estimated the impact of CSR implementation on profit efficiency. The literature has indicated that many bank characteristics should be taken into consideration when examining the CSR–profitability relationship (Luo and Bhattacharya 2009). Therefore, we incorporated this into the analysis of different control variables, which, in theory, express the construct of both financial metrics and social performance. In this context, we included various bankand country-level controls in the analysis known to affect the CSR–profitability relationship. We took into consideration bank size because of its potential impact on the CSR–efficiency relationship. We also considered whether the bank being foreign or local may reflect on the cost of funds, and whether it operates in mergers and acquisitions (M&As), where successful merger-and-acquisition deals increase firm profitability. The CSR–profitability relationship could be due to improvements in operations, in addition to increasing efficiency. Lastly, economic conditions may help determine the overall CSR level of firms (Hamidu et al. 2015), as well as influence firms’ performance, and the probability of CSR implementation was taken into account. Table 1 shows the definition and measurement of each variable. J. Risk Financial Manag. 2021,14, 515 7 of 17 Table 1. Moderator measures to predict CSR impact on profit functions. Measure Definition Measurement Institutional commitment to social initiatives (SI) The extent to which the banks are committed to using CSR programs Measured by accessing the percentage of the corporate budget allocated to CSR and using the average as a cutoff point; accordingly, we generated two categories of banks after checking all information: banks with high (above the average: SIi = 1) and low (under the average: SIi = 0) degrees of implementing CSR initiatives Bank size SIZi Total assets of the listed banks The order of banks according to the number of total assets Type of ownership LOCiTypes of ownership Local bank = 1; foreign bank = 0 Competitiveness positioning CPi The strength of the bank in comparison with the rest of its rivals in the marketplace The rank of the banks according to their market share Firm age FGi The number of years since bank inception in the marketplace Measured in natural log of years: the younger the bank, the less entrenched its culture Mergers and acquisitions M&As The merger-and-acquisition policies that affect bank profit structure if they occur in the previous period Occurrence of mergers and acquisitions = 1; if not = 0 Economic conditions λi The changes in economic conditions that affect bank profit structure if they occur in the previous period The 30 day Egyptian treasury bill interest rate 4.1. Sample Selection and Data We focused on commercial banks listed on the Egyptian Stock Exchange. In this study, we considered 7 years; thus, the investigated period was from the first quarter of 2013 to the fourth quarter of 2019, for 12 out of the 13. This yielded a balanced dataset of 336 observations. We content analyzed the narrative sections of banks’ annual reports (e.g., notes to financial statements, chairman statements, and CEO statements) and the banks’ websites the narrative to collect information on companies’ budgets allocated to CSR activities. 4.2. Profit Efficiency Estimation Because we treat CSR initiatives as investment and, consequently, the returns appear over the long term, we adopted the SFA approach which is a forward-looking financial market-based metric that captures the firm’s long-term performance. At the same time, our approach is similar to that used by Krasnikov et al. (2009), which was previously supported by Berger and De Young (1997) and Berger and Mester (1997). The SFA approach can support the assessment of the operational performance of CSR banks from a multiperiod perspective, and it enables a large number of variables to interact, thus providing a multidimensional analysis of the bank’s performance (Belasri et al. 2020). We adjusted the SFA by risk, according to Basel committee requirements, and employed moderator variables to assess profit efficiency through profit functions that constitute operating profits grounded on the prices of inputs and outputs. Table 2provides a procedural description of items for profit function used in the measurement model. We J. Risk Financial Manag. 2021,14, 515 8 of 17 then summarized the profit function for each bank at time t (Equation (1)), which models the log of a bank’s operating profit Vpit. ln(Prit +∆)=fln Pit, ln Iit, ln Zit, ln Rit, ln vp it, (1) where Pr it refers to the operating profits of the bank, I it refers to the prices of outputs (loans, securities, and services), P it refers to the variable input prices (deposits, labor, purchased funds, and marketing), Z it refers to the fixed inputs (financial equity and fixed assets), and R it are the categories of banking risk according to the Basel II pillar 1 (credit risk, market risk, and operational risk). It is noteworthy that the relationship of CSR to risk, incorporating adjusted returns for risk, can help managers to make returns comparable from one firm to another (Husted 2005). Table 2. Description of items for profit function. Item Description 1. Profit Difference between bank’s operating revenues and expenses 2. Price of deposits The ratio of interest paid/total deposits portfolio 3. Price of labor The ratio of salary expenses/total number of employees 4. Price of purchased funds The ratio of expenses of purchased funds (borrowed and federal funds)/total amount of purchased funds 5. Price of marketing The ratio of marketing and advertising expenses/total assets 6. Amount of loans The total amount of loan accounts 7. Quantity of securities Securities portfolio 8. Amount of services Revenues from service fees 9. Price of loans Interest income from loans/loans portfolio 10. Price of securities Revenues from securities/securities portfolio 11. Price of services Revenues from fees/total assets 12. Financial equity capital Total shareholder equity 13. Fixed assets Total fixed assets 14. Nonperforming loans and advances The proportion of loans past due >90 days 15. Market risk Value at risk (VaR) 95% confidence level Following previous studies, we added a constant, ∆ , to the operating profits of all banks in the sample to ensure that the values were positive (Berger et al. 1993;Krasnikov et al. 2009). Higher values of ln (vp it ) refer to higher profit efficiency because this reflects the bank’s ability to gain profit exceeding the industry average. To calculate profit efficiency PEFF it , we deemed the bank with extreme residual to refer to the efficient frontier (Equation (2)), and then we compared the distance between the residual of a focal bank and the higher residual for a given period from the profit function (Equation (1)). PEFFit =e(ln Vp max−ln Vp it). (2) J. Risk Financial Manag. 2021,14, 515 15 of 17 Hogan, John E., Katherine N. Lemon, and Roland T. Rust. 2002b. Customer equity management: Charting new directions for the future of marketing. Journal of service Research 5: 4–12. [CrossRef] Husted, Bryan W. 2005. 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