Firms in various markets such as health care, financial services, software, consumer goods etc. spend significant amount of money on corporate social responsibility (CSR) activities. Recently Financial Times (2014) reported that the Fortune 500 companies have spent more than $15 billion on CSR, and the publication indicates that this spending has come in various forms, which include: donating free drugs (Johnson & Johnson), giving free software (Oracle), investing in educational programs in developing countries (Prudential) or creating a more productive work environment for various minority groups (Chicago Fed). The literature suggests that consumers take into consideration firms’ CSR activities when making purchase decisions, noting that doing so may either increase their purchase intention or make them willing to pay higher prices for the firms’ products and services (Bhattacharya & Sen, 2004; Creyer & Ross, 1997; Pen Schoen Berland, 2010). In a recent global survey conducted by Nielsen,2 50% of 29,000 respondents across 58 countries were found to have had an intention of paying a higher price for the products and services developed by companies that invest in CSR. CSR programs can be costly and also they can compete for firms’ limited financial resources for marketing activities such as new product development and advertising. Naturally, firms are concerned about the financial impact of CSR. Unfortunately, notwithstanding its strategic benefits, the empirical findings regarding the impact of CSR on firms’ financials are mixed (Margolis, Elfenbein, & Walsh, 2009; Margolis & Walsh, 2003). Given this confusion in the empirical findings, Margolis et al. (2009) suggested that future research needs to establish the causal mechanism between CSR and a firm’s financials, and characterizing the conditions under which firms should engage in CSR and how to do it effectively. In this paper we propose a much more nuanced explanation for when and why investing in CSR can have positive or negative impacts on a firm’s profitability, which also provides a roadmap to the managers for investing efficiently in CSR. First, there are mainly two types of CSR3 : company ability relevant CSR (CSR-CA) and company ability irrelevant CSR (CSR-NCA). An example of CSR-CA would be Ben & Jerry’s implementation of fair trade norms in their production and creating a dairy farm sustainability program that might eventually enhance the company’s performance and bring in better quality products. Another example would be the introduction of the Tide Coldwater brand by Procter and Gamble (P&G), an investment in green technology that helped P&G to offer a better quality product that can save 395 pounds of carbon di-oxide per household per year.4 On the other hand, an example of CSR-NCA would be a company like Tom’s shoes which donates a pair of shoes to a child every time a customer purchases its product – clearly this is a CSR strategy that, would not improve company ability per se.5 Since consumers appreciate firms engaging in CSR they become willing to pay a higher price for a firm’s products when they observe the firm invest in CSR, of either type.