Does corporate social responsibility reduce financial distress? Evidence from emerging economy

Abstract

This work investigates the relational behavior of corporate social responsibility (CSR) and its effect on firms' financial distress (FD). The population of the study consists of all the non-financial firms presently listed in the equity market of Pakistan. The yearly data set of 213 non-financial companies is selected from 2005 to 2017 with total observations of 2769. The analysis of the study based on OLS regression, fixed effect, and random effect models. The study also uses the GMM technique to guard against potential problems of endogeneity and heteroskedasticity that arise from the use of panel data. Results indicate that higher investment in CSR leads to reduced/lower financial distress. It suggests that investment in CSR raises the reputation and creditworthiness of firms. Key findings are robust as confirmed by alternative proxies of financial distress. Overall findings advocate that CSR helps in reducing default risk or financial distress and creates a better corporate environment that ultimately improves organizations' economic outlook.

How does corporate social responsibility affect financial distress? The moderating role of corporate governance

“…This significant inverse relationship supports Yang et al’ s (2019) argument that a firm's participation in CSR activities attracts investment and establishes positive stakeholder relationships, which saves the firm from FD. Further, our findings are consistent with Zheng et al (2019), Al‐Hadi et al (2016), Shahab et al (2018), Boubaker et al (2020), Do (2021) and Khan et al (2021).…”

“…This supports the argument that a firm's engagement in CSR activities builds a relationship with the stakeholders, builds goodwill and provides easy access to capital in the time of need thus saving the firms from financial distress. results support the findings of Khan et al (2021), who conducted their study on PSX-listed firms and found the same negative relationship between CSR and FD among sample firms. This significant inverse relationship supports Yang et al's (2019) argument that a firm's participation in CSR activities attracts investment and establishes Among the control variables, leverage and firm size have a significant negative relationship with the Z-score.…”

“…Several approaches to measuring CSR have been proposed in the CSR literature. Following the study of Ehsan (2019), Farooq and Noor (2021) and Khan et al (2021), we used a multidimensional financial approach in this study: …”

“…The “Commission of the European Communities” defines CSR as “a concept in which enterprises voluntarily integrate social and environmental concerns into their business operations and relationships with their stakeholders” (2001, p. 6). In addition to the high cost of financing, FD can result in the loss of important customers and suppliers, and the loss of highly trained employees (Khan et al , 2021). FD has been a topic of academic interest for the last three decades.…”

Does corporate social responsibility mediate the relationship between board diversity and financial distress: evidence from an emerging economy?

“…There have been several different methods proposed in the literature for measuring CSR. In this study, we followed the research conducted by Ehsan (2019), Farooq and Noor (2021) and Khan et al (2021), and we used a multidimensional financial approach. …”