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

Abstract

Purpose This study aims to investigate the impact of corporate social responsibility (CSR) on the financial distress (FD) of firms listed on the Pakistan Stock Exchange (PSX). Furthermore, the moderating effect of corporate governance (CG) on the CSR–distress relationship is investigated in this study. Design/methodology/approach The final sample of the study includes 117 companies from 2008 to 2021. The sample firms' CSR engagement is assessed using a multidimensional financial approach, and the likelihood of FD is determined using Altman's Z-score. The governance level is measured using the governance index, which includes 29 governance provisions. To achieve the research objectives, the system generalized method of moments estimator is used. Furthermore, several tests are performed to assess the robustness of the study's findings. The analysis was carried out using STATA software version 15. Findings The authors find that CSR is significantly inversely related to FD. The governance mechanism was discovered to be inversely related to FD. Furthermore, corporate governance strengthens the negative relationship between CSR and FD. In addition, the authors find that CSR is significantly inversely related to FD in firms with strong CG mechanisms but has no effect on FD in firms with weak CG mechanisms. Practical implications The findings of this study provide policymakers, business managers, regulators and investors with a better understanding of the relationship between the quality of CSR investments and the likelihood of FD in Pakistani firms, as well as the role of CG in this context. Originality/value This study contributes to our understanding of the role of CG in the CSR-distress relationship in an emerging market. This suggests that policymakers should prioritize CG quality while anticipating the impact of CSR on corporate FD.

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

“…This supports the concept that a firm’s participation in CSR activities fosters relationships with stakeholders, fosters goodwill and gives easy access to cash in times of need, so protecting the firm from FD. The findings support the findings of Khan et al (2021) and Farooq et al (2023), who conducted a study on PSX-listed firms and discovered the same inverse association between CSR and FD across sample firms. This significant inverse association supports Yang et al ’s (2019) theory that a corporation’s participation in CSR activities draws investment and builds favorable stakeholder relationships, hence saving the firm from FD.…”

“…This supports the concept that a firm's participation in CSR activities fosters relationships with stakeholders, fosters goodwill and gives easy access to cash in times of need, so protecting the firm from FD. The findings support the findings of Khan et al (2021) and Farooq et al (2023), who conducted a study on PSX-listed firms and discovered the same inverse association between CSR and FD across sample firms. This significant The second variable of board diversity, board gender diversity, exhibits a significant positive impact on CSR, indicating that Pakistani companies with a higher number of women directors have more participation in CSR-related activities.…”

“…In addition, to test the robustness of the results, we used the ZM score (Zmijewski, 1984) to quantify the likelihood of FD among sample firms. In their respective research, Boubaker et al (2020) and Farooq et al (2023) also use the ZM score to assess the level of FD. The higher the ZM score, the higher the likelihood of FD.…”

“…Following Boubaker et al (2020), Bugeja (2015), Richardson et al (2015) and Farooq et al (2023), we evaluated the financial distress measure (FD) of sample firms using Altman’s (1968) Z -score. A higher Z -score indicates a lower risk of FD.…”

The Effect of Cash Flow and CSR Moderated by Corporate Governance

“…Until then, it is necessary to have various strategies that are considered feasible in dealing with the possibility of financial distress by a company. Then the research also verified the research previously conducted by Farooq et al, (2023)with its independent variable, corporate responsibility and moderated by corporate governance to be able to estimate the possibility of financial distress in corporate companies. However, this study will add to the independent variables, with lagged financial distress and cash flow.…”