The impact of corporate social responsibility on financial distress: empirical evidence

Abstract

Purpose The present study aims to explore the role of corporate social responsibility (CSR) on the likelihood of financial distress for a sample of 139 Pakistan Stock Exchange (PSX) listed firms throughout 2008–2019. Design/methodology/approach Panel logistic regression (PLR) and the dynamic generalized method of moments (GMM) estimator are used to examine the impact of CSR on financial distress. The investment in CSR measures through a multidimensional financial approach which comprises the sum of the contribution made by the company in the form of charitable donation, employees’ welfare and research and development, whereas the Altman Z-score and ZM-Score are used as an indicator of financial distress. The higher the Z-score lower will be the probability of financial distress, whereas the higher ZM score shows a greater probability of financial distress risk. Findings The authors find a significant negative impact of CSR on financial distress in both PLR and GMM models. This finding is consistent with the stakeholder view of CSR, as an investment in CSR not only aligns the interest between shareholders and stakeholders but also mitigates the risk of financial distress as well. Research limitations/implications Like other studies, the present study is not free from limitations. First, financial firms skipped from the sample, although literature witnesses a lot of studies highlight the financial firms' commitment to achieving CSR goals. Second, financial distress occurs in different stages, the authors fail to establish linkage CSR engagements at different stages of CSR. In the future, researchers can make a valuable addition by covering these missing links in present studies. Practical implications The findings of this study provide more insight to corporate managers and investors about the association between the quality of investment in CSR and the degree of financial distress, concerning Pakistani firms. Furthermore, this study contributes to the existing literature by adding new evidence from developing countries such as Pakistan which are helpful for regulatory bodies and policymakers in the formulation of long-term CSR strategies to manage financial distress. Originality/value The study extends the body of existing literature on CSR and the likelihood of financial distress in Pakistan. The results suggest that policymakers may pay special attention to the quality of CSR while predicting corporate financial distress.

Climate change performance and financial distress

“…Regarding the control variables, our results are mostly consistent with those of previous studies (Al‐Hadi et al, 2019; Boubaker et al, 2020; Farooq et al, 2021). There is a significantly positive ( p < .05 or better) relationship between SIZE and all the measures of financial distress.…”

“…Following the prior literature (Al‐Hadi et al, 2019; Boubaker et al, 2020; Farooq et al, 2021), we adopt a number of control variables in our study. Firm size ( SIZE ) is measured as the natural logarithm of the total assets, and it is expected to show a significant and positive relationship between CCDP and financial distress (Al‐Hadi et al, 2019; Boubaker et al, 2020; Farooq et al, 2021).…”

“…Following the prior literature (Al‐Hadi et al, 2019; Boubaker et al, 2020; Farooq et al, 2021), we adopt a number of control variables in our study. Firm size ( SIZE ) is measured as the natural logarithm of the total assets, and it is expected to show a significant and positive relationship between CCDP and financial distress (Al‐Hadi et al, 2019; Boubaker et al, 2020; Farooq et al, 2021). We control for firm leverage ( LEV ), which is measured as the long‐term debt divided by the total assets, and cash holding ( CASH ), which is defined as cash and marketable securities scaled by the total assets.…”

“…CCDP (climate change disclosure performance) is measured as the average score of all 11 items based on the TCFD recommended disclosures. The control variables in our equation are firm size ( SIZE ), leverage ( LEV ), the return on assets ( ROA ), the market‐to‐book ratio ( MTB ), cash holding ( CASH ), the quick ratio ( QUICK ), the ratio of research and development expenses ( RD ), firm loss ( LOSS ) and firm age ( AGE ), which are used in the prior literature (Al‐Hadi et al, 2019; Boubaker et al, 2020; Farooq et al, 2021). Details of the variables are in Appendix B.…”

Does board activeness strengthen the relationship between structure of corporate ownership and firm performance?

“…Associations provide opportunities for the firm to achieve better performance. Farooq et al (2020) asserted negative associations between associated ownership and distress, which leads to value addition. Managerial ownership had an immediate and backhanded adverse consequence on firm worth through scholarly capital as a mediating variable, and scholarly capital negatively affects firm worth ( Rafaizan et al, 2020 ).…”