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.