Revisiting the CSR and Financial Distress Nexus: Insights from Mediation of Agency Costs in an Emerging Market. Vol 12, Issue 2

Abstract

In a struggling and volatile economy like Pakistan, studying corporate financial distress (FD) is critically important. The current sustainability-oriented economic dynamics have made the connection between corporate social responsibility (CSR) and FD particularly relevant, as CSR can enhance business resilience, stakeholder trust, and risk management. Understanding this relationship helps determine whether socially responsible businesses are better equipped to handle financial crises. Therefore, this study aims to analyze the impact of CSR on FD while examining the mediating role of agency costs (AC). The sample includes 257 non-financial companies registered on the Pakistan Stock Exchange from 2008 to 2022. The generalized method of moments technique is used for hypothesis testing. The results reveal a significant link between CSR and FD, showing that investment in CSR reduces FD. Additionally, the study finds that CSR negatively influences AC, indicating that investment in CSR also lowers AC. The findings establish that AC mediates the relationship between CSR and FD.