Revisiting the CSR and Financial Distress Nexus: Insightsfrom Mediation of Agency Costs in an Emerging Market

Revisiting the CSR and Financial Distress Nexus: Insights from Mediation of Agency Costs in an Emerging Market

https://doi.org/10.35536/ljb.2025.v12.i2.a2

Submitted

November 22, 2023

Accepted

November 22, 2023

Accepted

November 22, 2023

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.

Keywords

Financial distress

corporate governance

agency costs

corporate social responsibility

Pakistan

This work is licensed under LJB.

Farooq, R., Khan, N., Rasheed, M. H., & Saghir. A. (2025). Revisiting the CSR and Financial Distress Nexus: Insights from Mediation of Agency Costs in an Emerging Market. The Lahore Journal of Business, 12(2), 33-56.

https://doi.org/10.35536/ljb.2025.v12.i2.a2

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