The Impact of Corporate Social Responsibility on Financial Distress Risk: Evidence from GCC Stock Markets

Abstract

Abstract : This study empirically examines the impact of Corporate Social Responsibility (CSR) on a company's financial distress risk (FDR). The Environmental, Social, and Governance (ESG) score serves as a proxy for CSR, and three models are employed to measure FDR levels (Altman's Z-score, Ohlson's O-score, and Zmijewski's ZM-score). The study sample comprises 302 non-financial companies publicly listed on GCC stock exchanges from 2018 to 2022. After analyzing a dataset of 1,510 observations using the Altman Z-score, the results show that CSR is positively and significantly associated with FDR. A high Z-score indicates a lower FDR. This implies that firms with better CSR performance and higher Z-scores are likely to face a lower risk of financial distress. Therefore, companies that engage in more substantial positive CSR activities are less likely to declare bankruptcy during severe financial distress and are more likely to recover swiftly. The results using Ohlson's O-Score and Zmijewski's ZM-Score show a negative and significant relationship between CSR and FDR, since higher O-Scores and ZM-Scores indicate a higher probability of FDR. This result confirms that higher CSR scores are associated with a lower probability of FDR, supporting the study's hypothesis of a negative and significant relationship between CSR and FDR in non-financial GCC-listed companies. The findings support the stakeholder theory of CSR, which suggests that meeting stakeholder expectations enhances a firm's legitimacy and long-term viability. They also support signaling theory, which indicates that strong CSR engagement signals stability and ethical standards to investors, reducing perceived risk. Furthermore, the results of this study show that older and larger firms are less likely to face FDR. Leverage remains a significant predictor of FDR, indicating that highly leveraged firms face greater risk, while firms with higher liquidity experience lower risk. Overall, this study provides new empirical evidence on the role of CSR in enhancing firm resilience and contributes to filling a critical gap in the CSR and FDR literature within the GCC context. Keywords: Corporate Social Responsibility, Financial Distress Risk, Altman Z-Score, Ohlson O-Score, Zmijewski ZM-Score, GCC Stock Markets