FINANCIAL DISTRESS PREDICTION AND CORPORATE SOCIAL RESPONSIBILITY EVIDENCE FROM A HIGH CARBON MANUFACTURING SECTOR

Abstract

Corporate social responsibility has emerged as an increasingly important consideration within financial literature. It is viewed as strategic resource to strengthen firm credibility, investors trust and long term resilience.  Although traditional distress models rely heavily on accounting ratios less is known about whether CSR engagement is associated with lower financial vulnerability. This study investigates the relationship between corporate social responsibility(CSR) and Corporate default risk(CDR) examining panel data from the firms listed on the Pakistan Stock Exchange covering the period 2015 to 2024. Financial distress is measured using the Altman Z-score, and CSR engagement is identified from sustainability related disclosures in annual reports. Pooled OLS, random effect  and fixed effects panel regressions are employed with the model selection guided by Hausman test. The results show that CSR engagement is positively and significantly associated with financial stability  with CSR active firms exhibiting Z-scores that are on average 1.15 points higher than non CSR firms (β ≈ 1.15, p < 0.01). In contrast financial leverage has a strong negative effect on Z-scores (β ≈ −2.30, p < 0.01), indicating a higher likelihood of financial distress among more highly leveraged firms.  The findings are consistent across pooled OLS, random-effects and fixed-effects estimations and the Hausman test supports the use of the random-effects model.The study contributes to the financial distress literature by demonstrating that sustainability related practices are meaningfully linked to firm financial stability and can complement traditional distress prediction models. These results offer important implications for investors, corporate managers and policymakers seeking to incorporate sustainability considerations into financial risk evaluation and early warning systems.