The impact of corporate social responsibility on financial constraints: the role of insider and institutional ownership

Abstract

Purpose

This study aims to examine the impact of corporate social responsibility (CSR) on financial constraints (FC). Furthermore, the authors investigate the moderating impact of two key ownership variables, insider and institutional ownership, separately and their interacting effect on the CSR-FC relationship.

Design/methodology/approach

The study sample consists of 137 nonfinancial Pakistan Stock Exchange listed firms from 2010 to 2019. Firms’ participation in socially responsible activities is measured using a multidimensional financial approach, whereas FC are determined using the WW index. The findings were observed using the dynamic generalized method of moments model.

Findings

According to the findings, CSR has a negative impact on FC. In terms of moderating impact, the interactive variable of CSR and insider ownership does not affect FC, implying that when an insider owns a majority of shares, the negative relationship between CSR and FC is weaker. The findings demonstrate the entrenchment effect of insider ownership. In terms of the moderating effect of institutional ownership, CSR and institutional ownership have a significant but positive relationship with FC, implying that when powerful institutional investors are present, the negative relationship between CSR and FC disappears, demonstrating that higher institutional ownership leads to shareholder conflicts. Finally, the interactive variable of insider and institutional ownership has no statistically significant effect on the CSR-FC relationship. This insignificant relationship does not support the substitution or complementarity effect of corporate governance.

Research limitations/implications

The authors measure CSR activities using a multidimensional financial approach; however, in the future, CSR should be measured using qualitative aspects such as content analysis to strengthen the findings. Because the research is limited to a single emerging economy, Pakistan, the generalizability of the findings is limited. In the future, this research could be replicated in other emerging economies in Asia, Africa and Latin America.

Practical implications

The findings of the study will assist regulatory authorities, investors, financial analysts and other stakeholders in better understanding CSR practices in Pakistani firms, as well as the role of CSR and two other important aspects of internal governance mechanisms, namely, insider ownership and institutional ownership, in the CSR-FC relationship.

Originality/value

Few studies in the literature investigate the impact of CSR on FC. To the best of the authors’ knowledge, this is the first study of its kind in an emerging market to empirically test this relationship and further investigate the role of insider and institutional ownership in this unexplored relationship.

Citation

Farooq, M. and Noor, A. (2023), "The impact of corporate social responsibility on financial constraints: the role of insider and institutional ownership", Journal of Financial Reporting and Accounting, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFRA-10-2022-0368