Internal Control Effectiveness as a Moderator in the Relationship Between Corporate Social Responsibility and Firms' Financial Performance: Evidence from Pakistan

Abstract

Corporate Social Responsibility (CSR) has become a decisive strategic issue in companies in developing economies but its nexus with financial performance is still the matter of continuous empirical discussion and especially in the institutional sphere of weak governance structures, unclear regulations and heterogeneous stakeholders. This paper explores the moderating position of internal control effectiveness in the connection among multi-dimensional CSR and financial performance of firms in the Pakistani corporate environment. Based on a synthesized theoretical context, rooted in the Stakeholder Theory, Legitimacy Theory, Agency Theory, Social Contract Theory, and Environmental Theory and supported by Resource-Based View (RBV) and Institutional Theory, the research hypothesis is that the strong offices of internal control enhance the CSR-performance connection through quality of governance, transparency, and optimization of resources. The proposed study will have a mixed-method quantitative design which involves the use of both primary and secondary data. The structured questionnaire surveys conducted on a five-point scale (likert scale) were used to measure firm level practices of CSR across seven theoretically based dimensions: Economic, legal, ethical, philanthropic, environmental, stakeholder and governance as a primary source of data. Two globally accepted compliance framework networks were used to operationalise the internal control effectiveness: the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework and the Sarbanes-Oxley Act (SOX) compliance indicators. To create three performance proxies of financial performance Return on Assets (ROA), Return on Equity (ROE) and the Q ratio of Tobin, which reflects accounting-based and market-based aspects of performance, secondary data were obtained through audited financial statements and Bloomberg databases. Four control variables at firm level are included: the size of firms, the age of firms, financial leverage, and high levels of research and development (R&D). The sample includes non-financial Pakistani companies that belong to the Pakistan Stock Exchange (PSX) during [202025]. The hypothesized relationships are tested using moderate regression analysis (hierarchical with moderated) with the help of panel data methods, such as fixed-effects and random-effects. Two-Stage Least Squares can resolve the endogeneity issues. (2SLS) estimation. The empirical evidence indicates that: (i) the CSR dimensions are positively and differentially related to the financial performance; (ii) internal control effectiveness positively mediates the CSR-financial performance relationship, which supports the governance-sustainability nexus. (iii) The size of the firm, leverage, age and R&D all play a significant role in determining the strength of this relationship in the Pakistani institutional environment. This research has taken part in the emerging yet developing literature on CSR in the South Asian emerging markets by offering the first work of exhaustive empirical analysis of internal controls as a boundary to the CSR performance relationship. The results have important policy and regulatory implications to corporate boards, regulators, and investors in Pakistan, guiding the design of CSR mandates, governance codes enforced, by the Securities and Exchange Commission of Pakistan (SECP), and the internal audit standards that comply with international best practice.

Keywords:

Corporate Social Responsibility (CSR); the Internal Control Effectiveness; Financial Performance; COSO Framework; SOX Compliance; Return on Assets; Return on Equity; Tobins Q; Stakeholder Theory; Legitimacy Theory; the Agency Theory; the Social Contract Theory; the Environmental Theory; the Institutional Theory; the Resource-Based View; the Pakistan Stock Exchange; the Emerging markets, the Corporate Governance