Financial reporting quality: exploring the missing link between corporate social responsibility and dividend policy decisions

Purpose This study examines the relationship between corporate social responsibility (CSR), financial reporting quality (FRQ), and dividend policy. It investigates how CSR influences dividend decisions and the mediating role of FRQ in this relationship. Design/methodology/approach The study analyzes data from 130 non-financial firms listed on the Pakistan Stock Exchange between 2010 and 2023. Using empirical models, it evaluates the links between CSR, FRQ, and dividend policy, focusing on the mediating impact of FRQ. Findings The results suggest that firms with robust CSR practices pay higher dividends, consistent with the “earnings channel hypothesis.” CSR practices also enhance FRQ, supporting the “stakeholder value maximization perspective” by demonstrating how ethical practices build trust and improve reporting quality. Moreover, the findings show that FRQ positively influences dividend policy, signaling financial stability and facilitating efficient resource allocation. Importantly, the study shows FRQ as a mediator in the relationship between CSR and dividend policy, emphasizing that improved reporting quality channels CSR's impact on dividend decisions. Practical implications The findings encourage policymakers and regulators to advocate for CSR initiatives and maintain strong financial reporting standards. These measures can enhance corporate accountability, strengthen financial systems, and increase shareholder trust. Social implications Promoting CSR and transparency contributes to building trust between businesses and stakeholders, fostering a more ethical and sustainable economic environment. Originality/value This study bridges the gap in understanding how CSR influences dividend policy through FRQ, offering new insights into the mechanisms that link ethical practices, financial transparency, and dividend decisions.