Mitigating the Pitfalls of Income Smoothing on Firm Value: The Double Edges of CSR Moderation and Cost of Debt Mediation

Purpose – This research aimed to measure the influence of income smoothing on the firm value, concentrating on non-financial firms listed in the S&P/EGX ESG index.  Furthermore, the study investigated the role of corporate social responsibility (CSR) in moderating the relationship between income smoothing, cost of debt and firm value within the Egyptian configuration.
Design/methodology/approach – Generalised Method of Moments (GMM) panel estimate approach was employed on a dataset of two hundred firm-year observations from 2014 to 2023.
Findings – It is evident from the results that income smoothing significantly reduces firm value. The results align with agency theory, indicating that income smoothing is frequently viewed as opportunistic conduct that deteriorates investor confidence and reduces firm value. Moreover, the findings indicate that the cost of debt mediates this impact, supporting signaling theory, as income smoothing increases lenders' risk perceptions, thereby raising borrowing costs and reducing firm value. Additionally, the research demonstrates that CSR is a crucial moderator that reduces the negative effect of income smoothing on firm value. In accordance with stakeholder theory, firms that actively participate in essential CSR initiatives are more inclined to maintain investor trust, especially in the presence of income smoothing strategies.
Research implications – This study offers practical implications for regulators, corporate executives, investors, and financial analysts. It emphasises the necessity of restricting income-smoothing practices to improve earnings quality and proposes legislative changes to promote market efficiency and penalise opportunistic income smoothing. The study proposes incorporating corporate responsibility (CSR) initiatives into firm practices to reduce the negative impressions related income smoothing.
Originality/value – This study is unique in integrating corporate social responsibility (CSR) as a moderating variable and the cost of debt as a mediating variable to evaluate the impact of income smoothing on firm value in the Egyptian context. This research explores the challenges that were experienced by the Egyptian economy after the significant events that undermined economic stability. The results have considerable significance for comprehending the dynamics of the Egyptian stock market and its capacity for resilience in confronting all of these challenges.
 
Keywords: Income Smoothing, Firm Value, Market Risk, corporate social responsibility, agency theory, signaling theory, S&P/EGX ESG index.