Is default probability associated with corporate social responsibility?

PurposeThe purpose of this study is to examine the relationship between corporate social responsibility (CSR) and the default risk level of firms operating in the Eurozone and how CSR can provide insurance-like protection during financial/economic downturns.Design/methodology/approachBased on prior empirical studies and by integrating the insights of different theories, this study proposes a framework linking CSR, firm default risk and corporate financial performance to explain firms' social behavior that can trigger default risk determinants (e.g. cost of capital, leverage, sales level) directly or indirectly. The authors use a panel regression approach.FindingsThe results support the mitigating effect of CSR on firm default risk. This effect is higher during a financial crisis, suggesting that CSR could provide insurance-like protection during economic downturns. These results hold even after using an alternative risk measure. Granger causality test results strongly suggest that reverse causality is not a concern. An instrumental variable approach is proposed to deal with potential endogeneity issues.Originality/valueWhile other studies examine the CSR–firm default risk relationship in US samples, this study focuses on the Eurozone. The novelty of this work is based on its sample and how financial crises are addressed within this relationship. Insurance-like protection concerns both negative announcements and periods (e.g. financial crises, recessions). The study's results are useful for investors and risk managers who intend to manage default risk in their portfolios or firms.

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“…On average, the default risk probability is 0.31% and ranges from 0 to 66.64%. Similar results are observed in Chang et al (2013).…”

Section: Descriptive Statistics and Preliminary Resultssupporting

confidence: 90%

Corporate social responsibility and firm default risk in the Eurozone: a market-based approach

Shahrour

Girerd‐Potin

Taramasco

2021

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“…Chang et al . () also find a negative association between CSR performance and distress risk in Taiwan. These studies suffer from a reverse causality problem, in that the distressed firms may reduce CSR investments to conserve cash.…”

Section: Determinants Of Financial Distressmentioning

confidence: 75%

Determinants and consequences of financial distress: review of the empirical literature

Habib

Costa

Huang

et al. 2018

Accounting & Finance

139

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We synthesise the empirical literature on the determinants and consequences of financial distress, critique the findings and offer suggestions for future research. We categorise these indicators into (i) firm-level fundamental determinants, (ii) macroeconomic determinants and (iii) firm-level corporate governance determinants. We categorise the consequences into (i) financial reporting and auditing consequences, (ii) firm-level operational consequences, (iii) capital market consequences and (iv) corporate governance consequences. We suggest that future research can make a more meaningful contribution, by developing more comprehensive models of predicting financial distress which will entail a departure from the current partial analysis to a more holistic complex analysis.

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“…This undoubtedly reduces a company's risk of facing financial penalties and lawsuits. In practice, companies with better social ratings are expected to have less financial risk than companies with poor social ratings (Benlemlih and Girerd-Potin [99]; Chang et al [100]). …”

Section: Multiple Regressionmentioning

confidence: 99%

Does Institutional Context Affect CSR Disclosure? A Study on Eurostoxx 50

2018

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Abstract:We propose to investigate the relationship between corporate social responsibility disclosure and institutional/environmental factors among a sample of European listed companies. We find that, by using several traditional explicative variables, institutional factors affect the level of CSR disclosure, in a context where the EU Commission has been paying growing attention to social and environmental accountability of listed companies (see the EU Dir. 95/2014). Our findings are further supported by multivariate regression, where ESG score (measure of CSR disclosure) is regressed on nine variables which represent the expression of institutional factors. By looking at the institutional determinants of CSR disclosure, we are seeking to pose a challenge for future research agenda, in order to understand whether CSR does actually reflect an effective commitment of firms to accounting practices and rules, as a form of social behavior, or whether it is just a tool to manage stakeholders' perception and to comply with regulation.

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Is default probability associated with corporate social responsibility?

Cited by 30 publications

References 36 publications

Corporate social responsibility and firm default risk in the Eurozone: a market-based approach

Corporate social responsibility and firm default risk in the Eurozone: a market-based approach

Determinants and consequences of financial distress: review of the empirical literature

Does Institutional Context Affect CSR Disclosure? A Study on Eurostoxx 50

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