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The Impact of Corporate Social Responsibility on Default Risk: Empirical evidence from US Firms

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  • Muhammad Suhail Rizwan

    (National University of Science & Technology, Islamabad)

  • Asifa Obaid

    (National University of Science & Technology, Islamabad)

  • Dawood Ashraf

    (Islamic Research & Training Institute, Jeddah, Saudi Arabia)

Abstract

This paper investigates the risk mitigation effects of engagement in corporate social responsibility (CSR) activities by using data from 1,119 non-financial US firms between 2000 and 2012. We find evidence that firms with higher CSR activity scores experience lower probability-of-default. However, the credit mitigation effect of CSR is more pronounced with activities related to primary stakeholders (employee relations, product quality, diversity, and governance). Engagement in secondary (institutional) CSR activities (environmental and community related) are not significant in this relationship. We found that the dotcom crisis (2001-02) and the financial crisis (2007- 08) substantially increased default probabilities. This study provides robust evidence that engagement and disclosure of CSR-related activities reduces credit risk suggesting that both management and investors can use socially responsible behavior as a pricing factor.

Suggested Citation

  • Muhammad Suhail Rizwan & Asifa Obaid & Dawood Ashraf, 2017. "The Impact of Corporate Social Responsibility on Default Risk: Empirical evidence from US Firms," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 9(3), pages 36-70, September.
    • Handle: RePEc:bec:imsber:v:9:y:2017:i:3:p:36-70
    DOI: dx.doi.org/10.22547/BER/9.3.2
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    Cited by:

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    2. Li, Hao & Zhang, Xuan & Zhao, Yang, 2022. "ESG and Firm's Default Risk," Finance Research Letters, Elsevier, vol. 47(PB).
    3. Suleiman A. Badayi & Bolaji T. Matemilola & Bany‐Ariffin A.N & Lau Wei Theng, 2021. "Does corporate social responsibility influence firm probability of default?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 3377-3395, July.
    4. Wang, Liyue & Yang, Liuyong, 2023. "Environmental, social and governance performance and credit risk: Moderating effect of corporate life cycle," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    5. Mohamad Hassan Shahrour & Isabelle Girerd-Potin & Ollivier Taramasco, 2021. "Corporate social responsibility and firm default risk in the Eurozone: a market-based approach," Post-Print hal-03198467, HAL.

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    More about this item

    Keywords

    CSR; Probability-of-default (PD); principal component analysis (PCA); beta regression;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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