CSR as entrenchment strategy and capital structure: corporate governance and investor protection as complementary and substitutive factors

This research is developed under the hypothesis that corporate social responsibility (CSR) can be promoted as a self-defence strategy against managerial discretion costs, leading to the capital market demanding higher debt levels to solve agency frictions and monitor the management. In accordance with this idea, this study aims to examine the complementary or substitutive role of some additional control factors: (i) the strength of corporate governance related to board independence and diversity as a firm-level factor and (ii) the level of investor protection as a country-level factor. We use an international sample from 21 countries for the period 2003–2010. Supporting the market demand for external debt as a control mechanism that avoids managerial discretion and entrenchment risks, our findings support the following: first, the complementary effect of corporate governance on the demand for external debt; second, the substitutive effect of the degree of investor protection on such a demand. Accordingly, debt as a control mechanism is less demanded in countries with a greater level of investor protection, while it remains necessary in firms with more diverse boards that cannot effectively constrain managerial discretion and entrenchment. In addition, the greater predictive power of the investor protection factor on the use of debt acts as a monitoring aspect; that is, country-level factors dominate firm-level factors.