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

Business & Economic Review, 9(3), 2017, pp. 36-70

35 Pages Posted: 22 Nov 2017 Last revised: 22 Jan 2018

See all articles by Muhammad Suhail Rizwan

Muhammad Suhail Rizwan

National University of Sciences and Technology (NUST)

Asfia Obaid

National University of Sciences and Technology (NUST)

Dawood Ashraf

Islamic Development Bank - Islamic Research and Training Institute

Date Written: 2017

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.

Keywords: CSR, Probability-of-Default (PD), Principal Component Analysis (PCA), Beta Regression

Suggested Citation

Rizwan, Muhammad Suhail and Obaid, Asfia and Ashraf, Dawood, The Impact of Corporate Social Responsibility on Default Risk: Empirical Evidence from US Firms (2017). Business & Economic Review, 9(3), 2017, pp. 36-70. Available at SSRN: https://ssrn.com/abstract=3074531 or http://dx.doi.org/10.2139/ssrn.3074531

Muhammad Suhail Rizwan (Contact Author)

National University of Sciences and Technology (NUST) ( email )

Pakistan

Asfia Obaid

National University of Sciences and Technology (NUST) ( email )

Pakistan

Dawood Ashraf

Islamic Development Bank - Islamic Research and Training Institute ( email )

P.O. Box. 9201
Jeddah, 21413
Saudi Arabia

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