Does corporate social responsibility affect leverage adjustments?

Abstract

This research outlines and tests two corporate social responsibility (CSR) views of the corporate leverage speed of adjustment (SOA). The first view (stakeholder value maximization) indicates that socially responsible firms commit to ethical behavior and provide reliable financial information, which is advantageous to access external financing, and thus these firms tend to gain faster leverage adjustments. The second view (overinvestment) predicts that if managers over-invest in CSR due to agency problems, CSR may raise external financing’s concerns and is related to slower leverage adjustments. Our findings strongly support the first view. We further find that the positive effect of CSR on SOA is more pronounced for firms with high information asymmetry, high financial constraints, and high adjustment costs. Taken together, this study generates important insight that CSR can reduce leverage adjustment costs stemming from information asymmetry, thereby leading to faster leverage SOA.

Keywords: Corporate Social Responsibility, Capital Structure, Leverage Speed of Adjustment, Information Asymmetry

JEL Classification: G32, M14