Corporate Social Responsibility and the Term Structure of CDS Spreads

Abstract

This paper examines the role of corporate social performance in the CDS market, with a focus on the differential effect conditional on the lengths of time horizons. We find that strong social performance is negatively associated with the slope of CDS term structure, by reducing the long-term credit risk and increasing the short-term credit risk. After controlling for credit ratings in a “path analysis”, we find that the direct effect of social performance remains significant, suggesting that CDS market participants incorporate this information more efficiently than credit rating agencies. Furthermore, the effects of social performance are stronger for firms with speculative-grade ratings, smaller size, or less analyst coverage.

Keywords: corporate social responsibility (CSR), credit default swap (CDS), term structure

JEL Classification: G10, G30, G32, M14, M41