Do environmental and social risks affect corporate financial policies?

47 Pages Posted: 9 Jun 2020 Last revised: 4 Jan 2021

See all articles by Chloe CY Ho

Chloe CY Ho

The University of Western Australia

Hannah Nguyen

Monash University - Monash Business School - Department of Banking and Finance

Van Hoang Vu

RMIT University - School of Economics, Finance and Marketing

Date Written: May 15, 2020

Abstract

We investigate the effects of heightened corporate social responsibility (CSR) risk, through environmental and social (E&S) incidents, on corporate financial policies. We test for this relation by investigating changes in corporate financial policies of unaffected but at-risk firms after an E&S incident. We find that firms draw down on cash holding, cut capital expenditure and borrow more debt. The changes in financial policies coincide with an increase in CSR investment, which in turn helps preventing future E&S incidents. The reaction is more pronounced in firms with weaker reputational capital and corporate governance due to their inability to absorb adverse CSR shocks. Overall, our analysis suggests that firms are responsive to heightened CSR risk.

Keywords: ESG; CSR; corporate decision making; investment decisions; financing decisions; cash holdings; CSR investment; reputational capital

JEL Classification: G31, G32

Suggested Citation

Ho, Chloe CY and Nguyen, Thu Ha and Vu, Van Hoang, Do environmental and social risks affect corporate financial policies? (May 15, 2020). Available at SSRN: https://ssrn.com/abstract=3601616 or http://dx.doi.org/10.2139/ssrn.3601616

Chloe CY Ho (Contact Author)

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia

Thu Ha Nguyen

Monash University - Monash Business School - Department of Banking and Finance ( email )

PO Box 197
Caulfield East, VIC 3145
Australia

Van Hoang Vu

RMIT University - School of Economics, Finance and Marketing ( email )

Level 12, 239 Bourke Street
Melbourne, Victoria 3000
Australia

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