Creditor Monitoring and Corporate Social Responsibility: Evidence from Covenant Violations

47 Pages Posted: 9 Jan 2021

See all articles by Luo He

Luo He

Concordia University, Quebec - John Molson School of Business

Jingjing Zhang

McGill University - Desautels Faculty of Management

Ligang Zhong

University of Windsor - Odette School of Business

Date Written: November 9, 2020

Abstract

We examine whether and how creditor monitoring affects corporate social responsibility (CSR) activities through the observable event of debt covenant violations. Covenant violations shift the control rights to creditors, allowing creditors to strengthen monitoring on firm policies. Employing a quasi-regression discontinuity design, we document differential effects of creditor monitoring on various components of CSR activities: firms tend to reduce CSR activities related to employee and community welfare, while leaving activities largely intact on the components that can have long-term adverse reputational effects on the firm. We also find that the reduction in CSR activities occurs primarily in situations where managerial agency problems in CSR activities tend to be more severe. Our findings provide evidence that creditors play a role in shaping CSR.

Keywords: Corporate social responsibility; debt governance; creditor monitoring; covenant violations

JEL Classification: M14, G21, G31, G34

Suggested Citation

He, Luo and Zhang, Jingjing and Zhong, Ligang, Creditor Monitoring and Corporate Social Responsibility: Evidence from Covenant Violations (November 9, 2020). Available at SSRN: https://ssrn.com/abstract=3727652 or http://dx.doi.org/10.2139/ssrn.3727652

Luo He

Concordia University, Quebec - John Molson School of Business ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

Jingjing Zhang (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5
Canada

Ligang Zhong

University of Windsor - Odette School of Business ( email )

401 Sunset
Windsor N9B 3P4, Ontario
Canada

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