Corporate Social Performance and the Likelihood of Bankruptcy: Evidence from a Period of Economic Upswing

Posted: 8 Jun 2021

See all articles by Florian Habermann

Florian Habermann

Catholic University of Eichstaett-Ingolstadt - Ingolstadt School of Management

Felix Fischer

Catholic University of Eichstaett-Ingolstadt - Ingolstadt School of Management

Date Written: June 5, 2021

Abstract

The paper aims to investigate the effects of corporate social performance (CSP) on bankruptcy likelihood in times of economic upswing. This is important because prior related literature focused on data containing times of economic crises. We measure bankruptcy likelihood with the Altman Z score and CSP with Thomson Reuters (TR) ESG scores. By applying static panel data regressions and instrumental variable regressions on a sample of 6,696 US-firm-year observations from 2010 to 2019 our main findings are: (i) In contrast to existing research, the level of firms’ CSP seems to have no (positive) effect on the likelihood of bankruptcy during times of economic upswing. (ii) Increasing a firm’s CSP in times of economic upswing leads to a rise in bankruptcy likelihood. We conclude that the positive effects of CSP on stakeholder relationships fail to materialize in flourishing business environments. The costs of increasing CSP, thus, outweigh their immediate positive effects and raise bankruptcy likelihood. However, as they reduce financial default risk in subsequent crises, CSP investments can be seen as a balancing measure. Our findings bear implications for scholars, practitioners, and policymakers.

Keywords: Bankruptcy Likelihood, Corporate Social Performance

JEL Classification: M14

Suggested Citation

Habermann, Florian and Fischer, Felix, Corporate Social Performance and the Likelihood of Bankruptcy: Evidence from a Period of Economic Upswing (June 5, 2021). Available at SSRN: https://ssrn.com/abstract=3860719

Florian Habermann (Contact Author)

Catholic University of Eichstaett-Ingolstadt - Ingolstadt School of Management ( email )

Auf der Schanz 49
Ingolstadt, 85049
Germany

Felix Fischer

Catholic University of Eichstaett-Ingolstadt - Ingolstadt School of Management ( email )

Finance and Banking Department
Catholic University of Eichstaett-Ingolstadt
Ingolstadt, 85049
Germany

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