Does corporate social responsibility reduce financial distress risk?

• Published in: Economic modelling Vol. 91; pp. 835 - 851
• Main Authors: Boubaker, Sabri, Cellier, Alexis, Manita, Riadh, Saeed, Asif
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-09-2020; Elsevier
• Subjects: Corporate social responsibility; Default; Financial distress risk; Humanities and Social Sciences; Z-score; Z-score; M14; Corporate social responsibility; G30; G33; G34; Financial distress risk; Default
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2020.05.012

This paper examines how corporate social responsibility (CSR) affects the level of financial distress risk (FDR). Using a sample of 1201 US-listed firms during 1991–2012, our results indicate that firms with higher CSR levels have lower FDR, suggesting that a better CSR performance makes firms more creditworthy and have better access to financing, which is rewarded with less financial defaults. This finding is robust to using alternative proxies of FDR, to controlling for potential endogeneity, and is mainly driven by the community, diversity, employee relations, and environmental dimensions of CSR. Moreover, this relationship is more prevalent in firms with strong governance mechanisms and high product market competition. It is also more exacerbated for less distressed firms and during non-crisis periods. Overall, our findings suggest that the adoption of CSR practices comes with less distress and default risks, likely leading to a more attractive corporate environment, better financial stability and more crisis-resilient economies.
•We examine the effect of CSR on financial distress risk (FDR).•High CSR firms exhibit lower financial default risk.•CSR makes firms have better access to finance, which is rewarded with less FDR.•This relation is driven by community, diversity, and employee dimensions of CSR.•It is prevalent in firms operating in competitive markets and with strong governance.