Corporate social responsibility and forward default risk under firm and industry heterogeneity

Abstract

Objective: This study aims to evaluate the impact of corporate social responsibility on forward default risk (FDR) under the setting of firm and industry heterogeneity.

Research Design & Methods: This study evaluated the impact of corporate social responsibility (CSR) on FDR using the data of 497 companies from 2007-2021 in the S&P 500 index, taking into account firm and industry heterogeneity aspects. This study utilized instrumental variable regression using the generalized method of moments (IV-GMM) estimation technique which is robust for controlling the pertinent issue of endogeneity.

Findings: This study found a negative relationship between CSR and FDR in the full sample. From the firm size aspect, this study found that CSR is more effective in mitigating FDR in large-cap firms than in mid-cap firms. Firm age heterogeneity exhibited a distinct behaviour, as young and middle-aged firms had a stronger impact on FDR management in comparison to old firms. Industry heterogeneity showed that industries with higher customer interaction have a higher impact on corporate social responsibility to control FDR. Industries with lower customer interaction have a lower impact on corporate social responsibility and FDR.

Implications & Recommendations: We proposed some policy recommendations based on the findings in the context of firm and industry heterogeneity. Especially the management of mid-cap and young corporations should improve the CSR policy to enhance CSR performance which would lead to stabilized protection against FDR. Similarly, consumer-intensive industries should also focus on enhancing CSR initiatives to decrease FDR. Non-consumer-intensive industries should focus on enhancing CSR policy and at the same time pay particular attention to communicating CSR results to end consumers to reduce FDR.

Contribution & Value Added: This study is the first to explore CSR’s impact on financial parameters under heterogeneity.

Keywords

corporate social responsibility, forward default risk, heterogeneity effect, firm, industry

Author Biography

Muhammad Mushafiq

MSc in Finance (2021, Bahria University Islamabad, Pakistan); Doctoral Scholar at Gdańsk University of Technology (Poland). His research interests include environmental economics and financial management.

Błażej Prusak

Habilitation in Economics (2014, Gdańsk University of Technology, Poland); Associate Professor and Head of Department (Finance) at Gdańsk University of Technology (Poland). His research interests include corporate and personal bankruptcy, corporate bankruptcy prediction, business valuation, investment projects and financial analysis.

Magdalena Markiewicz

PhD in Economics (2010, University of Gdańsk, Poland); Assistant Professor and Vice-Dean (Development and Cooperation with the Social and Economic Environment) at University of Gdańsk (Poland). Her research interests include financial markets and corporate finance.

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