Extant literature supports the view that Corporate Social Responsibility (CSR) engagement could potentially act as a risk mitigation device. We extend this literature to address the issue of whether CSR engagement could benefit firms which are already in bankruptcy. A unique feature of our empirical tests is the decomposition of CSR into two components – moral capital and exchange capital. We find that moral capital is associated with the likelihood of a distressed firm emerging from bankruptcy. Further, moral capital appears to reduce the number of days a distressed firm spends in bankruptcy. Our empirical evidence also suggests that moral capital increases the likelihood that a distressed firm successfully negotiates a pre-packaged agreement with its creditors. Finally, our empirical results indicate that the exchange capital component of CSR is positively related to the probability of procuring debtorin-possession financing by a distressed firm whilst in bankruptcy. Overall, our results imply that both moral and exchange capital components of CSR play a role in facilitating a firm’s emergence from bankruptcy.

Introduction

Increasingly, institutional investors are adopting environmental, social and governance standards, which are collectively referred to as Corporate Social Responsibility (CSR), in their investment decisions (Cheng et al., 2014). Researchers have examined CSR engagement in the corporate sector through different lenses. First, the duty-aligned perspective posited by Swanson (1995) suggests that corporate moral behavior may be expressed by obligations and duties derived on the basis of rights and justice without regard to a utilitarian assessment. Second, firms follow a utilitarian perspective and implement CSR initiatives to achieve performance objectives such as enhancing profitability, returns on investment or sales growth. Some scholars label this as the strategic view of CSR, which maintains that firms engage in profit maximizing CSR (Baron, 2001; McWilliams and Siegel, 2001) and that companies “do well by doing good.” Finally, the stakeholder-driven view proposes that corporations adopt social responsibility activities in response to pressures from various stakeholders. In a meta-analysis, there is mixed evidence on whether or not CSR is value-enhancing (Freeman, 1984; Orlitzky et al., 2003; Margolis and Walsh, 2003). More recently, a strand of research has emerged which suggests that a firm’s CSR activities may be used to mitigate its risk. Attig et al. (2013) suggest three channels for the CSR-risk linkage. First, by improving a firm’s relations with its stakeholders, a firm enhances the long-term sustainability of the firm.