۱- Introduction

۲- Research design

۳- Empirical results

۴- Robustness checks

۵- Concluding remarks

References

Abstract

Extant literature suggests that corporate social responsibility (CSR) accrues social capitals that buffers business risk. We extend this literature by documenting that firms with higher prior history of positive CSR engagement are less likely to file for bankruptcy when they are in deep financial distress and are more likely to experience accelerated recovery from distress. Furthermore, we decompose social capitals accrued from prior CSR engagement into moral capital and exchange capital. The results show that moral capital reduces bankruptcy likelihood when the firm grows larger. On the other hand, exchange capital mitigates bankruptcy likelihood when the firm relies on intangible assets to operate and when firms operates in more litigious business environment.

Introduction

This study aims to evaluate the value of corporate social responsibility (CSR, henceforth) in the context of corporate financial distress. At the crux of the study is a simple question: whether and how the bankruptcy likelihood of financially distressed firms can be reduced by their CSR engagement? CSR engagement is increasingly perceived as a risk management instrument that not only reduces cash flow volatility but also helps avoid costly lower-tail outcomes (Earnst & Young, 2017; Minor & Morgan, 2011; Peloza, 2006; Perez-Batres, Doh, Miller, & Pisani, 2012). Godfrey (2005) theorize that a firm’s prior CSR engagement provides an insurance-like protection when the firm is in crisis. For instance, firms with proactive CSR engagement in managerial practices like environmental assessment and stakeholder management (Wood, 1991) tend to anticipate and reduce potential sources of business risk, such as potential governmental regulation, labor unrest, or environmental damage (Orlitzky & Benjamin, 2001).1 We extend Godfrey (2005) by looking for evidence on the relationship between prior CSR engagement and bankruptcy likelihood. The empirical investigation is conducted based on a sample of financially distressed firms. Our research question is partly motivated by Smith and Stulz (1985), who postulate that value-maximizing corporations rationally acquire risk management instruments when the corporations expect future financial distress. This is because risk management instruments are most valuable to the corporations when the expected financial distress cost becomes so onerous that bankruptcy becomes imminent. As CSR engagement can be used as a form of risk management instrument, we expect that the prior CSR engagement can mitigate the expected distress cost and, consequently, lowers the bankruptcy likelihood.