This study uses a difference‐in‐differences estimation method to address potential endogeneity between corporate social responsibility (CSR) and firm performance using a natural experiment of COVID‐19, with a cross‐country sample of 80,454 firm‐quarter observations across 51 countries. We find that high‐CSR firms show better performance, raise more debt, and invest more during COVID‐19. The positive effect of CSR on firm performance is more pronounced in countries with better governance and among non‐ International Financial Reporting Standards adopters. Our findings suggest that when trust in firms and markets falls during an economic crisis, the trust established between a firm and its stakeholders via socially responsible behavior pays off.
Purpose
The demand-side view of creditor rights posits a negative association between creditor rights and corporate borrowings. The purpose of this paper is as follows: first, the author examines whether the demand-side effect is more pronounced amongst firms with excess promoter shareholding. Subsequently, the authors analyze the impact of high promoter holdings on investment decisions owing to bankruptcy reforms.
Design/methodology/approach
To answer the above questions, the authors exploit the passage of the Insolvency and Bankruptcy Code (IBC) (2016) that strengthens the creditor rights of lenders, which impacts the borrowings and financing activities of Indian corporates. Using a panel of listed Indian firms over the period of 2012–2019, the authors analyze how the IBC affects firms’ borrowings and financing decisions with excess promoter holdings.
Findings
The authors find that bankruptcy reforms led to a statistically significant decline in the use of borrowed funds (primarily secured and long-term debt) by firms with high concentrated holdings. The analysis also indicates that firms with excess promoter ownership face an increased cost of debt due to bankruptcy reforms. As a result, firms with excess promoter holdings curtail their investments. Overall, the results indicate that India’s bankruptcy reforms significantly affect the firms’ financing and investment decisions with highly concentrated ownership.
Originality/value
While past research has explored the relationship between bankruptcy reforms and demand for/supply of debt, the authors provide novel empirical evidence on the role of promoter holdings that affects the relationship between bankruptcy law and financing and investment decisions. To the best of the author’s knowledge, this study is the first to investigate the role of ownership structure in the context of bankruptcy reforms by using a quasi-natural experiment.
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