Do Corporate Social Responsibility Activities Reduce Credit Risk? Short and Long-Term Perspectives

Abstract

This study examines the short- and long-run effects of corporate social responsibility (CSR) activities on the credit risk implied in credit derivative prices. Measuring the different term effects on credit risk by the slope of credit default swap (CDS) spreads with different maturities, we investigate how CSR activities affect credit risk differently in the short and long run. Fama-MacBeth regressions reveal that firms with higher CSR scores tend to have more gently decreasing CDS slopes because, on average, CSR activities reduce credit risk in the long run more than in the short run. An analysis of individual CSR categories shows that while community, diversity and employee relations lead to a lower CDS slope, human rights and product characteristics increase the CDS slope. This finding suggests that not all CSR activities affect short-term and long-term credit risks in the same direction. Therefore, even though CSR activities can reduce credit risk in the long-run, some CSR activities may increase the short-term credit risk and hence increase short-term borrowing costs.

Liquidity and CSR: a chicken and egg story

“…This implies that high CSR performers sell their products and services in a shorter time, collect receivables faster and settle payables more rapidly. This signals that customers have a positive attitude and greater loyalty toward companies with a high level of CSR involvement and they are more willing to purchase products of those companies and settle their payments more rapidly (Truong and Kim, 2019). On the other hand, the negative association between CSR engagement and days payables outstanding implies that the improvement in receivables collection of CSR firms may stimulate early payment of credits as the company’s ability to collect its receivables affect its debt repayment ability (Poot, 2020).…”

“…On the other hand, reverse causality evidence supports the stakeholder theory such that greater CSR involvement stimulate positive attitudes of various stakeholders such as customers and other stakeholders. For example, customers have a positive attitude and more loyalty toward firms with a high level of CSR involvement (Truong and Kim, 2019), which will fasten the company’s inventory turnover and shorten cash collection time.…”

“…It is anticipated that CSR can stimulate client's purchase and sympathy toward the company, which fastens sales and facilitates receivables collection; companies with good relationships with their customers will have more sources of revenue as the latter expect a satisfactory level of services and higher value of their money (Paul, 2018). Further, customers have a positive attitude and more loyalty toward companies with a high level of CSR involvement, and they are more willing to support and identify these companies (Truong and Kim, 2019), which will shorten the company's cash collection time. Additionally, Hamrouni et al (2020) stated that CSR disclosure affects lenders' expectations about the company's payment ability and their evaluation of its financial situation.…”

Non-performing loans and bank performance: what role does corporate social responsibility play? A system GMM analysis for European banks

“…, 2018; Gangi et al. , 2019; Truong and Kim, 2019). In 2001, the European Commission (EC) defined CSR as the voluntary contribution of a company to a better society and clean environment by integrating social and environmental concerns in its activities.…”

“…However, few studies have drawn a connection between CSR and bank performance and/or risks (Gangi et al. , 2019; Truong and Kim, 2019; Belasri et al. , 2020; Zhou et al.…”