Does corporate social responsibility influence firm probability of default?

Abstract

This study extends the literature on the capital structure of corporate social responsibility (CSR) firms by examining the effect of CSR on the firm probability of default using a sample of 496 firms from 17 developing countries for the period 2010–2017. This paper employs the two‐step system generalized method of moments (GMM) technique that mitigates the endogeneity problem. Our findings for the full sample show that high CSR participation reduces the firm probability of default in developing countries. Our results are robust after separating the sample into four regions. Precisely, CSR participation reduces the probability of default in Asian, Latin American, and European regions (except the African and Middle Eastern region). Overall, our findings suggest that as firms in developing countries increase their investments in CSR activities, the probability to default their obligations decreases.

Investment in ESG Projects and Corporate Performance of Multinational Companies

“…A more recent study (Badayi et al, 2020) confirms the aforementioned positive relationship based on the analysis of 496 companies located in 17 countries of the emerging market.…”

“…The firm risk may rise if the company faces sanctions or lawsuits because of daily activities that negatively affect the environment or other social indicators. Moreover, the government can abruptly introduce new law prohibiting emission above a defined threshold, and hence, the company's operations will be threatened (Badayi et al, 2020). Third, if the company actively participates in ESG initiatives, stakeholders might be confident in the firm's future prosperity without sanctions and lawsuits caused by the company's operating activities that lead to social and environmental damages.…”

“…Therefore, scarcity of financial resources, increasing debt to fund this project, and ineffective ESG project implementation may trigger company default. Meanwhile, ESG initiatives decrease the likelihood of default occurrence by appealing to new customers (Sun & Cui, 2014), decreasing the firm's financial risk and financial distress (Badayi et al, 2020), and strengthening the relationship with stakeholders that may provide alternative capital instead of debt raising (Jo & Na, 2012). H2: Investment in ESG projects decreases the likelihood of the company default.…”

“…Many authors (e.g., Yu et al, 2018;Miralles-Quirós et al, 2019;Duque-Grisales & Aguilera-Caracuel, 2019;Badayi et al, 2020;Crespi & Migliavacca, 2020) revealed that the economic development of the country, in which the firm is headquartered, has a meaningful influence on the interrelationship between corporate financial performance and ESG activities. This is because people from developed countries are better informed about the importance of preservation of the environment, observance of human rights, and other social issues.…”

“…For instance, Cheng et al (2014), Arayssi et al (2016), Shaukat et al (2016), Garcia et al (2017), Yu et al (2018), Fatemi et al (2018), Duque-Grisales and Aguilera-Caracuel (2019), Miralles-Quirós et al (2019), Nekhili et al (2021), Bhaskaran et al (2020), De Lucia et al (2020, and Crespi and Migliavacca (2020) analyzed how investing in ESG projects may boost the market value of a firm and profitability measures, such as return on assets (ROA) and return on equity (ROE). Meanwhile, Sun and Cui (2014), Devalle et al (2017), and Badayi et al (2020) explored the influence of ESG initiatives on the default likelihood.…”