Can Corporate Social Responsibility Reduce the Propensity of Future Bankruptcy?

Posted: 22 Jul 2016

See all articles by Li (Lily) Brooks

Li (Lily) Brooks

Texas A&M International University

Date Written: April 30, 2016

Abstract

Stakeholder theory posits that integrating corporate social responsibility into the business model can enhance a firm’s long-term sustainability. Using the social and environmental ratings from MSCI ESG database as a proxy for corporate social responsibility (CSR, hereafter) for the sample period of 2004 to 2011, current study documents a negative association between CSR and the propensity of future bankruptcy. Specifically, this research finds that one standard deviation increase of CSR expenditure reduces the likelihood of bankruptcy by approximately 28.50 percent. The main inference is robust to the consideration of endogeneity issues and the use of a matched sample analysis. Cross-sectional analysis shows that the negative relation between CSR and future bankruptcy are driven by political connected firms, large firms, and firms with weak corporate governance. Current study provides evidence on the tangible benefits for firms to invest in social capital of CSR activities and offers additional insights on what firms may benefit more from CSR expenditure.

Keywords: Corporate Social Responsibility, Future Bankruptcy, Bankruptcy Prediction, Stakeholder Theory, Long-term Sustainability

JEL Classification: M14, G33, C53

Suggested Citation

Brooks, Li, Can Corporate Social Responsibility Reduce the Propensity of Future Bankruptcy? (April 30, 2016). Available at SSRN: https://ssrn.com/abstract=2812669

Li Brooks (Contact Author)

Texas A&M International University ( email )

5201 University Boulevard
Laredo, 78041-1900
United States
9563262491 (Phone)

HOME PAGE: http://https://info.tamiu.edu/facultyprofiles/faculty.aspx?email=lily.brooks@tamiu.edu

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