The impact of corporate social responsibility on firm risk ::evidence from the CDS market

This paper examines the impact of corporate social responsibility (CSR) performance on firms’ credit risk, as measured by CDS spreads. Using a broad data set with 1,326 companies and 6,448 observations across industries in the U.S over the period from 2006 to 2018, we find that, besides the overall CSR (ESG, Environmental, Social and Governance) score, only 2 out of 10 individual CSR dimensions are relevant for firms’ credit risk. In general, the individual dimensions workforce orientation and management efficiency are valued most by bondholders. When looking into different periods, we find that employee engagement and good management are associated with significant lower CDS spreads consistently in the pre-financial as well as in the post- financial crisis era. Our findings suggest that not all CSR investments pay off, but employee orientation and management efficiency are rewarded by debtholders and are associated with lower CDS spreads. Our results are consistent with the risk mitigation view, but show that only certain CSR policies serve as risk reducing and trust building mechanism, especially after periods when perceived firm risk is high. Firms with high engagement towards employees and with good corporate governance benefit from lower CDS spreads, especially in the post-crisis-era. This is empirical evidence for investors having learnt to incorporate those CSR activities as risk mitigating factor when assessing credit risk