Corporate social responsibility and future bankruptcy

Abstract

PurposeThis study aims to investigate the cross-sectional differences on the association between corporate social responsibility (CSR) and future bankruptcy along the dimensions of political connection and corporate governance strength. This study intends to provide evidence on the tangible benefits for firms to invest in social capital of CSR activities and offer insights on what firms may benefit more from CSR expenditure.Design/methodology/approachRunning a logistic regression on the determinants of bankruptcy model after controlling for financial stress factors based on prior literature, this study examines the moderating effect of political connection and corporate governance on the association between corporate social responsibility and future bankruptcy.FindingsCurrent study documents that the negative association between corporate social responsibility and future bankruptcy is only significant for politically connected firms, but insignificant for non-politically connected firms. Specifically, the authors find that one standard deviation increase of CSR expenditure significantly reduces the propensity of future bankruptcy by 53.20% for politically-connected firms. Conversely, the negative relation between CSR only exits for firms with weak corporate governance but do not exit for firms with strong corporate governance.Research limitations/implicationsCurrent 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.Originality/valueCurrent study extends the research to examine the cross-sectional variations in the negative association between CSR performance and the propensity of bankruptcy. The positive moderating effect of political connection on CSR and bankruptcy suggests that political connection and CSR are complements in reducing the propensity of future bankruptcy. A more pronounced negative association between CSR and bankruptcy for firms with weaker governance suggests that firms with weak corporate governance benefits more in engaging CSR activities than firms with strong corporate governance.