An Empirical Study on the Relationship between Corporate Social Responsibility and Default Risk: Evidence in Korea

Abstract

Focusing on the Korean stock market, this paper expands on previous research on the relationship between corporate social responsibility (CSR) and default risk. By using a comprehensive sample of 6977 firm-year observations during the 2011–2021 period, we employ the year fixed effects and industrial sector dummies classified by FnGuide Industry Classification Standard to control for shifting economic conditions over time and effects within industries. The Z-score is employed as the primary proxy for default risk, and the finding of the study confirms a negative association between CSR practices and default risk. Moreover, testing the three components of CSR, we also find that each component has a negative impact on the default risk. To ensure the robustness of our findings, we conduct a robustness check using two additional proxies of default risk: the K-score, a specific measure of default risk for the Korean market, and the distance to default (DTD), a market-based model. Our results remain consistent and robust even when utilizing alternative proxies, further confirming the negative relationship between CSR and default risk. This has significant implications for businesses and regulators who aim to decrease the risk of default through implementing CSR initiatives.