Do Corporate Social Responsibility Activities Reduce Credit Risk? Short and Long-Term Perspectives

This study examines the short- and long-run effects of corporate social responsibility (CSR) activities on the credit risk implied in credit derivative prices. Measuring the different term effects on credit risk by the slope of credit default swap (CDS) spreads with different maturities, we investigate how CSR activities affect credit risk differently in the short and long run. Fama-MacBeth regressions reveal that firms with higher CSR scores tend to have more gently decreasing CDS slopes because, on average, CSR activities reduce credit risk in the long run more than in the short run. An analysis of individual CSR categories shows that while community, diversity and employee relations lead to a lower CDS slope, human rights and product characteristics increase the CDS slope. This finding suggests that not all CSR activities affect short-term and long-term credit risks in the same direction. Therefore, even though CSR activities can reduce credit risk in the long-run, some CSR activities may increase the short-term credit risk and hence increase short-term borrowing costs.