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Quantitative easing and default probability of corporate social responsibility in US

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  • Feng-Jui Hsu
  • I-Chien Liu

Abstract

The US Federal Reserve’s quantitative easing (QE) policies lowered the cost of servicing corporate debt and enhanced firms’ ability to borrow. This article seeks to improve the accuracy of default probability calculations as proposed by Merton (1974) under conditions of lower interest rates resulting from QE. By modifying the long-term debt ratio, we find distance to default is undervalued. Specifically, we find that the distance to default is more stably for firms with excellent corporate social responsibility (CSR) performance, but those with poor CSR performance are significantly undervalued. Our results show that improved CSR performance correctly estimates the firm’s default risk, even during QE when the Federal Reserve’s balance sheet expanded by nearly $4.5 trillion.

Suggested Citation

  • Feng-Jui Hsu & I-Chien Liu, 2017. "Quantitative easing and default probability of corporate social responsibility in US," Applied Economics Letters, Taylor & Francis Journals, vol. 24(10), pages 681-685, June.
    • Handle: RePEc:taf:apeclt:v:24:y:2017:i:10:p:681-685
    DOI: 10.1080/13504851.2016.1221032
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    Cited by:

    1. Hsu, Feng-Jui & Chen, Sheng-Hung, 2021. "US quantitative easing and firm’s default risk: The role of Corporate Social Responsibility (CSR)," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 650-664.
    2. Chu-Hsiung Lin & Tzu-Chuan Kao & Chang-Cheng Changchien & Chien-Hui Wu, 2021. "Corporate Social Responsibility and Credit Ratings: On the Moderating Role of Firm Capability," Bulletin of Applied Economics, Risk Market Journals, vol. 8(2), pages 17-24.

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