Does Greater Corporate Social Responsibility Lead to Lower Risk of Corporate Failure?

Since 2008, researchers have identified 335 human diseases as having emerged in the period between 1960 and 2004, their names running the gamut from Avian flu to Zika. Furthermore, since 2003, the world has faced a series of medical challenges, such as the outbreaks of SARS, MERS, and Ebola, that have required immediate global action and coherent global responses. The effects of the ongoing coronavirus (COVID-19) pandemic on every aspect of social and economic life have highlighted the importance of corporate social responsibility (CSR) not only for corporate survival but also for human longevity.

Although each of these outbreaks was accompanied by a frenetic reaction at all levels, it was followed by a societal amnesia—so-called “business as usual.” Previous literature provides inconsistent evidence as to the impact of CSR on corporate financial performance and shareholder value, especially in the era of “chronic emergency” (as described by virologist Brian Bird) in which we now live. In addition, little evidence exists as to whether greater CSR leads to lower risk of corporate failure or higher likelihood of delisting. In our recent paper, we address this gap in the literature by investigating the association between CSR and economic objectives from the perspective of corporate survival.

We show that a better CSR rating is associated with a lower probability of corporate failure and a longer survival period. We also explore the degree to which each of the six CSR dimensions (environment, community, human rights, employee relations, diversity, and product) influences a firms’ probability of failure. We find that some CSR dimensions are more important than others in influencing the probability of default; that is, firms that put more weight on environmental protection, community engagement, employee relations, and product safety and quality are more likely to survive in the long run. Of these four dimensions, the environment and community dimensions contribute the most to the prolongation of corporate lifespans. We argue that firms with a high sense of environmental responsibility and community responsibility are, respectively, 23.5% and 18% less likely to delist than firms with low manifestations of these dimensions.

Furthermore, we explore the potential impact of CSR activities on firms’ short-term performance and long-term survival during a pandemic. Our results indicate that high-CSR firms have greater survivability than low-CSR firms and this effect is more pronounced in regions that experience higher infection rates. In particular, we find that that firms with high levels of CSR activity are about 10% more likely to survive when encountering challenges from pandemics than those without. In addition, for regions that have higher median CSR scores or a larger number of high-CSR firms, the future pandemic infection rate is significantly lower than in other regions. Finally, there is a positive association between corporate social performance and financial performance during the pandemic years. The latter finding highlights the importance of CSR on promoting a firm’s financial performance during periods of emergency.

After evaluating the merits of engaging in CSR activities during a pandemic, we investigate how climate change affects high-CSR firms’ performance and survivability. The reason is because large temperature variations also bring more uncertainty to operating conditions. We argue that while firms with headquarters located in low-CO2 emission states generally struggle to survive, those with high CSR levels have better survival rates as well as better financial performance. More specifically, we find a 15.2% increase in the likelihood of survival when firms perform better in the social and environmental dimensions of CSR.

Corporate social responsibility could also represent a successful marketing strategy, further improving a firm’s competitive advantage and thereby extending its survival; on the other hand, it is possible that firms facing fierce competition reduce failure risk by other means, such as improving operations-related (rather than CSR-related) activities. We find that firms with high-CSR policies are 12% less likely to delist in a highly competitive market, and that CSR activities are more important for firms in industries involving high competition. These results indicate the complementary role that CSR plays in relation to corporate governance.

In our paper, we analyze the relationship between a firm’s CSR performance and its survival probability in the context of the exogenous shock of pandemic disease and climate change. We conjecture that better corporate social performance is associated with a lower probability of corporate failure and a longer survival period. Finally, we show that better financial performance, fewer capital constraints, CEO behavioral discipline, and higher labor productivity are all channels through which firms with high CSR ratings improve their chances of survival.

Thomas J. Chemmanur is a Professor of Finance at the Carroll School of Management, Boston College.

Dimitrios Gounopoulos is Professor of Accounting and Finance at the University of Bath.

Panagiotis Koutroumpis is a Lecturer of Economics and Finance (adjunct staff) in the School of Economics and Finance at Queen Mary University of London.

Yu Zhang is a Lecturer in Accountancy at the University of College, Dublin, Ireland.

This post is adapted from their paper, “CSR and Firm Survival: Evidence from the Climate and Pandemic Crises” available on SSRN.

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