How does corporate social responsibility change capital structure?^*

* Accepted by Yue Ma upon recommendation by Junbo Wang.

Abstract

How do creditors view the existence of corporate social responsibility (CSR) strategies? Our study investigates the effect of CSR on information asymmetry between firms and creditors. Using Chinese listed firms as samples, our paper adopts propensity score matching to reconstruct the new samples to randomly assign CSR reportage to firms. We then use a differences-in-differences approach to construct our hypotheses as follows. First, firms that employ CSR strategies possess higher leverage than firms that do not. Second, the presence of CSR reports reduces the speed of capital structure adjustment, and the adjustment speeds of above-target leverage firms tend to be slower than those of below-target leverage firms. Third, CSR reports provide long-term predictions to creditors, enabling firms that issue them to maintain higher long-term leverage compared with firms that do not incorporate CSR into their operations. In summary, on the basis of causal inference, we conclude that CSR can considerably reduce information asymmetry between firms and creditors.

Keywords:

• Corporate social responsibility
• capital structure
• target leverage

Notes

* Accepted by Yue Ma upon recommendation by Junbo Wang.

1. The results for employee-oriented firms do not report in the paper.

2. According to the CSMAR database, each qualitative issue area is assigned a binary (1/0) rating. If firms report a qualitative issue area, this area is designated 1 and 0 otherwise.