The Impact of Default Risk on Corporate Social Responsibility: Evidence from Korean Firms

This paper examines the empirical association between corporate social responsibility(CSR) and default risk. Default risk affects virtually every financial contract. Based on the argument that CSR would play the role of reducing conflicts between firms and society, this study hypothesized that corporate social responsibility would be concerned in the firms’ credit rating as a proxy measure of default risk. Specifically, the firms with higher CSR activities are predicted to have higher credit rating, higher firm values than those with lower CSR activities. This study examined theses hypotheses, using a sample of 1,879 on Korean firms over three-year period (2010-2012). An ESG(Environment, Social, Governance) index published by Korean Corporate Governance Service (KCGS) was used as the measure of corporate social responsibility. The results of this study find that the firms with high corporate governance performance exhibit better credit rating as a proxy variable of default risk. These results are robust across different measures of variables and testing methodologies.