Abstract
This paper examines how CSR enhances firm performance by mitigating the frictions discussed in the literature of capital structure and product market performance, and how CSR works as insurance during boom and bust periods. We find evidences supporting that CSR tempers the predation incentive of competitors by lowering capital market frictions, and that CSR encourages customers' purchasing incentive by lowering the negative effect of switching costs. Through these two mechanisms, CSR helps mitigate the high leverage problem, which is shown as substantial market share losses for highly leveraged firms. We also find CSR exhibiting insurance characteristics under an extended definition of negative events. Overall, the findings support the positive role played by CSR and provide strategic implications for business operation and financial distress resolution.
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