Do corporate social responsibility ratings affect credit default swap spreads?

Abstract

AbstractWe examine the impact of a corporate social responsibility (CSR) rating announcement on the credit default swap (CDS) spreads of European firms. Our results indicate that a CSR rating upgrade leads to an immediate and significant decrease in CDS spreads of rated firms. In contrast, CSR rating downgrades do not have a significant immediate impact on the CDS market. Additionally, better CSR ratings, in terms of both the overall score and the scores for the three main CSR pillars (economic, environmental, and social), lead to lower CDS spreads. Therefore, we document that the CSR rating is a measure of CSR performance that affects market CDS prices. Our findings are consistent with the risk mitigation view, highlighting the benefits derived from CSR commitment. Consequently, CSR engagement can function as a tool for improving firm's creditworthiness. This result may provide an incentive to pay more attention to CSR in managerial, regulatory, and investment decisions.