The Real Effects of Environment and Social Scandals on the Corporate Sector

Abstract

We investigate the effects of heightened corporate social responsibility (CSR) risk, through environmental and social (E&S) incidents, on corporate financial policies. We test for this relation by investigating changes in corporate financial policies of unaffected but at-risk firms after an E&S incident. We find that firms draw down on cash holding, cut capital expenditure and borrow more debt. The changes in financial policies coincide with an increase in CSR investment, which in turn helps preventing future E&S incidents. The reaction is more pronounced in firms with weaker reputational capital and corporate governance due to their inability to absorb adverse CSR shocks. Overall, our analysis suggests that firms are responsive to heightened CSR risk.