US quantitative easing and firm’s default risk: The role of Corporate Social Responsibility (CSR)

Abstract

This study empirically investigates whether the US quantitative easing (QE) policy significantly mitigates a firm’s default risk by focusing on firms with differential levels of corporate social responsibility (CSR). Analyzing US firms’ data from 31,182 firm-year observations from 2000 to 2014, during QE implementation, we find that firms with better CSR performance showed a lower distance to default conditioning in extreme monetary expansion. Firms exhibited lower default risk during the US QE policy, but QE might generate adverse effects resulting from increased risk premiums and volatility for equities and low-grade corporate bonds, thereby increasing overall default probability. Our robustness tests not only considered various CSR dimensions and components but also used an alternative estimation method to improve the quality of default risk estimates.