The effect of CSR engagement on financial distress risk in emerging markets

: a cross-country analysis on the role of economic development and culture

Abstract

This thesis investigates the impact of firm engagement in Corporate Social Responsibility (CSR) on a company’s financial distress risk in emerging markets in South America, Asia & Europe. I use Thomson Reuters Environmental, Social and Governance (ESG) – score as a proxy for CSR-performance, Gross National Product (GNP) per Capita as a proxy for economic development as well as three of Hofstede’s (1980) cultural dimensions to capture cultural differences to investigate the effect of ESG-performance using two financial distress prediction models: Altman’s Z-score and Ohlson’s O-score. By analyzing 8301 panel observations from 20 emerging markets countries, I find a significantly weaker effect of CSR-performance on financial distress risk in all emerging markets countries when compared to S&P500 companies. Further, I find that economic development influences the relationship between economic development and financial distress risk. Lastly, Long-Term Orientation and Power Distance show moderating effects on the relationship between CSR-performance and financial distress risk,Individualism leverages it. My findings are robust to variation in time, industry, and region as well as reverse causality and endogeneity and jointly support Freeman’s (1984) hypothesis of the benefits of a strong firm-stakeholder relationship.

Date of Award	21 Oct 2022
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Ricardo Reis (Supervisor)