“Assessing the Impact of Corporate Social Responsibility Performance on the Relationship between Enterprise Risk and the Value of Cash Holdings” - An Applied Study

Abstract

For several decades, corporate social responsibility (CSR) has been a predominant, debated concept in business literature. The literature on the financial implications of high CSR firms has evolved and covered a wide variety of topics. A considerable number of studies have investigated the impact of CSR practices on firm financial performance. In contrast, few studies have examined the impact of CSR on cash holdings and firm risk.

While the determinants of corporate cash holdings have been widely studied in the literature, the direct relationship between corporate social responsibility (CSR) and corporate cash holdings remains largely unexplored. The research seeks to fill this gap by examining whether and how CSR relates to corporate cash holdings. In particular, this research identifies and tests two channels through which CSR may explain cash holdings. They are the idiosyncratic risk channel and the systematic risk channel.

CSR firms tend to have better relationship with stakeholders. Consequently, they enjoy higher levels of social capital that provide insurance-like protection that can mitigate harm from negative (especially firm-specific) events, thus reducing the need to maintain cash holdings at a high level. Inelastic demand due to either consumers' loyalty to CSR firms or investors' preference for CSR firms leads to lower systematic risk, which in turn makes CSR firms less sensitive to aggregate shocks. This has two competing effects on cash holdings.

On the one hand, low sensitivity to aggregate shocks makes firms less inclined to build up a large cash holding. On the other hand, firms with lower systematic risk tend to have a shorter debt maturity structure and thus a higher refinancing risk, suggesting that a higher cash holding is required to mitigate the refinancing risk.

This research aims at exploring the various links between corporate social responsibility,