Creditor Rights, Access to Finance, and Corporate Social Responsibility: Evidence from a Natural Experiment

Abstract

Using difference-in-difference approach, we find that strengthening creditor rights, after the staggered enactment of anti-recharacterization laws that enhanced the ability of creditors to repossess collateral during bankruptcy, leads to higher CSR and improves CSR strengths and CSR areas that directly relate to firms’ primary stakeholders. Stronger creditor rights lead to more corporate social performance in financially constrained firms and in those with increased post-shock debt financing and risk taking. Our new evidence suggests that stronger creditor rights increase CSR of firms that value external financing, shifting the attention more squarely to access to finance as a driver of CSR and points that strengthening stakeholders’ rights and relaxing the financial constraints of firms can lead to improved CSR.