Moderating effect of corporate social responsibility on debt capital structure and long-term debt to probability of default

This thesis investigates the effect of capital structure on probability of default using a sample data of 496 firms from 17 developing countries for the period 2010-2017. The study applies the two-step system generalized method of moments that mitigate endogeneity problem. The study also examines the moderating effect of corporate social responsibility (CSR) on the relationship between capital structure and long-term debt to the probability of default. The study finds a strong positive relationship between capital structure and probability of default. Furthermore, CSR activities negatively moderate the relationship between capital structure and probability of default. Moreover, CSR activities also negatively moderate the relationship between long-term debt and probability of default. The findings of this study have implications for managers and investors. Managers should be wary of debt financing because it is one of the major causes of default probability. Managers should also embrace CSR activities as their top agenda because high CSR activities help to establish good relationships with various stakeholders which helps to facilitate firms’ access to alternative sources of finance and decrease firms’ usage of debts, hence reducing the probability of default. Investors should consider high CSR firms when making investment decisions because high CSR decreases default risk which serves as potential protection to investments. This study makes three major contributions to finance literature. First, this study investigates capital structure as determinant of probability of default using a large sample of firms in developing countries. Second, this study adds a new determinant (i.e. CSR) of probability of default by specifically establishing evidence that CSR moderates the relationship between capital structure and probability of default on one hand, and long-term debt and probability of default on the other hand. Third, this study finds that firms’ active CSR participation helps to decrease their need for debt (especially debts with longer maturity), thus lowering their default probability.

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