The effect of social capital on firm risk, market valuation and risk shifting incentives

Student thesis: Doctoral Thesis

Abstract

This PhD thesis comprises three empirical chapters related to social capital. The thesis investigates the impact of social capital, captured by corporate social responsibility (CSR), on firms' risk, market valuation and investment decisions. In my first empirical chapter, I assess whether social capital is an effective reputational hedge against risks emerging from political and industry-wide uncertainty. I document that CSR reputation significantly reduces stock return volatility during regional political uncertainty and industry-wide peer competition, but cannot mitigate cash flow volatility. I further document that the hedging effect of social capital is transient but has positive real effect on firms' future performance and growth opportunities. In my second empirical chapter, I examine whether social capital creates value via effective hedging during political uncertainty. I find that firms with high social capital realize higher short-term abnormal returns compared to firms with low social capital during political uncertainty caused by elections. Moreover, I find that a portfolio of high CSR firms earns significantly higher long-term abnormal returns than portfolio of low CSR firms over the first three years after the election event. Hence, I document the evidence that social capital creates value both in the short and long run around election periods via reputation effect. In the third empirical chapter, I examine the relationship between CSR reputation and firm investment. I document that firms with high default probability shift risk, via increasing investment intensity, from shareholders to creditors when their CSR reputation is high. Hence, CSR reputation affects risk-shifting incentives. I find evidence that firms with higher probability of default increase their CSR investment to signal jam the information on firms' actual financial fragility.
Date of Award27 Aug 2021
Original languageEnglish
Awarding Institution
  • University Of Strathclyde
SponsorsUniversity of Strathclyde
SupervisorDimitris Andriosopoulos (Supervisor) & Krishna Paudyal (Supervisor)

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