Abstract:
This thesis examines how superior corporate social responsibility (CSR) relates to firm value, overall bank risk, and a range of risks, which can be mapped to a rating system commonly used in the banking industry, using a sample of 235 banks in 39 countries for the period between 2012 and 2017. This study aims to investigate whether CSR enhances banks’ value by improving their capabilities in managing or reducing risk, which is the value protective characteristic of CSR. Based on the stakeholder maximization view, I theorize that banks use CSR as a strategic tool to enhance reputation and strengthen trust from and relationships with stakeholders, which lead to improved firm value and reduced risks. The empirical analyses are based on a panel data regression approach. I use the two-stage least squares regression method, with firm and year fixed effects, and instrumental variables to address possible endogeneity issues.
I find that banks with good CSR performance have higher firm value and lower overall bank risk. My analyses also show that these banks have lower credit risk. My research contributes to the literature on CSR in the banking industry by extending the research into an area rarely explored, which is the association between CSR and a range of bank risks. This study shows that high CSR banks have stronger capital adequacy ratios, suggesting lower capital adequacy risk. I also find that banks with superior CSR have lower earnings risk. Moreover, high CSR banks have the ability to attract and retain retail deposits, resulting in lower sensitivity to interest rate risk. Nevertheless, I find that these banks have a relatively low liquid asset ratio and liquidity funding ratio, suggesting possible higher liquidity risk.
The sample banks are complying with their respective country’s regulatory requirements. Because superior CSR is associated with a good corporate reputation and relationships with
regulators, investors, and depositors, it may enable banks to have access to capital and be able to raise more capital, have more stable earnings, better asset quality, more capability to attract retail deposits, and have the flexibility and capacity to maintain an appropriate level of liquid assets. This study shows the dynamic association among CSR, firm value, and risks, which may have significant implications for managers, investors, and regulators. Bank managers constantly encounter the key trade-off between achieving operational cost efficiency and investing in long-term strategic initiatives. These findings could encourage bank managers to consider improving CSR performance, leading to enhanced shareholders’ value and possibly better managerial remuneration. Investors could also use the information to consider investing in firms with superior CSR performance. As good CSR performance could potentially improve bank stability, bank regulators could consider introducing policies to promote or mandate CSR initiatives.