Corporate social responsibility and bankruptcy probability: Exploring the role of market competition, intellectual capital, and equity cost

• Date: 01 January 2020
• Author: Mohammad Khodaei Valeh Zaghard,Ali Saeedi,Ali Asghar Anvary Rostamy,Hashem Kamalirezaei
• DOI: http://doi.org/10.1002/jcaf.22417
• Published date: 01 January 2020

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Corporate social responsibility and bankruptcy probability:

Exploring the role of market competition, intellectual capital,

and equity cost

Hashem Kamalirezaei

1

| Ali Asghar Anvary Rostamy

2,3

| Ali Saeedi

1

|

Mohammad Khodaei Valeh Zaghard

1

1

Department of Accounting, Faculty of

Management and Humanities, Tehran North

Branch, Islamic Azad University,

Tehran, Iran

2

Department of Management, Tarbiat

Modares University, Tehran, Iran

3

Department of Planning and Management,

Management Study and Technology

Development, Tarbiat Modares University,

Tehran, Iran

Correspondence

Ali Asghar Anvary Rostamy, Department of

Planning and Management, Management

Study and Technology Development,

Tarbiat Modares University,

No. 16, Rahnama Chitsaz, Saidi St., Shahid

Dr Lavasani Ave., Postal Code:

1954613953, Tehran, Iran.

Email: anvary@modares.ac.ir

Abstract

This research investigates the relationship between corporate social responsibility

and the probability of bankruptcy and explains the moderating role of the structure

of market competition, intellectual capital, and equity cost on this relationship.

Using a sample of the Tehran Stock Exchange during 2009–2016, panel data, and

logit-ranking model, we find an inverse relationship between corporate social

responsibility and the probability of bankruptcy. Results from additional analyses

show that corporate social responsibility has a significant inverse relationship with

the probability of bankruptcy and when the market structure moves to a monopoly,

the probability of bankruptcy is reduced due to high market entry costs for other

companies. Overall, we document that corporate social responsibility plays an

important roles in reducing the probability of bankruptcy of companies.

KEYWORDS

bankruptcy, corporate social responsibility, equity cost, intellectual capital, market competition

1|INTRODUCTION

Over the past two decades, corporate social responsibility

(CSR) has been significantly taken into account by eco-

nomic entities. The goal of CSR is to achieve sustainable

economic development through improving the quality of life

of firms' employees, their families, the environment, and

society as a whole. The CSR emphasizes important issues

such as ethics, environment, security, education, human

rights, and so on. Although CSR has a primary cost to the

firms, it is expected that improving the firms' reputation will,

in the long run, reduce costs and increase sales, improve the

financial performance and the ability to compete and reduce

the risk, including the risk of bankruptcy.

The bankruptcy and failure of firms has always been a

reflection of the problem. Due to the importance of the issue

of bankruptcy, many studies have been conducted around the

world. Gordon (1971) defined a decline in the profitability of

firms, which leads to an increase in the probability of inability

to pay debts, as a bankruptcy. It is not easy to pinpoint

the reason or reasons for financial problems and bankruptcy.

In many cases, multiple reasons lead to a phenomenon of

bankruptcy. Newton (2009) has divided the reasons for bank-

ruptcy into external and internal reasons. The external reasons

include the characteristics of the economic system, competi-

tion, trade change and transfer in public demand,trade volatil-

ity, financing market, and incidental accidents. However,

internal reasons include increased credit overhead, inefficient

management, inadequate capital, betrayal, and fraud.

Firms' unfavorable financial situation is detrimental to

the various strata of society, and in particular to investors. It

is very difficult to provide a precise definition of the groups

involved in the bankruptcy problem, but it can be argued

that management, investors, creditors, and legal entities are

more affected by the phenomenon of bankruptcy than others.

Therefore, today bankruptcy prediction is very important.

Received: 13 August 2019 Accepted: 16 September 2019

DOI: 10.1002/jcaf.22417

J Corp Acct Fin. 2020;31:53–63. wileyonlinelibrary.com/journal/jcaf © 2019 Wiley Periodicals, Inc. 53