![]() ” We investigate how the relation between a firm’s CSR score and long-term S&P credit rating varies with country- le velsocie tal tru st, foc usi ng on theinter act ionbetwe en so cie taltrustand CSR. Wh en a co unt ry’ s ov er all so cie tal tru st is low, a fir m can sig nal its tru stw ort hin ess to ra tin g age nc ies by eng agi ng in CSR to bu ild mor e so cia l cap ita l and ear n a “c red it rat ing prem ium. Alt ern ati vel y, cre dit ra t- ingagenc ies ma y val ue CSR mo re in cou ntr ies wit h low er so cie tal tru st. CSR is more likely to result in “reciprocity” in more trusting countries (Berg et al., 1995 ), which su gge st s tha t CSR ou tco me s are mo re lik ely to bea r fru it and be ob ser ved in the se cou ntr ies. It is lik ely tha t cre dit ra tin g age nci es val ue CSR mo re in co unt rie s wit h higher societal trust. ![]() Acc ord ing to a wid esp rea d vie w am ong pr act iti one rs an d co rpo ra tio ns, a fir m’ s CSR act ivi tie s gen er ate so cia l cap i- tal and trus t (Fit zger ald, 2003 Li ns et al. Following these clues, we hypothesize that so cie tal tru st pla ys an imp ort ant rol e in the rel ati on bet wee n CSR and cre dit rat ing age nci es’ ass ess men t of CSR. Asan info rmal inst ituti on, coun try-l eve l soci etal trus t prote cts inv esto rs by mitig ating mor al haza rd conc erns such as oppo r- tunistic managerial behavior and self-dealing (Cline & Williamson, 2016 ). Existing research also finds that CSR all ev iat es inf orm ati on asy mm etr y and fil ls an ins tit ut ion al voi d (D hal iw al et al. Pa st res ear ch sho ws tha t mo ra l haz ard con cer ns can be all evi ate d by cer tai n for mal an d inf orm al ins tit uti on al (re li- gious, cultural, and ethical) frameworks (Brockman et al., 2020 Zak & Knack, 2001 ). The ref ore, CSR can be a wa ste of res ou rce s and an ind ica tor for age ncy cos t. Inde ed, the agen cy theo ry-ba sed view of CSR (Fr iedm an, 1971 Jensen & Meckling, 1976 ) expresses severe moral hazard concerns associated with CSR, suggesting that man- age rs us e CSR to ser ve th ems elv es, su ch as dev elo pin g the ir ow n pet pro jec t or bui ldi ng the ir ow n rep uta tio n, ins tea d of ser vin g sha reh old er int ere sts. ![]() Unlike the financial factors that have a more straightforward impact on credit risk, the impact of nonfinancial factors like CSR engagement and performance, when combined with unob- serv able mana geria l incen tive s, is more chal lengi ng to asse ss. As an inf orm ati on gat her ing and pro ces sin g int erm e- diary, credit rating agencies are highly sensitive to information asymmetries which lead to adverse selection and/or moral hazard concerns (Millon & Thakor, 1985 ). CSP and credit rating varies because of moral hazard concerns that credit rating agencies have with respect to the un kno wn ma nag eri al inc ent ive s th at und erl ie CSR eng age men t.
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