Asset sales and financial distress: the moderating effect of corporate social responsibility

What the paper says

Purpose This study aims to investigate how corporate social responsibility (CSR) moderates the relationship between asset sales and financial distress, addressing a critical gap in corporate finance literature where these interactions remain unexplored. Design/methodology/approach Using a sample of 114 French firms observed over 2001-2023 (2324 firm-year observations) and employing generalized least squares regression, we test two competing theoretical perspectives: the stakeholder trust enhancement hypothesis versus the resource depletion hypothesis. France provides an ideal empirical setting with its mandatory CSR framework and over two decades of standardized data. Findings Asset sales significantly reduce financial distress. However, when firms maintain high CSR commitments, this beneficial relationship weakens substantially. Our results support the resource depletion hypothesis, revealing that CSR negatively moderates the asset sales-financial distress relationship, creating a substitution rather than a complementary effect between these strategies. Practical implications Our findings offer crucial guidance for corporate managers facing financial distress: maintaining extensive CSR programs during asset sales may inadvertently reduce restructuring effectiveness. Firms should strategically prioritize resource allocation, potentially scaling back CSR commitments temporarily to optimize financial recovery. For policymakers, our results highlight potential unintended consequences of mandatory CSR frameworks during economic downturns. Originality/value This is the first study to examine how CSR moderates the asset sales-financial distress relationship, resolving competing theoretical perspectives through empirical evidence. We provide novel insights into the strategic trade-offs between sustainability investments and financial recovery mechanisms during corporate distress.