Quantitative easing and default probability of corporate social responsibility in US |
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Authors: | Feng-Jui Hsu I-Chien Liu |
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Institution: | Department of Insurance and Finance, National Taichung University of Science and Technology, Taichung, Taiwan |
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Abstract: | The US Federal Reserve’s quantitative easing (QE) policies lowered the cost of servicing corporate debt and enhanced firms’ ability to borrow. This article seeks to improve the accuracy of default probability calculations as proposed by Merton (1974) under conditions of lower interest rates resulting from QE. By modifying the long-term debt ratio, we find distance to default is undervalued. Specifically, we find that the distance to default is more stably for firms with excellent corporate social responsibility (CSR) performance, but those with poor CSR performance are significantly undervalued. Our results show that improved CSR performance correctly estimates the firm’s default risk, even during QE when the Federal Reserve’s balance sheet expanded by nearly $4.5 trillion. |
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Keywords: | Quantitative easing distance to default corporate social responsibility Merton model |
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