Observación

In this set of endogeneity tests, we introduce a set of exogenous shocks to our model. These shocks influence the costs of high leverage but are exogenous with respect to firms’ CSR. Evidence of a more pronounced relationship between CSR and high

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leverage costs under exogenous shocks that magnify the costs of high leverage would suggest that endogeneity problems are not driving our main results. We employ a quasi- natural experiment as follows. A firm establishes its CSR policy two years before a base year. In the base year, the firm experiences an exogenous business shock. Because the firm’s CSR precedes the exogenous shocks, it is not likely to be affected by these shocks. However, the exogenous shocks can influence the costs of high leverage. Building on this argument, we predict that the mitigating effect of CSR on the costs of high leverage is magnified after the advent of the exogenous shock.

We focus on two sets of exogenous shocks. First, we use the reduction in import tariffs (e.g., Frésard, 2010; Lileeva and Trefler, 2010; Valta, 2012). A tariff cut can increase stakeholders’ sensitivity to high leverage, thus increasing the costs of high leverage. Bernard et al. (2006) show that lower trade barriers attract intensified competition from foreign rivals. Indeed, import tariff reductions are exogenous shocks that shift the competitive landscape of industries (Frésard, 2010). With reduced import tariffs, foreign rivals face lower costs of entering U.S. product markets, and therefore introduce a variety of goods and services to the U.S. markets (Valta, 2012). In this case, customers are more sensitive to high leverage, because in a more competitive environment they have more choices and do not have to stick with the original products regardless of the financial conditions of the firm. Competitors are also more reactive to a highly leveraged firm because the expanded pool of rivals increases the probability of predation.

Following prior studies, we use the industry-level import tariff data compiled by Feenstra (1996), Feenstra et al. (2002), and Schott (2010). These data cover the U.S. manufacturing industries (2000–3999 SIC range) over the 1972 to 2005 period. Following common practice (Frésard, 2010; Lileeva and Trefler, 2010; Valta, 2012; Flammer, 2015b) we define the “shock” when the reductions of tariff rates12 _{exceed a certain threshold. In} particular, we consider industry-years with a tariff reduction at least twice the average annual change in the same industry.13 To identify the relation between CSR and high leverage costs after tariff shocks, we employ a difference-in-difference regression,14 similar to Frésard (2010) and Valta (2012):

𝑆𝐴𝐿𝐸𝑆_𝐺_𝑖,𝑡 = 𝛼_𝑖+ γ₁𝑃𝑜𝑠𝑡_𝑟𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛_𝑗,𝑡×𝐶𝑆𝑅_{𝑖,𝑡−2}×𝐻𝐿𝐸𝑉_{𝑖,𝑡−2}+ γ₂𝐶𝑆𝑅_{𝑖,𝑡−2}×𝐻𝐿𝐸𝑉_{𝑖,𝑡−2} + γ3𝑃𝑜𝑠𝑡_𝑟𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑗,𝑡×𝐻𝐿𝐸𝑉𝑖,𝑡−2+ γ4𝑃𝑜𝑠𝑡_𝑟𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑗,𝑡×𝐶𝑆𝑅𝑖,𝑡−2 + γ5𝐻𝐿𝐸𝑉𝑖,𝑡−2+ γ6𝐶𝑆𝑅𝑖,𝑡−2+ γ7𝑃𝑜𝑠𝑡_𝑟𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑗,𝑡+ γ8𝑆𝐼𝑍𝐸𝑖,𝑡 + ∑ 2 𝑘=1 γ_9𝑘𝑃𝑅𝑂𝐹𝐼𝑇_{𝑖,𝑡−𝑘}

12 _{The ad valorem tariff rate is computed as the duties collected by U.S. Customs divided by the free-on-}

board value of imports.

13 _{The alternative choices of threshold (2.5, or 3 times) do not qualitatively influence our results, and thus are}

not reported for brevity.

14 _{The sample period of the difference-in-difference regression is 1996–2012. The end of sample period is set}

24 + ∑ 2 𝑘=1 γ_10𝑘𝐼𝑁𝑉𝐸𝑆𝑇𝑀𝐸𝑁𝑇_{𝑖,𝑡−𝑘}+ ∑ 2 𝑘=1 γ_11𝑘𝑆𝐸𝐿𝐿𝐸𝑋𝑃_{𝑖,𝑡−𝑘}+ 𝜀_{𝑖,𝑗,𝑡} . (4)

where i, j and t denote firm, industry and year. 𝛼_𝑖 is a vector of firm fixed effects.

𝑃𝑜𝑠𝑡_𝑟𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛 is a dummy equal to one if the tariff reduction has taken place in industry j by time t (Valta, 2012). Again, SALES_G, CSR, HLEV, and the control variables are defined as before. Similar to our main model, standard errors are clustered at the firm level.

The difference-in-difference result is reported in Table 1.5. The regression automatically treats all firm-years in industries that have not experienced a reduction in tariff as a control group. The coefficient of interest is the three-way interaction among

𝑃𝑜𝑠𝑡_𝑟𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛, CSR, and HLEV (γ1), which represents the difference in CSR–high leverage costs sensitivity between firms that have experienced tariff reduction and those in the control group. In the difference-in-difference model, we find the estimate of the three- way interaction is 0.074, positive and significant at the 5% level. This finding implies that after the tariff shock, firms’ CSR policy reduces extra stakeholder-related costs that could occur to highly leveraged firms in an exogenously modified competitive environment. This difference-in-difference result ensures that our main finding cannot be fully influenced by the endogeneity problems.

The second set of shocks we consider are exogenous economic and political conditions. During an economy-wide downturn, the viability of a highly leveraged firm becomes more uncertain, increasing unfavorable actions from both customers and

competitors. Following Campello (2003), we use changes in the unemployment rate and GDP. An increase in the unemployment rate or a decrease in GDP represents a negative shock to aggregate demand that adversely affects the product market environment, thus magnifying the costs of high leverage. We also use an annual policy uncertainty index from Baker et al. (2015). Greater policy uncertainty puts upward pressure on the cost of financing (Baker et al., 2015; Pástor and Veronesi, 2013), limiting the ability of highly leveraged firms to withstand attacks from competitors. We therefore expect the costs of high leverage to be greater under higher policy uncertainty.

To test the idea that the effect of CSR on the costs of high leverage is conditioned by the exogenous economic and political environment, we mainly rely on the two-step procedure of Campello (2003), who examines how continuous exogenous condition variables affect the main relation (the relation between CSR and high leverage costs in our setting). The results, which are untabulated for brevity, show that the effect of CSR on high leverage costs is more pronounced under bad exogenous conditions, lending further support to our main finding that CSR reduces the costs of high leverage.15

15 _{We also test this idea using a good/bad exogenous condition dichotomy. Specifically, we re-run Equation}

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