Managers as Agents Versus Angels: An Agency Theory Paradox of Corporate Social Responsibility, Bankruptcy, and Recovery

Luis E Davila P., Pace University


This dissertation focuses on the effects of corporate social responsibility (CSR) on bankruptcy outcomes and on the length of time it takes a firm to exit from Chapter 11 bankruptcy. Bankruptcy is a critical stage for any firm that has not been able to minimize the effects of financial distress and, consequently, has elected to seek protection under Chapter 11 of the bankruptcy laws. I not only analyze the effects of CSR on financial failure but also examine the effects of the level of a firm’s CSR commitment on its survival and liquidation probabilities after filing for reorganization under Chapter 11. I also explore the moderation and mediation effects of available slack on the relationship between CSR and bankruptcy given that slack resources are needed for a firm’s sustained CSR efforts. Further, I examine the association between a firm’s commitment to CSR and the length of the recovery process. Filing for bankruptcy is a response to the critical deterioration of a firm’s financial performance and asset values, which can result from either financial or economic distress (Bhattacharjee, Higson, Holly & Kattuman, 2009). While the former results from management’s actions in running the internal operations of the firm, the latter is entirely external, as it depends on market conditions and the overall external economic environment (Oxelheim and Wihlborg, 2009). Bankruptcy, whether due to financial or economic factors, or both, is a critical situation—with which managers are typically not familiar—that negatively influences the normal development of business. Bankruptcy adversely affects not only the financial performance and the economic value of the firm but also the relationships among the firm’s internal and external stakeholders. Moreover, a firm’s financial and operational deterioration, eventual bankruptcy filing, and the unsuccessful termination of bankruptcy proceedings (in the case of a liquidation of the firm) destroys value not only for the owners but also for all parties with an interest in the firm’s business. Even in the case of a successful recovery, bankruptcy has long-lasting negative effects on the reputation of the firm and the responsible managers. When a firm is under financial distress, managers appear to do “wrong” if they divert critical resources or restricted levels of organizational slack away from the core business in order to continue the firm’s CSR activities. However, in an agency theory paradox, these “bad” managers’ wrongful pre-bankruptcy CSR commitments become “good” deeds in hindsight because of the delayed “angel” or “steward” effect they have during the process of the firm’s recovery from Chapter 11. Rupp, Williams and Aguilera (2006) describe this relationship in their paper where they theorize that “stakeholders not only react to how they see the firm treating them but also hold organizations accountable for the treatment of other stakeholder groups.” Thus, the “bad but selfless” pre-bankruptcy manager’s behavior prepares the firm for the subsequent financial turnaround because the commitment to CSR, even during periods of critical financial distress, helps the firm to retain the support of key stakeholders for the positive resolution of a Chapter 11 filing. I found that a firm’s continued commitment to CSR while going through periods of financial distress is an accelerator of financial failure or Chapter 11 filing and, simultaneously, a facilitator of a firm’s eventual recovery from bankruptcy. Further, I found that CSR decreases a firm’s likelihood of liquidation and increases its likelihood of recovery from Chapter 11 bankruptcy. Lastly, I found that there is a positive association between commitment to CSR and the length time from a firm’s filing for bankruptcy to the court’s approval of a reorganization plan.

Subject Area

Management|Business administration|Organizational behavior

Recommended Citation

Davila P., Luis E, "Managers as Agents Versus Angels: An Agency Theory Paradox of Corporate Social Responsibility, Bankruptcy, and Recovery" (2016). ETD Collection for Pace University. AAI27547057.



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