Do Well-Behaved Firms Attract More Market Makers? Evidence from the CDS Market

This paper explores whether corporate social performance impacts CDS market liquidity. We first document that better corporate social performance attracts more CDS market makers and induces more frequent CDS price updates. Second, we explore the influence mechanism of CSR on CDS market liquidity. Cross-sectional analyses show that the effect of CSR on liquidity provision is stronger for firms with smaller sizes, fewer analysts following, higher stock return volatility, higher systematic risk or higher credit risk. These findings are consistent with the notion that strong social performance attracts CDS dealers by reducing information asymmetry or offsetting firm risk. Our findings are robust to controlling for more variables, remain qualitatively similar for three subperiods around the 2008 financial crisis period and are robust to the acquisition of CSR data vendors. To our knowledge, this is the first study to focus on the relation between corporate social responsibility and financial market microstructure.