How risk mediates the CSP-CFP relationship

What is the relationship between corporate social performance (CSP) and corporate financial performance (CFP)? This empirical study uses bond market data to assess the relationship, arguing that if CSP is related to CFP it would be over the long-term, and that therefore long-term bonds are a more the suitable security to study rather than stocks. It is further proposed that CSP affects risk, and that it is risk that then affects the firm's financial performance. Thus risk is proposed to be an intermediary between CSP and CFP. Mediated regression is therefore used to assess the relationship between CSP (as measured by KLD) and CFP (as measured by the yield-to-maturity, YTM, on bonds). Risk is measured by the Moody's risk rating on a firm's long-term bonds, because it is a forward-looking measure and a long-term measure, and is therefore an appropriate measure of long-term future risk. Regression results show that the Moody's risk rating does fully mediate the relationship between KLD and YTM. Other backwards-looking risk measures-beta, the current ratio, and the standard deviation of EBIT-do not.