The Power of Diversity and Inclusion: Impact on Credit Default Swap Spreads

ABSTRACT In the evolving business landscape, diversity and inclusion (D&I) practices have gained increasing prominence, particularly as societal movements highlight the importance of creating diverse and inclusive workplaces. This study explores how a firm's D&I engagement affects its credit default swap (CDS) spreads, providing new insights into the financial benefits of robust D&I performance. Our empirical analysis shows that firms with higher D&I ratings tend to enjoy lower CDS spreads, a benefit that is particularly significant for highly leveraged firms. We also identify three key mechanisms through which D&I practices help reduce credit risk: enhanced financial health, increased transparency, and reduced agency costs. As such, a firm's commitment to D&I can serve as a strategic tool for enhancing a firm's credit profile, offering a compelling rationale for incorporating D&I initiatives into managerial strategies, regulatory frameworks, and investment choices.