Corporate social performance and cost of debt: the relationship

TLDR

Academic debate has focused on CSR and CSP, yet few studies examine CSR’s effect on cost of debt and firm risk; literature indicates cost of debt is negatively associated with firm risk and that CSR may reduce risk, leading to the expectation that higher CSP lowers debt costs. This paper investigates the link between corporate social performance and cost of debt financing. Using a unique dataset of 332 firms over five years before the global financial crisis, the authors apply a linear regression model. The results reveal a positive relationship between CSP and cost of debt, showing that CSR does not act as a value driver to reduce firm risk or financing costs, contrary to expectations.

Abstract

Purpose This paper aims to investigate the link between corporate social performance (CSP) and cost of debt financing. Despite academic debate has focused on the link between corporate social responsibility (CSR) and CSP (expressed through accounting and market measures of profitability), few empirical researches have analysed the relations between CSR, cost of debt and its relation with the risk profile of a firm. The literature on the cost of debt determinants generally documents a negative association between measures of the risk of the firm and its cost of debt. The literature on CSR defines risk reduction as one of the potential benefits related to CSR activities. Thus, the expectation is that high CSP scores are inversely related to cost of debt. Design/methodology/approach Using a unique data set of 332 firms over a time period of five years antecedent to the global financial crisis, a linear regression model is applied. Findings The results show a positive relation between CSP and cost of debt, demonstrating that CSR is not a value driver with an impact on the firm’s risk profile. Practical implications The research has also practical implications as it makes managers aware of the potentiality of CSP to reduce the firm’s cost of debt. Originality/value These findings enlarge the empirical research on the value of CSP, expanding it towards a quite new area of investigation: the cost of external financing.