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Corporate Social Responsibility and the Cost of Corporate Bonds
Abstract and Figures
This study examines how a firm’s corporate social responsibility (CSR) performance is associated with the cost of its new bond issues. Using credit ratings as an ex ante cost of debt, we find that better CSR performance is associated with better credit ratings. After controlling for credit ratings, our results show that better CSR performance is associated with lower yield spreads but some of the effect is absorbed by credit ratings. When we examine CSR strengths and concerns separately, we find that a higher CSR strength (concern) score is associated with lower (higher) yield spreads. Our results on the effect of firm performance on seven individual CSR dimensions are generally consistent with our main findings. Our results indicate that firms with better CSR performance are able to issue bonds at lower cost and that both CSR strengths and concerns are considered by bondholders. Additional subsample test results suggest that the association between CSR performance and bond yield spreads is more pronounced in investment-grade and non-Rule 144a bonds, for financially healthier bond issuers, for issuers with weaker corporate governance and higher information asymmetry, and for issuers operating in environmentally sensitive industries.
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... According to the shareholder theory (Ge and Liu, 2015), CSR practices imbibe cash and increase a company's distress risk. In contrast, the stakeholder theory claims that CSR performance advantages capital markets by reducing information asymmetry among parties to the contract and reducing issuers' perceived legal risks. ...
... Easley et al. (2002) also claimed that the number and quality of a firm's relevant information might directly impact asset values and that enterprises can affect (lower) their financing costs by minimising the information asymmetry problem. CSR success may also enhance a company's investor base (Ge and Liu, 2015). As per Heinkel et al. (2001), socially aware investors seek to eliminate companies with poor CSR practices from their portfolios. ...
... The overall conclusion is that sustainability actions considerably reduce the cost of stock, debt and total capital costs (Gregory, 2022). According to Ge and Liu (2015) findings, CSR performance is linked to higher credit ratings and reduced yield spreads in new company bond issuance. They also discovered that a more excellent CSR issue score is linked to larger bond yield spreads, and a lower CSR strength score is linked to lower bond yield spreads. ...
Purpose
The growing trend in environmental, social and governance (ESG) research, along with its relevance to the financial performance of firms, has gained a lot of attraction in academia and industry. This study aims to fill the existing gap in the literature by conducting a thorough systematic review with the latest research articles in this area.
Design/methodology/approach
This study adopted a blend of systematic literature review and bibliometric techniques. A proper search string was used to retrieve the data from the Scopus database. The final dataset comprises 296 documents used for science mapping, and the review was done of 60 articles finalised after further refining the documents.
Findings
The results of this study indicate that stakeholder, legitimacy and signalling theories are the foundation for ESG and financial performance. Social firms have a lower capital cost because of their low-risk potential. Moreover, this study provides the knowledge structure by framing four clusters, “CSR/ESG determinants and firm performance”, “Moderators and Mediators”, “Investors’ perception” and “CSR in the tourism sector”.
Originality/value
This study has reviewed the literature with both tools, that is, qualitative (systematic review) and quantitative (bibliometric). Moreover, this study presents the latest synthesis of the literature.
... Our focus on credit risk as a measure of firm performance is driven by not only growing concerns over sustainability issues but also rising global nonfinancial corporate debt. The bulk of prior empirical studies supports the risk mitigation view: better aggregate ESG performance is related to better credit ratings (Attig et al., 2013;Jiraporn et al., 2014;Kiesel and L€ ucke, 2019;Zanin, 2022), smaller loan spreads (Goss and Roberts, 2011;Kim et al., 2014;Qian et al., 2023), smaller bond spreads (Apergis et al., 2022;Ge and Liu, 2015;Huang et al., 2018;Lian et al., 2023) and more recently, narrower credit default swap (CDS) spreads (Bannier et al., 2022;Barth et al., 2022;Drago et al., 2019;Naumer and Yurtoglu, 2022). However, there is also some empirical support for the overinvestment view in terms of corporate bond spreads (Menz, 2010), corporate bond ratings (Stellner et al., 2015) and bank loan spreads (Magnanelli and Izzo, 2017). ...
... These results are reaffirmed in similar subsequent studies by Oikonomou et al. (2014), Jiraporn et al. (2014) and Dorfleitner and Grebler (2020). The risk-mitigating effect of ESG is also documented when corporate bond spreads and bank loan spreads are used as a measure of risk, see inter alia Ge and Liu (2015) and Oikonomou et al. (2014) for US corporate bond spreads, Huang et al. (2018) for China's corporate bond spreads, and Goss and Roberts (2011) and Kim et al. (2014) for bank loan spreads. By contrast, Stellner et al. (2015) suggest no direct effect of ESG on corporate bond ratings, and Menz (2010) even finds a positive relation between ESG and corporate bond spreads. ...
Purpose
Based on a sample of 1,872 firm-year observations for 573 global firms over the period 2013–2016, this study aims to provide empirical evidence on how environmental, social and governance (ESG) performance affects corporate creditworthiness as measured by credit default swap (CDS) spreads.
Design/methodology/approach
The authors use a regression model that accounts for country, industry and time-fixed effects as well as the instrumental-based Generalized Method of Moments (GMM) approach to dynamic panel modeling.
Findings
This study finds that improvements in ESG performance, especially in its governance pillar, reduce credit risk. Further, the authors uncover evidence suggesting the complementarity between ESG performance and country-level sustainability. The results indicate a stronger risk-mitigating impact of ESG performance in countries with higher sustainability scores.
Practical implications
In terms of practical implications, the findings suggest that corporations should strengthen governance frameworks and procedures to reduce credit risk, prior to embarking on environmental and social objectives. Further, the finding that country sustainability is an important determinant of CDS spreads suggests that country-level sustainability initiatives would not only help to preserve natural capital and promote social capital but also be beneficial to businesses and financial stability.
Originality/value
The study adds to the literature on the effects of ESG performance on credit risk by (1) utilizing a measure of ESG performance that considers the financial materiality of ESG issues across different industries; (2) utilizing a market-based measure of credit risk and CDS spreads; (3) examining the relative importance of ESG components to credit risk, rather than just the aggregate measure; and (4) assessing the influence of country sustainability on the relationship between ESG and credit risk.
... This situation is especially relevant to public bond investors, who, unlike private lenders such as banks and insurance companies, often have to pay high fees to assess the risk of borrower default. These costs could be attributed to factors such as the inability to access non-public information, the challenge of crafting customized debt obligations, or the inefficiency in scrutinizing potentially problematic firms [12,[26][27][28]. ...
Embracing corporate sustainability has emerged as a crucial strategy for companies to bolster their competitive edge and reputation. This research delves into the connection between environmental, social, and governance practices (ESG) and the cost of debt, as well as the moderating role of financial distress within this connection. By analyzing data from Saudi-listed firms between 2013 and 2021, we discovered that ESG practices have a notable negative impact on borrowing costs. This implies that organizations with increased transparency in their ESG disclosure gain access to external financial resources under more favorable terms. Additionally, we observed that the effect of ESG on the cost of debt is significantly and negatively moderated by the financial distress encountered by a firm. To bolster the credibility of these findings, dynamic generalized method of moments (GMM) models were utilized to address any potential endogeneity concerns, thereby enhancing the strength and resilience of the outcomes. The findings of this paper hold substantial value for investors, lenders, corporate management, and policymakers when considering the implementation and significance of a company’s ESG practices.
... At the same time, however, the risk preference perspective asserts that family firms tend to be risk-averse and thus allocate less capital to long-term investments (Anderson et al., 2012). Given this risk-aversion, sustainability activities are seen as a long-term investment with considerable benefits that include improving the firm's image and reputation (Kansal et al., 2014), reducing the cost of capital (Ge and Liu, 2015) and increasing firm value (Nekhili et al., 2017), alongside many other benefits that contribute to the firm's long-term viability (Ahmad et al., 2020). Consequently, family firms arguably exhibit greater socioemotional wealth than non-family-owned firms. ...
Purpose
This study investigates the behaviour of family firms, family management and family ownership regarding their socioemotional wealth (Corporate Social Responsibility (CSR)) during the COVID-19 pandemic and according to their slack resources availability.
Design/methodology/approach
This study employs a multiple regression analysis to analyse 245 firm-year observations from 2020 to 2021.
Findings
Family firms have a negative effect on CSR, as do family management and family ownership. Slack resources (both absorbed and unabsorbed) reduce the negative effect of family firms (and family ownership) on CSR. Unabsorbed slack resources reduce the negative effect of family management on CSR and absorbed slack resources increase the negative effect of family management on CSR. The results are robust with various measurements of slack resources. Extra analyses reveal that family commissioner has no effect on CSR.
Originality/value
To the best of the author’s knowledge, this is the first empirical study to analyse the impact of COVID-19 on the preservation of socioemotional wealth in family firms. This study proves the theoretical argument of prior studies that the preservation of socioemotional wealth in family firms during the COVID-19 pandemic depends on their financial condition. The study also proves that there are different attitudes among family ownership, family management and family firms concerning the use of slack resources for socioemotional wealth preservation that have not been analysed by previous research.
Sustainability aspects are assuming a key role both in investment decisions and in credit assessment processes. The aim of this research is to investigate the relationship between environmental, social and governance (ESG) variables and credit rating. We conduct an analysis on a sample of 1191 US-listed companies in 2021. We collect S&P credit ratings on Thomson Refinitiv and we regress ESG variables, and the sub-categories of each pillar E/S/G, against credit rating, along with common firm-specific factors affecting credit risk. The result highlights a direct relationship between ESG performance and credit ratings, confirming previous literature (Apergis et al., 2022; Devalle et al., 2017). Companies with good ESG scores achieve better credit ratings of up to three points. Particularly, good social performance is significantly associated with better credit ratings. However, the empirical analysis shows that the current integration of ESG parameters into credit rating assignment processes is only at an early stage because it is still difficult to quantify the impact of these factors by separating them from economic and financial indicators. This study updates previous research with a larger sample and paves the way for improving and strengthening ESG research on environmental, social and governance performance issues. Managers should promote an effective ESG policy and, in particular, social practices to improve a firm’s creditworthiness, while regulators should unify the ESG evaluation criteria for credit rating agencies.
A popular subject of general interest is the connection between corporate social responsibility, research and development, tax policy, and the purchase of green bonds. To encourage the coordinated growth of the economy and a pollution-free environment, it is crucial to understand how they interact. The paper develops a theoretical framework based on the general equilibrium theory's multi-sector model to examine how tax competition affects environmental degradation. The existence of such an effect, which is a threshold effect resulting from corporate social responsibility (CSR), and how it is impacted by CSR are theoretically established. The study used Moroccan province panel data from 2000 to 2022 and the spatial panel threshold model. The empirical finding demonstrates the importance of the threshold impact of CSR since reduced tax competition tends to worsen environmental degradation when CSR is above the threshold value and to reduce it when CSR is below the threshold value. The study also reveals that the impact of tax competitiveness varies regionally. Several policy suggestions are then put out to assist Morocco in reducing environmental pollution through taxation.
We test the relationship between shareholder value, stakeholder management, and social issue participation. Building better relations with primary stakeholders like employees, customers, suppliers, and communities could lead to increased shareholder wealth by helping firms develop intangible, valuable assets which can be sources of competitive advantage. On the other hand, using corporate resources for social issues not related to primary stakeholders may not create value far shareholders. We test these propositions with data from S&P 500 firms and find evidence that stakeholder management leads to improved shareholder value, while social issue participation is negatively associated with shareholder value. Copyright (C) 2001 John Wiley & Sons, Ltd.