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Corporate Social Responsibility and the Cost of Corporate Bonds

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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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... For the debt financing cost, prior literature mainly employs two types of proxies, the measure based on the accounting interest expense (Francis, Khurana, & Pereira, 2005;Francis, LaFond, et al., 2005;Kim, Simunic, et al., 2011;Du et al., 2017;Jung et al., 2018;Eliwa et al., 2021) and the measure based on the cost of individual banking loan (Bharath et al., 2008;Goss & Roberts, 2011;Kim, Song, & Zhang, 2011;Schneider, 2011;Chava, 2014;Ge & Liu, 2015;El Ghoul et al., 2023). In our main regression analyses, we use the accountingbased debt financing cost measure (COD), which is calculated as the interest expenses divided by the mean value of the interest-bearing debts outstanding at the beginning and end of each year. ...
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