Corporate Social Responsibility and the Cost of Capital: Evidence from Japanese Firms

Abstract

This study examines the link between corporate social performance (CSP) and the cost of capital of Japanese firms for 2007 to 2013, explicitly considering the influences of the banking relationship and ownership structure. Specifically, we examine the relation between CSP and the cost of capital in terms of the cost of debt capital (cost of debt hereafter), the cost of equity capital (cost of equity hereafter), and the weighted average cost of capital (WACC), using a Composite CSP measure based on stakeholder relationships. We find that CSP reduces the cost of equity capital, whereas it increases the cost of debt capital. This finding suggests that CSP is perceived by debtors as cost spending rather than as mitigating information asymmetry, while it reduces agency costs in the equity market. By integrating equity and debt financing, we find that the weighted average cost of capital has no significant relation with CSP. Thus, our results suggest a conflict of interests between institutional investors and banks on the role of CSP in determining the risk premium. Our observed sample period (2007–2013) includes the global financial crisis and its aftermath. Considering the changes in business and financial circumstances during this time, the period is divided into two sub-periods: 2007–2010 and 2011–2013. The results of the sub-period estimations examined in this study show that the association between CSP and the cost of equity capital is insignificant, while that between CSP and the cost of debt capital is strongly positive for 2007 to 2010 including the global financial crisis. However, while the CSP–equity relation becomes strongly negative, the CSP–debt linkage becomes insignificant for 2011 to 2013. Finally, our results also suggest that the bank relationship is still a key determinant for providing small borrowers with access to external financing.