Does It Pay or Does Firm Pay? The Relation between CSR Performance and the Cost of Debt

Abstract

This paper investigates the link between corporate social performance and cost of debt financing. The literature on the determinants of the cost of debt generally documents a negative association between measures of the risk of the firm and its cost of debt. The literature on Corporate Social Responsibility, instead, presents risk reduction as one of the potential benefits related to these investments. Thanks to that effect, therefore, an efficient market should recognize a ‘ethical financial premium’ to socially responsible firms, corresponding to a less cost of debt financing.In order to test this hypothesis, the developed model investigates the relation between firms’ CSR performance (measured through the SAM index*) and their cost of debt. Potentially confounding factors such as industry, size and time lag effects were also analyzed. Employing a unique data set of 332 firms over a time period of five years (1641 observations) we find some evidence that there is no ‘ethical financial premium’ for improved corporate social responsibility in term of cost of debt applied by banks and financial institutions to the company. Instead, the results document a positive relation between the CSR performance proxy and the cost of debt, demonstrating that CSR is not considered a value driver with an impact on the firm’s risk profile, but a sort of waste of resources that can negatively affect the performance of the firm, independently from the country in which the firm operates.