abstract
This study addresses the controversial issue of how non-financial performance affects the cost of debt capital and access to it. The relationship between corporate social performance and two measures of debt cost (accounting-based and market-based) and the measure of debt access are analysed by means of a multi-theoretical framework combining economics with social theories. By observing a sample of listed European non-financial firms over an 8-year period from 2005 to 2012, we find a negative relationship between corporate social performance and interest rate. Consistent with this result, we find a positive relationship between corporate social performance and debt rating. Thus, corporate social performance has a positive role in reducing the cost of debt capital. Moreover, firms with better corporate social performance are more attractive to lenders in terms of leverage allowance. Overall, our findings provide deeper insight into the reasons why companies should improve their corporate social performance.
7. Concluding remarks
Our study has implications for business managers, who should be more aware of the impact of social performance on both the cost of debt and access to debt financing. Managers of high-risk companies can use CSP as a strategic project and complementary tool to appear more reliable and pay less interest on debt. In times of crisis, CSP no longer plays the beneficial roles it generally plays in times of stability, and lenders tend to disregard CSP by focusing exclusively on financial performance. Our findings suggest that firms should devote more resources to CSP in times of economic stability rather than during a crisis. These results highlight the importance of considering the moderating effects of the external environment in social studies (Donaldson, 2002; Lawrence & Lorsch, 1967; Muller, 2006). In addition, the results of this study provide managers of small companies with deeper insight into the advantages of CSP for small firms, which are traditionally less creditworthy and, consequently, more constrained by capital than big companies are (Kestens, Van Cauwenberge, & Vander Bauwhede, 2012). By investing in strategic CSP, managers of small firms could increase both the reputation and financial returns of their companies. Furthermore, the results of this study have implications for investors, who will be discouraged to invest in companies with low levels of social performance.
