The Effects of Corporate Social Performance on the Cost of Corporate Debt and Credit Ratings

Date01 February 2014
Published date01 February 2014
The Financial Review 49 (2014) 49–75
The Effects of Corporate Social
Performance on the Cost of Corporate Debt
and Credit Ratings
Ioannis Oikonomou
ICMA Centre, University of Reading, UK
Chris Brooks
ICMA Centre, University of Reading, UK
Stephen Pavelin
School of Management, University of Bath, UK
This study investigates the differential impact that various dimensions of corporate so-
cial performance have on the pricing of corporate debt as well as the assessment of the
credit quality of specific bond issues. The empirical analysis, based on an extensive longi-
tudinal data set, suggests that overall, good performance is rewarded and corporate social
transgressions are penalized through lower and higher corporate bond yield spreads, respec-
tively. Similar conclusions can be drawn when focusing on either the bond rating assigned
to a specific debt issue or the probability of it being considered to be an asset of speculative
Corresponding author: ICMA Centre, Henley Business School, University of Reading, Whiteknights,
Reading RG6 6BA, UK; Phone: +44 118 378 8239; Fax: +44 118 931 4741; E-mail:
We are grateful to the Editor,Robert Van Ness, and to two anonymous referees for useful comments that
considerably improved the paper. We also thank Davide Avino for helping us with the overview of the
literature of corporate bond spread determinants.
C2014 The Eastern Finance Association 49
50 I. Oikonomou et al./The Financial Review 49 (2014) 49–75
Keywords: corporate social responsibility, CSP, socially responsible investing, credit ratings,
cost of debt, credit spreads, corporate bonds
JEL Classifications: C33, G32, M14
1. Introduction
The notions of corporate social responsibility and corporate social performance1
(CSP)—demonstrative of the degree to which firms incorporate social and environ-
mental concerns in their operations—have been of significant interest to both the
academic and business world for the last four decades. Nevertheless, it is a common
perception that issues relevant to CSP have become more prominent in recent years
(Starks, 2009).
Faced with these new pressures, firms have to reorient their perspective and
business operation and it appears that they are aware of this. This is supported by the
UN Global Compact-Accenture CEO Study, based on a 2010 survey of more than
750 CEOs. Overall, 93% of them see sustainability as a factor that can materially
influence their firm’s future success. Perhaps the most characteristic figures showing
the increasing public awareness of CSP issues come from the socially responsible
investing (SRI) movement. According to the U.S. Social Investment Forum, in 1995
there were just 55 SRI funds with $12 billion assets under their management whereas
in 2010 there were 250 socially screened mutual funds in the United States with total
assets of $316.1 billion. These figures translate to a 455% increase in the number of
SRI funds and a staggering 2,634% increase in the value of the assets in these funds.
Given these evolutionsand trends, it is perhaps unsurprising that a wide-ranging
academic literature has been developed, with studies going as far as exploring the
connections of CSP with political beliefs (Rubin, 2008). The most substantial part of
this literature concentrates on the nature, magnitude, and significance of the connec-
tion of CSP with corporate financial performance (CFP). Although numerous papers
have been written and published in this area, as evidenced by theexisting comprehen-
sive reviews (Margolis and Walsh, 2003; Renneboog, Ter Horst and Zhang, 2008a),
no consensus has been reached with regard to the empirical relationship between
CSP and CFP either at the firm level (Brammer, Brooks and Pavelin, 2006; Edmans,
2011) or at the portfolio level of analysis (Bauer, Koedijk and Otten, 2005; Galema,
Plantinga and Scholtens, 2008; Renneboog, Ter Horst and Zhang, 2008b).
The majority of studies investigating the CSP-CFP link look at CSP resources
as being potentially value creating (or value destroying) by attempting to connect
1Although there are some distinguishing differences between the terms, they tend to be used interchange-
ably in the bulk of the related literature (Barnett, 2007); we will exclusively employ the term CSP in this

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