How Doing Good Helps Firms Borrow Better
Why It Matters
Firms with a strong commitment to social responsibility are not just polishing their image – they're gaining a financial edge, especially when tapping into public debt markets.
Key Takeaways
- Firms with better CSR records are more likely to access public bond markets than rely on bank loans.
- CSR helps companies overcome investor concerns about transparency and governance.
- The financial benefit of CSR is strongest for firms under investor scrutiny or facing limited funding options.
The Link Between CSR and Public Debt Access
Accessing public debt – such as corporate bonds – is often tougher than securing a bank loan. That’s because public debt investors lack the close relationship and oversight banks typically have with firms. As a result, public investors demand more transparency and sound governance before parting with their money.
This is where corporate social responsibility (CSR) comes in. CSR – through actions like promoting diversity, safeguarding the environment, or supporting communities – can signal a company’s integrity and long-term thinking. The study finds that firms with stronger CSR profiles tend to raise more money from public markets, rather than relying on bank financing. Essentially, good social performance builds trust and lowers barriers to public borrowing.
The research looked at over 3,000 US firms from 2001 to 2015, using CSR scores from MSCI and detailed debt data from Capital IQ. The results showed a consistent and positive link between CSR performance and the proportion of public debt in a firm’s capital structure.
Why CSR Reduces Financial Friction
The study highlights two reasons CSR makes a difference to debt markets:
- Reducing Agency Problems: Public debt investors worry about management acting in self-interest, particularly when oversight is limited. CSR practices – like better employee treatment or community engagement – signal that a firm values long-term relationships over short-term gain. That reassures investors.
- Improving Transparency: CSR reporting often comes with better non-financial disclosures. This helps address information asymmetry, making it easier for investors to assess a firm’s financial health and intentions.
The effect is particularly strong for firms with:
- High free cash flow but few growth prospects (suggesting potential mismanagement),
- Weak governance structures (e.g. low board independence), and
- Complex operations or volatile stock performance (which usually scare off investors).
In these high-risk settings, CSR acts as a credibility signal – making it easier to borrow from the public market.
Market Events That Proved the Point
Two major events provided natural “tests” for the study’s hypothesis:
1. Dow Jones Sustainability Index (DJSI) Inclusion
When firms were newly added to the DJSI – widely seen as a CSR benchmark – their public debt usage jumped nearly 10 percentage points compared to peers. This suggests that public markets view DJSI inclusion as a green light for trustworthiness.
2. BP Oil Spill
Following the 2010 BP oil spill, investor awareness of CSR skyrocketed. The study found that CSR’s influence on public debt decisions became even stronger post-disaster – but not for oil and gas firms. For them, trust in CSR was damaged by association, weakening the CSR effect in that sector.
These two events confirm that investor sentiment plays a big role: when CSR matters more to investors, its benefits are amplified.
Business Implications
This research sends a clear signal to company leaders and policymakers:
- CSR is a financing strategy: Going beyond compliance and embracing authentic CSR can unlock cheaper, more flexible capital through public debt markets.
- Investor perceptions matter: CSR isn’t just about what firms do, but how it’s seen. Firms in controversial sectors or low-trust regions need to be especially transparent to gain financial credibility.
- Tailored CSR pays off: Financially constrained companies stand to gain the most from CSR. When traditional financing is limited, a strong CSR reputation opens new doors.
- Policy potential: Governments aiming to promote responsible business practices could consider incentives that reward CSR with better borrowing terms or capital access.
Authors and Sources
Authors: Xin (Simba) Chang (Nanyang Technological University), Bin Xu (University of Reading),
Yung Chiang Yang (University of Liverpool Management School)
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