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A matter of trust? The bond market benefits of corporate social capital during the financial crisis

Subject

Finance

Publishing details

CEPR Discussion Paper

Authors / Editors

Amiraslani H;Lins K;Servaes H;Tamayo A

Biographies

Publication Year

2017

Abstract

We investigate whether a firm's social capital, and the trust that it engenders, are viewed favorably by bondholders. Using the financial crisis as an exogenous shock to trust, and firms' corporate social responsibility (CSR) activities as a proxy for social capital, we show that high-CSR firms benefited from lower bond spreads in the secondary market during the financial crisis compared to low-CSR firms. These findings are more pronounced for firms that, when in distress, have a greater opportunity to engage in asset substitution or divert cash to shareholders. High-CSR firms were also able to raise more debt capital on the primary market during this period, and those high-CSR firms that raised more debt were able to do so at lower at-issue bond spreads, better initial credit ratings, and for longer maturities. Our results suggest that debt investors believe that high-CSR firms are less likely to engage in asset substitution and diversion that would be detrimental to stakeholders, including debtholders. These findings also indicate that the benefits of CSR that accrued to shareholders during the financial crisis carry across to another important asset class, debt capital.

Keywords

Corporate bonds; Cost of debt; CSR; Financial crisis; Social capital; Trust

Series Number

DP12321

Series

CEPR Discussion Paper

Available on ECCH

No


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