HOW DOES CORPORATE SOCIAL RESPONSIBILITY PERFORMANCE INFLUENCE THE COST OF DEBT? EVIDENCE FROM FRANCE

Abstract

This study explores the indirect relation between corporate social responsibility (CSR) performance and the cost of debt through two channels: information asymmetry and risk profile. We also examine how mandatory CSR disclosures influence the relation between CSR performance and the cost of debt. Based on a sample of French non-financial listed companies over the period 2005-2016 and a path model, we show that there is a negative effect of CSR performance on the cost of debt via the risk channel, while the effect of CSR via the information asymmetry channel is not robust supporting the risk management argument. These results suggest that CSR performance provides insurance-like protection that mitigates firm risk. Furthermore, using the difference-in-difference approach, the results show that firms with high CSR performance experience a significant decrease in the cost of debt subsequently to the Grenelle II act on CSR mandatory disclosures. The findings provide valuable implications for market participants. Managers may overinvest in CSR activities to reduce firm risk and benefit from a decreasing cost of debt while investors may want to invest in socially responsible firms to reduce their risk exposure. Our results are robust to alternative measures of risk, model specifications and endogeneity concerns.