Corporate social responsibility and trade credit

Review of Quantitative Finance and Accounting - Prior studies show that higher corporate social responsibility (CSR) performance lowers firms’ cost of debt and equity financing. Using a...     

Prosocial CEOs and the cost of debt: Evidence from syndicated loan contracts

This paper investigates whether banks value the presence of prosocial CEOs when designing loan contracts. Using personal charitable donation behavior to identify prosocial CEOs, we find robust evidence that the presence of prosocial CEOs is negatively related to firms' cost of debt. We address endogeneity concerns by employing a difference-in-differences setting that exploits exogenous CEO turnover events. Moreover, we show that the presence of prosocial CEOs mitigates the conflicts of interest between shareholders and creditors, thereby reduces the agency cost of debt. In addition, we find that the effect of prosocial CEOs also extends to non-price loan contract terms. Finally, we show that the presence of prosocial CEOs has positive implications for firm value and is associated with lower default risk.     

Corporate social responsibility and inside debt: The long game

We examine the effect of CEO inside debt on corporate social responsibility (CSR). We document a positive relation between CEO inside debt and CSR. This positive relation is attenuated not only when firms face high risk, but also when firms have high short-term institutional ownership. Our evidence supports the view that CEOs with large inside debt holdings are more concerned about firm sustainability and, are therefore more likely to prefer CSR for long-term firm benefits, i.e., the long game. We also find that CSR and CEO inside debt jointly exert a significantly positive impact on long-run stock performance, particularly in the presence of a low level of short-term institutional holdings. Overall, our findings highlight the importance of aligning institutional investor preferences with CEO incentives in order to maximize shareholder benefits from CSR investment.     

Corporate social responsibility and financial fraud: evidence from China

This paper investigates the impact of corporate social responsibility (CSR) on corporate financial fraud in China. We find that CSR scores are negatively associated with fraudulent financial activities, suggesting that CSR firms are less likely to engage in financial fraud. The results also indicate that the negative relation is more significant for CSR performance than CSR disclosure. Additionally, we demonstrate that the negative effect of CSR is more pronounced for firms with voluntary CSR practices, continuous CSR engagements, financial pressure and internal control weaknesses. Overall, we find that CSR is an ethical behaviour that reduces financial misconduct.     

Corporate social responsibility and provision of trade credit

In this article, we identify and examine three different views of corporate social responsibility (CSR) and the relationship between CSR and firms’ provision of trade credit. The trust view of CSR argues that CSR and trade credit provision are related positively, because CSR, as a trust-enhancing device, complements the incomplete contract nature of trade credit. The CSR literature shows that CSR firms tend to have higher cash holdings. With this in mind, the precautionary motive view of CSR suggests that cash holdings serve as a hedge against trade credit risk, while, on the other hand, the substitution view of CSR predicts that cash hoarding discourages the provision of trade credit. Using a dataset of 20,591 firm-year observations from 1991 to 2015, we find strong evidence that supports both the trust and substitution views of CSR but not the precautionary view of CSR.     

Corporate social responsibility,product market perception,and firm value

We examine whether corporate social responsibility (CSR) is used to signal product quality and whether CSR affects firm value through its positive effect on product market perception. Using a proprietary database, we find that visible CSR, such as environmental and community involvement, positively impacts product market perception, particularly for standardized goods and in competitive industries, and that this impact is more pronounced for product quality attributes. Furthermore, we find that CSR indirectly increases firm value through an improvement in product market perception. We conclude that product market perception is a channel through which CSR creates firm value.     

The flight home effect: Evidence from the syndicated loan market during financial crises

This paper shows that the collapse of the global market for syndicated loans during financial crises can in part be explained by a flight home effect whereby lenders rebalance their loan portfolios in favor of domestic borrowers. The home bias of lenders' loan origination increases by approximately 20% if the bank's home country experiences a banking crisis. This flight home effect is distinct from flight to quality because borrowers of different quality are equally affected. The results indicate that the home bias in capital allocation tends to increase when adverse economic shocks reduce the wealth of international investors.     

Corporate social responsibility performance,financial distress and firm life cycle: evidence from Australia

This study examines the association between corporate social responsibility (CSR) performance and financial distress and additionally the moderating impact of firm life cycle stages on that association. Based on a sample of 651 publicly listed Australian firm‐years’ data covering the 2007–2013 period, our regression results show that positive CSR activity significantly reduces financial distress of the firm. In addition, the negative association between positive CSR performance and financial distress is more pronounced for firms in mature life cycle stages. Our results are robust to alternative proxy measures of financial distress, CSR performance and life cycle stages.     

GAAP goodwill and debt contracting efficiency: evidence from net-worth covenants

We study the role of goodwill in promoting contracting efficiency and the effect of SFAS 141 and 142 on this role. We provide three main results. First, when a lending agreement contains some type of minimum net-worth covenant, the probability of a tangible net-worth covenant is decreasing in the borrower’s goodwill. Second, the use of tangible net-worth covenants has increased since the promulgation of SFAS 141 and 142. Finally, covenant slack is not significantly related to the use of tangible net-worth covenants relative to net-worth covenants. These results suggest that contracting parties realize efficiency gains by permitting borrowers’ actions to be restricted by the value of GAAP goodwill. However, recent changes in GAAP have reduced the contracting usefulness of goodwill.

The debt market relevance of management earnings forecasts: evidence from before and during the credit crisis

We investigate the credit market’s response via changes in credit default swap (CDS) spreads to management earnings forecasts and evaluate the importance of these forecasts relative to earnings news during the periods before and during the recent credit crisis. We document that credit markets react significantly to management forecast news and that the reactions to forecast news are stronger than to actual earnings news. Consistent with the asymmetric payoffs to debt holders, the forecast news is mainly relevant for firms with poor credit rating or announcing bad news. We also show that the relevance of management forecasts to credit markets is particularly strong during periods of high uncertainty, as experienced during the recent credit crisis.     

Corporate social responsibility and earnings quality: Evidence from China

We examine the association between corporate social responsibility (CSR) and earnings quality using CSR ranking data from Rankins (RKS) and four measures of earnings quality. Using a sample of 2580 Chinese listed firms for fiscal years 2009–2015, with 14,807 firm-year observations, we find that CSR firms and those with higher CSR ratings are less likely to engage in earnings management than non-CSR firms and those with lower CSR ratings, and their earnings are more persistent and more accurately predict future cash flows from operations. State ownership and marketization moderate the relationship between CSR disclosures and earnings quality.     

Information asymmetry and firms’ credit market access: Evidence from Moody's credit rating format refinement

I exploit Moody's 1982 credit rating refinement to examine its effects on firms’ credit market access, financing decisions, and investment policies. While firms’ ex ante yield spread can partially predict the direction of refinement changes, firms with refinement upgrades experience an additional decrease in their ex post borrowing cost compared with firms with downgrades. The former subsequently also issue more debt and rely more on debt financing over equity than the latter. Lastly, upgraded firms have more capital investments, less cash accumulation, and faster asset growth than downgraded firms. These findings show that credit market information asymmetry significantly affects firms’ real outcomes.     

The role of audit verification in debt contracting: evidence from covenant violations

We investigate the role of audit verification in the resolution process following debt covenant violations. Using two sets of proxies for demand—audit fees and the independence and diligence of audit committees—we find evidence that covenant violations result in a demand for differentially higher levels of audit verification. Further analyses demonstrate the link between the increased demand for audit verification and the mechanisms designed to control agency costs in debt contracts. We document cross-sectional variations in the observed fee differential with respect to the level of reliance on financial covenants, the type of covenants violated, and waiver decisions. Moreover, we find that the observed audit fee increases are associated with more favorable movements in borrowing costs and the adoption of more conservative investment policies post violation. Our findings suggest that covenant violations increase the demand for audit services to help control contracting costs post violation.     

Accounting and non-accounting based information in the market for debt: Evidence from Australian private debt contracts

This paper examines accounting and non-accounting based restrictive covenants in Australian private debt agreements. With respect to the former, our findings differ from previous research on public debt. We find more varied definitions of constraints and their specified tightness in private debt contracts than in public debt contracts. Further, limits on interest cover are found to be continuing constraints and not 'once-off' limits. The paper reports frequent use of more specific or 'tailored' accounting based constraints and the frequent inclusion of off-balance sheet numbers in the measurement rules specified.
The paper also provides the first Australian evidence on the use of non-accounting based constraints. These are pervasive and cover a wide range of corporate activity. While largely consistent with previous research the paper also reports evidence of restrictions previously argued to be sub-optimal and hence, unlikely to be observed. Specifically, there are frequent restrictions on firms' production and investment policies.     

Managerial effect or firm effect: Evidence from the private debt market

This paper provides evidence that the managerial effect is a key determinant of firms’ cost of capital, in the context of private debt contracting. Applying the novel empirical method developed by an earlier study to a large sample that tracks the job movement of top managers, we find that the managerial effect is a critical and significant factor that explains a large part of the variation in loan contract terms more accurately than firm fixed effects. Additional evidence shows that banks “follow” managers when they change jobs and offer loan contracts with preferential terms to their new firms.     

Corporate social responsibility and stakeholder value maximization: Evidence from mergers

Using a large sample of mergers in the US, we examine whether corporate social responsibility (CSR) creates value for acquiring firms' shareholders. We find that compared with low CSR acquirers, high CSR acquirers realize higher merger announcement returns, higher announcement returns on the value-weighted portfolio of the acquirer and the target, and larger increases in post-merger long-term operating performance. They also realize positive long-term stock returns, suggesting that the market does not fully value the benefits of CSR immediately. In addition, we find that mergers by high CSR acquirers take less time to complete and are less likely to fail than mergers by low CSR acquirers. These results suggest that acquirers' social performance is an important determinant of merger performance and the probability of its completion, and they support the stakeholder value maximization view of stakeholder theory.     

Corporate social responsibility assurance and reporting quality: Evidence from restatements

Previous research has shown that obtaining independent assurance of corporate social responsibility (CSR) reporting has capital market benefits and that these benefits are amplified when accountants provide the assurance. Yet, little is known about whether and the manner in which CSR assurance improves the quality of CSR reporting, and whether accounting providers improve reporting quality to a greater extent than non-accounting providers. This study uses the unique setting of CSR restatements to examine these issues. We present theoretical and empirical evidence supporting a competitive advantage of using accounting firms as assurance providers as they not only identify inaccuracies in previous reports earlier than non-accounting providers, but also prevent future reporting inaccuracies. CSR assurance, from either type of provider, also leads to improved reporting definitions, scopes, and methodologies that require restatements for comparability. Results also indicate that CSR reporting frameworks (e.g., GRI) are not a substitute for obtaining CSR assurance as the latter has incremental benefits over GRI usage in terms of identifying errors and reporting improvements. These results have implications for public policy makers considering the merits of mandating CSR assurance and for organizations assessing the relative benefits and costs of preparing GRI-based CSR reports, obtaining CSR assurance, and choosing between accounting vs. non-accounting CSR assurance providers.     

Corporate responsibility towards employees and innovation: Evidence from an emerging market

Against a background of rising labor costs and the need to build a harmonious labor–capital relationship in China, this paper focuses on non-pecuniary incentives for employees and discusses the impact of corporate social responsibility (CSR) towards employees on innovation performance. The empirical results show that CSR towards employees significantly promotes corporate innovation, and that this effect remains robust after accounting for alternative proxies and endogeneity issues. In addition, the positive effect of CSR towards employees on innovation is more significant for firms in high-tech industries, with high levels of R&D inputs and high valuation of employee collaboration. Further analysis indicates that CSR towards employees does not promote R&D investment, but does significantly improve innovation efficiency and the marginal output of R&D investment and reduces the turnover rate of management-level staff with production and R&D backgrounds, which is conducive to stability of the innovation team. In addition, this paper also finds that for companies with high R&D expenditures, CSR towards employees significantly eases the sensitivity between executive turnover and performance, which helps executives resist pressure arising from a decline in short-term performance. The findings of this paper have implications for improving labor–capital relations and enhancing firm innovation capabilities.     

Credit information,consolidation and credit market performance: Bank-level evidence from developing countries

Paying particular attention to the degree of banking market concentration in developing countries, this paper examines the effect of credit information sharing on bank lending. Using bank-level data from African countries over the period 2004 to 2009 and a dynamic two-step system generalised method of moments (GMM) estimation, it is found that credit information sharing increases bank lending. The degree of banking market concentration moderates the effect of credit information sharing on bank lending. The results are robust to controlling for possible interactions between credit information sharing and governance.     

Sovereign credit rating determinants: A comparison before and after the European debt crisis

This paper compares the importance of different sovereign credit rating determinants over time, using a sample of 90 countries for the years 2002–2015. Applying the composite marginal likelihood approach, we estimate a multi-year ordered probit model for each of the three major credit rating agencies. After the start of the European debt crisis in 2009, the importance of the financial balance, the economic development and the external debt increased substantially and the effect of eurozone membership switched from positive to negative. In addition, GDP growth gained a lot of importance for highly indebted sovereigns and government debt became much more important for countries with a low GDP growth rate. These findings provide empirical evidence that the credit rating agencies changed their sovereign credit rating assessment after the start of the European debt crisis.