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In this paper, we analyze the relationship between corporate social responsibility (CSR) and the cost of debt financing. Using a large sample of U.S. firms across all industries from 2006 to 2013, we find that firms with strong CSR have a lower cost of debt. This is especially evident in the manufacturing and financial industries. Further, we analyze the impact of managerial ownership on the CSR/cost of debt relationship. Practically speaking, to reduce the cost of debt financing our results suggest that it would be beneficial for firms to strengthen involvement and engagement in CSR activities.
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INTRODUCTION
Awareness and interest in corporate social responsibility has been on the rise in recent years. A report conducted by the CECP and The Conference Board finds that over half of companies surveyed increased their level of corporate giving from 2012 to 2014.1 While the relationship between corporate social responsibility and firm performance is somewhat ambiguous in the academic literature, it is apparent that investors are interested in companies that engage in CSR. In fact, a survey from LGT Capital Partners, Ltd. find that there has been an increase in interest among institutional investors to integrate CSR into decisions about investments. Elliott, et. al (2014) find that investor estimates of fundamental value is positively influenced by a company's corporate social responsibility.
Engagement in corporate social responsibility has been shown to be a strategic choice to improve financial performance. According to Wu and Shen (2013), rather than a purely altruistic behavior or simply an effort to enhance the image of the company (greenwashing), companies engage in CSR as a central part of their management strategy. In this study we investigate this notion further by looking at the relationship between CSR and the cost of debt used by the firm. Specifically, we look to see whether having strong CSR reduces the cost of debt. This would make sense if enhancing CSR is done from a strategic management perspective to improve financial performance. This is in line with stakeholder theory, which suggests that tuning in to stakeholder needs provides firms with a competitive advantage over counterparts that have weak CSR initiatives. The competitive advantage can be in the form of financial resources, which come at...