CSR performance and the cost of debt: does audit quality matter?

Abstract

Purpose This study aims to shed light on the effect of corporate social responsibility (CSR) on the cost of debt. It also investigates whether audit quality affects the cost of debt incurred by socially responsible firms. Design/methodology/approach Based on a sample of French non-financial companies over the period 2005 to 2016, this paper uses panel data regressions. This paper re-estimates the model using Newey-West standard errors and the weighted-least-squares method. For further robustness, this paper runs instrumental variable regressions using the two-stage instrument variable method (two-stage least square). Findings The results show a negative relationship between CSR performance and the cost of debt, suggesting that financial institutions are likely to apply preferential costs for socially responsible firms. Financial institutions reward socially responsible companies as they recognize the potentiality of CSR to reduce firm risk and enhance its reputation. The findings also show that the perceived audit quality, along with CSR performance, are relevant to banks in the pricing of debt. The incremental audit quality, attributable to audits by the Big 4 auditors, decreases the cost of debt for CSR firms. Big 4 auditors are expected to, simultaneously, play information and insurance roles, thereby enhancing the firm risk profile. The results are robust to alternative audit quality measures (i.e. audit fees). Practical implications This study has important implications for managers and banks. Managers will be able to understand the effect of CSR on financing costs with relevant implications for strategic financing planning. Firms are also encouraged to signal their commitment to maintain a high-level quality reporting and reduce agency costs through their expenditure in auditing (i.e. hiring a large well-known audit firm). Moreover, this study sensitizes banking institutions to encourage the concept of socially responsible finance and consider soft information (i.e. involvement in societal issues, corporate citizen, trustworthiness, integrity and non-opportunistic behavior), as part of the credit decision-making and debt pricing process. Originality/value This study extends the literature on CSR and the cost of debt. Unlike prior studies, this paper focuses on the debt-pricing effects of audit quality for CSR firms. Audit quality is deemed to be an important governance feature that is likely to constraint opportunistic behaviors (i.e. CSR diversion) and play information and insurance roles to lenders. Audit quality (perceived or real), along with CSR performance, are associated with lower costs of debt.

The Effect of Environmental, Social, and Governance (ESG) Performance and Disclosure on Cost of Debt: The Mediating Effect of Corporate Reputation

“…Other studies revealed a positive relation between CSR performance and cost of debt, demonstrating that CSR is not a value driver with an impact on the firm's risk profile (e.g., Magnanelli and Izzo, 2017). Therefore, it seems that there is no unanimous consensus in the literature regarding the relationship between CSR and the cost of debt, and this link is still an empirical issue (Bacha et al, 2021). Debate and controversy continue thus to exist about how (i.e.…”

“…This could affect the financial uncertainty, leading to a higher risk and thus higher cost of debt financing. Many other authors also suppose that CSR can increase reputation and decrease the firm risks (Desender et al, 2020;Bacha et al, 2021). It seems therefore that corporate reputation, among other factors, might explain the mechanism by which CSR influences cost of debt.…”

Exploring the Moderating Role of Social and Ethical Practices in the Relationship between Environmental Disclosure and Financial Performance: Evidence from ESG Companies

“…This result suggests that the marketplace is becoming increasingly annoyed with regards to non-financial information, which shows that the disclosure of this fact can bring competitive blessings. In the context of the determinants of performance, Garcia et al [12] stipulate that ED is prominent for international companies involved in social obligation and sustainability practices. Thus, given the extant findings, we assume an association between the companies' ED and its market value.…”

“…Thus, several theories can explain the relationship between the goals of companies and society. Inside the view of the scope of application of legitimacy theory and signal theory, the company's social responsibility has the capability to boom the overvaluation of the stock market value of the corporation [12].…”

Labor lawsuits and debt maturity

“…In our study, we highlight how employee mistreatment deteriorates a firm's reputation in capital markets. Effective stakeholder treatment is related to greater transparency (Bacha et al, 2021;Mattingly et al, 2009;Sorensen and Miller, 2017). However, frequently sued firms may fail to convey trustworthiness and integrity.…”