Abstract
This study provides evidence on the relationship between corporate social responsibility (CSR) and firms’ credit ratings. We find that credit rating agencies tend to award relatively high ratings to firms with good social performance. This pattern is robust to controlling for key firm characteristics as well as endogeneity between CSR and credit ratings. We also find that CSR strengths and concerns influence credit ratings and that the individual components of CSR that relate to primary stakeholder management (i.e., community relations, diversity, employee relations, environmental performance, and product characteristics) matter most in explaining firms’ creditworthiness. Overall, our results suggest that CSR performance conveys important non-financial information that rating agencies are likely to use in their evaluation of firms’ creditworthiness, and that CSR investments—particularly those that extend beyond compliance behavior to reflect what is desired by society—can lead to lower financing costs resulting from higher credit ratings.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
To illustrate, consider a firm that invests in pollution control equipment (Waddock and Graves 1997a). Because capital investment is expensed over time, this socially responsible behavior can weaken or even negate the potentially positive effects of CSR on short-term profitability. However, because this investment will help protect the firm from violations of environmental regulations and litigation, it is likely to enhance the firm’s credit standing by reducing the probability of financial distress arising from environmental failures and lawsuits. We therefore argue that firms’ credit ratings are a better measure of the financial benefits of CSR.
This is also in accord with Carroll’s (1979, 1991) view of CSR. Carroll (1979) defines CSR using a four-layer pyramid, where each layer reflects one of the four interrelated aspects of CSR: economic, legal, ethical, and discretionary (or philanthropic) responsibilities. The first two layers (economic and legal responsibilities) are socially required, the third layer (ethical responsibilities) is socially expected, and the fourth layer (philanthropy) is socially desired (Carroll 1991; Windsor 2001).
We consider firm-level credit ratings rather than specific debt issue ratings because the former reflect the overall default risk of the company, while the latter reflect the default risk associated with a single bond issue (Weber 2006) and thus are less likely to be influenced by CSR activities.
Goss and Roberts’ (2011) evidence is based on private debt extended by banks, which are considered pressure-sensitive institutions (Brickley et al. 1988). Credit rating agencies, in contrast, are less likely to depend on business relationships with the firms they rate and thus to serve as “gatekeepers” who protect investors’ and other stakeholders’ interests.
In 2009, KLD was acquired by RiskMetrics, which in turn was acquired by MSCI in 2010.
All results remain unchanged when we use an ordered logit framework.
One might expect credit rating agencies to give more weight to negative information because they are inherently conservative.
Brown and Forster (2013, p. 303) add that “Altruistic CSR projects are pursued without regard to economic benefits.”
Fixed effects models represent another approach to address omitted variable bias. However, Zhou (2001) stresses that if there is small within-firm variation in the explanatory variable (in our case, CSR performance proxies), fixed effects become inappropriate and reduce the power to find an effect, if any. In our data, we find that the autocorrelation coefficient on the CSR score is 0.875, implying that the CSR score is highly persistent.
References
Ashbaugh-Skaife, H., Collins, D. W., & LaFond, R. (2006). The effects of corporate governance on firms’ credit ratings. Journal of Accounting and Economics, 42, 203–243.
Attig, N. (2011). A good horse never lacks a saddle: Management quality practices and corporate social responsibility. Working paper, Saint Mary’s University.
Back, K. H., Cao, H. H., & Willard, G. A. (2000). Imperfect competition among informed traders. Journal of Finance, 55, 2117–2155.
Barnett, M. L. (2007). Stakeholder influence capacity and the variability of financial returns to corporate social responsibility. Academy of Management Review, 32, 794–816.
Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120.
Beck, T., Demirgüç-Kunt, A., & Levine, R. (2006). Bank supervision and corruption in lending. Journal of Monetary Economics, 53, 2131–2163.
Bhojraj, S., & Sengupta, P. (2003). Effect of corporate governance on bond ratings and yields: The role of institutional investors and outside directors. Journal of Business, 76, 455–475.
Blume, M. E., Lim, F., & Mackinlay, A. C. (1998). The declining credit quality of U.S. corporate debt: Myth or reality. Journal of Finance, 53, 1389–1413.
Boutin-Dufresne, F., & Savaria, P. (2004). Corporate social responsibility and financial risk. Journal of Investing, 13, 57–66.
Brickley, J., Lease, R., & Smith, C. (1988). Ownership structure and voting on antitakeover amendments. Journal of Financial Economics, 20, 267–292.
Brown, J. A., & Forster, W. R. (2013). CSR and stakeholder theory: A tale of Adam Smith. Journal of Business Ethics, 112, 301–312.
Carroll, A. (1979). A three-dimensional conceptual model of corporate performance’. Academy of Management Review, 4, 497–505.
Carroll, A. (1991). The pyramid of corporate social responsibility: Towards the moral management of organizational stakeholders’. Business Horizons, 34, 39–49.
Chatterji, A. K., Levine, D. I., & Toffel, M. W. (2009). How well do social ratings actually measure corporate social responsibility? Journal of Economics and Management Strategy, 18, 125–169.
Chava, S. (2011). Socially responsible investing and expected stock returns. Working Paper, Georgia Institute of Technology.
Chen, X., Harford, J., & Li, K. (2007). Monitoring: Which institutions matter? Journal of Financial Economics, 86, 279–305.
Chih, H.-L., Chih, H.-H., & Chen, T.-Y. (2010). On the determinants of corporate social responsibility: International evidence on the financial industry. Journal of Business Ethics, 93, 115–135.
Dallas, G. (2004a). Nachhaltigkeit, corporate governance und risikobewertung: Wostehen die vorreiter? In Presentation at the Standard & Poor’s conference “Risk & Opportunity. Best Practice in Non-Financial Reporting”, Nov 19 2004, Berlin.
Dallas, G. (Ed.). (2004b). Governance and risk: An analytical handbook for investors, managers, directors, and stakeholders. New York: McGraw-Hill.
Davis, K. (1960). Can business afford to ignore its social responsibilities? California Management Review, 3, 70–76.
Dimson, E. (1979). Risk measurement when shares are subject to infrequent trading. Journal of Financial Economics, 7, 197–226.
El Ghoul, S., Guedhami, O., Kwok, C. C., & Mishra, D. (2011). Does corporate social responsibility affect the cost of capital? Journal of Banking & Finance, 35, 2388–2406.
Fama, E. F., & French, K. R. (1997). Industry costs of equity. Journal of Financial Economics, 43, 153–194.
Feldman, S. J., Soyka, P. A., & Ameer, P. (1997). Does improving a firm’s environmental management system and environmental performance result in a higher stock price? Journal of Investing, 6, 87–97.
Figge, F., Han, T., Schaltegger, S., & Wagner, M. (2002). The sustainability balanced scorecard: Linking sustainability management to business strategy. Business Strategy and the Environment, 11, 269–284.
Fombrun, C., & Shanley, M. (1990). What’s in a name?: Reputation building and corporate strategy. Academy of Management Journal, 33, 233–258.
Foster, D. F., & Viswanathan, S. (1996). Strategic trading when agents forecast the forecasts of others. Journal of Finance, 51, 1437–1478.
Frederick, W. C. (1995). Values, nature and culture in the American corporation. New York: Oxford University Press.
Galema, R., Plantinga, A., & Scholtens, B. (2008). The stocks at stake: Return and risk in socially responsible investment. Journal of Banking & Finance, 32, 2646–2654.
Gompers, P. A., Ishii, J., & Metrick, A. (2003). Corporate governance and equity prices. Quarterly Journal of Economics, 118, 107–155.
Goss, A., & Roberts, G. S. (2011). The impact of corporate social responsibility on the cost of bank loans. Journal of Banking & Finance, 35, 1794–1810.
Greene, W. H. (2000). Econometric analysis (4th ed.). Englewood Cliffs, NJ: Prentice-Hall.
Greening, D. W., & Turban, D. B. (2000). Corporate social performance as a competitive advantage in attracting a quality workforce. Business and Society, 39, 254–280.
Hart, S. L. (1995). A natural-resource-based view of the firm. Academy of Management Review, 20, 986–1014.
Herremans, I. M., & Akathaporn, P. (1993). An investigation of corporate social reputation and economic performance. Accounting, Organizations and Society, 18, 587–604.
Hillman, A. J., & Keim, J. D. (2001). Shareholder value, stakeholder management, and social issues: What’s the bottom line? Strategic Management Journal, 22, 125–139.
Hong, H., & Kacperczyk, M. (2009). The price of sin: The effects of social norms on markets. Journal of Financial Economics, 93, 15–36.
King, A. (1995). Avoiding ecological surprise: Lessons from long-standing communities. Academy of Management Review, 20, 961–985.
Lee, D. D., & Faff, R. W. (2009). Corporate sustainability performance and idiosyncratic risk: A global perspective. Financial Review, 44, 213–237.
Legnick-Hall, C. A. (1996). Customer contributions to quality: A different view of the customer-oriented firm. Academy of Management Review, 21, 791–824.
Mansi, S., Maxwell, M., & Miller, D. (2004). Does auditor quality and tenure matter to investors? Evidence from the bond market. Journal of Accounting Research, 42, 755–793.
Margolis, J. D., & Walsh, J. P. (2003). Misery loves companies: Rethinking social initiatives by business. Administrative Science Quarterly, 48, 268–305.
Matten, D., & Moon, I. (2005). Corporate social responsibility. Journal of Business Ethics, 54, 323–337.
McWilliams, A., & Siegel, D. (2001). Corporate social responsibility: A theory of the firm perspective. Academy of Management Review, 28, 117–127.
Menz, K. M. (2010). Corporate social responsibility: Is it rewarded by the corporate bond market? A critical note. Journal of Business Ethics, 96, 117–134.
Orlitzky, M., Schmidt, F. M., & Rynes, S. L. (2003). Corporate social and financial performance: A meta-analysis. Organization Studies, 24, 403–441.
Orlitzky, M., Siegel, D. S., & Waldman, D. A. (2011). Strategic corporate social responsibility and environmental sustainability. Business & Society, 50, 6–27.
Sengupta, P. (1998). Corporate disclosure quality and the cost of debt. Accounting Review, 73, 459–474.
Shane, P. B., & Spicer, B. H. (1983). Market response to environment information produced outside the firm. Accounting Review, 58, 521–536.
Sharfman, M. P., & Fernando, C. S. (2008). Environmental risk management and the cost of capital. Strategic Management Journal, 29, 569–592.
Standard and Poor’s. (2008). Corporate ratings criteria. http://www.scribd.com/doc/29391142/Corporate-Ratings-Criteria-2008. Accessed 13 Aug 2012.
Starks, L. T. (2009). EFA keynote speech: Corporate governance and corporate social responsibility: What do investors care about? What should investors care about? Financial Review, 44, 461–468.
Surroca, J., Tribó, J. A., & Waddock, S. (2010). Corporate responsibility and financial performance: The role of intangible resources. Strategic Management Journal, 31, 463–490.
Turban, D. B., & Greening, D. W. (1997). Corporate social performance and organizational attractiveness to prospective employees. Academy of Management Journal, 40, 658–672.
Waddock, S. A. (2003). Myths and realities of social investing. Organization and Environment, 16, 369–380.
Waddock, S. A., & Graves, S. B. (1997a). The corporate social performance–financial performance link. Strategic Management Journal, 18, 303–319.
Waddock, S. A., & Graves, S. B. (1997b). Quality of management and quality of stakeholder relations. Business & Society, 36, 250–279.
Weber, J. (2006). Discussion of the effects of corporate governance on firms’ credit ratings. Journal of Accounting and Economics, 42, 245–254.
Weber, O. (2012). Environmental credit risk management in banks and financial service institutions. Business Strategy and the Environment, 21, 248–263.
Weber, O., Scholz, R. W., & Michalik, G. (2010). Incorporating sustainability criteria into credit risk management. Business Strategy and the Environment, 19, 39–50.
Whitehouse, L. (2006). Corporate social responsibility: Views from the frontline. Journal of Business Ethics, 63, 279–296.
Windsor, D. (2001). The future of corporate social responsibility’. International Journal of Organizational Analysis, 9, 225–256.
Zhou, X. (2001). Understanding the determinants of managerial ownership and the link between ownership and performance: Comment. Journal of Financial Economics, 62, 559–571.
Author information
Authors and Affiliations
Corresponding author
Appendices
Appendix A: Qualitative Issue Areas
We consider six qualitative issue areas: community, diversity, employee relations, environment, human rights, and product characteristics. Each area has a set of strengths and concerns as detailed below. We calculate a score for each area equal to the number of strengths minus the number of concerns. We also calculate an overall CSR score equal to the sum of all areas’ scores.
Concerns | Strengths |
|---|---|
Community | |
Investment controversies | Charitable giving |
Negative economic impact | Innovative giving |
Indigenous peoples relations | Non-US charitable giving |
Tax disputes | Support for housing |
Other concern | Support for education |
Indigenous peoples relations | |
Volunteer programs | |
Other strength | |
Diversity | |
Controversies | CEO |
Non-representation | Promotion |
Other concern | Board of directors |
Work/life benefits | |
Women and minority contracting | |
Employment of the disabled | |
Gay and lesbian policies | |
Other strength | |
Employee relations | |
Union relations | Union relations |
Health and safety concern | No-layoff policy |
Workforce reductions | Cash profit sharing |
Retirement benefits concern | Employee involvement |
Other concern | Retirement benefits strength |
Health and safety strength | |
Other strength | |
Environment | |
Hazardous waste | Beneficial products and services |
Regulatory problems | Pollution prevention |
Ozone-depleting chemicals | Recycling |
Substantial emissions | Clean energy |
Agricultural chemicals | Communications |
Climate change | Property, plant, and equipment |
Other concern | Other strength |
Human rights | |
South Africa | Positive record in South Africa |
Northern Ireland | Indigenous peoples relations strength |
Burma concern | Labor rights strength |
Mexico | Other strength |
Labor rights concern | |
Indigenous peoples relations concern | |
Other concern | |
Product characteristics | |
Product safety | Quality |
Marketing/contracting concern | R&D/innovation |
Antitrust | Benefits to economically disadvantaged |
Other concern | Other strength |
Appendix B: Variable Definitions and Data Sources
Variables | Definition | Source |
|---|---|---|
Dependent variable | ||
RATING | Standard & Poor’s long-term issuer credit ratings converted to an ordinal scale according to the following schedule: 8 (AAA), 7 (AA), 6 (A), 5 (BBB), 4 (BB), 3 (B), 2 (CCC), 1 (CC) | Authors’ calculations based on Compustat data |
CSR variables | ||
CSR_COM_S | The community score equals the number of strengths minus the number of concerns in the community qualitative issue area | MSCI ESG STATS |
CSR_DIV_S | The diversity score equals the number of strengths minus the number of concerns in the diversity qualitative issue area | As above |
CSR_EMP_S | The employee relations score equals to the number of strengths minus the number of concerns in the employee relations qualitative issue area | As above |
CSR_ENV_S | The environment score equals the number of strengths minus the number of concerns in the environment qualitative issue area | As above |
CSR_HUM_S | The human rights score equals the number of strengths minus the number of concerns in the human rights qualitative issue area | As above |
CSR_PRO_S | The product score equals the number of strengths minus the number of concerns in the product qualitative issue area | As above |
CSR_STR_S | The CSR strengths score equals the number of strengths in the community, diversity, employee, environment, human rights, and product characteristics qualitative issue areas | As above |
CSR_CON_S | The CSR concerns score equals the numbers of concerns in the community, diversity, employee, environment, human rights, and product characteristics qualitative issue areas | As above |
CSR_S | The CSR score equals the sum of the community, diversity, employee, environment, human rights, and product characteristics qualitative issue areas scores | As above |
Control variables | ||
SIZE | Natural logarithm of total assets in $ million | Authors’ calculations based on Compustat data |
COVERAGE | Earnings before interest and taxes plus interest expense divided by interest expense | As above |
MARGIN | Ratio of operating income to sales | As above |
LEVERAGE | Ratio of long-term debt to total assets | As above |
CAPINT | Ratio of property, plant, and equipment to total assets | As above |
BETA | Market beta estimated over the fiscal year using Dimson’s (1979) model with one lag and one lead of the CRSP value-weighted index | Authors’ calculations based on CRSP data |
LOSS | Indicator variable set to 1 if net income before extraordinary items is negative in the current and previous year, and 0 otherwise | Authors’ calculations based on Compustat data. |
NIO | Number of institutional investors holding the firm’s shares | Authors’ calculations based on Thomson 13-F data |
NPPFO | Number of public pension funds holding the firm’s shares | As above |
GINDEX | Gompers et al. (2003) index of 24 antitakeover provisions | Authors’ calculations based on RiskMetrics data |
STKMIX | Ratio of executives stock-based compensation to total compensation | Authors’ calculations based on ExecuComp data |
BIG4 | Indicator variable set to 1 if the firm hires a Big 4 auditor, and 0 otherwise | Authors’ calculations based on Compustat data |
ACOV | Number of analysts providing a one-year-ahead forecast of the firm’s earnings per share | I/B/E/S |
Rights and permissions
About this article
Cite this article
Attig, N., El Ghoul, S., Guedhami, O. et al. Corporate Social Responsibility and Credit Ratings. J Bus Ethics 117, 679–694 (2013). https://doi.org/10.1007/s10551-013-1714-2
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10551-013-1714-2