IDEAS home Printed from https://ideas.repec.org/a/cai/finpug/fina_322_0009.html
   My bibliography  Save this article

The Link between Social Rating and Financial Capital Structure

Author

Listed:
  • Isabelle Girerd-Potin
  • Sonia Jimenez-Garces
  • Pascal Louvet

Abstract

This article focuses on the link between a firm?s corporate financial structure and its social rating. We propose a new general model showing that less socially engaged firms issue more debt in order to avoid the financial market penalties experienced by non-socially responsible firms. With growing investor interest in social responsibility, these non-SR firms bear a higher financing cost when issuing equity capital. However, they can issue debt at the same cost as their SR counterparts given that banks do not take into account SR criteria in their interest rate determinations. Debt will thus be preferred by non-socially responsible companies while socially responsible firms take advantage of issuing equity capital. We tested the main implications of our model on the European market. Our sample consists of 562 firms which were rated by the Vigeo rating agency from 1999 to 2007. We use regression methodology to study the link between a firm?s debt ratio and its social rating. Our regressions used for explaining firm debt ratios include various control variables (as explanatory variables) such as bankruptcy costs, tax rates, agency and adverse selection variables. Our results show that European firms with a lower social rating tend to exhibit a higher or increasing debt ratio over the period 1999-2007. In particular, when considering the top and bottom quartile firms in term of their social rating, a firm?s social rating has a negative and highly significant influence on its debt ratio. Moreover, we get a significant and negative link between the debt ratio variation and each social dimension rating, except the environmental and the community involvement ones. Globally, our results seem to show that debt financing is a way for firms with low social commitment to avoid the equity market penalty.

Suggested Citation

  • Isabelle Girerd-Potin & Sonia Jimenez-Garces & Pascal Louvet, 2011. "The Link between Social Rating and Financial Capital Structure," Finance, Presses universitaires de Grenoble, vol. 32(2), pages 9-52.
  • Handle: RePEc:cai:finpug:fina_322_0009
    as

    Download full text from publisher

    File URL: http://www.cairn.info/load_pdf.php?ID_ARTICLE=FINA_322_0009
    Download Restriction: free

    File URL: http://www.cairn.info/revue-finance-2011-2-page-9.htm
    Download Restriction: free
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Benlemlih, Mohammed, 2017. "Corporate social responsibility and firm financing decisions: A literature review," Journal of Multinational Financial Management, Elsevier, vol. 42, pages 1-10.
    2. Peter Krištofík & Juraj Medzihorský & Hussam Musa, 2022. "Capital Structure and Its Determinants—A Comparison of European Top-Rated CSR and Other Companies," JRFM, MDPI, vol. 15(8), pages 1-16, July.
    3. Ahmed Imran Hunjra & Peter Verhoeven & Qasim Zureigat, 2020. "Capital Structure as a Mediating Factor in the Relationship between Uncertainty, CSR, Stakeholder Interest and Financial Performance," JRFM, MDPI, vol. 13(6), pages 1-18, June.
    4. Sheikh, Shahbaz, 2019. "Corporate social responsibility and firm leverage: The impact of market competition," Research in International Business and Finance, Elsevier, vol. 48(C), pages 496-510.
    5. Mohammed Benlemlih, 2017. "Corporate Social Responsibility and Firm Debt Maturity," Journal of Business Ethics, Springer, vol. 144(3), pages 491-517, September.
    6. Hubert Tchakoute Tchuigoua, 2015. "Capital Structure of Microfinance Institutions," Journal of Financial Services Research, Springer;Western Finance Association, vol. 47(3), pages 313-340, June.
    7. Jonathan Peillex & Loredana Ureche-Rangau, 2016. "Identifying the Determinants of the Decision to Create Socially Responsible Funds: An Empirical Investigation," Journal of Business Ethics, Springer, vol. 136(1), pages 101-117, June.
    8. Shu-Chen Hsu & Kun-Tsung Wu & Qing Wang & Yuan Chang, 2023. "Is capital structure associated with corporate social responsibility?," International Journal of Corporate Social Responsibility, Springer, vol. 8(1), pages 1-20, December.
    9. Barbara Grabinska & Dorota Kedzior & Marcin Kedzior & Konrad Grabinski, 2021. "The Impact of CSR on the Capital Structure of High-Tech Companies in Poland," Sustainability, MDPI, vol. 13(10), pages 1-20, May.
    10. Benlemlih, Mohammed, 2019. "Corporate social responsibility and dividend policy," Research in International Business and Finance, Elsevier, vol. 47(C), pages 114-138.
    11. Suleiman A. Badayi & Bolaji T. Matemilola & Bany‐Ariffin A.N & Lau Wei Theng, 2021. "Does corporate social responsibility influence firm probability of default?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 3377-3395, July.
    12. Simo, Christelle & Tchakoute Tchuigoua, Hubert & Nzongang, Joseph, 2023. "Does corporate social responsibility pay? Evidence from social ratings in microfinance institutions," Technological Forecasting and Social Change, Elsevier, vol. 187(C).
    13. Ahlem NAJAH & Anis JARBOUI, 2013. "Extra-Financial Disclosure And The Cost Of Debt Of Big French Companies," Business Excellence and Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 3(4), pages 57-69, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cai:finpug:fina_322_0009. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jean-Baptiste de Vathaire (email available below). General contact details of provider: https://www.cairn.info/revue-finance.htm .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.