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A Matter of Trust? The Bond Market Benefits of Corporate Social Capital during the Financial Crisis

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  • Amiraslani, Hami
  • Lins, Karl
  • Servaes, Henri
  • Tamayo, Ane

Abstract

We investigate whether a firm's social capital, and the trust that it engenders, are viewed favorably by bondholders. Using the financial crisis as an exogenous shock to trust, and firms' corporate social responsibility (CSR) activities as a proxy for social capital, we show that high-CSR firms benefited from lower bond spreads in the secondary market during the financial crisis compared to low-CSR firms. These findings are more pronounced for firms that, when in distress, have a greater opportunity to engage in asset substitution or divert cash to shareholders. High-CSR firms were also able to raise more debt capital on the primary market during this period, and those high-CSR firms that raised more debt were able to do so at lower at-issue bond spreads, better initial credit ratings, and for longer maturities. Our results suggest that debt investors believe that high-CSR firms are less likely to engage in asset substitution and diversion that would be detrimental to stakeholders, including debtholders. These findings also indicate that the benefits of CSR that accrued to shareholders during the financial crisis carry across to another important asset class, debt capital.

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  • Amiraslani, Hami & Lins, Karl & Servaes, Henri & Tamayo, Ane, 2017. "A Matter of Trust? The Bond Market Benefits of Corporate Social Capital during the Financial Crisis," CEPR Discussion Papers 12321, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12321
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    1. repec:gam:jsusta:v:11:y:2019:i:10:p:2883-:d:232983 is not listed on IDEAS
    2. repec:gam:jsusta:v:11:y:2019:i:4:p:1098-:d:207377 is not listed on IDEAS
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    4. repec:taf:oabmxx:v:4:y:2017:i:1:p:1359445 is not listed on IDEAS

    More about this item

    Keywords

    corporate bonds; cost of debt; CSR; financial crisis; social capital; Trust;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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