IDEAS home Printed from https://ideas.repec.org/p/rdg/icmadp/icma-dp2014-14.html
   My bibliography  Save this paper

The Effects of Corporate and Country Sustainability Characteristics on the Cost of Debt: An International Investigation

Author

Listed:
  • Andreas Hoepner

    (ICMA Centre, Henley Business School, University of Reading)

  • Ioannis Oikonomou
  • Bert Scholtens
  • Michael Schroder

Abstract

We investigate the relationship between corporate and country sustainability on the cost of bank loans. We look into 470 loan agreements signed between 2005 and 2012 with borrowers based on 28 different countries across the world and operating in all major industries. Our principal findings reveal that country sustainability related to both social and environmental frameworks has a statistically and economically impactful effect on direct financing of economic activity. An increase of one unit in country sustainability scores is associated with an average decrease in the costs of debt by 64 basis points. Our analysis shows that the environmental dimension of a country's institutional framework is approximately two times as impactful as the societal dimension when it comes to determining the cost of corporate loans. On the other hand, we find no conclusive evidence that firm-level sustainability influences the interest rates charged to borrowing firms by banks.

Suggested Citation

  • Andreas Hoepner & Ioannis Oikonomou & Bert Scholtens & Michael Schroder, 2014. "The Effects of Corporate and Country Sustainability Characteristics on the Cost of Debt: An International Investigation," ICMA Centre Discussion Papers in Finance icma-dp2014-14, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:icmadp:icma-dp2014-14
    as

    Download full text from publisher

    File URL: http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2532431_code943229.pdf?abstractid=2532431&mirid=1
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. El Ghoul, Sadok & Guedhami, Omrane & Kwok, Chuck C.Y. & Mishra, Dev R., 2011. "Does corporate social responsibility affect the cost of capital?," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2388-2406, September.
    2. Carole Howorth & Andrea Moro, 2012. "Trustworthiness and interest rates: an empirical study of Italian SMEs," Small Business Economics, Springer, vol. 39(1), pages 161-177, July.
    3. Bill Francis & Iftekhar Hasan & Ying Huang & Zenu Sharma, 2012. "Do Banks Value Innovation? Evidence from US Firms," Financial Management, Financial Management Association International, vol. 41(1), pages 159-185, March.
    4. Hoje Jo & Maretno Harjoto, 2011. "Corporate Governance and Firm Value: The Impact of Corporate Social Responsibility," Journal of Business Ethics, Springer, vol. 103(3), pages 351-383, October.
    5. N. Kreander & R.H. Gray & D.M. Power & C.D. Sinclair, 2005. "Evaluating the Performance of Ethical and Non‐ethical Funds: A Matched Pair Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(7‐8), pages 1465-1493, September.
    6. N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 455-470.
    7. Alexander Kempf & Peer Osthoff, 2008. "SRI Funds: Nomen est Omen," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(9-10), pages 1276-1294.
    8. Philipp Schreck, 2011. "Reviewing the Business Case for Corporate Social Responsibility: New Evidence and Analysis," Journal of Business Ethics, Springer, vol. 103(2), pages 167-188, October.
    9. Mark P. Sharfman & Chitru S. Fernando, 2008. "Environmental risk management and the cost of capital," Strategic Management Journal, Wiley Blackwell, vol. 29(6), pages 569-592, June.
    10. Goss, Allen & Roberts, Gordon S., 2011. "The impact of corporate social responsibility on the cost of bank loans," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1794-1810, July.
    11. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    12. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    13. Michael Schröder, 2007. "Is there a Difference? The Performance Characteristics of SRI Equity Indices," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1‐2), pages 331-348, January.
    14. L. Bottazzi & M. Da Rin & T. Hellmann, 2007. "The Importance of Trust for Investment: Evidence from Venture Capital," Working Papers 612, Dipartimento Scienze Economiche, Universita' di Bologna.
    15. N. Kreander & R.H. Gray & D.M. Power & C.D. Sinclair, 2005. "Evaluating the Performance of Ethical and Non-ethical Funds: A Matched Pair Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(7-8), pages 1465-1493.
    16. Michael Schröder, 2007. "Is there a Difference? The Performance Characteristics of SRI Equity Indices," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1‐2), pages 331-348, January.
    17. DeanS. Karlan, 2007. "Social connections and group banking," Economic Journal, Royal Economic Society, vol. 117(517), pages 52-84, February.
    18. Paige Fields, L. & Fraser, Donald R. & Subrahmanyam, Avanidhar, 2012. "Board quality and the cost of debt capital: The case of bank loans," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1536-1547.
    19. Hoje Jo & Maretno Harjoto, 2012. "The Causal Effect of Corporate Governance on Corporate Social Responsibility," Journal of Business Ethics, Springer, vol. 106(1), pages 53-72, March.
    20. Siegel, Jordan I. & Licht, Amir N. & Schwartz, Shalom H., 2011. "Egalitarianism and international investment," Journal of Financial Economics, Elsevier, vol. 102(3), pages 621-642.
    21. Edward I. Altman & Amar Gande & Anthony Saunders, 2010. "Bank Debt versus Bond Debt: Evidence from Secondary Market Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(4), pages 755-767, June.
    22. Mariassunta Giannetti & Yishay Yafeh, 2012. "Do Cultural Differences Between Contracting Parties Matter? Evidence from Syndicated Bank Loans," Management Science, INFORMS, vol. 58(2), pages 365-383, February.
    23. Gropp, Reint & Guettler, Andre, 2018. "Hidden gems and borrowers with dirty little secrets: Investment in soft information, borrower self-selection and competition," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 26-39.
    24. Edward Nelling & Elizabeth Webb, 2009. "Corporate social responsibility and financial performance: the “virtuous circle” revisited," Review of Quantitative Finance and Accounting, Springer, vol. 32(2), pages 197-209, February.
    25. Becchetti, Leonardo & Ceniccola, Claudia & Ciciretti, Rocco, 2010. "Stock Market Reaction to the Global Financial Crisis: the Role of Corporate Governance and Product Quality Ratings in the Lehman Brothers' Event," Sustainable Investment and Corporate Governance Working Papers 2010/14, Sustainable Investment Research Platform.
    26. Galema, Rients & Plantinga, Auke & Scholtens, Bert, 2008. "The stocks at stake: Return and risk in socially responsible investment," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2646-2654, December.
    27. Alexander Kempf & Peer Osthoff, 2007. "The Effect of Socially Responsible Investing on Portfolio Performance," European Financial Management, European Financial Management Association, vol. 13(5), pages 908-922, November.
    28. Hong, Harrison & Kacperczyk, Marcin, 2009. "The price of sin: The effects of social norms on markets," Journal of Financial Economics, Elsevier, vol. 93(1), pages 15-36, July.
    29. Andreas Ziegler & Michael Schröder & Klaus Rennings, 2008. "The Effect of Environmental and Social Performance on the Stock Performance of European Corporations," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 40(4), pages 609-609, August.
    30. Ashbaugh-Skaife, Hollis & Collins, Daniel W. & LaFond, Ryan, 2006. "The effects of corporate governance on firms' credit ratings," Journal of Accounting and Economics, Elsevier, vol. 42(1-2), pages 203-243, October.
    31. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    32. Kim, Moshe & Surroca, Jordi & Tribó, Josep A., 2014. "Impact of ethical behavior on syndicated loan rates," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 122-144.
    33. Ioannis Oikonomou & Chris Brooks & Stephen Pavelin, 2014. "The Effects of Corporate Social Performance on the Cost of Corporate Debt and Credit Ratings," The Financial Review, Eastern Finance Association, vol. 49(1), pages 49-75, February.
    34. Amy J. Hillman & Gerald D. Keim, 2001. "Shareholder value, stakeholder management, and social issues: what's the bottom line?," Strategic Management Journal, Wiley Blackwell, vol. 22(2), pages 125-139, February.
    35. Nandy, Monomita & Lodh, Suman, 2012. "Do banks value the eco-friendliness of firms in their corporate lending decision? Some empirical evidence," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 83-93.
    36. Alexander Kempf & Peer Osthoff, 2008. "SRI Funds: Nomen est Omen," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(9‐10), pages 1276-1294, November.
    37. Kempf, Alexander & Osthoff, Peer, 2007. "The effect of socially responsible investing on portfolio performance," CFR Working Papers 06-10, University of Cologne, Centre for Financial Research (CFR).
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kim, Moshe & Surroca, Jordi & Tribó, Josep A., 2014. "Impact of ethical behavior on syndicated loan rates," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 122-144.
    2. Henke, Hans-Martin, 2016. "The effect of social screening on bond mutual fund performance," Journal of Banking & Finance, Elsevier, vol. 67(C), pages 69-84.
    3. Zerbib, Olivier David, 2019. "The effect of pro-environmental preferences on bond prices: Evidence from green bonds," Journal of Banking & Finance, Elsevier, vol. 98(C), pages 39-60.
    4. repec:dau:papers:123456789/7347 is not listed on IDEAS
    5. Erragragui, Elias, 2018. "Do creditors price firms’ environmental, social and governance risks?," Research in International Business and Finance, Elsevier, vol. 45(C), pages 197-207.
    6. Oikonomou, Ioannis & Platanakis, Emmanouil & Sutcliffe, Charles, 2018. "Socially responsible investment portfolios: Does the optimization process matter?," The British Accounting Review, Elsevier, vol. 50(4), pages 379-401.
    7. Derwall, Jeroen & Koedijk, Kees & Ter Horst, Jenke, 2011. "A tale of values-driven and profit-seeking social investors," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2137-2147, August.
    8. Metin Borak & Hatice Dogukanli, 2023. "Effect of Corporate Social Responsibility on Portfolio Performance: Evidence From Turkey," SAGE Open, , vol. 13(4), pages 21582440231, December.
    9. Hui-Ju Tsai & Yangru Wu, 2022. "Changes in Corporate Social Responsibility and Stock Performance," Journal of Business Ethics, Springer, vol. 178(3), pages 735-755, July.
    10. Thomas Walker & Kerstin Lopatta & Thomas Kaspereit, 2014. "Corporate sustainability in asset pricing models and mutual funds performance measurement," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 28(4), pages 363-407, November.
    11. Halbritter, Gerhard & Dorfleitner, Gregor, 2015. "The wages of social responsibility — where are they? A critical review of ESG investing," Review of Financial Economics, Elsevier, vol. 26(C), pages 25-35.
    12. Kais Bouslah & Lawrence Kryzanowski & Bouchra M’Zali, 2018. "Social Performance and Firm Risk: Impact of the Financial Crisis," Journal of Business Ethics, Springer, vol. 149(3), pages 643-669, May.
    13. Nicholas Apergis & Vassilios Babalos & Christina Christou & Rangan Gupta, 2019. "Are there Really Long-Run Diversification Benefits from Sustainable Investments?," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 18(2), pages 141-163, September.
    14. Leite, Paulo & Cortez, Maria Céu, 2014. "Style and performance of international socially responsible funds in Europe," Research in International Business and Finance, Elsevier, vol. 30(C), pages 248-267.
    15. Urquhart, Andrew & Zhang, Hanxiong, 2019. "The performance of technical trading rules in Socially Responsible Investments," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 397-411.
    16. Alan Gregory & Rajesh Tharyan & Julie Whittaker, 2014. "Corporate Social Responsibility and Firm Value: Disaggregating the Effects on Cash Flow, Risk and Growth," Journal of Business Ethics, Springer, vol. 124(4), pages 633-657, November.
    17. Maretno A. Harjoto & Andreas G. F. Hoepner & Marcus A. Nilsson, 2022. "Bondholders’ returns and stakeholders’ interests," Review of Quantitative Finance and Accounting, Springer, vol. 59(4), pages 1271-1301, November.
    18. Federica Ielasi & Paolo Ceccherini & Pietro Zito, 2020. "Integrating ESG Analysis into Smart Beta Strategies," Sustainability, MDPI, vol. 12(22), pages 1-22, November.
    19. Díaz, Antonio & Escribano, Ana, 2021. "Sustainability premium in energy bonds," Energy Economics, Elsevier, vol. 95(C).
    20. Andrew Ainsworth & Adam Corbett & Steve Satchell, 2018. "Psychic dividends of socially responsible investment portfolios," Journal of Asset Management, Palgrave Macmillan, vol. 19(3), pages 179-190, May.
    21. Gregor Dorfleitner & Christian Kreuzer & Christian Sparrer, 2020. "ESG controversies and controversial ESG: about silent saints and small sinners," Journal of Asset Management, Palgrave Macmillan, vol. 21(5), pages 393-412, September.

    More about this item

    Keywords

    corporate social responsibility; CSR; CSP; sustainability; banking; financial contracts; culture;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • 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

    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:rdg:icmadp:icma-dp2014-14. 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.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with 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: Marie Pearson (email available below). General contact details of provider: https://edirc.repec.org/data/bsrdguk.html .

    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.