The Bond Market Benefits of Corporate Social Capital
While the importance of Physical Capital, Human Capital, and Intellectual Capital in corporations is well understood, there is another type of capital, perhaps equally important, which has received considerably less attention: Social Capital – broadly defined as the quality of the relationships that a firm, and its executives and employees, have cultivated with other stakeholders. To date, most research on social capital has focused on the social capital of countries (or regions within countries), generally measured by the civic engagement of the population or the willingness of people in a society to trust each other, concluding that regions with more social capital enjoy higher economic growth. More recently, researchers have shown that the notion of Social Capital can also be applied to corporations, and that such social capital engenders trust in the firm and its managers. This trust benefits both stakeholders and shareholders.
In this paper, we investigate whether a firm’s Social Capital, and the trust that it builds, are also viewed favorably by bondholders. Unlike in banking relationships, bondholders often do not have access to private information and cannot easily monitor the firm nor renegotiate their contracts.
Our main analyses are conducted using a large sample of publicly-traded, non-financial, U.S. domiciled firms with bond trade data available between 2005 and 2013. We also identify a sample of corporate bond issues that were offered on the primary market over the period 2007-2013. As in prior work, we use a firm’s Corporate Social Responsibility (CSR) efforts to proxy for Social Capital.
For the entire sample period, we do not find a relation between bond spreads and CSR. We then turn to the financial crisis as an exogenous shock to the importance of trust. The financial crisis brought about an overall erosion of trust in firms, markets, and institutions; in such a setting, we expect firm-level trust to become more valuable to bondholders.
Consistent with the above prediction, we show that high-CSR firms benefited from lower bond spreads in the secondary market during the financial crisis compared to low-CSR firms – increasing CSR by one standard deviation is associated with a least 0.34% lower credit spreads. These findings are more pronounced for firms that, when in distress, have a greater opportunity to increase risk 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 take actions that would be detrimental to stakeholders, including a firm’s bondholders. Overall, they indicate that the economic benefits of CSR also extend to debt capital markets.