An Empirical Study of the Impact of Corporate Social Responsibility on the Cost of Debt

It is generally believed that firms' engagement in Corporate Social Responsibility (CSR) activities can effectively reduce their cost of capital. This article provides value insights to the inverse relationship between the CSR rating and the cost of debt (COD). We first investigate the determinants of CSR ratings from both executive level and the firm’s level. Various board-related factors are associated with different dimensions of the CSR rating. We demonstrate that CSR is negatively associated with COD measured by interest paid over total debt. The relationship is most obvious when CSR rating is lagged by one period relative to COD, implying the time effect of CSR on COD. This effect is also most relevant in large size companies. Further analysis shows an increase in CSR leads to higher probability of decrease in COD and vice versa.