CSR in the Bond Market: Pricing stakeholders and the moderating role of the institutional context

Antonio Salvi

LUM Jean Monnet University

Anastasia Giakoumelou University of Rome Tor Vergata

ABSTRACT

This study examines the impact of corporate social performance (CSP) on the spreads and

credit ratings of corporate bonds on a global scale. The relationship is examined within the national

legal and institutional environment and with regard to specific stakeholder practices. We construct

and use a unique longitudinal, international dataset with a total of 5,280 bond issues dating from

2003 to 2018 and spanning 40 countries worldwide.

We provide evidence that more responsible firms benefit from lower bond spreads and

improved bond ratings, while a higher degree of CSR-related controversies penalizes firms on both

dimensions. Various, but not all, stakeholder relationships appear to generate a significant impact

on spreads and bond ratings, with shareholders remaining crucial in both civil and common law

countries, opposite to literature findings so far. Corporate governance is corroborated as a primary

concern also in the debt market for common law economies, while societal stakeholders assume

significance for civil law systems. Finally, findings highlight that stronger regulation and

government involvement do not further promote the role of CSP in the debt market. On the other

hand, free public criticism and media scrutiny generate a more pronounced effect of CSP on bond

pricing providing support for the rewards associated with voluntary and proactive CSR.

KEYWORDS

Corporate Social Responsibility · corporate bonds · bond spreads · bond ratings · stakeholder

management· legal system· institutional environment

1. Introduction

After a long path paved with corporate and shareholder wealth objectives, firms are now held

to higher standards of performance on a multitude of fields (economic, social, environmental) and

a complex stakeholder management. A reality that gave birth to a vast number of studies exploring

the relationship between CSR and various dimensions of corporate performance. Nevertheless,

researchers have mainly focused on benefits deriving from superior CSR on aspects of corporate

financial performance at the firm level (Hart, 1996; Klassen and McLaughlin, 1996; Russo and

Fouts, 1997; Dowell, Hart and Yeung, 2000; Orlitzky and Benjamin, 2001; Benito and Benito,

2005; Lech, 2013), in the equity markets (Griffin and Mahon, 1997; Margolis and Walsh, 2003;

Orlitzky et al., 2003), or at the portfolio level of analysis (Bauer, Koedijk and Otten, 2005;

Renneboog, Horst and Zahng, 2008).

The debt market, on the other hand, remains relatively unexplored as a field. Assuming that

CSR is recognized in all the aforementioned studies as a factor of value creation, researchers limit

their view on CSR failing to recognize it as a source of risk management (Soppe, 2004). The debt

market, however, represents a fundamental source of external financing for firms and, thus,

neglecting to evaluate this field as a mechanism to transmit CSR into the evaluation of credit

instruments would lead to a major oversight.

Further support regarding the importance of analyzing the debt market as crucial in the

examination of CSP and firm performance lies in the prevalence of institutional investors in it; the

latter are considered to be facing lower information asymmetries compared to other investors, as

well as an elevated level of capabilities (Menz, 2010; Oikonomou, Brooks and Pavelin, 2014;

Weber, Duffy and Schram, 2018), two facts that make it highly probable that CSR performance

(CSP) is incorporated in their investment decisions. In addition, the underlying sophistication of

debt markets and their participants render such actors into active influencers for the firm.

In this study, we focus on the bond market within the overall debt market and analyze the

manner in which CSP affects bond pricing and credit ratings assigned to securities, considering

them an efficient mechanism of default risk communication to market participants (Badoer and

Demiroglu, 2019). We construct and employ a vast international sample of corporate bond issues,

something that we only find in relevant literature in the work of Hoepner et al. (2014) which,

however, focuses on the impact of CSP on the pricing of bank loans towards firms.

Our first contribution is to be found in the tailor-made sample that we employ, collecting bond

issue and corporate data from over 40 countries in a period of 15 years, while our second key

novelty lies in the operationalization of CSP. More specifically, we break CSP down to more

meaningful dimensions that regard practices linked to specific stakeholders, allowing findings to

be translated into useful practical implications. Finally, we elaborate our widely international

sample examining the role of the legal and institutional context in the relationship.

2. Literature Review and Hypotheses Development

The capital market includes multiple potential transmission mechanisms for CSR. First and

foremost, based also on recent trends, we mention socially responsible investing (SRI) (Heinkel et

al., 2001), while a second transmission mechanism, also growing in terms of importance, involves

shareholder activism (Smith, 1996).

The debt market, specifically, is crucial for the external financing of corporate activity, making

the interference potential for debtholders result paramount. Additionally, debt-holders may have

the incentive to urge firms to act more responsibly (Scholtens, 2006). If the former is combined

with the higher frequency at which corporations revolve to the debt market to raise capital (rather

than by issuing shares), due to the shorter maturities of debt instruments compared to equity ones,

firms face extensive exposure to the debt-market discipline.

An additional reason arguing in favor of the debt market is the participation of both listed and

not listed companies, a fact significantly raising the number of firms reached compared to the

equity market. Finally, the debt market is dominated by investors who present a higher level of

sophistication, in terms of information and capabilities, and rationality (Barber and Odean, 2000;

Locke and Mann, 2005; Menz, 2010), two reasons that can lead to CSR being largely incorporated

in investment decisions and the evaluation of securities. Considering also the size and

concentration of institutional investors, the power exerted by them on firms appears more

promising.

Moving to the core of our study, investing in bonds involves a high level of consideration

regarding risk, remuneration for which is reflected in credit spreads. Factored in the overall risk

consideration is credit, liquidity and systematic risk (Nelles and Menz, 2007). Nevertheless, a

number of studies on debt instruments highlight the lack of explanatory power of the previous

factors alone with regard to the actual level of credit spreads (Amato and Remolona, 2003; Cox,

Brammer and Millington, 2004), leaving space to omitted factors that are priced in by market

participants.

The impact of CSP, through its various dimensions, on the corporate debt market has received

limited attention and has most often been studied either in specific markets or specific industries

of reference. More specifically, among seminal studies in the field, Menz (2010) studied the

Eurobond market indicating a null relationship between responsibility and risk premia. Frooman,

Zietsma and McKnight (2008), Bauer and Hann (2010), Ge and Liu (2015), Oikonomou, Brooks

and Pavelin (2014) and, finally, Stellner, Klein and Zwergel (2015), on the other hand, provide

support for the link between the two measures. However, they all either focus on a limited

timeframe (one-year data for Frooman, Zietsma and McKnight), a limited geographic area

(Stellner, Klein and Zwerge focus on Eurobonds, while Ge and Liu and Oikonomou, Brooks and

Pavelin only focus on US issues) or a limited measure of CSR (Bauer and Hann only focus on

environmental performance).

Expanding arguments raised previously, responsible firms are expected to be regarded as less

risky, with their CSP viewed as an insurance mechanism in case of negative occurrences (Orlitzky

and Benjamin, 2001; Di Giulio, Migliavacca and Tencati, 2007). Lower operational and financial

risk will thus translate into lower spreads on debt securities issued by them. Taking on previous

literature (Oikonomou, Brooks and Pavelin, 2014), we analyze CSP using two variables: CSP

strengths, which measures the overall firm’s CSR engagement and CSP controversies, which

measures CSR-related controversies associated with the firm. Therefore, our two first hypotheses

are formed as follows:

Hypothesis 1: Firms with higher CSP strengths in period t-1 benefit from lower credit spreads

in period t.

Hypothesis 2: Firms with higher CSP controversies in period t-1 will face higher credit

spreads in period t.

We argue that CSP has an impact on both short-and long-term risk, relevant to both firms and

investors (Margolis and Walsh, 2001). Due to increasingly efficient markets and information

dissemination, inadequate behavior regarding CSR will generate negative externalities to

stakeholders around a firm reflecting back to the firm itself. Despite the notion that short- and

long-term risks are incompatible and defined by a series of fundamentally different factors

(Knight, 1921), we expect CSP to have a significant impact on credit spreads in both timeframes.

Hypothesis 3: The impact of CSP on bond spreads will be equally pronounced in the short-

and long-term investment horizon.

A second, but connected to the first, focal point in this study examines the impact of CSP on

credit ratings assigned to securities. Rating agencies provide evaluations regarding the underlying

risks of a security that affect investors, although the degree to which such occurrence takes place

is debated academically (Baker and Mansi, 2002). Notwithstanding the importance of credit

ratings, rating agencies and investors may differ as to how they price risk and the risk-return

profiles they assign (Schipper, 1991; Diacon, 2004). In this study, we follow Weber, Duffy and

Schram (2018) and build on the pricing efficiency that characterizes the debt market assuming that

credit ratings already incorporate a great portion of information pertaining to risk. As a result, we

expect that CSP dimensions will be reflected in the credit quality as captured by bond ratings

assigned to a security. Furthermore, we do not incorporate such ratings into the initial model since

the overlap of CSP information and the factors already priced in ratings may generate misleading

results. Concluding, we form the following hypotheses:

Hypothesis 4: Firms with higher CSP strengths in period t-1 will benefit from higher credit

ratings in period t.

Hypothesis 5: Firms with higher CSP controversies in period t-1 will face lower credit ratings

in period t.

As one of our three key contributions, we delve deeper into the dynamics underlying the impact

of CSP in the bond market, by breaking CSR into dimensions targeting specific stakeholder

groups. We take off from stakeholder theory pillar studies (Davies, 1983; Freeman, 1984) and

consider the long-observed primary stakeholder groups that provide vital input to and have eminent

expectations from a firm: employees, customers, shareholders. A fourth constituency has also

frequently been considered a key stakeholder in a firm’s nexus and involves business partners, in

terms of suppliers and contractors (Clarkson, 1995). Nevertheless, in an environment that has

greatly evolved regarding CSR and stakeholder relations, we cannot fail to observe three additional

stakeholder groups, in the sense of their connection to a firm’s survival and long-term license to

operate: a firm’s management, the community and the environment. Despite the fact that the

community and the environment have traditionally been classified as secondary stakeholders

(Lantos and McGillicuddy, 2019) and management rarely viewed as a separate stakeholder within

the nexus, we view all three of them as constituencies affecting a firm’s performance. Attributing

to all three groups the importance of dimensions that are explicitly considered in CSR performance

scores, they are included among stakeholder groups studied as to their impact on the debt market

and credit agencies’ evaluations of a firm’s risk profile. Finally, we consider employees and

suppliers as one stakeholder group rather than two separate ones. Based on the stakeholder view

of the firm, we expect the performance of the firm on stakeholder dimensions to have an impact

on its bond spreads and ratings.

Hypothesis 6: Firms with higher performance on stakeholder relationships in period t-1 will

face lower credit spreads in period t.

Hypothesis 7: Firms with higher performance on stakeholder relationships in period t-1 will

face higher credit ratings in period t.

2.1. The legal and institutional context

Concluding with the third contribution of this study, we examine the moderating role of the

institutional and legal environment on the relationship of interest, given the widely international

nature of our sample.

Although various CSR studies assume an international character and explore the role of

institutional factors, most of them focus on the direct impact that the latter generate on CSR

practices and disclosure (Chapple and Moon, 2005; Campbell, 2007; Jackson and Apostolakou,

2010; Ioannou and Serafeim, 2012; Cahan et al., 2016; El Ghoul et al., 2017; Benlemlih and Potin,

2017) reaching no consensus (Ali et al., 2017). Campbell’s work is closer to what we posit in this

study, suggesting that a series of institutional factors affect CSR commitment including public and

private regulations, the presence of institutionalized norms on corporate accounting, cultural

systems, and the degree of stakeholder engagement. Other studies highlight the importance of the

legal environment as a source of CSR and elaborate more on the distinction between common and

civil law economies and their respective stakeholder- and shareholder-orientation (Ball et al.,

2000; Matten and Moon, 2008; Allen, Carletti, and Marquez, 2009; Jackson and Apostolakou,

2010; Liang and Renneboog, 2016; Benlemlih and Potin, 2017). The latter authors posit that

common-law systems tend to be more shareholder-oriented with more liberal economies, while

civil-law systems present more coordinated markets and an increased stakeholder orientation.

Furthermore, Benlemlih and Potin (2017), among the limited literature, provide insights on the

role of the legal environment alone in the relationship between CSP and firm financial risk,

highlighting the stronger impact of CSP in a civil-law context. As a result of what has been said

so far, we posit:

Hypothesis 8: The negative relationship between CSP and credit spreads is stronger in civil-

law than in common-law countries.

Hypothesis 9: Stakeholder relationship performance, excluding shareholders, has a stronger

impact on credit spreads in civil-law than in common-law countries.

Drawing from the Institutional Theory framework, most authors that examine cross-country

CSR data argue that institutions influence corporate behavior with norms and mainly focus on the

origins of cross-country variation in CSR practices (Carroll, 2008; Jackson and Apostolakou,

2010; Blasco and Zolner, 2010). However, a widespread absence of multinational data,

significantly limits empirical comparative research based on different backgrounds, especially in

the field of institutional factors and CSR in corporate financial aspects.

We supplement our cross-country analysis part with the set of institutional factors that most

affect CSR in literature, in order to test their potentially moderating effect on the relationship

between CSP and risk, as captured in bond spreads. Previous works in the field of institutional

context and CSR find support for the significance of democratic regimes, freedom of speech and

media, government stability and lack of terrorism, effective regulations and laws, protection of

property and the private sector (Doupnik and Salter, 1995; La Porta et al., 1997; Amor-Esteban et

al., 2017). We posit that the impact of CSP on credit spreads will be accentuated based on country-

level institutional factors. More specifically, we expect CSP to have a stronger impact on spreads

in countries with more pronounced freedom of speech, accountability and public voicing of

criticism, regulatory quality in policy formulation and implementation, quality of public and civil

services, independence of political pressures, government credibility and commitment to policies,

effective regulation to protect and promote the private sector. To this end, we rely on data regarding

national governance indicators provided by the World Bank, through its World Governance

Indicators (WGI).

Hypothesis 10: CSP has a stronger impact on credit spreads in countries with higher freedom

of speech and independent media.

Hypothesis 11: CSP has a stronger impact on credit spreads in countries with higher

regulatory quality and effectiveness, increased protection of private rights and government

credibility.

Hypothesis 12: CSP has a stronger impact on credit spreads in countries with higher

government commitment to policy formulation and implementation to protect and promote the

private sector.

3. Research Design

3.1. Sample Construction

We construct our sample drawing all available data on Thomson Reuters Eikon and Datastream

regarding standard “plain vanilla” corporate bonds (excluding convertible, floating rate, asset-

backed securities, index-linked, hybrid, preferred bonds), issued by any firm on an international

level during the period 2003-2018. We exclude financial issuers given the peculiarities of bond

pricing and the high yearly number of bond issues in the sector that would dominate our sample.

At this first stage, we come down with a total of 11,793 bond issues.

Proceeding, we exclude bonds with an amount issued lower than $100 million to account for

illiquidity issues affecting bond pricing (liquidity preference theory – Hicks, 1939; Modigliani,

1944). We further eliminate defaults and bond issues that lack ESG or firm-level data. Finally, we

follow empirical works in the field (Waddock and Graves, 1997; Nelling and Webb, 2009;

Oikonomou, Brooks and Pavelin, 2014) and lag all independent variables, manually matching both

categories of variables to each bond issue. Lagging firm characteristics and CSP variables is done

for two key reasons: first off, we try to reduce endogeneity in our data and, secondly, we account

for the time period necessary for market participants to absorb information regarding firms and

incorporate them into the valuation of financial instruments issued by them. The final sample

includes 4,574 bonds, issued by 881 firms, operating in 56 subsectors and 40 countries during the

period 2003-2018. Table 1 of Appendix A offers an overview of bond distribution over the years,

subsectors and countries in our sample.

3.2. Bond spreads and credit ratings

Data regarding the two dependent variables of our analysis are drawn from the Thomson

Reuters Datastream and Eikon databases. Corporate bond spreads are calculated as the differential

between the bond’s yield and that of the equivalent government benchmark bond for the bond’s

currency of denomination, expressed in basis points. Given that maturities for the majority of

corporate bonds do not perfectly match the maturity of the available government benchmark

bonds, both databases employed here apply linear interpolation to estimate the yield of a

government benchmark with the same maturity as the analyzed bond. For bonds with a maturity

longer than the longest benchmark, the yield is compared to the longest benchmark and not

extrapolated. Similarly, bonds with maturities shorter than the shortest benchmark are compared

to the shortest available benchmark. The dependent variable representing bond spreads in this

particular analysis is constructed taking the logarithm of the aforementioned measure, in order to

account for skewness in the yield spread distribution.

Moving on, we construct the bond rating variable by scaling Moody’s Bond Rating data

available on Thomson Reuters Datastream, following several important studies in the field (Blume,

Lim and Mackinlay, 1998; Menz, 2010; Ashbaugh-Skaife, Collins and LaFond, 2006; Chava,

2011; Attig, El Ghoul, Guedhami and Suh, 2013; Oikonomou, Brooks and Pavelin, 2014). This

type of ranking assigns values from one (for the lowest bond rating group – Ca, C) to eight (for

the highest bond rating group – AAA) to the bond issues analyzed (see Table 2, Appendix B). We

opt for bond ratings assigned by Moody’s due to an increased availability of data.

Table 3 of Appendix B offers an overview of mean spreads and bond ratings across sectors. It

is worth noting the substantial variability among sectors. As one can observe, there is no

compelling match between bond ratings and spreads, a fact that comes in agreement with major

scholar works in the field of pricing financial securities suggesting that, even in cases of identical

credit ratings, industries are characterized by different cyclicalities and structural profiles that

correspond to differences in the underlying systematic risk and risk premia linked to it (Longstaff

and Schwartz, 1995; Nelles and Menz, 2007; Menz, 2010). Table 4 of Appendix B presents an

overview of mean spreads and bond ratings by country.

3.3. CSP and Stakeholder measures

CSR and stakeholder data are drawn from the Thomson Reuters Asset4 database. The latter

classifies CSR data into three major pillars -environmental, social and governance-, based on:

a) 15 category groupings -emission reduction, product innovation, resource reduction

(environmental pillar), board functions, board structure, compensation policy,

shareholders policy, vision-and-strategy (governance pillar), community, diversity,

employment quality, health-and-safety, human rights, product responsibility, training-

and-development (social pillar);

b) 226 KPIs -70 for environmental ratings, 88 for social ratings and 68 for governance

ratings.

ESG (Environmental, Social and Governance) scores are generated after adjustment for the

respective firm’s region and industry to assign each item with the relative weight based on its

relevance. Each pillar is composed by both Boolean and metric measures. On top of the individual

category and KPI ratings, Asset4 provides an overall ESG score (CSP strengths), an overall ESG

score for relative controversies (CSP controversies), as well as an overall ESG score adjusted for

controversies.

On a higher level of inference, we opt to examine CSP under CSP strengths and CSP

controversies, instead of the overall adjusted score. We follow this rationale in order to test whether

positive CSP aspects and negative CSP-related occurrences generate the same effect in the

relationship of focus.

3.3.1. Stakeholder measures

Moving into the study of specific CSR practices that are priced in the bond market, we tailor

six dependent variables that reflect the stakeholder groups identified: employees; the community;

customers; the environment; management; shareholders. Each variable is built as the sum of single

KPI scores that regard it, adjusted for the respective controversies as provided in the Asset4

database. All variables are then scaled to assume a minimum value of 0 and a maximum value of

100.

To this regard, we build the employee score variable as the sum of performance on the 31

metrics that evaluate design, implementation and monitoring of safety and health provisions

regarding staff, fair trade practices, policies to treat employees and suppliers-contractors as key

business partners, business ethics, whistleblower protection, awards assigned to incentivize

employee behavior and performance, protection from forced and child labor, diversity and

opportunity environment, women participation in employee base and managerial positions, work-

life balance, protection and amenities for disabled and elderly employees, daycare services and

maternity provisions, employment quality in terms of growth and stability in the long-term career

of employees, employment benefits, fostering a culture of trust, employee relations tools and the

efficiency of internal communication, trade unions relations, bonus plans and incentives. Summing

up, the employee variable is designed to depict the firm’s capacity to create a positive, safe,

empowering climate for its employees in a context that fosters equality and human rights

protection.

We tailor a variable to measure community performance based on 16 Asset4 metrics of social

performance that range from programs of human rights protection, donations (in-kind and

otherwise), voluntary work initiatives, fair competition practices and inclusion initiatives for the

disabled, the elderly and other sensitive population groups.

Passing on to the customer dimension of CSP, the customer score variable is the sum of the

firm’s performance on 24 metrics that include: protection of human rights, donations (in-kind and

otherwise), fostering voluntary work, explicit product quality and responsibility practices, health

and safety policies for the customer, responsible and clear marketing strategy, to access low

income and disabled customers, product and process transparency, protection of privacy, revenues

from businesses deemed harmful (i.e. tobacco, gambling), product recalls, social inclusion

initiatives, the company's management commitment and effectiveness towards maintaining its

license to operate by being a good citizen (donations of cash, goods or staff time, etc.), protecting

public health (avoidance of industrial accidents, etc.) and respecting business ethics (avoiding

bribery and corruption, etc.). More concisely, the customer score variable measures the firm’s

ability to relate to its customers in a manner that the latter are put in the best conditions to realize

informed purchasing decisions and are protected before and after purchase in a comprehensive

manner.

The environmental performance of the firm, on the other hand, captures its performance on 44

metrics that regard strategy, implementation and monitoring of a series of practices it engages in

to either reduce its negative impact on the environment or increase its positive impact on its

preservation. Environmental practices comprised in the overall environmental score include all

types of emissions reduction, protection of biodiversity, resource usage, waste management,

process reengineering to minimize waste, emissions and resources employed, environmental

partnerships, restoration initiatives, R&D and innovation on product and processes. The

environmental score measures, therefore, the manner in which the firm affects its environmental

context in a positive manner.

The management score variable is the sum of 18 firm scores on the level of alignment of

management compensation and incentive schemes with long-term corporate objectives,

managerial commitment to the formulation and implementation of a robust corporate strategy,

managerial commitment to integrate ESG strategy into ordinary corporate management and

decision making. Overall, this variable measures the effectiveness of the relationship between the

firm and its management, in terms of serving corporate goals while maintaining a satisfied and

incentivized managerial front.

Finally, the shareholder score is the sum of the firm’s individual performance on 32 metrics

that include the degree to which it monitors and structures policy regarding majority and minority

shareholder voting and ownership rights, anti-takeover mechanisms in place, board structure,

function, independence and compensation provisions, as well as voting procedure and rights

policies. Summarizing, the shareholder dimension of CSP reflects the effective relationship

between the firm and its shareholders.

3.4. Control Variables

We introduce a series of control variables, in line with prevalent research in the field of credit

risk, ratings and bond pricing (Ziebart and Reiter, 1992; Ashbaugh-Skaife, H., Collins, D., LaFond,

2006; Lee and Faff, 2009; Oikonomou, Brooks & Pavelin, 2014). We classify control variables

used in this analysis into two categories: bond-specific and firm-specific factors.

3.4.1. Bond-specific Factors

Examining the impact of CSP on bond spreads and credit ratings, we need to account for the

specificities of each bond issue within the sample. The years to maturity are incorporated in our

models given that the longer the maturity of a bond the higher it is subject to systematic interest

rate risk through market movements in yields (Fama and French, 1993). Additionally, duration

and convexity are inserted into our analysis, with the first reflecting the bond’s exposure to interest

rate risk and the second reflecting the curvature of such relationship. Along with duration, at this

point, we consider modified duration as a further control in order to account for potential pitfalls

generated by different durations among bonds (Fong and Fabozzi, 1985; Menz, 2010). Finally, the

nominal amount issued for each bond is also considered among the control variables both as a

proxy for the bond’s liquidity, aside firm liquidity considered among firm-specific factors later

analyzed.

3.4.2. Firm-specific Factors

Firm characteristics employed as controls in this analysis start with firm size, taken as the

logarithm of the firm’s market capitalization. Size can be linked to both sides of the relationship

of interest, influencing the capacity of the underlying firm to invest in CSR, as well as the risk

profile it presents as an issuer. Leverage is another variable closely related to bond spreads and

credit ratings, since it is often associated with increased default risk. We calculate leverage as the

ratio of total debt over common equity. In a similar manner, a commonly used control takes into

consideration the interest coverage ratio, calculated as EBIT divided by interest expenses.

Furthermore, we follow Chan and Chen (1991) and include the market-to-book ratio, the reciprocal

of which in their work is associated to the distress factor. The current ratio is herein employed as

a proxy for short-term liquidity and calculated as the ratio of the firm’s book value of current assets

divided by the book value of current liabilities. Return on assets is another variable proxying the

firm’s ability to efficiently utilize its assets and cover debt obligations. The final control we use in

our analysis accounts for each borrower’s sector (2-digit level of analysis), provided, as previously

presented, that different industries are characterized by different risk premia.

3.5. Institutional Context Variables

As discussed earlier in this study, we examine four institutional dimensions on a country-level:

the legal system; freedom of speech and independent media; regulatory effectiveness; regulation

to protect and promote the private sector.

We measure the legal system of the issuer’s country following an extensively documented

taxonomy of legal frameworks applied around the world and draw relevant data from the CIA

World Factbook database. We eliminate countries that apply a mixed legal system varying from

civil-common law to mixes of classic legal systems with customary law.

Moving on, we measure freedom of speech, media and public voicing of criticism employing

the Voice and Accountability variable of the World Bank’s WGI database. The latter measures

perceptions of the extent to which a country's citizens are able to participate in selecting their

government, as well as their freedom of expression, association, and a free media. Given the

voluntary nature of multiple facets of CSR, we expect firms in countries with increased values of

Voice and Accountability to be more prone to receive criticism and voiced concerns from the

public. As a consequence, we expect such factor to have a positive moderation effect on CSP’s

impact on bond spreads. Additionally, the variable Regulatory Quality of the same database

measures the quality of formulation and implementation of laws and regulations that protect and

promote the private sector. Government effectiveness, on the other hand, measures a country’s

government credibility, commitment to policies, public and civil service independent of political

pressures. Variables measuring the various dimensions of institutional context, with the exception

of legal system, assume values from -2.5 to 2.5 (being the strongest governance performance on

the relative WGI indicator). We conclude this section with the key statistics for the variables

employed in Table 5 of Appendix C.

3.6. Model specification

We study the impact of CSP and stakeholder relationships on bond spreads employing a multi-

way cluster analysis that takes on three tiers of clusters: cross-section, time and country of issue.

In addition to the former considerations, we control for industry in both models by introducing

dummy variables given that factors affecting bond spreads and ratings may originate on an industry

level.

The analysis method chosen allows adjustment of residuals that are correlated across issuers,

years and countries. One can argue that a fixed effects regression analysis may fit our data in a

similar manner, but, in reality, we consider the cluster analysis more robust provided that a lot of

issuers repeat themselves over the years as well as within the same year of analysis, a problem that

would not be dealt with efficiently with a fixed effects model (Cameron, Gelbach and Miller, 2006;

Thomson, 2011; Correia, 2015). Moreover, the static nature of a multitude of our dependent

variables, such as amount issued, duration and others, result in the cluster analysis being a better

fit.

Finally, we use an ordered probit model on our examination of the impact of CSP on bond

ratings, applying random effects as seminal studies in the field have previously done (Frechette,

2001; Oikonomou, Brooks and Pavelin, 2014).

4. Results

4.1. Model outcome

Tables 6 and 7 summarize the empirical findings on the relationship between CSP and bond

spreads and ratings.

Table 6 Model outcome on CSP and corporate bond spreads-All-world subsample

log(spread) log(spread)

Amount Issued 0.108*

(0.002)

0.113**

(0.003)

Modified Duration 0.131***

(0.000)

0.129***

(0.000)

Convexity -0.005***

(0.000)

-0.005***

(0.000)

Duration 0.002***

(0.067)

0.001***

(0.349)

Leverage 0.000

(0.037)

0.000

(0.000)

Market Cap -0.122***

(0.093)

-0.142***

(0.058)

Interest Coverage -0.003***

(0.063)

-0.001***

(0.529)

ROA -1.527***

(0.011)

-1.847***

(0.014)

Current Ratio 0.023

(0.538)

0.028**

(0.473)

Market To Book Value 0.000

(0.166)

0.000

(0.234)

CSP Strengths -0.013***

(0.000) -

CSP Controversies 0.004**

(0.000) -

Management Score - 0.000***

(0.594)

Shareholder Score - 0.001

(0.474)

Community Score - -0.003***

(0.035)

Customer Score - -0.002*

(0.048)

Employee Score - -0.006***

(0.000)

Environmental Score - 0.000

(0.795)

Country Effects Yes Yes

Year Effects Yes Yes

Sector Effects Yes Yes

Adjusted R2 47.06% 48.70%

N 4,574 4,574

Parentheses report p-values for coefficients, ***, **, * indicate statistical significance at a 1%, 5% and

10% level respectively.

Findings confirm the significance of bond-specific factors related to bond pricing and spreads.

Summing up results associated with bond and firm characteristics, we find that lower corporate

bond spreads are to be expected for bonds with a lower amount issued, lower maturities and

modified duration and higher convexity. In the same way, lower bond spreads are to be enjoyed

by firms with a higher market capitalization, ROA and interest coverage ratio.

More on the focus of this study, both CSP strengths and controversies result of high

significance on credit spreads confirming hypotheses 1 and 2, in line with other academic works

(Stellner, Klein and Zwergel, 2015; Huang, Hu and Zhu, 2018).

Some interesting insights arise regarding stakeholder practices. In this case, findings suggest

that not all CSR practices have the power to generate an impact on the cost of corporate debt. In

particular, practices linked to shareholders and environmental performance do not yield significant

influence on spreads, notwithstanding the former being considered a primary stakeholder. On the

other hand, evidence suggests that the cost of bonds is influenced by the firm’s relationships with

employees, management, customers and the community. As a consequence, only partial support is

provided for Hypothesis 6. Concluding with the econometric parameters reported on the

relationship between CSP and bond spreads, we observe high values of the adjusted-coefficient of

determination further confirming the good fit of the model on our data.

Proceeding, Table 7 presents the results of the ordered probit model on bond ratings. Before

commenting findings, we need to specify that this part of the analysis is conducted on a lower

number of observations (a total of 3,815 instead of 4,574), given the reduced number of bond

issues that were assigned with a credit rating.

Table 7 Model outcome on CSP and bond credit ratings

Moody’s Rating Score Moody’s Rating Score

Amount Issued -0.131***

(0.001)

-0.170***

(0.000)

Modified Duration 0.001***

(0.394)

0.000***

(0.836)

Convexity 0.0169***

(0.49)

0.033***

(0.212)

Duration -0.0038***

(0.628)

-0.003***

(0.684)

Leverage 0.000*

(0.036)

0.000*

(0.008)

Market Cap -0.051*** -0.020***

(0.06) (0.526)

Interest Coverage 0.0181***

(0.000)

0.0157***

(0.000)

ROA 1.776***

(0.008)

2.034***

(0.009)

Current Ratio -0.064***

(0.18)

-0.057***

(0.282)

Market To Book Value 0.000***

(0.000)

-0.064***

(0.000)

CSP Strengths 0.022***

(0.000) -

CSP Controversies -0.009***

(0.000) -

Management Score - 0.002***

(0.141)

Shareholder Score - 0.001

(0.504)

Community Score - -0.001***

(0.493)

Customer Score - 0.003***

(0.151)

Employee Score - 0.016***

(0.000)

Environmental Score - 0.000***

(0.465)

Year fixed effects Yes Yes

Country fixed effects Yes Yes

Sector fixed effects Yes Yes

Pseudo-R2 16.33% 19.78%

N 3,815 3,815

Parentheses report p-values for coefficients, ***, **, * indicate statistical significance at a 1%, 5% and 10% level

respectively.

We find support for Hypotheses 4, 5 and 7, while all control variables result highly impactful

for the evaluation of the credit quality of the underlying financial security.

It is worth noting that parts of our empirical findings, regarding CSP strengths and

controversies, come in agreement with what has been suggested by similar studies in the field

(Bauer and Hann, 2010; Ge and Liu, 2015; Oikonomou, Brooks and Pavelin, 2014) expanding

them on a global scale of study at this first stage. A similarly international study has only

previously been conducted on the impact of CSP on the cost of bank loans (Hoepner et al., 2014).

Concentrating on one of this study’s key contributions in terms of novelty, we find support for

Hypothesis 7, with all stakeholder groups resulting significant for credit rating decisions. However,

we only find partial support for hypothesis 6, as not all stakeholders appear to affect investors’

valuation of the issuing company’s risk, as reflected in spreads. Given the links between employee

satisfaction, in our case implicit in a wide range of measures incorporated in the employee score

variable, and firm performance often evidenced in literature (Berry, 1980; Kotler, 1991; Harter et

al., 2002; Saks, 2006; Edmans, 2009), an initial explanation for their significance in this case

surfaces. The same principle applies on improved customer scores, with several studies providing

strong evidence on the relationship between customer satisfaction, implicit in higher customer

scores, and a firm’s sustainable economic performance (Mittal et al., 2005; Gupta and Zeithaml,

2006; Purohit, 2015).

What is more interesting is the strong impact that relationships with management and the

community generate, especially in the case of bond spreads. Looking back at what the management

score variable measures, it appears that managerial alignment with the firm’s objectives,

compensation alignment and ESG integration in the firm’s overall strategy are factors that are

actively considered by the debt market. Even more insightful is the impact that a philanthropic

attitude, as reflected in community scores, generates on bond spreads, as well as credit ratings.

Findings verify the increasing benefits for firms from assuming a more holistic good citizen role.

Finally, a long stream of academic works highlights the pitfalls of litigation and the long-term

negative impact it has on firms, both in terms of monetary and indirect costs (Skinner, 1994; Shu,

2000; Lowry and Shu, 2002; Bolton et al., 2011). The aforementioned may lay the grounds for an

additional and not secondary explanation behind any positive impact linked to improved

stakeholder relationships; with effective stakeholder management, litigation risk is naturally

driven down for the underlying firm, which in the meantime benefits from a more robust license

to operate.

On the other hand, the lack of significant influence on spreads deriving from shareholder

relationships and environmental aspects of performance should not be considered overly

surprising. Provided that the context of this study involves the debt capital market, shareholders

remain a sort of counterpart for bond holders, with both being sources of capital for the firm, and

as such may not rank high in valuation factors for investors. This finding finds corroboration in

works that highlight the limited and lagged incorporation of many corporate governance aspects

into bond evaluation by investors (Nelles and Menz, 2008; Menz, 2010). Concluding, the absence

of a strong impact coming from environmental performance on bond spreads is also supported in

research conducted by Barnett (2007), Menz (2010) and Oikonomou, Brooks and Pavelin (2014).

This outcome may be attributable to the fact that environmental practices, as well as shareholder

protection, are, to a large degree, subject to explicit regulation, something that does not constitute

a reality for other aspects of CSP; namely, employee diversity and empowerment, community

relations, donations and voluntary work, education and training programs and so on. As a direct

consequence of the latter, we can detect a rewarding behavior towards aspects of CSP that are not

mandated but expected to generate an impact regardless.

4.2. The legal system’s role

We examine the impact that a country’s legal system has on the relationship of interest,

assuming that common-law countries present a more liberal and shareholder-oriented economy,

while civil-law countries are characterized by more coordinated markets and a more pronounced

stakeholder-orientation. Dividing our sample based on the legal system in place, Table 8 presents

findings regarding the relationship between CSP and bond spreads in the two subsamples.

Table 8 CSP and bond spreads in civil- and common-law systems

Civil Law Common Law

Amount Issued 0.029**

(0.013)

0.040**

(0.016)

0.040*

(0.022)

0.027*

(0.026)

Modified Duration 0.002***

(0.007)

0.051***

(0.007)

0.102***

(.008)

-0.004***

(0.000)

Convexity -0.055***

(0.000)

-0.019***

(0.000)

-0.050***

(0.006)

-0.098***

(0.009)

Duration 0.001***

(0.000)

0.077***

(0.000)

0.004**

(0.002)

0.005 ***

(0.001)

Leverage 0.000

(0.000)

0.046

(0.000)

-0.16

(0.012)

0.001

(0.000)

Market Cap -0.074

(0.054)

-0.047

(0.032)

-0.221***

(0.040)

-0.193***

(0.032)

Interest Coverage -0.002*

(0.001)

-0.002**

(0.001)

-0.001***

(0.003)

-0.002***

(0.000)

ROA -0.492*

(0.312)

-0.664*

(0.378)

-0.457***

(0.060)

-0.499***

(0.061)

Current Ratio 0.048

(0.021)

0.034

(0.026)

0.010**

(0.003)

0.014**

(0.002)

Market To Book Value -0.003

(0.000)

-0.004

(0.000)

0.000

(0.000)

0.001

(0.000)

CSP Strengths -0.030***

(0.001) -

-0.007***

(0.002) -

CSP Controversies 0.000*

(0.000) -

0.004

(0.000) -

Management Score - -0.024

(0.001) -

-0.001***

(0.001)

Shareholder Score - 0.022**

(0.000) -

-0.004***

(0.005)

Community Score - -0.011**

(0.001) -

0.001

(0.001)

Customer Score - -0.065

(0.001) -

0.000

(0.000)

Employee Score - -0.053***

(0.001) -

-0.003

(0.001)

Environmental Score - 0.005

(0.000) -

-0.000

(0.000)

Country Effects yes yes no no

Year Effects yes yes yes yes

Sector Effects yes yes yes yes

Adjusted R2 37.64% 38.96% 54.76% 56.21%

N 904 904 3,141 3,141

As one can notice, there are significant differences between the two groups. First of all, CSP

controversies only appear significant for the civil-law group, while CSP remains highly impactful

for both subsamples, providing no support for Hypothesis 8. We find confirmation that

shareholders remain the key stakeholders for common-law systems, followed in our case by the

firm’s management, reinstating the priority corporate governance assumes in those economies. On

the other hand, findings suggest civil-law countries place a special focus on employees and the

community. Contrary to initial expectations and analysis, shareholders result among the

stakeholder relationships that affect a firm’s spreads and are significantly factored in by the debt

market in both systems, providing partial, if any, support for Hypothesis 9.

4.3. Institutional moderation

Opposite to current literature, we do not focus on the direct relationship between national

factors and bond spreads and ratings, rather than their potentially moderating role in the analyzed

relationship.

At this point, we need to specify that this part of analysis excludes rating agencies and only

focuses on bond pricing. Given that credit rating agencies explicitly incorporate institutional

factors in their rating processes, also formalized and communicated to the public, no significant

additional effect should be found by adding back institutional factors in existing ratings. An

additional analysis we perform but do not report here supports our notion. Table 9, therefore,

presents findings regarding the moderating role of the three institutional factors selected in this

study on bond spreads.

Table 9 Institutional Moderators-Bond spreads

ESG -0.0012***

(0.0004)

-0.0022***

(0.0005)

-0.0011**

(0.0005)

Amount Issued 0.0012*

(0.0002)

0.0022**

(0.0000)

0.0013**

(0.0000)

Convexity -0.0039***

(0.0002)

-0.0040***

(0.0002)

-0.0039***

(0.0002)

Modified Duration 0.0907***

(0.0028)

0.0911***

(0.0028)

0.0906***

(0.0028)

Duration 0.0009***

(0.0001)

0.0010***

(0.0001)

0.0009***

(0.0001)

Leverage 0.0000

(0.0000)

0.0000

(0.0000)

0.0000

(0.0000)

Market Cap -0.1262***

(0.0067)

-0.1239***

(0.0066)

-0.1239***

(0.0067)

Interest Coverage -0.0010***

(0.0001)

-0.0010***

(0.0001)

-0.0010***

(0.0001)

ROA -0.5480***

(0.0487)

-0.5434***

(0.0484)

-0.5461***

(0.0486)

Current Ratio 0.0095*

(0.0030)

0.0090**

(0.0030)

0.0096***

(0.0030)

MTB 0.0000

(0.0000)

0.0000

(0.0000)

0.0000

(0.0000)

Regulatory Quality -0.0286**

(0.0120) - -

Government

Effectiveness - -

-0.0361***

(0.0125)

Voice and

Accountability -

-0.1047***

(0.0151) -

REG Moderation

Term 0.0000

(0.0000) - -

GOV Moderation

Term - -

-0.0001

(0.0003)

VOAC Moderation

Term -

0.0010***

(0.0004) -

Firm Effects yes yes yes

Year Effects yes yes yes

Adjusted R2 47.11% 47.65% 47.15%

N 4,045 4,045 4,045

Parentheses report p-values for coefficients, ***, **, * indicate statistical significance at a 1%, 5% and 10% level respectively.

In order to suggest a moderating role for a variable, statistical significance needs to be found

for the moderation term (the product of) between the moderator and the key independent variable.

Unlike mediation, there is no need for the two aforementioned variables to be correlated and any

existing correlation has no special interpretation (Sharma, Durand and Gur-arie, 1981). As a result,

we can notice that the only variable in our dataset qualifying as a moderator is Voice and

Accountability measuring the freedom of speech and media, supporting Hypothesis 10.

Our findings offer new insights, although we must point out that existing literature mainly

focuses on the direct impact of institutional factors on CSR practices. More specifically, we find

support for the role that institutional factors have in the debt market but no moderation in the CSP

and bond spreads relationship when it comes to the regulatory and government context. This first

realization leads us to conclude that, although such factors shape the debt market and CSR

practices overall, they fail to work as a CSR channel in the debt market. With the additional support

of significant findings only regarding the freedom for public scrutiny, we are confident that CSR

has assumed a role that goes well beyond compliance. If we are to accept that investors attribute

lower risk to firms with stronger CSP and this effect is magnified in contexts where firms are more

prone to public criticism and media coverage, we are to conclude that CSR has evolved into an

integral corporate practice expected to meet expectations that surpass mere legal provisions.

4.4. Additional controls

4.4.1. Investment grade and speculative bonds

We divide our sample into investment grade and speculative bonds and run our initial model

unchanged. In this case, we omit stakeholder variables and focus on the higher level of inference

regarding the relationship of interest.

Table 10 CSP effect on bonds spreads by investment grade classification

log (spread) Investment grade Speculative

CSP STRENGTHS -0.0092** -0.0068***

CSP CONTROVERSIES 0.0021*** 0.0031

Firm-level controls Yes Yes

Bond-level controls Yes Yes

Sector controls Yes Yes

Adjusted R2 47.77% 48.13%

N 3,294 1,280

***, **, * indicate statistical significance at a 1%, 5% and 10% level respectively.

Outcomes suggest that while both CSP aspects significantly affect bond spreads in the case of

investment grade securities, speculative bonds are only affected by CSP strengths. Such findings

corroborate the secondary significance often assigned by investors to CSR dimensions compared

to structural and financial firm aspects (Steger, Ionescu-Somers, Salzmann, 2007).

4.2.2. Investment timeframe and CSP impact on bond spreads

In this section, we examine the impact of CSP on spreads based on bond maturities, employed

here as a proxy for investment horizon. Based on existing literature in the field of SRI investing

(Graves and Waddock, 1994; Dimson, Karakas and Li, 2015; Vanwalleghem, 2017), we explore

the debate over whether it is only in the long-term horizon that CSP benefits are fully reaped by

investors (Hillman and Keim, 2001). Thus, we divide bond issues into four categories of

maturities: up to five years, between five and ten years, between ten and twenty years and over

twenty years that respectively reflect a short-, medium-, medium-long- and long-term investment

horizon.

Table 11 CSP and bond spreads based on bond maturity

Investment Horizon <5 years 5-10 years 10-20 years >20 years

CSP strengths -0.011** -0.011*** -0.0096*** -0.0057*

CSP controversies 0.0012** 0.0013* 0.0012* 0.0015

Firm-level controls Yes Yes Yes Yes

Bond-level controls Yes Yes Yes Yes

Sector controls Yes Yes Yes Yes

Adjusted R2 46.35% 51.28% 46.44% 72.01%

N 150 667 328 175

***, **, * indicate statistical significance at a 1%, 5% and 10% level respectively.

As depicted in Table 11, our findings do not corroborate existing research but, instead,

highlight a significant relationship between CSP, especially strengths, and bond spreads over all

investment horizons, confirming Hypothesis 3.

4.2.3. Endogeneity

The dataset employed in this study is prone to endogeneity issues. We try to tackle this issue

by going further than lagging our key independent variable. More specifically, we apply a 2-stage

instrumental variable model focusing on aggregate CSP and applying fixed effects to capture time-

invariant factors. Considering the key prerequisite to define a fit instrument that requires the latter

only affect the dependent variable through its impact on the endogenous variable, we follow Cheng

et al. (2014) and Bhandari and Javakhadze (2017) and adopt two instruments: country-industry

average and country-year average for CSR performance, excluding the firm’s relative performance

in the calculation of both. As previously demonstrated in literature (Ioannou and Serafeim, 2011,

2012), CSP at the firm level is influenced by both industry and country characteristics, with CSP

of other firms in the same country and industry affecting the specific CSP of the firm. Results of

the 2SLS model are reported in Table 12 and confirm that our instruments are relevant with the F

statistic greater than the critical value. Overall, our base hypothesis that superior CSP is linked to

lower credit spreads finds here additional support.

Table 12 2SLS model outcome

First stage Second stage

Country-Sector Mean CSP 1.175***

(0.024)

Country-year Mean CSP 0.358***

(0.002)

CSP -0.045***

(0.002)

Amount Issued 0.061**

(0.022)

-0.085***

(0.003)

Modified Duration 0.032***

(0.001)

0.079***

(0.023)

Convexity -0.009*

(0.000)

-0.011***

(0.000)

Duration -0.041**

(0.002)

-0.001

(0.000)

Leverage -0.014**

(0.000)

0.132*

(0.002)

Market Cap 0.213***

(0.028)

-0.270***

(0.066)

Interest Coverage 0.035*

(0.002)

0.047*

(0.002)

ROA -1.702*

(0.049)

-1.002*

(0.066)

Current Ratio -0.027*

(0.000)

0.014

(0.000)

Market To Book Value 0.001**

(0.000)

0.012*

(0.001)

Country Fixed Effects Yes Yes

Year Fixed Effecs Yes Yes

Sector fixed effects Yes Yes

F 156.4***

Adjusted-R2 27.22% 34.05%

N 4,574 4,574

***, **, * indicate statistical significance at a 1%, 5% and 10% level respectively.

5. Conclusions

This paper takes on a unique approach to the relationship between CSP and corporate financial

performance through the study of a vast international longitudinal sample of corporate bond issues.

With a total of more than 4,574 bond issues, issued by 881 firms, operating in 56 sectors, 40

countries and spanning 15 years we assume an unparalleled comprehensive view on the impact

that CSR has on corporate financial performance. Furthermore, we place attention on the

aforementioned relationship under the less studied perspective of the debt market and the specific

stakeholder dynamics that affect debt pricing and credit quality.

This study offers the ground to draw a series of novel insights into the benefits that arise from

superior CSP, especially acknowledging the areas of the latter that matter the most to bond

investors. Our findings indicate a strong link between CSP and the cost and credit quality of

corporate debt. Superior CSP strengths are associated with lower credit spreads and improved

ratings for securities, while a higher number of CSP-related controversies have the power to

deteriorate credit quality as mirrored in ratings, as well as increase the cost of corporate bonds.

Rating agencies, as a matter of fact, appear even more strongly inclined to consider and incorporate

CSP in the ratings assigned to financial securities.

Moving into the more refined part of our analysis, the significant role played by CSP in bond

pricing and ratings is further corroborated by findings regarding both investment-grade and

speculative bonds and all investment horizons. The latter reflects an additional valuable

contribution of this study, given that it provides evidence that goes past academic theory

suggesting the link between CSP and financial performance is mainly located in the long-run.

Opposite, we herein highlight a strong impact generated by both CSP strengths and controversies

for all investment timeframes. Not only that, but we also find support that rejects the notion that

CSP gives fruit in the long-term as opposed to CSP controversies that generate backlash mainly in

the short-term. As a matter of fact, our data suggest that CSP strengths produce a steady, strong

influence on spreads and ratings for all investment horizons and all classes of bonds; investment-

grade or speculative. We need, however, to point out that investment-grade securities appear to be

more receptible to their underlying CSP values, with respect to both strengths and controversies,

while speculative bonds receive a less pronounced influence given the weight that investors

potentially attribute to more structural corporate issues.

Along with the global and longitudinal perspective it adopts, this study’s second fundamental

contribution sheds light on the specific CSR practices that count the most in the bond market as to

the stakeholders they target. Also in this case, credit ratings assigned by agencies are the recipients

of the strongest impact by CSP stakeholder dimensions. With the sole exclusion of shareholders,

a firm can see a hit or a rise in its credit quality profile caused by any important stakeholder group:

management, the community, employees, customers and the environment. Passing on to yield

spreads, findings produce a series of implications. Legal systems appear to affect the orientation

of firms operating in the underlying economy and overturn insights regarding CSP’s impact in the

debt market in the overall international sample. Common-law economies remain focused on

corporate governance actors that include primarily shareholders and managers, while civil-law

systems present a stakeholder orientation where the community and employees gain a significant

role in the valuation of the debt market. We need to point out, however, that attention to

shareholders is not missing also in this case, opposite to academic views that regard the two

disconnected, as well as findings in the first part of this analysis. Shareholders remain a crucial

primary stakeholder, being the ones that provide capital to firms, along with growing focus on

philanthropy and human resources. With employees and the community appearing as the two

influential stakeholders, when accounting for the legal context of issuers, we find evidence for the

rewarding nature of voluntary and proactive CSR, if we consider the lack of extensive regulation

governing such aspects, opposite to corporate governance and environmental practices.

Before passing on to the third and final contribution of this paper, we need to recognize that

CSR remains a multi-faceted and dynamic reality for firms, influenced by a long series of factors

that render it of more or less impact on performance and alter CSR practices that matter the most.

Such finding confirms once more the careful consideration that practitioners must attribute to CSR

if they are to reap fruit from their commitment.

We conclude this study with our third major contribution examining the role that the

institutional context plays in the relationship between CSP and the way the debt market valuates

firm financial risk as measured by credit spreads on corporate bonds. Although we find a direct

relationship between the national institutional context and credit spreads, we find that the only

institutional dimension capable of affecting the relationship between CSP and bond spreads is the

degree of freedom of speech and a free media. This should constitute an important point for

reflection for practitioners and regulators. If stronger regulation and/or implementation do not

further increase the impact of CSP in the debt market but another factor does, it would be fortuitous

to accept the integral role of CSR for corporations that goes beyond compliance, as often widely

viewed. Companies that find themselves more under the attention and scrutiny of media and the

voicing of free public criticism receive, in our study, a magnified effect deriving from their CSR

commitment.

Provided all that has been said so far, a new perspective on CSR with specific directives is to

be assumed by various categories of actors; managers, regulators and investors alike have to see

CSR under a different light. With shareholder relationships remaining central for corporations, a

whole set of relationships needs to be catered to given their significance in the debt market, a

primary source of financing, although to a different degree around the world. Firms are expected

to meet more than mere compliance standards and manage multiple dynamic relationships that

move within a more complex nexus than traditionally seen. Investors, on the other hand, should

now come up with new evaluation techniques that incorporate CSP in portfolio decisions as a key

factor of value creation. Finally, rating agencies may also benefit from a clearer demonstration of

the importance that CSR and stakeholder relationships assume in the viability and prospects of a

firm, as well as its impact on informed investment decisions, thus, leading to new rating models

that will explicitly elaborate and consider these dimensions when judging the credit quality of

corporate entities or financial securities.

We conclude our study by recognizing weaknesses and pitfalls faced in it, viewing them as an

opportunity for future research in the field. CSR is a multi-dimensional reality that provides

endless possibilities of examination; we chose one method of operationalization, which obviously

is not a universal solution. What is more, future works may focus on the impact of CSP from

different angles; focusing on investors and not firms, one can explore the CSR aspects that result

more profitable inside portfolios, such as focusing on samples of specific industries the findings

of this study can be taken to a next level of specification. Finally, the internal interactions and

dynamics among the various dimensions of CSR remain a widely unexplored territory that has the

potential to change existing knowledge on the subject.

APPENDIX A

Table 1 Bond issues by sector, country and year

COUNTRY N % SECTOR N % YEAR N %

ARGENTINA 5 0.19 BASIC MATERIALS 468 10.23 2004 12 0.44

AUSTRALIA 68 2.51 CONSUMER GOODS 777 16.99 2005 23 0.63

AUSTRIA 5 0.19 CONSUMER SERVICES 772 16.87 2006 31 0.75

BELGIUM 60 2.2 HEALTHCARE 341 7.44 2007 71 1.32

BRAZIL 12 0.44 INDUSTRIALS 1191 26.04 2008 53 1.32

CANADA 287 10.6 OIL & GAS 253 5.54 2009 134 3.32

CHILE 32 1.19 TECHNOLOGY 364 7.96 2010 181 4.08

CHINA 7 0.25 TELECOM. 142 3.11 2011 209 4.58

CZECH REPUBLIC 29 1.07 UTILITIES 266 5.81 2012 399 10.98

DENMARK 29 1.07 2013 407 10.85

FINLAND 26 0.94 2014 496 11.86

FRANCE 366 13.49 2015 561 9.6

GERMANY 216 7.97 2016 672 12.36

HONG KONG 214 7.9 2017 770 14.37

INDIA 58 2.13 2018 555 13.55

INDONESIA 17 0.63

ISRAEL 2 0.06

ITALY 168 6.21

JAPAN 100 3.7

LUXEMBOURG 10 0.38

MEXICO 99 3.64

NETHERLANDS 156 5.77

NEW ZEALAND 3 0.13

NORWAY 60 2.2

PERU 2 0.06

PHILIPPINES 5 0.19

POLAND 3 0.13

PORTUGAL 7 0.25

SINGAPORE 49 1.82

SOUTH AFRICA 5 0.19

SOUTH KOREA 71 2.63

SPAIN 27 1

SWEDEN 177 6.52

SWITZERLAND 3 0.13

TAIWAN 9 0.31

THAILAND 7 0.25

TURKEY 24 0.88

UNITED ARAB

EMIRATES 7 0.25

UNITED KINGDOM 286 10.54

USA 1864

APPENDIX B Table 2 Bond rating scale

MOODY'S RATING

SCORE

MOODY'S RATING

CATEGORY

S&P RATING

CATEGORY

1 Ca, C CC, C, DDD

2 Caa1, Caa2, Caa3 CCC+, CCC, CCC-

3 B1, B2, B3 B+, B, B-

4 Ba1, Ba2, Ba3 BB+, BB, BB-

5 Baa1, Baa2, Baa3 BBB+, BBB, BBB-

6 A1, A2, A3 A+, A, A-

7 Aa1, Aa2, Aa3 AA+, AA, AA-

8 Aaa AAA

Table 3 Mean bond spread and rating by sector

SECTOR MEAN MOODY'S

RATING

MEAN BOND

SPREAD

BASIC MATERIALS 4.1 265.9

CONSUMER GOODS 5 363.1

CONSUMER SERVICES 4.9 160.6

HEALTHCARE 4.8 240.5

INDUSTRIALS 5.1 184.7

OIL & GAS 5.4 253.2

TECHNOLOGY 5.2 137.0

TELECOMMUNICATIONS 4.9 189.8

UTILITIES 5.2 141.4

Table 4 Mean bond spread and rating by country

COUNTRY MEAN MOODY'S

RATING

MEAN BOND

SPREAD

ARGENTINA 3 731.7

AUSTRALIA 5.6 134.4

AUSTRIA 5 70

BELGIUM 5.1 134.1

BRAZIL 4 371.3

CANADA 4.4 296.6

CHILE 4.9 292.2

CHINA . 654

CZECH REPUBLIC 5 162.7

DENMARK 5 143.3

FINLAND 5 163.7

FRANCE 5.4 187

GERMANY 5.6 155

HONG KONG 5.3 214.6

INDIA 4.4 299.9

INDONESIA 5 295.6

ISRAEL . 221.6

ITALY 4.6 321.5

JAPAN 5.4 199.3

LUXEMBOURG 5 173.8

MEXICO 5.5 233.4

NETHERLANDS 5.3 133.9

NEW ZEALAND 5 138.4

NORWAY 6.8 90.22

PERU 4 301.5

PHILIPPINES . 241.4

POLAND . 556.9

PORTUGAL . 205.2

SINGAPORE 6 173.7

SOUTH AFRICA 5 281.4

SOUTH KOREA 6.4 115.2

SPAIN 2.8 637.1

SWEDEN 4.9 129.2

SWITZERLAND 5 245.6

TAIWAN . 93

THAILAND 5 179.6

TURKEY 4 449.8

UNITED ARAB EMIRATES 7 143.4

UNITED KINGDOM 5.1 221.2

USA 5.3 167

APPENDIX C

Table 5 Summary statistics of employed variables

VARIABLE mean sd min max

SPREAD 187.09 191.84 1.40 611

MOODY’S

RATING SCORE 5.13 .94 2 7

AMOUNT

ISSUED 377,313 221,834 114,000 1,000,000

MODIFIED

DURATION 6.24 4.66 0.01 26.83

CONVEXITY 64.27 80.63 0.00 829.61

DURATION 8.64 3.75 1.00 30

LEVERAGE 0.77 8.31 (441.67) 184.62

MARKET

CAP 13,915.30 35,012.80 73.90 370,318

INTEREST

COVERAGE 12.33 26.83 (216.28) 522.61

ROA 0.10 0.08 (0.95) 0.53

CURRENT

RATIO 1.53 1.14 0.18 14.80

MARKET TO BOOK VALUE 2.46 11.08 (178.90) 292.60

CSP

STRENGTHS 64.89 15.59 0 97.51

CSP

CONTROVERSIES 30.48 26.29 0 80.77

MANAGEMENT

SCORE 53.55 26.66 0 99.98

SHAREHOLDER

SCORE 55.17 28.18 0 99.85

COMMUNITY

SCORE 73.51 22.24 0 99.83

CUSTOMER

SCORE 65.88 25.89 0 99.67

EMPLOYEE

SCORE 67.57 25.02 0 99.80

ENVIRONMENT

SCORE 42.03 38.13 0 97.64

LEGAL SYSTEM 0.28 0.41 0 1

VOICE & ACCOUNTABILITY 1.11 0.29 -1.5 1.74

GOVERNMENT

EFFECTIVENESS 1.48 0.33 -0.27 2.27

REGULATORY QUALITY 1.43 0.35 -0.47 2.26

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