The impact of corporate social responsibility activities on corporate financing: a case of bank loan covenants

ABSTRACT

We examine the impact of corporate social responsibility (CSR) activities on the intensity of loan covenants, one of the most important nonpricing terms of syndicated loan contracts. Undocumented in the existing literature, we offer new evidence that while CSR strengths have little impact on loan covenants, CSR concerns lead to stricter loan covenants. These asymmetric results suggest that while lenders view CSR strengths as discretionary, they are more concerned about value-destroying CSR concerns, which induces the lenders to screen out firms engaging in nonsocially responsible activities and penalize these firms with stricter loan covenants. Combined with the evidence on the CSR-loan spread association in the existing literature, our results provide strong evidence that CSR matters to both pricing and nonpricing terms of loan contracts.

KEYWORDS:

• Corporate social responsibility
• strengths
• concerns
• loan covenants

JEL CLASSIFICATION:

• G24
• G34

Acknowledgement

The authors acknowledge many helpful comments from Maretno Agus Harjoto on the earlier version of this article. The usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ We have also performed Tobit regression analysis using an indicator variable of COVINDEX_ADJ as dependent variable, which is equal to 1 if a loan has a covenant and 0 otherwise. Though not reported here, the regression estimates of CSR-STR and CSR-CON are qualitatively identical to those reported in Table 2.