22 Jul 2011Working Paper Summaries

Corporate Social Responsibility and Access to Finance

by Beiting Cheng, Ioannis Ioannou and George Serafeim

Corporate social responsibility may benefit society, but does it benefit the corporation? Indeed it does, according to a new study that shows how CSR can make it easier for firms to secure financing for new projects. Research was conducted by George Serafeim and Beiting Cheng of Harvard Business School and Ioannis Ioannou of the London Business School. Key concepts include:

The better a firm's CSR performance, the fewer capital restraints it will face.
Better CSR performance is the result of improved stakeholder engagement, which in turn reduces the likelihood of opportunistic behavior and pushes managers to adopt a long-form strategy. This introduces a more efficient form of contracting with key constituents.
Firms with good CSR performance are likely to report their CSR activities, thus increasing their overall transparency. Higher levels of transparency ease the fears of potential investors, making them more likely to invest.

Author Abstract

IIn this paper, we investigate whether superior performance on corporate social responsibility (CSR) strategies leads to better access to finance. We hypothesize that better access to finance can be attributed to a) reduced agency costs due to enhanced stakeholder engagement and b) reduced informational asymmetry due to increased transparency. Using a large cross-section of firms, we find that firms with better CSR performance face significantly lower capital constraints. Moreover, we provide evidence that both of the hypothesized mechanisms, better stakeholder engagement and transparency around CSR performance, are important in reducing capital constraints. The results are further confirmed using an instrumental variables and a simultaneous equations approach. Finally, we show that the relation is driven by both the social and the environmental dimension of CSR.