DR. HENRI SERVAES
We investigate whether a firm’s social capital, and the trust that it engenders, are viewed favorably by bondholders. Using the financial crisis as an exogenous shock to trust, and firms’ corporate social responsibility (CSR) activities as a proxy for social capital, we show that high-CSR firms benefited from lower bond spreads in the secondary market during the financial crisis compared to low-CSR firms. These findings are more pronounced for firms that have more of an opportunity to engage in asset substitution. 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 engage in asset substitution that would be detrimental to stakeholders other than shareholders. These findings also indicate that the reciprocity benefits of CSR that accrued to shareholders during the financial crisis carry across to another important asset class, debt capital
