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On the Value of Corporate Social Responsibility Disclosure: An Empirical Investigation of Corporate Bond Issues in China

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Abstract

We provide the first comprehensive and robust evidence on the relationship between CSR disclosure quality and the costs of corporate bonds in China. We find that firms with high CSR disclosure quality are associated with lower costs of corporate bonds. Our findings are robust to endogeneity issues arising from reverse causality, omitted variable bias, and the interdependencies between price and non-price terms. The negative relationship between CSR disclosure quality and the costs of corporate bonds is stronger in weak corporate governance firms and in firms located in regions with weak institutional environments. We also find that firms’ misconduct significantly mitigates the influence of CSR disclosure quality. In the additional analyses, we provide evidence that CSR disclosure can offer incremental information beyond the credit ratings. Regarding non-price terms, we conclude that firms with higher quality of CSR information are less likely to be subject to collateral terms, but they tend to include more restrictive covenants. Further analyses also show that compared with low-quality or mandatory CSR disclosure firms, bond investors perceive firms with CSR disclosures rated above “A” categories or voluntary CSR disclosure as less likely to cause asymmetric information problems and thus charge lower risk premiums. Overall, this study demonstrates that CSR disclosure quality is an important determinant that affects both price and non-price bond contract terms.

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Notes

  1. We are especially grateful to the referee for his/her suggestion that we should focus more on the "window dressing" purpose of CSR reporting. In response, in addition to discussing this topic in the institutional background, we also conduct analyses to explore this possibility in “Does CSR reporting serves the "window dressing" purpose surrounding bond issuance?” section.

  2. It is important to note that most prior studies do not distinguish clearly between CSR performance and CSR information disclosure. Whether superior CSR performance will generate more benefits depends on the view of investors, which leads to inconsistent results reported in previous research (Ye and Zhang 2011; Goss and Roberts 2011; Qian et al. 2015). For example, some regard firms with superior CSR performance as having a more favorable risk profile, whereas others regard investments in CSR, such as corporate donations, as a waste of scarce resources. However, from the perspective of CSR disclosure, we consistently conclude that adequate information disclosure can decrease information asymmetry, which significantly benefits investors. In our study, we obtain CSR data from RKS, which evaluates firms’ CSR reports mainly based on information disclosure. Therefore, we develop our hypotheses based on information theory.

  3. Generally, issuing bonds begins by the borrower appointing the lead underwriter, who conducts due diligence and establishes non-price bond features such as amount, maturity, and covenants with the borrower and leaves the final price to be determined. At this stage, the lead underwriter would formally poll potential investors to gauge the level of coupon rate in the bond. This process is referred to as the “book-building mechanism”, and it has been adopted in selling public bonds, which is similar to the loan syndication process described by Bharath et al. (2011). Thus, this description of the bond issuing process makes our assumption of yield spreads being determined after all other non-price terms have been settled quite realistic.

  4. Notably, all Chinese corporate bonds are requested to be issued at their par value by the CSRC, which means that discount issuing is forbidden. Therefore, the coupon rate can accurately measure the real financing cost of bond issuer.

  5. SOEs are defined as those borrowers directly or indirectly owned or controlled by state asset management bureaus or other state-owned enterprises controlled by the central government or local governments (Chen et al. 2013).

  6. In an unreported analysis, we also use the methodology reported by Francis et al. (2005) and Ball and Shivakumar (2006) to measure accruals, and the results remain qualitatively unchanged.

  7. The index captures the characteristics of each regional institutional environment by analyzing the following aspects: (1) the relationship between the government and the markets, shown by factors such as the role of markets in allocating resources and the enterprise burden in addition to normal taxes; (2) the development of non-state business, as measured partly by the ratio of industrial output from the private sector to total industrial output; (3) the development of product markets, indicated by features such as regional trade barriers; (4) the development of factor markets, measured by indicators such as foreign direct investment (FDI) and mobility of labor; and (5) the development of market intermediaries and the legal environment, captured through measures such as the protection of property rights.

  8. We measure the institutional environment using the lagged marketization index at the end of the fiscal year before bond issuance. However, because Fan et al. (2011) provide data for the marketization index across various regions in China from 2001 to 2009 only, we use the regional marketization index measured in 2009 for bonds issued after 2010.

  9. We should note that firms’ misconduct can be divided into three categories: (1) the misconducts have been observed and disclosed by others, such as CSRC and Shanghai and Shenzhen stock exchanges; (2) the misconducts have been observed and proactively disclosed by firms themselves; and (3) the misconducts have occurred but they have not been detected. Because we observe only detected misconducts, we have to neglect the third category.

  10. We use one-year lagged CSR. The common practice in the RKS (a CSR rating agency, which will be discussed later) is actually to assemble the various social/environmental data at the end of each calendar year and compile them into spreadsheets at the beginning of the next year. Therefore, lagging the CSR variables helps ensure that the ratings for each firm were public knowledge at time t.

  11. Referring to the ISO26000, the RKS, an independent third-party rating agency, builds a comprehensive score scale index to measure the CSR disclosure quality of Chinese listed firms from their disclosed CSR reports. According to the statement of RKS, this index is built to raise awareness of CSR disclosure quality, promote more quantitative information disclosure of CSR reports, and assist academic research on CSR disclosure.

  12. In the latest edition (2012), RKS incorporates the fourth dimension, the industrial dimension, which receives the lowest (10 %) weight in the CSR index. Considering the consistency of CSR, we neglect the industrial dimension, that is, a CSR score is developed based on the former three dimensions.

  13. The CSMAR and Wind database were developed according to the international standards of databases to meet the requirement of academic research, and those databases were used in several recent studies. See, for example, Chen et al. (2013), Chen and Zhu (2013), and Gong et al. (2015).

  14. As suggested by Ge and Kim (2014), we use the lagged accounting variables, which offer two advantages. First, offering yield is more affected by past accounting information than by current accounting information, which ensures that accounting information is already available to bondholders at the time of bond issuance. Second, regression of current bond yields on lagged accounting information alleviates a potential endogeneity concern.

  15. However, after using regression analysis, we document that CSR disclosure is negatively correlated with the collateral requirement on the bond, which will be discussed later.

  16. We offer our many thanks to the referee for his/her valuable suggestion. As suggested, we report variance inflation factors (VIF) in Table 2. Moreover, according to Du et al. (2015), we also employ the condition indices to diagnose the multicollinearity. Non-tabulated results show that the largest intercept-adjusted condition index is far less than 10, suggesting that there is no serious multicollinearity in our empirical models.

  17. A referee provides insightful conjecture motivating us to do more descriptive analyses to address this concern in the Chinese corporate bond market.

  18. In 2007, the CSRC published corporate bond issuance rules that require the bond to be ranked above the investment grade when issued. Thus, our paper only includes bonds with credit rating ranging from AA− to AAA.

  19. The calculation is as follows: \(LogSpread_{CSR score3rd} - LogSpread_{CSR score1st}\,=\,\log \left( {\frac{{Spread_{CSR score3rd} }}{{Spread_{CSR score1st} }}} \right)\, =\, - 0.001 \times \left( {35.5 - 0} \right) = - 0.0355.\) Thus, \(\frac{{Spread_{CSR score3rd} }}{{Spread_{CSR score1st} }}\, =\, e^{ - 0.0355}\, =\, 96.5{\text{\% }}.\) This ratio reflects the effect on the bond spreads when firm’s CSR score moves from the first to the third quartile, that is, there is a 3.5 % decrease in Spread.

  20. We ignore any compounding effect here. Thus, the value of 1.302 million is essentially the lower bound of the amount of interest savings that may result from high-quality CSR disclosure.

  21. Prior research finds that non-state-owned CSR initiatives have a higher market valuation (Wang and Li 2015) and financial transparency (Qian et al. 2015) than government-controlled CSR initiators. To check whether the effect of CSR disclosure quality on the costs of corporate bonds is more pronounced when the firm is a non-state-owned (NSOE), we include in our regression models an interaction term of NSOE and a proxy for CSR disclosure quality. Although not reported for brevity, we find that the estimated coefficients of these interaction terms are not statistically significant, suggesting that our results on the relation between CSR disclosure quality and the costs of corporate bonds are insensitive to ownership type.

  22. We thank the referee for his/her suggestion that we should simultaneously consider the two dimensions of CSR: CSR disclosure and CSR performance. For example, some firms conduct good CSR activities and report them very clearly. In this situation, CSR disclosure and CSR performance will simultaneously affect the cost of debt. If we omit the CSR performance variable, the effect of CSR disclosure quality on the costs of corporate bonds will be biased.

  23. We acknowledge the referee’s comments on the validity of instruments. His/her important comments have encouraged us to invest greater effort in finding valid instruments.

  24. In the robustness test, we also use four non-price features (BondAmt, Maturity, Collateral, and Covenants) of a bond to construct the non-price term index. The results (not tabulated for brevity) show that the estimated coefficients on the CSR disclosure variables remain statistically negative.

  25. Principal component analysis (PCA) is a variable reduction procedure. It reduces a set of variables to artificial variables (called principal components) by parsing any redundancies among the observed set of variables while preserving most of the variance in the observed variables.

  26. According to Shen and Chang (2009), the classification of samples between CSR disclosure firms versus non-disclosure firms may not be a random process and is endogenously determined. Thus, we employ a propensity score matching (PSM) following Rosenbaum and Rubin (1983) to correct for the sample’s self-selection bias for a robustness check. The results (not tabulated for brevity) show that the estimated coefficient on the CSR disclosure variable (CSR dummy) remains statistically significant and qualitatively unaltered after adopting four matching specifications (Kernel matching, Nearest neighbor matching, Radius matching, and AIM matching).

  27. We thank the referee for his/her suggestion that we should use change model to mitigate the endogeneity issue. Since our sample observations are bond-years, the firm’s CSR disclosure data for a given year can be matched with multiple corporate bonds. Thus, when regressing the changes in the costs of corporate bonds on the changes in CSR disclosure quality, we may need to use two corporate bonds initiated in different years by the same firm. The untabulated results show that only fifteen firms satisfy the requirements. Even though the coefficient on ∆ Overall score is negative and significant at the 10 % level (−0.025 with t = −1.85), due to the small sample size, we cannot draw a robust conclusion after using change model. Further, among the fifteen firms, we only find that one firm (stock code: 600655) makes the first-time CSR disclosure before the secondary bond issuance but after the first bond issuance. The descriptive analysis (untabulated) indicates that after releasing CSR report, the spreads of the subsequent bond offering decreases. Even so, we cannot draw any conclusion based on a particular case. We thank the referee again who reminds us of this limitation.

  28. We thank the referee for his/her suggestion that we had better include both governance variables and their interaction terms in the regression.

  29. Even though the coefficients of interaction terms are marginal, the effect of institutional environment on the relation of CSR disclosure quality and the costs of corporate bonds is statistically significant, except for column (3). If we replace LogSpread with Spread as a dependent variable, the coefficients on the interaction terms are 0.001, 0.004, 0.001, 0.008, and 0.058, respectively. Those coefficients are statistically significant except for the coefficient of Content score × Market. Thus, our regression results are still robust.

  30. From another perspective, the result is similar to that in Table 6. Xia and Fang (2005) indicate that compared with other corporate governance mechanisms, such as ownership structure, independent directors, independent auditors, market for executives and mergers, and acquisitions market, the institutional environment is a more inherent governance mechanism. Thus, we draw a consistent conclusion that CSR disclosure is more valuable not only under weak corporate governance firms but also in a weak institutional environment.

  31. We acknowledge the referee’s valuable suggestion regarding the comparison between our finding and that of Williams and Barrett (2000).

  32. If CSR score and Technical score are used to measure CSR disclosure quality, we do not find that their differences are statistically significant.

  33. We greatly acknowledge the referee’s constructive suggestion which is very helpful to improve our research.

  34. In an unreported analysis, we also examine the relation between the proxies for CSR disclosure quality and bond amount. The dependent variable in the regression is the natural logarithm of bond offering amount measured in RMB hundred million. An unreported regression shows that there is no significant association between CSR disclosure quality and bond amount.

  35. We do not report the coefficients of other firm- and bond-specific characteristics in Table 10 for the sake of the brevity of analysis. These results are available upon request from the authors.

  36. In the bond prospectus, they also include event-related covenants and accounting-related covenants. However, event-related covenants are often written loosely by lawyers, using boilerplate language. They are designed to protect bondholders upon default by increasing the recovery amount and decreasing the possible losses, which usually serve a minor role in settling the coming default. For accounting-related covenants, these covenants are seldom used in public bond contracts because only 3.09 % of bond contracts include them (Gong et al., 2015). Therefore, we only consider financing-related and asset-sale covenants in this study.

  37. Financing-related covenants are restrictions on guarantees of indebtedness of other parties and obligations secured by pledge on property of the company. Asset-sale covenants usually specify that the firm should not sell any assets except for those required for normal business activities.

  38. In our sample, the lowest quality rating for the CSR disclosure is CCC.

  39. We acknowledge the referee’s comments on the high correlations among several variables.

Abbreviations

CSR:

Corporate social responsibility

CSRC:

China securities regulatory commission

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Acknowledgments

We are especially grateful to the section editor (Dr. Steven Dellaportas) and two anonymous reviewers for their many insightful suggestions and constructive comments. We thank the funding supported by the Ph.D. Programs Foundation of Ministry of Education of China (Grant no. 20130161110045).

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Authors and Affiliations

  1. Business School of Hunan University, Changsha, 410079, China

    Guangming Gong & Si Xu

  2. College of Finance and Statistics, Hunan University, Changsha, 410079, China

    Xun Gong

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  1. Guangming Gong
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  3. Xun Gong
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Correspondence to Si Xu.

Appendix

Appendix

See Table 12.

Table 12 Variable definitions
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Gong, G., Xu, S. & Gong, X. On the Value of Corporate Social Responsibility Disclosure: An Empirical Investigation of Corporate Bond Issues in China. J Bus Ethics 150, 227–258 (2018). https://doi.org/10.1007/s10551-016-3193-8

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