Do creditors value corporate social responsibility disclosure? Evidence from Ghana

Abstract

Purpose Drawing on risk mitigation theory, this study aims to examine the link between corporate social responsibility (CSR) disclosure and the cost of debt financing (CDF). In particular, this paper seeks to determine whether firms with higher CSR disclosure scores have a lower CDF. Design/methodology/approach This paper uses a panel data analysis of non-financial Ghanaian firms listed on the Ghana Stock Exchange from 2006 to 2019. The CSR index constructed from firms’ annual reports and sustainability reports is used as a proxy for the extent of CSR information disclosures by Ghanaian companies. Findings The empirical results demonstrate that CDF is positively related to CSR disclosure scores. Besides, the results show that the levels of long-term debt increase with CSR disclosure in a highly risky industry. However, the finding does not meet the lenders’ expectations in terms of CSR attracting favourable debt financing sources. Research limitations/implications The research is based only on the quantity of the CSR information disclosed by Ghanaian companies and does not account for the quality of the CSR disclosures. The empirical model omits some control variables such as the age of the firm and external business conditions. The results should not be generalized, as the sample was based on three listed industries in Ghana for 2006–2019. Originality/value This study extends the scope of previous studies by examining the importance of CSR disclosures in financing decisions. More precisely, it focuses on the relatively little explored relationship between the extent of CSR disclosures and access to debt financing. Moreover, this study focuses on the rather interesting empirical setting of Ghana, which is characterized by its low level of CSR awareness. Achieving a better understanding of the effects of CSR information is useful for corporate managers desiring to meet lenders’ expectations and attract debt financing sources.

CSR Disclosures, CSR Awards and Corporate Governance as Determinants of the Cost of Debt: Evidence from Malaysia

“…However, now CSR_AWARDS is positive and significant (α= 0.006, p < 0.10), which implies that, when a company wins an award, the cost of debt increases, because the market may believe that the PLCs overinvested in CSR activities to gain legitimacy (Barnea and Rubin 2010). The results of our study seem to be consistent with Boachie and Tetteh (2021) in Ghana, who found that lenders tend not to rely on CSR disclosures as a mitigating risk factor. The main concern by lenders is the possibility of overinvestment by management in CSR investments by diverting scarce resources (Barnea and Rubin 2010).…”

The effect of environmental, social, and governance disclosure and real earning management on the cost of financing

“…This is a quantitative measure that indicates the degree of transparency and scope in reporting ESG data. For the COD, we follow Francis et al (2005) by calculating it as the percentage of the interest expense in year t divided by the average interest‐bearing debt during year t (Boachie & Tetteh, 2021; Yeh et al, 2020). For the COE, we use the CAPM model of Sharfman and Fernando (2008), which considers the expected return on equity as an indicator of the cost of capital.…”

“…MTB measures the market valuation of the company relative to book value. Companies with high MTB could be expected to have lower financing costs to the extent that they present additional value over book value, which implies lower financial risk (Bhuiyan & Nguyen, 2019; Boachie & Tetteh, 2021; Erragragui, 2018; Hasan et al, 2017). ROA measures are included because default risk is lower for profitable firms and could reduce borrowing costs and the required rate of return (Arena, 2018; Boachie & Tetteh, 2021; Erragragui, 2018).…”

“…Lenders and long‐term investors appreciate companies with better ESG disclosure, which could have an impact on lower financing costs related to the COD and COE (Bhuiyan & Nguyen, 2019; Du et al, 2017; Hamrouni et al, 2019; Raimo et al, 2021; Suto & Takehara, 2020). On the other hand, short‐term investors or lenders are likely to value ESG disclosure negatively when deciding to invest or lend, applying exclusively financial criteria (Boachie & Tetteh, 2021; Magnanelli & Izzo, 2017). In this case, ESG disclosure would increase the COD and the COE.…”

The Influence of Corporate Social Responsibility on the Financial Performance of Firms in Ghana: The Moderating Role of Board Independence and Diversity

“…The assessment of CSR involved the creation of a CSR reporting index. To formulate this index, initial references were made to the items and checklists utilized in prior research covering specific themes (Boachie & Tetteh, 2021;Barauskaite & Streimikiene, 2021). The CSR disclosure items were extracted from the annual reports of companies.…”