Abstract
This study examines the relationship between firms’ corporate social responsibility (CSR) or environmental, social and governance performance and bondholders’ returns. We argue that bondholders are fixed claimants who only value firms’ CSR performance in relation to firms’ risks. We hypothesize that firms with CSR concerns or controversies tend to increase firms’ default risk which would adversely affect bondholders’ returns. We also argue that CSR investments (CSR strengths) increase the opportunity for residual claimants (i.e., shareholders) to shift the investment risk to the bondholders. Hence, CSR strengths represent higher asset substitution risk or risk-shifting. We argue that bondholders’ returns and the stakeholders’ interests are aligned when firms have CSR concerns or controversies but their interests are not aligned for CSR strengths since CSR strengths increase asset substitution risk for the bondholders. The alignment and misalignment between bondholders and stakeholders’ interests are moderated by bond maturities and are affected by a negative shock in the credit market. Analysing a sample of 5240 bonds in a portfolio setting from 425 U.S. companies during the pre-green bond era (2001–2014), we find evidence to support our hypotheses.
