Corporate Social Responsibility and Bond Volatility

Abstract

This paper examines the effects of corporate social performance on bond volatility. We find a strong positive relationship between social performance and volatility after controlling for bond characteristics and firm fundamentals. The empirical results show that the effect concentrates on social performance strengths and is robust to alternative measures, alternative sample periods and endogeneity controls. The main mechanism through which CSR spending affects bond market uncertainty is overinvestment inasmuch as social performance-related spending raises bond investor concerns. In addition, we find that the effect is more pronounced for firms with higher CEO risk-taking incentives and more active tax avoidance practices.

Keywords: Bond volatility, corporate social responsibility, overinvestment, CEO risk taking, tax avoidance

JEL Classification: G10, G12, G30, G32, M14