Corporate Social Responsibility and Cost of Financing – the Importance of the International Corporate Governance System

Research Question/Issue: Our study examines whether international corporate governance systems shape the relationship between a firm’s engagement in Corporate Social Responsibility (CSR) and their cost of financing (both equity and debt). Research Findings/Insights: Using a large international sample, our findings reveal that while the link between CSR performance and the cost of equity is negative in a shareholder-oriented system, this relationship is positive in a stakeholder-oriented system. Furthermore, the link between CSR performance and the cost of debt is negative for firms that are close to default in both systems. Theoretical/Academic Implications: Our study highlights the importance of considering the shareholder/stakeholder-orientation at the country level to explain the link between CSR performance and the cost of financing. Our findings help to explain and place into context the previous mixed findings on the relationship between CSR and the cost of equity and debt and add to the debate about whether CSR is beneficial or detrimental to corporate governance. Practitioner/Policy Implications: The analysis of how the country corporate governance system influences the effect of CSR performance on the cost of financing allows for a deeper understanding of how investors respond to CSR initiatives worldwide and offers managers,directors and policy makers context-specific recommendations. Our analysis also highlights the limitations of transferring insights regarding CSR from one corporate governance system to another.