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2011/2 (Vol. 32)

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Pages 9 - 52 Next



This article focuses on the link between a firm’s corporate financial structure and its social rating. We propose a new general model showing that less socially engaged firms issue more debt in order to avoid the financial market penalties experienced by non-socially responsible firms. With growing investor interest in social responsibility, these non-SR firms bear a higher financing cost when issuing equity capital. However, they can issue debt at the same cost as their SR counterparts given that banks do not take into account SR criteria in their interest rate determinations. Debt will thus be preferred by non-socially responsible companies while socially responsible firms take advantage of issuing equity capital. We tested the main implications of our model on the European market. Our sample consists of 562 firms which were rated by the Vigeo rating agency from 1999 to 2007. We use regression methodology to study the link between a firm’s debt ratio and its social rating. Our regressions used for explaining firm debt ratios include various control variables (as explanatory variables) such as bankruptcy costs, tax rates, agency and adverse selection variables. Our results show that European firms with a lower social rating tend to exhibit a higher or increasing debt ratio over the period 1999-2007. In particular, when considering the top and bottom quartile firms in term of their social rating, a firm’s social rating has a negative and highly significant influence on its debt ratio. Moreover, we get a significant and negative link between the debt ratio variation and each social dimension rating, except the environmental and the community involvement ones. Globally, our results seem to show that debt financing is a way for firms with low social commitment to avoid the equity market penalty.


  1. Introduction‡
  2. The Model
    1. Model Hypotheses
      1. Firm Characteristics
      2. Bank Characteristics
      3. Investor Characteristics
    2. Investor Equilibrium
    3. Equilibrium for Entrepreneur j
      1. Insurance premiums and bankruptcy costs
      2. Optimum Debt
      3. Cost of Capital
  3. Evidence from European Data
    1. Data and Hypotheses
      1. Data
      2. Testable Hypotheses
      3. Variables
    2. Results
      1. Social Rating and the Cost of Debt
      2. Social Rating and the Debt Level
      3. Social Rating and the Evolution of the Debt Policy
      4. Detailed Analysis for Each Social Rating Dimension
  4. Conclusion

To cite this article

Isabelle Girerd-Potin, Sonia Jimenez-Garces, Pascal Louvet, “ The Link between Social Rating and Financial Capital Structure ”, Finance 2/2011 (Vol. 32) , p. 9-52
URL : www.cairn.info/revue-finance-2011-2-page-9.htm.

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