Journal of Business Ethics (2010) 96:117134
DOI 10.1007/s10551-010-0452-y
Corporate Social Responsibility:
Is it Rewarded by the Corporate
Bond Market? A Critical Note
ABSTRACT. The question of whether corporate social
responsibility (CSR) has a positive impact on firm value
has been almost exclusively analysed from the perspective
of the stock market. We have therefore investigated the
relationship between the valuation of Euro corporate
bonds and the standards of CSR of mainly European
companies for the first time in this article. Generally, the
debt market exhibits a considerable weight for corporate
finance, for which reason creditors should basically play a
significant role in the transmission of CSR into the val-
uation of financial instruments. Given that socially
responsible firms are often regarded as economically more
successful and less risky, they should have lower risk
premia. The results of the empirical analysis, however,
reveal that based on an extensive data panel the risk
premium for socially responsible firms according to the
classification by SAM Group was ceterius paribus higher
than for non-socially responsible companies. However,
only one case of the models investigated was weakly
significant. Thus, largely the relationship has to be clas-
sified as marginal; so CSR has apparently not yet been
incorporated into the pricing of corporate bonds.
KEY WORDS: corporate social responsibility, corpo-
rate citizenship, sustainability, triple bottom line, social
performance, credit spreads, corporate bond evaluation
Introduction
The interest in corporate social responsibility (CSR)
has increased almost explosively in recent years. One
reason for this development is possibly the fact that
even profit-oriented companies, faced with global
climate changes, scarce resources and growing social
tensions resulting from increased wealth disparity,
are increasingly realizing the social necessity of
Springer 2010
Klaus-Michael Menz
developing holistic aims and objectives. In this
context one often speaks of focusing on the so-called
triple bottom line, i.e. the contemporary consid-
eration of economic, social and environmental
aspects in the formulation of corporate guidelines. For
others, the growing corporate attention to social and
environmental factors simply is an inevitable conse-
quence of many years of excessive focus on short-term
profit maximization (Korner, 2005). Another reason
for the increased interest in sustainability issues is the
assumption of many investors that a high standard of
CSR should be reflected in a superior long-term
development of the company value.
In the meantime numerous studies have been
published which approach the relationship between
CSR and business success from different angles. The
focus was often the question of whether a socially
responsible management approach leads to an
increase in corporate operating income, and in par-
ticular to higher stock prices (Griffin and Mahon,
1997; Margolis and Walsh, 2003; Orlitzky et al.,
2003). But also the influence of CSR on a number of
company-specific risk ratios (for example, earnings
volatility, leverage or stock beta) has been analysed as
the meta-study by Orlitzky and Benjamin (2001)
demonstrates. Recent studies have also examined
whether a link exists between CSR and cost of capital
(Bassen et al., 2006; Di Giulio et al., 2007). How-
ever, the influence of CSR on the valuation of credit
instruments has not to our knowledge been
researched in any study as yet. This article aims to fill
this gap.
The debt market is highly important for the
external financing of corporations (ECB, 2007).
Therefore, in principle, creditors have the potential
to provide for a transmission of CSR in the valuation
118 Klaus-Michael Menz
of credit instruments through their business activi-
ties. The question which arises is whether this
potential is actually put into practice. As socially
responsible companies are generally considered to be
less risky (Soppe, 2004), the lenders have an incen-
tive, however, to incorporate CSR in their assess-
ment. Consequently, a high degree of managerial
responsibility, ceteris paribus, should be reflected in
a lower risk premium. As the availability of data on
individual terms of bank loans (maturity, cost, etc.) is
quite limited, we will assess the relationship between
CSR and debt risk premiums using the example of
the thriving market for Euro corporate bonds
(Deutsche Bundesbank, 2004).
The remaining article is structured as follows.
Following a definition of the concept of CSR we
first discuss in section Aspects of the corporate
social responsibility theme: a general overview why
companies should theoretically in addition to
economic factors also incorporate social and
environmental factors and how CSR should affect
the corporate success in practical terms. In section
Corporate social responsibility and credit spreads:
transmission and hypotheses, the transmission
mechanism between CSR and credit markets and
possible evaluation relationships between corporate
bonds and socially responsible business policy are
discussed. Given that CSR is a very complex issue
that is difficult to measure, we deal with this aspect
in more detail in section Measurement of corporate
social responsibility. In section Empirical analysis companys management given the difficult perfor-
the empirical analysis is conducted. First, the data-
base used and the control variables are presented,
then methodological aspects are discussed and finally
the results are interpreted. This article concludes
with a summary and issues for future research in
section Conclusions and implications.
Aspects of the CSR theme: a general
overview
Corporate social responsibility is defined as a
corporate policy that includes social, ethical and
ecological aspects. According to the European
Commission (2002), it is a concept by which com-
panies voluntarily integrate social and environmental
issues in their business activities and in their inter-
actions with various stakeholder groups. CSR is
pursuant to Renneboog et al. (2008) the sum of
ecological efficiency, good corporate governance
and good relations with the various stakeholders of
the company.
In the Anglo-Saxon language area, the expressions
CSR, corporate citizenship, sustainability, triple
bottom line and social performance are often used
synonymously (Mercer, 2007). Since, however, no
single definition of CSR exists, neither in existing
literature nor in language use, divergent interpreta-
tions of the terms are common (Bassen et al., 2006).
The linguistic and partly conceptual diversity of the
CSR idea has led to increased confusion amongst the
general public (Margolis and Walsh, 2003), which is
probably not conducive to the dissemination of the
concept and recognition of its far-reaching impor-
tance in society.
According to the traditional principle of ratio-
nality, companies and their top managers should
only pursue one objective under the shareholder
value primacy, namely that of profit maximization
(Jensen, 2001; Rappaport, 1986). A consideration of
social or environmental issues would only produce
unnecessary costs which would conflict with the
target of an increase in share price. Moreover, a
multidimensional objective function, which aims to
maximise not only the economic but also the social
value of the company, would hamper the efficient
design of management contracts and thus signifi-
cantly reduce the performance incentives of the
mance measurement (Tirole, 2001).
Nevertheless, non-traditional behavioural models
are moving away from this neo-classical perspective,
including the assumption of a one-sided human
utility structure with the model of a strictly selfish,
profit-oriented homo oeconomicus and now also
take into account social, emotional and ethical
aspects as beneficial factors in the target system of a
company (Cornell and Shapiro, 1987). Various
articles (Fehr and Gachter, 2000, 2002; Guth et al.,
1982; Trivers, 1971, 1985; White, 2004), for
example, have shown that social and ethical values
also affect economic behaviour (fairness, reciprocity)
and that subjective utility often also depends on the
utility of others and all, respectively (altruism).
Moreover, the violation of social norms, for example
the discrimination of minorities in the workforce or
severe air pollution, can cause a significant loss in
 Corporate Social Responsibility: Is it Rewarded by the Corporate Bond Market?
reputation for the company and its managers
(Akerlof, 1980), which can, irrespective of any
financial costs (litigation, fines), negatively affect
even basic human emotions such as pride and self-
esteem (Elster, 1998). From the perspective of Fama
and Jensen (1983), public reputation even represents
the main motivating factor for managers. Further-
more, the aversion against having to regret (at least
in part) a decision (regret aversion) can cause an
undesirable state of cognitive dissonance that man-
agers as well as most economic agents usually want
to avoid (Festinger, 1957, Kahneman and Tversky,
1982). This increased mental stress for the manage-
ment, in particular, stems from the negative conse-
quences of a deliberately chosen alternative. For
example, the investment in an older production
technology is often initially cheaper, but it generates
increased environmental pollution and may thus lead
to public protests at a later date. In addition, other
stakeholders of the company (including shareholders,
customers, employees, suppliers, government, etc.)
could exert additional pressure on the management
and thus reinforce the state of dissonance.
Amongst the intellectual roots of a sustainable,
socially responsible corporate policy, the behavioural
theory of the firm by Cyert and March (1963) is of
significance, which advocates a more realistic char-
acterization of this form of organization. According
to Winter (1964), the work of Cyert and March
(1963) represents a scientific revolution, which
expressly questions the mean whilst dominant theory
of the profit-maximizing company. This alternative
firm theory includes as the main constituent ele-
ments, amongst others, the assumptions that com-
panies consist of political coalitions of individuals
and groups with time-varying and sometimes
conflicting needs resulting in multidimensional
objectives of the firm that the economic agents
involved are boundly rational in the sense of Simon
(1957), and that the decision-making process espe-
cially consists of finding satisfactory, instead of
optimal solutions for problems (satisfying principle;
Simon, 1955). The behavioural theory of the firm
stands in marked contrast to the neoclassical
approach, which presumes profit maximization, sets
unrealistic assumptions, and which describes the
organization as a given bundle of options for action,
in which the alternatives and their associated con-
sequences are well known, meaning that the best
119
alternative must be identified through compensatory
evaluation of all options (optimization) alone.
The practical mechanism leading to better eco-
nomic development of socially responsible compa-
nies in comparison to other firms is as complex as
intuitively obvious. Amongst other things, CSR
might attract qualified employees, who are moti-
vated and remain with the company for longer
periods (Phillips et al., 2007, p. 6). In this context,
the above-mentioned fairness aspect plays a very
important role. As contractual arrangements for
employment contracts are typically incomplete,
because the wages are usually fixed, but the job
performance is determined within certain limits
through the commitment and the input of individual
workers, working morale has great relevance for the
success of the company. Good working morale, in
turn, is exhibited by employees if they feel that they
are fairly treated and remunerated (Fehr and Falk,
1999). Moreover, socially responsible enterprises
have lower costs due to less production-related
environmental damage and possible litigation, which
in turn improves the reputation and enhances the
brand value. Furthermore, such companies often
maintain good relations with public institutions and
other organizations, therefore creating a positive
moral capital with insurance-like effects that has a
positive impact on the value of the company
(Godfrey, 2005). Overall, long-term competitive
advantages could be achieved, also because cus-
tomers are often more loyal and thus higher earnings
and/or margins are attainable.
However, the consideration of social and envi-
ronmental factors is also directly associated with
higher costs, because, for example, extensive health
and safety measures or modern, environmentally
friendly production facilities are expensive. This
could result in a decrease in profitability and com-
petitiveness of a company. As the side effects caused
by entrepreneurial activity (for example, air and
water pollution, health impairments), are often not
or not fully borne by the polluter (imperfect inter-
nalisation of external effects), less responsible com-
panies could benefit economically at the expense of
society. Therefore, sceptics assume that socially
responsible companies may have a poorer perfor-
mance than firms that only concentrate on short-
term economic success (Preston and OBannon,
1997; Shleifer, 2004). This assumption is supported
120
by results of interviews with various stakeholders of
companies, whereby, for example, many share-
holders and customers are hardly interested in the
topic of CSR (Steger et al., 2007). Moreover,
studies show that many people reveal a very
ambivalent attitude towards public goods. According
to Kahneman et al. (1998), individuals often show
generally positive attitudes in experiments, for
example, towards the preservation of rare species or
the preservation of intact ecosystems, but it is not a
matter of economic preferences, because most peo-
ple only maintained their positive attitude as long as
the conservation of such public goods costs little or
nothing. Moreover, many consumers seem to show
no willingness to pay more for products from socially
responsible businesses than for comparable normal
products. Against this background, it seems quite
questionable whether socially and environmentally
oriented companies can in fact achieve higher eco-
nomic success because of their reputation and loyal
customers.
In summary, according to the above discussion it
is debatable whether the corporate objective func-
tion includes social, ethical and environmental
factors in addition to economic factors and whether
high CSR standards are reflected in economic
success. Ultimately, these and similar questions can
be answered only empirically.
Corporate social responsibility and credit
spreads: transmission and hypotheses
Following the preceding background discussion, the
next step will draw up concrete hypotheses about
the relationship between CSR and credit spreads. In
order to show the special importance of bond
investors as market disciplining forces, who can
influence the CSR of companies by their actions, we
will first discuss the possibilities and limitations of
these and other transmission mechanisms by the
capital market.
The transmission of corporate social responsibility
by the capital market
Amongst the traditional transmission channels for
CSR are first socially responsible investments (in
Klaus-Michael Menz
shares) (Heinkel et al., 2001) and secondly share-
holder activism (Smith, 1996). By investing in
companies with high CSR standards and/or an
avoidance of sin stocks (Hong and Kacperczyk,
2005), investors can indirectly influence the behav-
iour of companies. By focusing on socially respon-
sible companies, their stock prices should ceteris
paribus increase faster than those of other companies.
This increases the (relative) cost of equity for the less
responsible companies, thus the company could be
pushed to adhere to higher CSR standards. Since
according to Eurosif (2006) socially responsible
investments represent only about 1015% of all
European fund investments (public and special
funds), the interference potential is, however, only
moderate from a quantitative perspective. Moreover,
according to the pecking order theory, the majority
of companies only relatively seldom use the stock
market as an external source of financing (Myers and
Majluf, 1984); so potential pressure due to increased
capital costs will only sporadically be effective. If
companies raise additional equity capital, then this
step as has been empirically proven is taken
almost exclusively after a very positive stock price
development, in other words when the risk appetite
amongst investors is high and the capital costs are
low (Baker and Wurgler, 2002). Especially in the
final stages of bull markets, investors often behave
irrationally, because they neglect fundamental factors
whilst evaluating, demand too low risk premia and
all too often follow the herd instinct (Shiller, 2000).
The possibilities of exerting pressure on companies
via higher (equity) capital costs therefore have to be
considered to be limited.
As socially responsible (equity) investment per se
can be judged as being ineffective for the reasons
described above, shareholder activism is regarded as
being a more appropriate transfer mechanism
(Johnsen, 2003). Through active participation in
general meetings investors can generate a broader
public awareness of CSR issues and possibly achieve
(through persuasion) changes in business practices.
By coordinating with other stakeholders and bun-
dling and exercising voting rights, a significant
influence on the management could be exercised
(Grundfest, 1993). However, the existent results on
the success of an active shareholder strategy with a
few exceptions (Monks and Minnow, 1995; Smith,
1996) also tend to be sobering (Haigh and
 Corporate Social Responsibility: Is it Rewarded by the Corporate Bond Market?
Hazelton, 2004). In this context Heinkel et al.
(2001) confirmed that a much higher number of
socially responsible stock investors is needed to
exercise substantial influence over the management.
This means that at least 25% of such investors are
necessary, but according to the data from Eurosif
(2006) the actual number is currently far lower.
In contrast, the potential impact of the credit
market on a company is much higher. First, the
balance-sheet debt of European companies is gen-
erally much higher than the equity (ECB, 2007).
Lenders therefore have the quantitative potential
and as discussed below also the incentive to
convince companies to exercise responsible behav-
iour (Scholtens, 2006). For example, leading banks
nowadays view environmental and social issues as
real risk variables that may affect their creditors as
well as their own performance. This has led to the
creation and adoption of the Equator Principles,
which aim to incorporate environmental and social
standards into project lending practices of banks
(Esty et al., 2005).1 In addition, banks like HSBC
(2009) also see business opportunities in environ-
mental or social issues (i.e. acting as an adviser for
customers capital spend or banks own investments
in innovative projects). Secondly, companies need to
revert to the debt market for external finance more
often, because both the maturity of bank loans and
bonds in general limited. If a company does not fulfil
the CSR requirements, then it risks being exposed
to market discipline. The lenders could namely
refuse to extend expiring loans and/or to buy new
bonds of the issuer. In order to not jeopardize
regular refinancing, the managers are forced to meet
the needs of creditors adequately. Thirdly, even
non-public companies (partnerships, companies
without a public stock listing) take on debt. For this
reason, the potentially disciplining effect of the
credit market reaches far more companies than the
stock market. Fourthly, the Euro credit market is
dominated by institutional players. Whilst banks
especially do the traditional lending business and act
as intermediary between supply and demand of
capital by size and maturity transformation, invest-
ment companies, insurance firms and pension funds
play an essential role as buyers in the market for
corporate bonds. As the corporate bond market is
characterized by decentralized OTC dealing (over
the counter market), where the majority of trans-
121
actions are executed bilaterally amongst institution-
als via the phone (Schultz, 2001), direct
participation of private investors in this market can
also be largely excluded. The very small direct
influence of private investors in the debt market has
two implications. First, private investors trade on
the basis of less and lower quality of information
and often act more irrationally than institutional
investors (Barber and Odean, 2000; Locke and
Mann, 2005), which is why they are probably much
less able to take a very complex issue such as CSR
into account efficiently in investment decisions.
Thus, the low market participation of private
investors increases the probability that CSR is
incorporated as an influence factor in the valuation
of financial instruments. On the other hand, we
know from the stock market that here individuals
play a greater role as direct investors and therefore
the owners rights are often more widely dispersed.
This tends to increase the freedom for the man-
agement (to ignore external demands), because a
high free float reduces the incentive to control and
discipline the corporate management (Shleifer and
Vishny, 1986). Since institutional investors have a
high significance in credit markets because of their
size and concentration, the influence by the lenders
should generate more pressure potential.
The influence of corporate social responsibility
on credit spreads
The credit spread of a corporate bond or another
debt instrument represents a compensation for the
risks which the investor additionally incurs in
comparison to risk-free investments (e.g. Treasury
bonds). Credit risk, liquidity risk and systematic risk
number empirically amongst the main components
of this risk premium (Nelles and Menz, 2007).
However, almost all investigations of credit instru-
ments reveal that these evaluation factors are not
fully able to explain the level of actual credit spreads
(Amato and Remolona, 2003). Thus, there must be
more risks, which are priced by the market partici-
pants.
Empirical results of Bollen et al. (2005) identify
fraud or unethical behaviour by the management as a
dominant factor of influence for the collapse of large
European firms, which is predominantly due to
122 Klaus-Michael Menz
ineffective corporate governance mechanisms. In
addition, the largest and most prominent case of
insolvency in the Euro corporate bond market, the
Italian dairy company Parmalat SpA, was ultimately
caused by bad corporate governance, which made
fraudulent mismanagement, accounting irregularities
and deficient firm control possible (Buchanan and
Yang, 2005). Therefore, one of these missing risk
factors should be corporate governance. Indeed,
Nelles and Menz (2008) show that, in addition to
the above-named factors, the corporate governance
quality has an influence on the risk premium of
credit instruments of European companies, although
the evidence, however, is very weak. As corporate
governance is only a part of CSR, one can assume
that for other aspects of socially responsible firm
behaviour a greater impact may be proven. In
addition to environmental policy, this applies espe-
cially to relations with the various stakeholders of a
company, which mainly means that the respective
interests of the stakeholders are adequately consid-
ered and protected.
The lenders belong to the important primary
stakeholders of a company just as shareholders or
employees do. As the ability of a company to create
sustained added value is determined mainly through
(good) relations with its essential stakeholders (see
Post et al., 2002, p. 9), good companies with their
long-term orientation will promote fair and open
interaction with its lenders that will be rewarded by
them presumably with lower yield requirements. In
particular, the bondholders of a company are affected
by specific principal-agent conflicts because manag-
ers generally have an incentive to behave opportu-
nistically to the benefit of shareholders who,
ultimately, are paying them. Under certain condi-
tions, the equity providers benefit from the execu-
tion of very risky investment projects, because they
harvest most of the gains if the project is successfully
completed, whilst a failure would even be to the
detriment of the creditors. Generally speaking, it is
about a possible wealth transfer from bondholders to
shareholders (Alexander et al., 2000).
Moreover, empirical studies show that environ-
mental factors significantly affect the valuation of
companies. For example, Klassen and McLaughlin
(1996) reveal a decline in the share price after
environmental disasters, which in addition to
the direct and indirect-cost items (customers and
reputation loss, expenses for the elimination of
environmental pollution, etc.) that lower the com-
panys profits, is possibly due to an increase in
company-specific risk premium. Derwall et al.
(2005) also discover that eco-efficient companies
have better stock returns than firms that consume
more resources and/or produce more waste in their
business activities. However, environmental issues
are also important for bondholders and creditors. For
instance, heavy litigation claims due to asbestos
contamination led to a massive deterioration of the
issuer credit rating of the SwissSwedish engineering
firm ABB from investment grade (AA-/Aa3) to
junk (B+/B1). Furthermore, there are banks that
became legally responsible to pay for the clean-up on
foreclosed property which had been contaminated
by borrowers (e.g. in the 1980s and 1990s US-based
Maryland Bank & Trust and Fleet Financial).
Accordingly, wasteful companies should possess a
higher risk premium than firms with high eco-
efficiency or low environmental issues.
Overall, socially responsible firms can be regarded
as less volatile and risky (Di Giulio et al., 2007;
Orlitzky and Benjamin, 2001; Spicer, 1978). As
these companies are less heavily burdened by the
negative financial consequences of their business
activities (for example legal costs, damages, fines,
conditions), their operating results often prove to be
more stable which is usually reflected in a less vol-
atile stock price. Systematically lower operational
and financial risks should, ceteris paribus, lead to
lower yield claims by the lenders and hence lower
risk premiums. Theoretically, this conclusion is also
substantiable with the help of Mertons structural
credit risk model (1974), because in this approach a
reduced volatility of the firm value also leads to a
lower risk premium.
On the basis of these considerations, we derive
the hypothesis that companies with a socially
responsible corporate policy should have, ceteris
paribus, lower credit spreads than those that are
following less holistic guidelines.
Measurement of corporate social
responsibility
Many studies on the relationship between social and
financial development of firms face the problem of
 Corporate Social Responsibility: Is it Rewarded by the Corporate Bond Market?
how this can be measured (Margolis and Walsh,
2001; Scholtens, 2008). Due to complex interrela-
tions and numerous elements of a good and
holistic corporate policy, CSR is not easy to assess.
Furthermore, CSR screens are inherently subjective.
In addition, the collection of relevant data is asso-
ciated with very high efforts. Therefore, from a
practical point of view the use of specialized external
services is required in order to evaluate the CSR.
One of the worlds first rating agencies, special-
izing on the analysis and assessment of corporate
social performance, is Kinder, Lydenberg and
Domini (see Sharfman, 1996). The selection pro-
cedure of Kinder, Lydenberg and Domini (KLD)
takes the multidimensionality of CSR into account,
including factors such as social engagement, corpo-
rate governance, diversity, employee relations,
environment, human rights and product character-
istics on the valuation list. As part of the evaluation
positive and negative factors are listed separately for
each individual topic, so that the strengths and
weaknesses of a company with respect to CSR
become more recognizable. A disadvantage of the
extensive KLD database is, however, that it primarily
contains information about U.S. corporations.
Moreover, the calculation methodology has been
criticized because almost all factors have the same
weight (see Di Giulio et al., 2007, p. 9). This
complicates the intersectoral comparability, as the
different themes do not have the same importance
across all industries (see Steger et al., 2007). Obvi-
ously, in a sector comparison social, societal and
environmental aspects are of differing relevance. For
example, in the energy and chemical industry
environmental issues play a more important role,
whereas in the textile and toy industry (e.g. child
labour) as well as in food and beverage manufac-
turing (e.g. fair remuneration of farmers in devel-
oping countries) social factors often come first.
Due to the limitations of the KLD rating, the so-
called Corporate Sustainability Assessment of Sus-
tainable Asset Management Research (SAM) is used
in this study to measure the firm-specific quality of
CSR (see www.sam-group.com for further detailed
information about the research process). The SAM
Group is a financial research company based in
Zurich, which has focused on socially responsible
investments and the evaluation of CSR since 1995.
Since its introduction in 1999, the SAM Research
123
has also determined the relevant investment universe
for the first global sustainability stock index, the
Dow Jones Sustainability Index (DJSI World).
SAM Researchs selection of the company is based
on the best in class approach. Here the leading stock
companies in every industry are identified on the
grounds of numerous economic, environmental and
social criteria, assessing issues such as corporate gov-
ernance, risk management, climate change mitiga-
tion, supply chain standards and labour practices and
taking sectoral specifics into account when selecting
for the investment universe. The three groups of
criteria each account for 33% in the valuation. The
overall verdict is essentially made up to equal pro-
portions of general and industry-specific factors,
which in total include approximately 130 individual
criteria. However, as not all sectors are affected by the
same level of economic (e.g. corruption), environ-
mental (e.g. eco-efficiency) and social (e.g. employ-
ment conditions) problems; this is adequately
considered when conducting the industry analysis.
The sustainability assessment is carried out based on
a comprehensive questionnaire, which is completed
by the company that is to be evaluated. In order to
verify the obtained data SAM uses direct corporate
information that the analysts get via personal inter-
views and company visits in addition to public sources
(annual reports, company websites, and image bro-
chures). All data are stored in a database and regularly
reviewed by an accounting firm. In most cases, SAM
reviews a CSR evaluation once a year.
From various studies it is known that the quan-
tification of CSR is very difficult. For this reason the
measurement of the relationship between CSR and
various financial variables (security price develop-
ment, price volatility, risk premiums) can be signif-
icantly affected (McWilliams and Siegel, 2000). For
this reason, SAM undertakes complex evaluation
procedures by which, with the assistance of external
experts (universities), the meaningfulness of the
evaluation results should be ensured.
The results of the SAM sustainability analysis are
documented in various rankings. In this study we
revert to the Investment List, which includes the
basic investment universe of SAM with about 500
worldwide leading sustainable companies. However,
this list does not allow further differentiation
between the listed firms, because there are no scores
or rank numbers indicated. Therefore, it can only be
124 Klaus-Michael Menz
judged in a binary manner, which means that a
company is either socially responsible (it is on the
list) or non-socially responsible (it is not on the list).
Empirical analysis
In the next step of the investigation, we will
examine the hypothesis developed in section
Corporate social responsibility and credit spreads:
transmission and hypotheses that companies with a
socially responsible corporate policy, should, ceteris
paribus, have lower credit spreads than those that
pursue less holistic guidelines.
Data and control variables
Our data panel consists of 498 bonds with observed
values over 38 months. After the elimination of
outliers and the deduction of missing values, a total
of 16,957 observations remain for the analysis. The
sample used includes all fixed-income securities in
the Merrill Lynch Non-Financial Corporate Bond
Index (ticker symbol: EN00) that are constituents at
the end of May 2006.2 All investment grade bonds
(BBB-/Baa3 or better) with remaining maturities of
1 year and longer and an issuance volume of EUR
100 million and more are enclosed in this index,
whereas the sample actually only contains bonds
with a nominal value of more than 250 million
Euros (sample median: 600 million par value). With
the exception of some hybrid issues, the majority of
securities are senior bonds with no extra features,
such as call options or interest deferral clauses. This
universe was observed between the end of July 2004
and the end of August 2007 over a historical period
of 38 months. All monthly bond data used in the
analysis (features, credit spreads, modified duration,
credit rating, sector membership) are taken from the
Merrill Lynch index system.
When econometrically measuring the relationship
between CSR and financial development specifica-
tion problems often arise because CSR indicators
frequently correlate with other firm ratios and thus
the influence of CSR on the performance is often
artificially distorted upwards (McWilliams and
Siegel, 2000). Besides the selection of an appropriate
CSR indicator, it is therefore necessary to control
for alternative influences on the credit spread.
McGuire et al. (1988) argue, for example, that so-
cially responsible companies are generally charac-
terized by a low debt level which affects the risk
profile significantly. In this context Ederington and
Yawitz (1987) demonstrated that especially hard
financial ratios for financial and business risk of a
firm (for example, debt ratios, interest coverage
ratio, profitability) along with soft criteria such as
management quality are key determinants of credit
ratings. Credit ratings of the prestigious agencies
Standard & Poors, Moodys and Fitch are in turn
the traditionally predominant indicators of credit risk
(Crouhy et al., 2001). Even more, credit agencies
provide a public certification effect that makes
investors reluctant to lend if an issuer has no rating at
all (Sufi, 2009). Consequently, when estimating the
empirical relationship the creditworthiness of the
company has to be explicitly taken into account, in
order to make sure that the CSR indicator ultimately
measures not only the credit risk.
Empirical studies also show that the various
industry sectors at the corporate bond market have
different risk premiums despite identical ratings
(Longstaff and Schwartz, 1995; Nelles and Menz,
2007). As the respective industrial sectors have dif-
ferent structural characteristics and cyclical sensitiv-
ities, the systematic risks of the sectors vary as do the
corresponding risk premiums. A consideration of
sector effects is also advisable in view of findings of
the CSR Research that the social, societal and
environmental issues in different sectors are of dif-
fering relevance (Scholtens, 2008; Steger et al.,
2007). Thus, sector effects are controlled for by the
inclusion of industry dummies.
Bonds are also subject to the systematic interest
rate risk, because their prices may vary depending on
movements of market yields (Fama and French,
1993). In accordance with the liquidity preference
theory (Hicks, 1939) investors require an additional
premium for this monotonically with the maturity of
the bond increasing risk. In principle, this applies
both to the yield curves of (credit) risk-free gov-
ernment bonds (Drakos, 2001) as well as risky bonds.
For corporate bonds with an investment grade
rating, Fons (1994) and Kao (2000) amongst others
show that the risk premium as measured by the
credit spread is a positive function of the bond
maturity. In order to reduce the distorting influence
 Corporate Social Responsibility: Is it Rewarded by the Corporate Bond Market?
of different maturities on the valuation, the modified
duration is used in the analysis as a control variable
for the interest rate risk. Basically, the higher the
modified duration is, the more sensitively the bond
prices react to variations in interest rates (Fong and
Fabozzi, 1985).
Finally, the influence of company size as a factor has
to be considered because it is likely that larger firms
have more resources to invest in CSR and are able to
afford CSR, respectively (Di Giulio et al., 2007). As
this aspect, however, is already reflected in credit rat-
ings, because larger companies tend to receive better
credit ratings, the inclusion of an additional indicator
for the size of the company is not mandatory.
Methodology and results
After considering the application requirements three
different panel econometric methods are in principle
available for the empirical analysis (pooled ordinary
least squares (OLS), fixed effects and random effects
model, see Baltagi, 2001, for details). With the aid of
these and taking the control variables into consid-
eration, we can examine whether a significant cor-
relation exists between credit spreads and CSR
quality, both in cross section as well as over a period
of time. The question which of the three models is
most appropriate for the analysis is answered by the
model specification tests in Table I.
The significance of the F-test shows the superi-
ority of the fixed effects model in comparison to the
simple pooled regression. Accordingly, individual
effects play a role which is relevant to evaluation,
and the assumption of homogeneity of all cross-
section objects over time, which is reflected in a
common intercept in the pooled OLS, can be
rejected. The Durbin-Watson test statistics (not
reported) indicate positive autocorrelation in the
residuals. Therefore, robust covariance estimations
of the coefficients based on the period method of
White are conducted, which are insensitive to
autocorrelation and time-variable variances in the
residuals (Arellano, 1987; Beck and Katz, 1995). In
addition, as it can not be assumed that the residual
variances will be constant across all cross-section
objects, but rather should vary in a company-specific
way, a cross-section weighting is used when esti-
mating the panel, which enables a correction of this
125
heteroscedasticity (generalized least squares (GLS)-
specification).
As summarized in Table I, we have set up eight
different models in order to investigate whether
there is a significant correlation between credit
spreads (dependent variable) and CSR (CSR)
taking control variables into account. In the first
variant, only the indicator variable for CSR is in-
cluded as an explanatory factor in the standard
regression model (pooled OLS). The regressor is
significant at the 1% level and has the assumed
negative sign. However, the very low R-squared
(1.70%) signals little explanatory power of the model.
Also, the F-test clearly indicates that the fixed effects
approach is preferable to the simple pooled OLS
method (model 2). Intuitively, this result is also
understandable as the universe is composed of dif-
ferent bonds (credit rating, maturity) of different
issuers (industries). Therefore, given this cross-
sectional heterogeneity issue-specific effects play a
considerable role for the evaluation, which is allowed
for in the fixed effects model. In this model specifi-
cation, the CSR indicator loses any significance and
the negative sign. Based on the Hausman test, which
in addition is used to determine the suitability of the
fixed effects model in comparison to the random
effects approach, one concludes that the fixed effects
approach is preferable from a methodical view, due to
the significant test statistics. In the models 3 and 4, we
extend each estimation equation with the two control
variables modified duration (MD) and rating
(RAT) in order to take into account the hetero-
geneity caused by different interest rate sensitivity and
credit quality. In both cases, except for the CSR all
other regressors variables are significant (1% level),
with the model specification test demonstrating again
the superiority of the fixed effects approach in com-
parison to the simple pooled regression procedure.
The null hypothesis of the Hausman test is rejected
at the 1% level of significance; so also in this case
the fixed effects model is most appropriate. The
R-squared of the regression increases with this version
to almost 77%.
To further support the robustness of our results, we
add a total of 13 dummies for industry affiliation in
model 5 (TELEC = telecom, UTILI = utility,
CC = cyclical consumption, CNC = non-
cyclical consumption, BASIC = basic resources,
SC = cyclical services, CG = capital goods,
 TABLE I
Results of the panel models 126

Model 1 2 3 4 5 6 7 8
Variant 1 1 2 2 3 3 4 4
Method OLS FE OLS FE OLS OLS OLS FE

Independent variables
C 52.16547*** 54.58435*** 2.715949*** 52.43934*** 0.38181 -1.796888*** 24.87637***
(0.747) (0.458) (0.874) (1.628) (1.029) (0.640) (1.016)
CSR? -4.858389*** 0.636304 0.750547 0.459569 0.151475 0.160348 0.210792 0.907209*
(0.972) (0.960) (0.588) (0.981) (0.623) (0.612) (0.408) (0.540)
MD? 4.811213*** -1.351075*** 4.797912*** 4.799468*** 5.617893*** 4.339101***
(0.149) (0.231) (0.142) (0.142) (0.116) (0.160)
RAT? 0.119683*** 0.040916*** 0.105407*** 0.105361*** 0.113954*** 0.027839***
(0.003) (0.005) (0.003) (0.003) (0.002) (0.003)
TELEC? 11.62227*** 11.23178***
(1.371) (1.152)
UTILI? 0.389821
(1.031)
CC? 4.186633*** 3.807883***
(1.165) (1.016)
CNC? 6.707996*** 6.325554***
(0.990) (0.965)
Klaus-Michael Menz

BASIC? 4.746550*** 4.360812***

(1.185) (0.968)
SC? 4.836383*** 4.465165***
(1.261) (1.108)
CG? 6.860420*** 6.468650***
(1.413) (1.271)
ENERG? 7.899035*** 7.525113***
(1.788) (1.838)
REAL? 10.71789*** 10.33708***
(2.290) (2.173)
MEDIA? 10.16247*** 9.790900***
(2.110) (1.991)
TECHN? 1.607
(1.703)
SNC? 12.99140*** 12.61436***
(1.210) (0.963)
 Corporate Social Responsibility: Is it Rewarded by the Corporate Bond Market? 127

401.215841***

Panel regressions of 498 bonds over the period between July 2004 and August (May) 2007. Robust standard errors and covariance matrix based on the period method of White.
ENERG = energy, REAL = real estate,

73.568590***

223.0684***
MEDIA = media, TECHN = technology,

0.881002
SNC = non-cyclical services) and the potential

15,566
bond subordination (SUB). Thus, industry-
FE

specific effects will be incorporated in the evaluation.

8
4

Except for two industry dummies (utilities and

technology) and the CSR indicator, all other

14723.57***
regressors are significant. In model 6, the two insig-

0.739473
nificant dummies were removed from the estimation

15,566
OLS

equation, but that has almost no effect on the

7
4

remaining regressors. In particular, the coefficient of

CSR is still not significant and has a positive sign. The
R-squared of this variant lies at just under 57%, well
90.85098***

1598.561***

below the level of model 4, which indicates for

0.569145
(7.899)

16,957

evaluation that firm-specific heterogeneity as

OLS

measured by the fixed effects approach is more

6
3

relevant than industry-specific distinctions. The fact

that company heterogeneity is also dominant in case
90.85100***

***, ** and * indicates significance on the 1%-, 5%- and 10%-level. Robust standard errors in brackets.

of sector identity had already been identified by Cyert

and March (1963) as a fundamental issue.
0.56936
(7.903)

16,957

In our last two models 7 and 8, we estimate the

OLS

models 3 and 4 on the basis of a period which was

5
3

shortened by 3 months, so lasted only until the end

896.836719***
continued

of May 2007. This approach takes into account that

TABLE I

41.242903***

109.7413***

the financial crisis broke out openly in summer

0.769287

2007, which resulted in significant market distor-

16,957

tions that might have exerted a distorting influence

FE
4
2

on our results. This suspicion was also nourished by

a striking finding in model 4, namely the negative
parameter value for the variable interest rate risk
7134.022***

(MD). As the results in Table I show, for the

0.557998

16,957

shortened period with the fixed effects method

OLS

estimated MD coefficient value changed its sign as

3
2

expected (model 8). In contrast, the coefficient of

the CSR indicator also remains positive in this
105.637892***
8.998749***

105.4279***

specification with the t-statistic in this case indicating

0.761333

even a weak significance at the 10% level (p-value

16,957

0.093). The goodness of the regression is above

FE

average as measured by a R2 of over 88%. In the

2
1

pooled OLS model (model 7), which is inferior to

the alternative fixed-effects specification according
293.902***

to the F-test, the estimated CSR coefficient retains

0.017038
F-test (OLS versus FE)

16,957

the insignificant positive sign compared to model 3.

Model specification tests
OLS
1
1

(FE versus RE)

Hausman-test

Discussion
F-statistic
Method
Variant
Model

SUB?

In summary, contrary to our hypothesis, bonds of

R2

socially responsible corporates do not have lower

N
128 Klaus-Michael Menz
risk premiums than those of non-socially responsible
companies. The investigated models mostly identi-
fied positive coefficient values for the CSR factor; so
in fact the direct opposite seems to be the case.
However, the estimated positive relationship
between credit spreads and CSR is only (weakly)
significant in one model. There are several possible
explanations for this apparent lack of relevance of
CSR for the corporate bond evaluation.
One main reason is that obviously credit ratings
matter more for bond investors than CSR ratings, as
indicated by the highly significant and positive
RAT coefficients in models 38. As expected, a may partly explain the puzzling finding of a (weakly)
higher rating factor, which implies a lower credit
rating, results in a higher credit spread. Besides
financial criteria, credit ratings also incorporate a
host of non-financial factors and even confidential
information (Crouhy et al., 2001). Therefore, as
credit ratings already to some extent include gov-
ernance, environmental and social issues, an extra
CSR rating from a non-certified research agency
does not seem to add informational value to bond-
holders.
Furthermore, although issue-specific factors are of
major importance, systematic sector-related risks
(e.g. potential environmental disasters, regulation)
are also priced by credit investors, as shown by the
mostly significant industry dummies. Interestingly,
sector risks are not perceived to be highest in energy
(e.g. oil and gas) or basic resources (including
chemicals) where environmental issues with the
potential to cause very high financial costs are
generally considered to be very critical according to
results of Steger et al. (2007). Instead, apart from
non-cyclical services, bondholders have the highest
risk assessment for telecoms although these are
generally perceived to be quite defensive. Especially
due to their steady cash flows, however, telecoms
face above average event risks from LBOs and
M&A, leading potentially to higher bondholder
cautiousness.
Although the superior importance of credit rat-
ings seems be the main reason for the minor rele-
vance of CSR for bond pricing, there might be
further explanations for this finding. On the one
hand, a limited informative value of the CSR indi-
cator used in this study might be causal, because
the SAM Research, amongst other things, states the
identification of corporates with a leading role in the
creation of shareholder value as a screening target.
However, the empirical evidence shows that the
simultaneous realization of shareholder value and
bondholder value is often difficult because of agency
problems (Menz and Nelles, 2006). For example,
extensive shareholder rights and a lack of protection
against takeovers are generally regarded as being
positive for shareholder value, whilst the bondholder
value tends to be affected negatively by that. Essen-
tially, the more anti-takeover mechanisms, the better
for holders of investment grade bonds because of
lower event risk (Bradley et al., 2007). In fact, this
positive connection between our CSR indicator and
credit spreads.3
On the other hand, the characteristics of the firms
used in our two researched universes, i.e. investment
grade corporate bonds and socially responsible firms,
may be very different. We know from other studies
that the compositions of equity indices for socially
responsible corporations possess pronounced funda-
mental characteristics, often having a high propor-
tion of so-called growth stocks (growth bias)
(Statman, 2006). As these are often relatively small
and young firms which do not usually receive
investment grade ratings by virtue of their smaller
size and more uncertain business prospects (see
Deutsche Bundesbank, 2004, p. 19), these firms may
not be by majority in our sample, thus the results
could be affected. For this reason, we examined the
rating distributions of the industrial companies that
were on the annually updated investment lists of
SAM. Accordingly, many companies actually have a
low credit rating (non-investment grade) or have
no credit rating at all from the leading agencies.
However, these percentages are relatively low, for
example, in 2007 approximately 8% of the socially
responsible companies were non-investment grade
and 7.5% were not officially rated by the agencies.
Consequently, as firms with an investment grade
rating represent over 80% of the SAM universe, the
distorting influence should be only moderate.
Finally, another possible explanation might be that
CSR is still largely ignored as a valuation factor by
bond investors. An evidence of the validity of this
reasoning are the findings of Nelles and Menz (2008),
which suggest that even corporate governance is only
slowly becoming considered as a valuation factor by
bond investors. As corporate governance, however,
 Corporate Social Responsibility: Is it Rewarded by the Corporate Bond Market?
has been a subject of public debate since the scandals
at Enron, Worldcom and Parmalat and is nevertheless
only hesitantly being incorporated in investment
decisions, it could be that this development is still
imminent for the factor CSR. But possibly, bond
investors consciously turn down the incorporation of
the CSR criterion when screening because they re-
gard the diversification opportunities as being too
greatly reduced by the constrained investment uni-
verse and are not convinced of the positive impact on
their portfolios with respect to risk-reward charac-
teristics (Geczy et al., 2005).
Conclusions and implications
The interest in CSR has increased almost explosively
in recent years. The question of whether CSR has a
positive impact on the company evaluation has,
however, so far almost exclusively been analysed from
the perspective of the stock market. In this article we
therefore investigated the relationship between the
valuation of Euro corporate bonds and the quality of
CSR of mainly European companies for the first time.
Generally, the debt market is of considerable impor-
tance for corporate finance, which is the reason for
the fact that creditors could generally play a significant
role in the transmission of CSR into the valuation of
financial instruments. Because socially responsible
corporations are often regarded as commercially more
successful and less risky, they should have lower risk
premiums, all other things being equal. The results of
the empirical analysis show, however, that for a large
data panel of investment grade corporate bonds the
risk premium for socially responsible corporations
based on the classification by SAM Research was
ceterius paribus higher than for non-socially responsible
firms. The different investigated models, however,
were only weakly significant in one case. Thus, by
and large an assumed relationship between CSR and
credit spreads must be rejected. One main reason is
that obviously credit ratings matter more for bond
investors than CSR ratings. As credit ratings already
to some extent include governance, environmental
and social issues, an extra CSR rating does not seem to
add informational value to bondholders.
In addition, possibly credit investors consciously
forgo a consideration of social, ethical and environ-
mental factors when making investment decisions due
129
to scepticism and because they are not convinced of
the positive effects on the risk-return characteristics of
their portfolios. This would be consistent with
modern portfolio theory, arguing that any constraints
imposed on the investment and diversification
opportunities entail a cost, especially for bond
investors who face quite different risk-reward char-
acteristics than shareholders.
Although our puzzling results that socially
responsible firms do not have lower cost of public
debt are in line with previous research on share-
holder performance that revealed no direct and
conclusive empirical evidence on whether high
CSR standards lead to lower cost of equity
(Renneboog et al. (2008), there are issues that
require further research attention. First, one possible
explanation for the lack of influence of CSR on the
risk premium may be a limited explanatory power of
the CSR indicator used in this study. As we found
no significant empirical link between our used CSR
measure and credit spreads, this may mean that the
SAM sustainability indicator is not a good proxy for
firms CSR, at least from the perspective of bond-
holders. Therefore, we would recommend the use of
other CSR indicators (e.g. from Innovest, Oekom,
Vigeo, or Eiris, to name a few) for further research.
Secondly, recent research shows that the usage of
aggregate CSR scores can have confounding effects
as the composing dimensions are often imperfectly
correlated (Scholtens, 2008). As we have not been
able to test the influence of CSR sub-scores on
governance, environmental and social performance
due to data limitations, we would recommend
further studies that fill this gap.
These limitations in mind, the results of this
article nonetheless yield both practical and theoret-
ical implications. From a practical point of view,
ramifications concern both financial intermediaries
and regulatory bodies. Since it is quite uncontro-
versial that ecological, social and governance (ESG)
issues can have massive negative effects on firm
performance, financial intermediaries (e.g. banks,
pension funds, mutual funds) are well advised
(or must be incentivized) to incorporate those non-
financial factors into their decision-making pro-
cesses. This is not only in their own economic
interest but also consistent with the fiduciary duty of
bond investors and banks when social, ecological and
governance issues impact profitability and default
130 Klaus-Michael Menz
risks of companies to whom they lend. However,
the inadequate consideration of CSR by creditors is
probably not due to a lack of interest in the theme
but due to a lack of comprehensive, comparable and
easily accessible data to evaluate the ESG perfor-
mance. In addition, not all financial institutions are
willing to utilize the CSR rating of research firms
like SAM as this is costly and non-certified. In order
to enable the incorporation, one of the most
important preconditions is therefore the availability
of reliable, objective and low-cost information on
the CSR performance of firms which allows for the
impact of various ecological, social and governance
factors to be diligently analysed and understood as
accurately as possible. As anecdotal evidence sug-
gests, the company reporting of ESG performance is
currently differing considerably. This is especially
inapprehensible since the Global Reporting Initia-
tive (GRI), a large multi-stakeholder network of
thousands of experts collaborating with the United
Nations Environment Programme and United
Nations Global Compact, has developed an ESG
reporting framework for worldwide application that
serves as a means for improving the standardisation
of company reporting. One main reason for the
currently often unstandardized disclosure is that
reporting on ESG performance is still mainly vol-
untary and therefore usually unaudited. Therefore,
regulatory bodies should rule public disclosure of
comprehensive and standardized reporting of ESG
information by all firms seeking access to public
capital markets. The same should be valid for com-
panies applying for loans at least for those surpassing
certain size limits. Lastly, financial industry bodies
might work on a practical and easily implementable
tool for the quantitative and systematic evaluation of
CSR, like for example the Excel-based Scorecard
for German Corporate Governance developed by
the German Society of Financial Analysts (DVFA)
based on a code of best practice.
Furthermore, there are manifold theoretical
implications that the results of this article generate.
First, the finding that unobserved heterogeneity
plays a significant role when investigating the rela-
tionship between CSR and financial firm perfor-
mance as measured by the credit spread should be of
general interest for CSR researchers. This is gener-
ally important since spurious correlations could
emerge due to unobserved company characteristics
possibly leading to erroneous conclusions in empir-
ical research. Secondly, the estimation results with
the highly significant credit rating suggest that also
future studies on the impact of CSR on equity
performance should incorporate and control for
different credit risks of researched firms. This aspect
is also in line with the growing amount of empirical
literature revealing a significant impact of credit
rating signals on stock prices.
Thirdly, with respect to more debt-specific issues,
it is remarkable that until now almost nothing is
known about the impact of CSR on loan perfor-
mance and corporate bond evaluation although most
of the external finance for companies is provided by
banks and bond buyers. Therefore, in the future
CSR research should focus more on the debtholders
perspective and less on shareholders due to the
considerable weight of debt in financing and the
potential for transmitting CSR into debt pricing.
Fourthly, more focus on the debtholders per-
spective should also be interesting for researchers
because creditors presumably act differently from
shareholders regarding CSR, due to the different
contractual rights and claims and therefore different
incentives and risk-reward-profiles of stocks and debt.
For example, under certain conditions the providers
of shareholder funds profit from the execution of very
risky investment projects, since they harvest most of
the gains if it turns out well, whilst a failure would be
also at the expense of the creditors as they bear most of
the costs. Referring to Merton (1974), defaultable
claims like loans or bonds can thus be characterised as
having sold a put on the firms assets, whilst the equity
position can be imagined as being long a call on this
underlying asset value. Or as Alchian and Demsetz
(1972) put it, bonds with their fixed claims are sold to
pessimists and stocks with a residual claim are sold to
optimists. Therefore, debtholders perspective on
CSR implies a more downside oriented view, in
contrast to stockholders who have also the prospect of
a huge upside in share prices. One important impli-
cation of this different view concerns the most
appropriate CSR screening approach from a debt-
holder perspective. In contrast to a stockholder view,
where a best-in-class rating filter might be adequate,
providers of debt are presumably less interested in
engaging in the 10 or 20% most socially responsible
companies but more keen to avoid the worst in
class, i.e. those firms that have the highest potential
 Corporate Social Responsibility: Is it Rewarded by the Corporate Bond Market?
of being involved in adverse ESG issues like envi-
ronmental disasters or massive litigation costs and thus
eventually put into effect the much feared tail risk
with the negative consequences for debtholder
wealth.
Finally, the findings raise the important issue of
market efficiency with potentially both theoretical
and practical implications. According to the efficient
market hypothesis, all available information is fully,
correctly and quickly incorporated into asset pricing.
Indeed, the puzzling results suggest that corporate
bond markets are not efficiently pricing the different
CSR risks of mostly European firms. From a prac-
tical point of view, this finding might potentially
offer the opportunity for bond investors to earn
excess returns on a risk-adjusted basis in the future.
However, the investigation of this issue has been left
for future research.
Notes
1
There are also investment industry initiatives to inte-
grate non-financial factors, like corporate governance
and environmental issues, into the investment research
process. See, e.g. OLoughlin and Thamotheram (2006).
2
For a detailed description of the Merrill Lynch cor-
porate bond indices, see Merrill Lynch (2000).
3
In addition, Schroder (2005) shows that most sus-
tainability stock indices have higher volatility than con-
ventional benchmarks. It is therefore possible that
socially responsible companies have higher systematic
risk, leading to a higher return claim by bond investors.
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