Ideas with Impact
UNB Faculty of Management

Being good: how corporate social behaviour affects the bond market

Author: Ideas with Impact

Posted on Dec 12, 2017

Category: Faculty

Dr. Jeff Frooman teaches courses in business ethics and finance. He recently published an article on the impact a firm's corporporate social behaviour has on the value of its bonds.Corporate social responsibility is a trend that has been gaining much momentum over the past 25 years or so and while many people agree that “doing good” is the right thing to do, many wonder whether it actually does any good from a business perspective. University of New Brunswick business professor, Dr. Jeff Frooman, was interested in the answer to this question and collaborated with a team of researchers at other universities to investigate the impact changes in organizations’ social performance has on the value of their bonds. Their research resulted in the article, “What good does doing good do? The effect of bond rating analysts’ corporate bias on investor reactions to changes in social responsibility,” which was published this year in the Journal of Business Ethics, one of the Financial Times Top 50 business journals.

Frooman’s interest in what kind of impact a firm’s corporate social responsibility might have on the long-term value of its bonds began in 1994 when he was completing his PhD at the University of Pittsburgh. “At the time, information about the bond market was sparse; researchers had to search through microfilm to find any data, and it was pretty sketchy,” he said.

Around 2000, things started change. Information about the bond market became more centralized and automated and he realized it would be possible to investigate in a more scientific manner, how analysts rated bonds in response to firms’ social performance. While attending a conference in Banff, Alberta, in 2006 he discovered a few other researchers shared his interest, and their project began.The question they pursued was, does a firms’ change in social performance have an impact on the value of if its bonds? They started looking at how analysts with Moody’s, Fitch Ratings, and Standard & Poor’s rated bonds.

A bond analyst’s job is to assess the value of a firm’s bonds and to determine their level of risk. The stronger the likelihood of a bond paying out, the lower its risk, and so the higher its value. In addition to studying their financial statements, says Frooman, “It does appear that bond analysts pay attention to corporate social performance when they assess the value of a firm’s bonds.” There are many categories of social performance analysts consider; these include such things as the diversity of the workplace, composition of the board, environmental stewardship, union relationships, and even services including on-site day cares. “These things can signal a stable work environment and hence long-term sustainability,” suggests Frooman.

Their research suggests that when a firm makes investments in corporate social responsibility, analysts tend to rate the bonds higher. In addition to this, they discovered some interesting trends, both positive and negative. As analysts reward a firm for investing in social responsible projects by improving the firm’s risk rating, investors tend to respond by investing more in the firm. In turn, firms are more likely to align their social behavior with society’s expectations. On the other hand, they discovered that when firms suspend their social responsibility, analysts don’t appear to punish the behavior by downgrading the risk ratings of the bonds.

The down side of this, suggests Frooman, is that “firms might think that by initiating social responsibility they’ll reap immediate reward, but it won’t matter if they don’t follow through in the long term.” This can hurt investors over time, because they won’t be aware of a firm’s minor lapses in social performance and until it adds up over time without warning.

The most significant discovery, however, was that with long term bonds, for which investors are prepared to wait for pay-offs, corporate social responsibility has a stronger impact on the value of a firm’s bonds. Investors who take a long-term approach tend to value a firm’s socially responsible behavior.

Frooman’s co-writers on this project are Oana Branzei, with the Richard Ivey School of Business; Brent Mcknight, with the DeGroote School of Business; and Charlene Zietsma with the Schulich School of Business. Recently, Frooman received the 2017 Faculty Excellence in Research Award which recognizes the quantity and quality of faculty research over a six-year period. In the past year, he has published three other research papers in the Financial Times Top 50 list of journals.

Since he joined UNB’s faculty of business administration in 2007 Frooman has been teaching courses in finance and in business ethics. The immediate impact of this research is that it will help his students understand the impact of corporate social performance in the market place.

For more information, contact Liz Lemon-Mitchell with UNB’s faculty of business administration. Learn more about our business programs.

Photo: Dr. Jeff Frooman teaches courses in business ethics and finance. He recently published an article on the impact a firm's corporporate social behaviour has on the value of its bonds.