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Agency Costs, Leverage, and Corporate Social Responsibility:

A Test of Causality

Elizabeth Webb

Federal Reserve Bank of Philadelphia

Abstract

This paper focuses on different avenues of corporate social responsibility as alternative methods for alleviating agency problems between shareholders and bondholders. Specifically, the paper documents the relationship between capital structure (leverage) and corporate social responsibility. Using agency theory, a positive causal relationship is shown between leverage and certain corporate social responsibility measures and a lower cost of debt financing for firms with strong levels of corporate social responsibility. Increasing corporate involvement in current environmental and diversity issues “Granger causes” increases in firm leverage (and vice versa). However, this is not the case for other areas of corporate social responsibility including community contributions.