Corporate social performance, innovation intensity, and financial performance: Evidence from lending decisions

This study examines how loan requests for intensifying corporate social performance (CSP) activities and loan requests for increasing innovation intensity affect loan officers' credit judgments and lending decisions. In addition, the impact of a balanced loan request for both CSP and innovation intensity was examined. An experiment was designed by manipulating the purpose of a loan request from a pharmaceutical company in order to create four alternative lending scenarios: (1) a full loan request for intensifying CSP activities; (2) a full loan request for increasing innovation intensity; (3) a loan request for a balanced investment in both CSP and innovation; and (4) a general purpose loan request (control group). The findings support that CSP investment is interpreted by loan officers as an indicator of superior corporate financial performance. However, no clear positive relationship between innovation intensity and lending decisions was found. These results are consistent with the view that lenders could be reluctant to fund innovation intensity initiatives because there may be a considerable time lag between this investment and its payoff. Contrary to expectations, a balanced loan request for both CSP and innovation was not interpreted by loan officers as the most favorable lending scenario for an innovative firm.