Effect of the Corporate Sustainability Index on the Relationship between Profit Persistence and Debt Cost in Brazilian Companies
DOI:
https://doi.org/10.4270/ruc.2023121Keywords:
Profit Persistence, Debt Cost, Corporate Sustainability Index (ISE)Abstract
The study analyzes the effect of the Corporate Sustainability Index (ISE) on the relationship between profit persistence and cost of debt in Brazilian non-financial companies listed on Brasil, Bolsa, Balcão (B3) in the period from 2011 to 2018. Through regression of panel data with robust standard errors (clustering), in a sample of 217 companies with data obtained from the Economatica® database, an association between the persistence of profits and the cost of debt is observed. This denotes that creditors value more permanent and less transitory profits. Furthermore, there was a moderating effect of the ISE on the relationship between persistence of profits and cost of debt, which implies a lower cost of debt and demonstrates that, being an ISE index company strengthens the relationship between persistence and cost of debt and the agents of credit incorporate sustainability and earnings quality information when pricing financial debts. Therefore, companies belonging to ISE can seek greater profit persistence, given the economic benefits of providing quality accounting information, which is the reward of lower debt cost. Thus, this research contributes to the literature that investigates the impact of the quality of accounting information on the cost of debt and also enables managers to understand that involvement in sustainability practices and profit persistence results in a lower cost of debt. It also implies noting that creditors value socially responsible actions (in terms of being included in a corporate sustainability index, as this indicates good business practices, which can mitigate agency problems) and are particularly concerned with the quality of the disclosure of corporate results , which tends to reduce information asymmetry and increase understanding of the company's solvency and likely efficient results in negotiating the cost of debt with the customer.
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