We examine the relationship between CSR and loan spread in the direct lending market, a segment of private debt that has been understudied in prior research owing the opacity of such transactions. Unlike publicly traded debt, which has low information asymmetry owing to published disclosures and credit ratings, direct loans are privately negotiated utilizing close relationships and proprietary due diligence. Using a sample of more than 1,000 direct lending loans from the US and Europe over the period of 2016–2021, we find a statistically and economically significant U- shaped relationship between CSR and spread, robust to alternative model specification and estimation method. We also report the moderating effects of firm size and country. A breakdown of CSR reveals that environmental-CSR is more valued by direct lenders than social-CSR. To the best of our knowledge, this is the first study focusing on the CSR-spread relationship in the direct lending market, thus answering whether and how CSR performance of borrowers influences the direct lenders’ assessment of credit risk and loan spread. Our research also sheds new light on the scarcely covered non-monotonic impact of CSR.
