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Determinants of corporate credit ratings: Does ESG matter?

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  • Michalski, Lachlan
  • Low, Rand Kwong Yew

Abstract

We perform an empirical evaluation of fourteen multinomial classifiers in the prediction of credit ratings on a large dataset consisting of macroeconomic, firm-level financial, and environmental, social, and governance (ESG) variables. Random forests and extremely randomized trees exhibit the highest predictive power for US and global firms. We show that environmental and social responsibility variables are important determinants for the credit ratings, specifically measures of environmental innovation, resource use, emissions, corporate social responsibility, and workforce determinants. The influence of ESG variables become more pronounced following the financial crisis of 2007–2009, and are important across both investment-grade and speculative-grade classes.

Suggested Citation

  • Michalski, Lachlan & Low, Rand Kwong Yew, 2024. "Determinants of corporate credit ratings: Does ESG matter?," International Review of Financial Analysis, Elsevier, vol. 94(C).
    • Handle: RePEc:eee:finana:v:94:y:2024:i:c:s1057521924001601
    DOI: 10.1016/j.irfa.2024.103228
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    Cited by:

    1. Wang, Ziyuan & Zhang, Cong & Wu, Ran & Sha, Lina, 2024. "From ethics to efficiency: Understanding the interconnected dynamics of ESG performance, financial efficiency, and cash holdings in China," Finance Research Letters, Elsevier, vol. 64(C).
    2. Rahat, Birjees & Nguyen, Pascal, 2024. "The impact of ESG profile on Firm's valuation in emerging markets," International Review of Financial Analysis, Elsevier, vol. 95(PA).

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    More about this item

    Keywords

    Corporate credit ratings; ESG; Statistical learning; SHAP;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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