IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v12y2020i8p3456-d349502.html

ESG Scores and the Credit Market

Author

Listed:
  • Ga-Young Jang

    (Department of finance, Hanyang University Business School, Seoul 04763, Korea)

  • Hyoung-Goo Kang

    (Department of finance, Hanyang University Business School, Seoul 04763, Korea)

  • Ju-Yeong Lee

    (Department of finance, Hanyang University Business School, Seoul 04763, Korea)

  • Kyounghun Bae

    (Department of finance, Hanyang University Business School, Seoul 04763, Korea)

Abstract

This study analyzes the relationship between Environmental, Social and Governance (ESG) scores and bond returns using the corporate bond data in Korea during the period of 2010 to 2015. We find that ESG scores include valuable information about the downside risk of firms. This effect is particularly salient for the firms with high information asymmetry such as small firms. Interestingly, of the three ESG criteria, only environmental scores show a significant impact on bond returns when interacted with the firm size, suggesting that high environmental scores lower the cost of debt financing for small firms. Finally, ESG is complementary to credit ratings in assessing credit quality as credit ratings cannot explain away ESG effects in predicting future bond returns. This result suggests that credit rating agencies should either integrate ESG scores into their current rating process or produce separate ESG scores which bond investors integrate with the existing credit ratings by themselves.

Suggested Citation

  • Ga-Young Jang & Hyoung-Goo Kang & Ju-Yeong Lee & Kyounghun Bae, 2020. "ESG Scores and the Credit Market," Sustainability, MDPI, vol. 12(8), pages 1-13, April.
    • Handle: RePEc:gam:jsusta:v:12:y:2020:i:8:p:3456-:d:349502
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/12/8/3456/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/12/8/3456/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Emiel Duuren & Auke Plantinga & Bert Scholtens, 2016. "ESG Integration and the Investment Management Process: Fundamental Investing Reinvented," Journal of Business Ethics, Springer, vol. 138(3), pages 525-533, October.
    2. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    3. Yung-Ming Shiu & Shou-Lin Yang, 2017. "Does engagement in corporate social responsibility provide strategic insurance-like effects?," Strategic Management Journal, Wiley Blackwell, vol. 38(2), pages 455-470, February.
    4. Ioannis Oikonomou & Chris Brooks & Stephen Pavelin, 2014. "The Effects of Corporate Social Performance on the Cost of Corporate Debt and Credit Ratings," The Financial Review, Eastern Finance Association, vol. 49(1), pages 49-75, February.
    5. Klock, Mark S. & Mansi, Sattar A. & Maxwell, William F., 2005. "Does Corporate Governance Matter to Bondholders?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(4), pages 693-719, December.
    6. Justyna Przychodzen & Fernando Gómez-Bezares & Wojciech Przychodzen & Mikel Larreina, 2016. "ESG Issues among Fund Managers—Factors and Motives," Sustainability, MDPI, vol. 8(10), pages 1-19, October.
    7. Hao Liang & Luc Renneboog, 2017. "On the Foundations of Corporate Social Responsibility," Journal of Finance, American Finance Association, vol. 72(2), pages 853-910, April.
    8. Bohyun Yoon & Jeong Hwan Lee & Ryan Byun, 2018. "Does ESG Performance Enhance Firm Value? Evidence from Korea," Sustainability, MDPI, vol. 10(10), pages 1-18, October.
    9. Tim Verheyden & Robert G. Eccles & Andreas Feiner, 2016. "ESG for All? The Impact of ESG Screening on Return, Risk, and Diversification," Journal of Applied Corporate Finance, Morgan Stanley, vol. 28(2), pages 47-55, June.
    10. Jae-Joon Han & Hyun Jeong Kim & Jeongmin Yu, 2016. "Empirical study on relationship between corporate social responsibility and financial performance in Korea," Asian Journal of Sustainability and Social Responsibility, Springer, vol. 1(1), pages 61-76, December.
    11. Alicia M. Robb & David T. Robinson, 2014. "The Capital Structure Decisions of New Firms," The Review of Financial Studies, Society for Financial Studies, vol. 27(1), pages 153-179, January.
    12. Paul C. Godfrey & Craig B. Merrill & Jared M. Hansen, 2009. "The relationship between corporate social responsibility and shareholder value: an empirical test of the risk management hypothesis," Strategic Management Journal, Wiley Blackwell, vol. 30(4), pages 425-445, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kiyoung Chang & Ying Li & Hyeongsop Shim, 2022. "Corporate social responsibility and credit rating around the world: The role of societal trust," The Financial Review, Eastern Finance Association, vol. 57(4), pages 863-891, November.
    2. Jongmoo Jay Choi & Hoje Jo & Jimi Kim & Moo Sung Kim, 2018. "Business Groups and Corporate Social Responsibility," Journal of Business Ethics, Springer, vol. 153(4), pages 931-954, December.
    3. Amrou Awaysheh & Randall A. Heron & Tod Perry & Jared I. Wilson, 2020. "On the relation between corporate social responsibility and financial performance," Strategic Management Journal, Wiley Blackwell, vol. 41(6), pages 965-987, June.
    4. Joel T. Harper & Li Sun, 2025. "Asset redeployability and corporate social responsibility," Review of Quantitative Finance and Accounting, Springer, vol. 64(4), pages 1595-1631, May.
    5. Ramzi Benkraiem & Maria Qureshi & Asif Saeed & Constantin Zopounidis, 2024. "Corporate social responsibility, carbon footprints and stock market valuation," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 33(3), pages 213-237, August.
    6. Hans B. Christensen & Luzi Hail & Christian Leuz, 2021. "Mandatory CSR and sustainability reporting: economic analysis and literature review," Review of Accounting Studies, Springer, vol. 26(3), pages 1176-1248, September.
    7. Cai, Xiangshang & Gao, Yang & Wu, Zhiting & Yuan, Jiayi, 2024. "Chief executive officer marital status and corporate credit ratings," International Review of Financial Analysis, Elsevier, vol. 95(PA).
    8. Shin, Jiyoung & Moon, Jon Jungbien & Kang, Jingoo, 2023. "Where does ESG pay? The role of national culture in moderating the relationship between ESG performance and financial performance," International Business Review, Elsevier, vol. 32(3).
    9. Haifei Wang & Hongjun Wu & Peter Humphreys, 2022. "Chinese Merchant Group Culture, Corporate Social Responsibility, and Cost of Debt: Evidence from Private Listed Firms in China," Sustainability, MDPI, vol. 14(5), pages 1-18, February.
    10. Benjamin Lynch & Martha O'Hagan‐Luff, 2024. "Relative corporate social performance and cost of equity capital: International evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 2882-2910, July.
    11. Shih, Yi-Cheng & Wang, Yao & Zhong, Rui & Ma, Yi-Ming, 2021. "Corporate environmental responsibility and default risk: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    12. Zhu, Minghao & Yeung, Andy C.L. & Zhou, Honggeng, 2021. "Diversify or concentrate: The impact of customer concentration on corporate social responsibility," International Journal of Production Economics, Elsevier, vol. 240(C).
    13. R. Benkraiem & M. Qureshi & A. Saeed & C. Zopounidis, 2024. "Corporate Social Responsibility, Carbon Footprints and Stock Market Valuation," Post-Print hal-04679536, HAL.
    14. Sabbaghi, Omid, 2022. "The impact of news on the volatility of ESG firms," Global Finance Journal, Elsevier, vol. 51(C).
    15. Konstantin Ignatov & Markus Rudolf, 2023. "Sentimental Sustainability: Does What Companies Say Tell More Than What Companies Do?," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 32(4), pages 221-252, November.
    16. Chi, Wuchun & Wu, Shing-Jen & Zheng, Zhen, 2020. "Determinants and consequences of voluntary corporate social responsibility disclosure: Evidence from private firms," The British Accounting Review, Elsevier, vol. 52(6).
    17. Megumi Suto & Hitoshi Takehara, 2020. "Corporate social responsibility intensity, management earnings forecast accuracy, and investor trust: Evidence from Japan," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(6), pages 3047-3059, November.
    18. Alves, Carlos Francisco & Meneses, Lilian Lima, 2024. "ESG scores and debt costs: Exploring indebtedness, agency costs, and financial system impact," International Review of Financial Analysis, Elsevier, vol. 94(C).
    19. Heli Wang & Ming Jia & Zhe Zhang, 2021. "Good Deeds Done in Silence: Stakeholder Management and Quiet Giving by Chinese Firms," Organization Science, INFORMS, vol. 32(3), pages 649-674, May.
    20. Ehsan Poursoleyman & Gholamreza Mansourfar & Mohammad Kabir Hassan & Saeid Homayoun, 2024. "Did Corporate Social Responsibility Vaccinate Corporations Against COVID-19?," Journal of Business Ethics, Springer, vol. 189(3), pages 525-551, January.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jsusta:v:12:y:2020:i:8:p:3456-:d:349502. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.