Do creditors price firms’ environmental, social and governance risks?

By Elias Erragragui. Research In International Business and Finance, 2017

124 citations recorded by the source corpus.

The relationship between Corporate Social Performance (CSP) and firm value has received a growing attention in recent academic literature. Despite the rich contributions it has led to, few studies attempted to investigate the link between CSP and firms’ credit risk. This research fills this gap and empirically examines the relationship through which CSP impacts firms’ cost of debt. Using KLD social ratings, the study isolate specific constituents of firms’ CSP found to have operational implications in creditors’ risk perception. Observing a panel of 214 U.S firms from December 2000 to December 2011, the results show that only few constituents of CSP actually matters in creditor’s perception of firms’ risks. Our prime results show that environmental concerns increase firms’ cost of debt while governance concerns have no impact on it. Secondarily, the results also confirm that environmental and governance strengths reduce firms’ cost of debt as demonstrated in prior works. Our findings thus reveal a “governance paradox” whereby governance strengths and governance concerns are not considered with the same importance by creditors.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/650d841c54743e74b4fb8926b06b73b1c6747efc

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

1. Çiğdem Vural-Yavaş
2. Sean Geobey
3. Yasser Eliwa
4. Ahmed Saleh
5. Yujun Cui
6. O. Weber
7. Haiying Lin

In Finance

1. Sean Geobey
2. Yasser Eliwa
3. Çiğdem Vural-Yavaş
4. Ahmed Saleh
5. Yujun Cui
6. O. Weber
7. Haiying Lin

Citations in the corpus

• The Impact of Green Lending on Credit Risk in China (2018, background): “Also, greater environmental concerns appear to line up with higher costs of debt, and proactive environmental practices correlate with lower costs of debt [29,30].”
• Economic policy uncertainty, stakeholder engagement, and environmental, social, and governance practices: The moderating effect of competition (2020, background): “Moreover, financial institutions value the CSR or ESG activities and reduce the cost of debt of socially responsible firms (Eliwa et al., 2019; Erragragui, 2018).”
• ESG practices and the cost of debt: Evidence from EU countries (2019, background): “Regarding ESG performance, Table 3 shows that it is negatively correlated with LEV and IntCov .”