To ESG or Not to ESG? That is The Question for Cost of Debt
(2023) BUSN79 20231Department of Business Administration
- Abstract (Swedish)
- Purpose and research question: The purpose of this study is to investigate whether an improved ESG performance leads to a lower cost of debt, proxied by the yield spread of newly issued corporate bonds and if this effect is more pronounced for firms operating in a stronger institutional environment. We therefore ask the following two research questions: Does a higher ESG score lead to a lower cost of debt, and is this effect moderated by the institutional environment?
Methodology: For our panel data we apply POLS-regression models, random effects models, introduce an interaction term to test for the partial effect of the institutional environment, and an ordered probit model to exchange our dependent variable. Finally, we test the... (More) - Purpose and research question: The purpose of this study is to investigate whether an improved ESG performance leads to a lower cost of debt, proxied by the yield spread of newly issued corporate bonds and if this effect is more pronounced for firms operating in a stronger institutional environment. We therefore ask the following two research questions: Does a higher ESG score lead to a lower cost of debt, and is this effect moderated by the institutional environment?
Methodology: For our panel data we apply POLS-regression models, random effects models, introduce an interaction term to test for the partial effect of the institutional environment, and an ordered probit model to exchange our dependent variable. Finally, we test the sensitivity of our results with various robustness tests.
Theoretical perspectives: The theoretical perspectives used to develop our hypotheses and contextualize our findings are ESG, Cost of debt, Legitimacy theory, Institutional theory and Agency theory.
Empirical foundation: The study uses a final sample of 1086 firm-year observations of 176 ESG-rated firms with their headquarters located in Europe that have issued corporate bonds on the primary market over the time period 2010-2021.
Conclusions: We provide evidence that there is a significant negative relationship between ESG performance, the individual dimensions environmental and social, and the associated corporate bond spread. Furthermore, our findings suggest that the overall institutional environment partly determines a firm's inherent financial risk and that two institutional dimensions are capable of positively moderating the relationship between ESG performance and bond spreads namely the Institutional score and Government Effectiveness (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/9127603
- author
- Janols, Kasper LU and Grönkvist, Zakarias LU
- supervisor
- organization
- course
- BUSN79 20231
- year
- 2023
- type
- H1 - Master's Degree (One Year)
- subject
- language
- English
- id
- 9127603
- date added to LUP
- 2023-09-12 15:43:55
- date last changed
- 2023-09-12 15:43:55
@misc{9127603,
abstract = {{Purpose and research question: The purpose of this study is to investigate whether an improved ESG performance leads to a lower cost of debt, proxied by the yield spread of newly issued corporate bonds and if this effect is more pronounced for firms operating in a stronger institutional environment. We therefore ask the following two research questions: Does a higher ESG score lead to a lower cost of debt, and is this effect moderated by the institutional environment?
Methodology: For our panel data we apply POLS-regression models, random effects models, introduce an interaction term to test for the partial effect of the institutional environment, and an ordered probit model to exchange our dependent variable. Finally, we test the sensitivity of our results with various robustness tests.
Theoretical perspectives: The theoretical perspectives used to develop our hypotheses and contextualize our findings are ESG, Cost of debt, Legitimacy theory, Institutional theory and Agency theory.
Empirical foundation: The study uses a final sample of 1086 firm-year observations of 176 ESG-rated firms with their headquarters located in Europe that have issued corporate bonds on the primary market over the time period 2010-2021.
Conclusions: We provide evidence that there is a significant negative relationship between ESG performance, the individual dimensions environmental and social, and the associated corporate bond spread. Furthermore, our findings suggest that the overall institutional environment partly determines a firm's inherent financial risk and that two institutional dimensions are capable of positively moderating the relationship between ESG performance and bond spreads namely the Institutional score and Government Effectiveness}},
author = {{Janols, Kasper and Grönkvist, Zakarias}},
language = {{eng}},
note = {{Student Paper}},
title = {{To ESG or Not to ESG? That is The Question for Cost of Debt}},
year = {{2023}},
}