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German financial institutions, Interest rate sensitivity, Term structure, Nelson–Siegel approach, G12, G21, G22,

This paper is the first to systematically test the significance of survivorship bias using a comprehensive database and to test the significance of the differences of survivorship biases resulting from different methodical approaches. We apply the various methods most commonly used in the literature on a uniform dataset. In addition, we analyze the performance of closed funds as the driver of survivorship bias and the performance of new funds as the driver of incubation bias. Our main findings are: i) Ignoring closed funds leads to a significantly positive survivorship bias. This is in line with previous research. ii) The choice of methods leads to statistically and economically significant differences in survivorship bias estimates. We are able to suggest a bias-minimizing combination of methods if survivorship bias-free data is not available. iii) The performance of closed funds drives survivorship bias since these funds underperform surviving funds years before they are closed. iv) We find evidence for incubation bias in our data but its impact is rather small and clearly depends on the methods applied.

PurposeThe authors investigate the implications of environmental, social and governance (ESG) practices of firms for the pricing of their credit default swaps (CDS). In doing so, the authors compare European and US firms and consider nonlinear and indirect effects. This complements the previous literature focusing on linear and direct effects using bond yields and credit ratings of US firms.Design/methodology/approachFor this purpose, the authors apply fixed effects regressions on a comprehensive panel data set of US and European firms. Further, nonlinear and indirect effects are investigated utilizing quantile regressions and a path analysis.FindingsThe evidence indicates that higher ESG ratings mitigate credit risks of US and European firms from 2007 to 2019. The risk mitigation effect is U-shaped across ESG quantiles, which is consistent with opposing effects of growing stakeholder influence capacity and diminishing marginal returns on ESG investments. The authors further reveal a mediating indirect volatility channel that substantially amplifies the direct effect of ESG on credit risk. A one-standard-deviation improvement in ESG ratings is estimated to reduce CDS spreads of low, medium and high ESG firms by approximately 4%, 8% and 3%, respectively.Originality/valueThis is the first study to examine whether credit markets reflect regional differences between Europe and the US with regard to the ESG-CDS-relationship. In addition, this paper contributes to the existing literature by investigating differences in the response of CDS spreads across ESG quantiles and to study potential indirect channels connecting ESG and CDS spreads using structural credit risk variables.

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