Do corporate social responsibility ratings affect credit default swap spreads?

167

We examine whether environmental, social and governance (ESG) scores of European banks impact on their risk‐taking behavior and on bank value. We find that high ESG scores are associated with a modest reduction in risk‐taking for banks that are high or low risk‐takers, and that the impact is conditional on executive board characteristics. These findings are consistent with the “stakeholder” view of ESG activities. However, high ESG scores are also associated with a reduction in bank value consistent with the “overinvestment” view of ESG whereby scare resources are diverted from investment. The decline in bank value occurs notwithstanding a positive indirect link between ESG scores and bank value through their impact on risk taking. We conclude that there is a trade‐off between reducing bank risk‐taking and a more stable financial system on the one hand and bank value on the other.

Section: Literature and Hypothesis Developmentmentioning

confidence: 99%

Do ESG scores effect bank risk taking and value? Evidence from European banks

Tommaso

Thornton

2020

167

“…Other studies have also analysed the relation of CSR performance with either the cost of companies' financing (Attig et al, 2011), with how bonds perform (Sharfman & Fernando, ), with either the credit default swap (Drago, Carnevale, & Gallo, ) or the stock market (Miralles‐Quiros, Miralles‐Quiros, & Guia, ). This last study revealed that, in general, European stock market investors value the CSR information published by listed companies for decision making, but this study found differences between markets.…”

Section: Background and Research Hyphotesismentioning

confidence: 99%

The impact of corporate social responsibility transparency on the financial performance, brand value, and sustainability level of IT companies

González

Poza

Olmeda

2019

The companies are aware of the impact that disseminating their corporate social responsibility (CSR) performance has on how shareholders or investors perceive them. This work analyses if disseminating CSR results affects their economic–financial results, their scores in open‐access sustainability ranking, their brand values, and also the credit ratings that agencies S&P and Moody's confer them. For this purpose, the only 13 companies of the IT sector occupying a top 100 brand rankings position were selected. The results reveal that large companies come over as being more transparent in terms of sustainability, but this transparency is not related to their financial behaviour. Brand rankings collect socio‐economic and environmental information, but only the transparency in social and environmental aspects explains the public‐access CRS rankings. Finally, the results also show that this transparency affects credit ratings.

“…Rating refers to the evaluation of the quality, performance, and outcomes of entities, individuals, and organizations (Drago et al, ; Elsbach & Kramer, ). It is often regarded as a “social test” that distinguishes the good from the bad (Rao, ).…”

Section: Theory and Hypothesesmentioning

confidence: 99%

“…Lee et al () also found that firms that are highly rated are more likely to initiate online communication with stakeholders than those that are poorly rated. Drago et al () found that although the upgrade of CSP rating leads to an immediate and significant decrease in credit default swap spreads of rated firms, the downgrade does not have a significant immediate impact on the credit default swap market. However, to our knowledge, beyond the above several studies, few other studies have examined firm response to being rated.…”

Section: Theory and Hypothesesmentioning

confidence: 99%

“…The possible threats that the negative ratings pose to the firm often drive the firm's decision makers to take actions (Chatterji & Toffel, ). Although past studies mainly focused on how ratings can affect the behavior of various stakeholders, only several studies have examined why and how firms learn from and respond to being rated (e.g., Chatterji & Toffel, ; Drago, Carnevale, & Gallo, ; Elsbach & Kramer, ; Lee, Oh, & Kim, ). Thus, we still know relatively little about how firm characteristics can influence firm responses.…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Sustainable development and the rating effects: A strategic categorization approach

Zeng

Xu²

2019

With the increasing call for sustainable development, rating agencies of corporate sustainability performance (CSP) have got a good momentum of development all over the world. Different from past studies that utilize stakeholder theory or information economics in explaining rating effects, this study takes a strategic categorization approach to investigate firm responses to CSP ratings of a newly emerging rating agency. Using a sample of listed firms in Japan, our study finds that compared with firms with moderate CSP rating scores, firms with high or low rating scores are more likely to increase their corporate philanthropic contributions, and such an effect is strengthened when the firms have higher levels of foreign ownership. This study contributes to the literature by enriching our understanding of how the rating of a newly emerging rating agency shapes firms' sustainable activities.