Issuing bonds during the Covid-19 pandemic: Was there an ESG premium?

We rely on the ESG ratings assigned by four distinct agencies (MSCI, Refinitiv, Robeco, and Sustainalytics) to study the link between ESG scores and firms’ cost of debt financing during the Covid-19 pandemic. We document the existence of a statistically and economically significant ESG premium, i.e. better rated companies access debt at a lower cost. Despite some differences across rating agencies, this result is robust to additional controls for the issuer’s credit standing as well as several bond and issuer’s characteristics. We find that this effect is mainly driven by firms domiciled in advanced economies, whereas creditworthiness considerations prevail for firms in emerging markets. Lastly, we show that the lower cost of capital for highly rated ESG firms is explained both by investors’ preference for more sustainable assets and by risk-based considerations unrelated to firms’ creditworthiness, such as exposure to climate change risks.     

Directional spillover effects and time-frequency nexus between oil,gold and stock markets: Evidence from pre and during COVID-19 outbreak

The Covid-19 crisis has been spread rapidly throughout the world so far. However, how deep and long the turbulence would depend on the success of solutions taken to deter the spread of Covid-19, the impacts of government policies may be prominent to alleviate the current crisis. In this article, we investigate the spillover effects and time-frequency connectedness between S&P 500, crude oil prices, and gold asset using both the spillover index of Diebold and Yilmaz (2012) and the wavelet coherence to evaluate whether the time-varying dynamic return spillover index exhibited the intensity and direction of transmission during the Covid-19 outbreak. Overall, the present results shed light on that in comparison with the pre-Covid-19 period, and the return transmissions are more apparent during the Covid-19 crisis. More importantly, there exist significant dependent patterns about the information spillovers among the crude oil, S&P 500, and gold markets might provide significant implications for portfolio managers, investors, and government agencies.     

Volatility and correlation of Islamic and conventional indices during crises

We examine the correlation and volatility of Islamic indices and their conventional counterparts during the 2008–2009 Global Financial Crisis as well as the Covid-19 pandemic. We provide evidence that the volatility of Islamic indices is relatively lower than that of conventional peers during turmoil periods. Consistent with the decoupling hypothesis, our results indicate that the volatility of Islamic and the volatility of conventional indices tend to move in tandem in tranquil times but diverge in times of crises. Our results also indicate that the correlation between Islamic and conventional indices is a priced risk factor for Islamic index returns.     

Take it with a pinch of salt—ESG rating of stocks and stock indices

This paper investigates the environmental, social, and governance (ESG) ratings of 20 leading stock exchange indices by analyzing and aggregating ratings of underlying stocks. ESG ratings are increasingly important inputs to sustainable investments in the European Union and United States with the phasing-in disclosure regulations. We find that ratings from two different rating providers (Sustainalytics and Refinitiv) for the same listed stocks are only weakly correlated, even if the scaling differences of the ratings are adjusted. Monte Carlo simulations are conducted to estimate how the choice of major ESG rating inputs (i) aggregation formula, (ii) weighting scheme and (iii) data provider influence the uncertainty of ratings and thus indirectly the sustainable investment process. The simulations reveal that the uncertainty is primarily related to choice of the ESG rating provider. We found that the popular best-in-class portfolio selection could be built on ESG scores. In lower segments of the ESG asset universe, investment selection becomes more challenging due to the increasing uncertainty of ratings. Finally, the paper shows that exchanges in the European Union provide relatively good ESG investment opportunities in international comparison.     

The impact of news on the volatility of ESG firms

This study provides one of the first empirical investigations of asymmetric volatility for environmental, social, and governance (ESG) investing. Using the Morgan Stanley Capital International (MSCI) indices as proxies for ESG test assets, this study investigates volatility risk for the highest ESG-rated firms through an empirical analysis in assessing how good news and bad news impact the risk of ESG firms. The analysis provides empirical evidence in support of the hypothesis that the impact of news on the volatility of ESG firms is larger for bad news, compared to good news. Employing an EGARCH framework, the analysis also finds that, in response to bad news, the observed volatility increases for small size ESG firms is lower compared to large and mid-cap ESG firms. The findings provide evidence of a slow response by small size firms to news in an ESG context. In modeling the conditional volatility of the ESG test assets, the analysis also provides evidence of higher persistence in the conditional volatility dynamics for small size ESG firms.     

New ESG rating drivers in the cross-section of European stock returns

We assess the performance of two quantitative signals based on ESG scores across a large, multi-national cross-section of European stock returns. We test whether the cost of equity capital is more influenced by the upward momentum (measured over time) of the ESG scores of the firms issuing stocks or by their stability (identified as the volatility of the scores over time), measured around a changing mean level. We find that short-term ESG momentum over 1 month has a significant impact on the cross-section of stock returns, lowering the anticipated cost of capital and leading to positive average abnormal returns. This suggests that short-term ESG momentum may represent a novel, priced systematic risk factor. Furthermore, we find strong evidence that an ESG volatility spread strategy which buys low ESG score volatility stocks and sells high volatility ones, generates a substantial alpha and affects the ex-ante cost of capital. Both quantitative ESG signals result in portfolio sorting and long-short strategies that enhance the overall sustainability profile of the issuing firms without compromising the raw average of their ESG scores.     

Fund ESG performance and downside risk: Evidence from China

Whether responsible investing reduces portfolio risk remains open to discussion. We study the relationship between ESG performance and downside risk at fund level in the Chinese equity mutual fund market. We find that fund ESG performance is positively associated with fund downside risk during the period between July 2018 and March 2021, and that the positive relationship weakens during the COVID-19 pandemic. We propose three channels through which fund ESG performance could affect fund downside risk: (i) the firm channel in which the risk-mitigation effect of portfolio firms’ good ESG practices could be manifested at fund level, (ii) the diversification channel in which the portfolio concentration of high ESG-rated funds could amplify fund downside risk, and (iii) the flow channel in which funds’ better ESG performance may attract greater investor flows that could reduce fund downside risk. We show evidence that the observed time-varying relationship between fund ESG performance and downside risk is driven by the relative force of the three channels.     

Spillover of stock price crash risk: Do environmental,social and governance (ESG) matter?

This study measures the static and dynamic crash risk connections across ESG networks from 2015 to 2020, using the generalized vector autoregressive framework. In particular, it highlights the mixed results of the crash risk connections across ESG three pillars and the different spillover performance when firms with different ownership structures and qualification of margin-trading and short-selling. Our results reveal that stocks with higher ESG ratings display more negative net spillover effects, which is consistent with the ideas that stock groups with good ESG performance experience lower crash risk, and thus transmitting smaller crash risk to other ESG levels. Among the three ESG pillars, good social performance (S) significantly lowers the total crash risk connections. In contrast, firms with well environment performance (E) do not transmit lower crash risk. Moreover, SOEs and firms with qualification of margin-trading and short-selling have lower total crash risk connections among ESG ratings. Using propensity score matching to match companies with high ESG and low ESG quarterly, we find the results are still robust. When dividing the sample according to the outbreak of COVID-19, we find the crash risk connections across ESG networks are stronger during crisis.     

Bringing Back the Jobs Lost to Covid-19: The Role of Fiscal Policy

Covid-19 induced job losses occurred predominantly in industries with intensive worker–client interaction as well as in pink-collar and blue-collar occupations. We study the ability of fiscal policy to stabilize employment by occupation and industry during the Covid-19 crisis. We use a multisector, multioccupation macro-economic model and investigate different fiscal-policy instruments that help the economy recover faster. We show that fiscal stimuli foster job growth for hard-hit pink-collar workers, whereas stimulating blue-collar job creation is more challenging. Only a cut in labor income taxes generates a substantial number of blue-collar jobs.     

Covid-19 and heuristic biases: evidence from India

Stock markets worldwide have witnessed high volatility during the year 2020 owing to the eruption of Covid-19. Due to the world’s unprecedented economic challenges, this study could potentially guide financial advisors and individual investors in dealing with pandemics. An association between investors’ perception toward the intensity of Covid-19 and heuristic biases is analyzed using the responses of 290 stock investors of National Capital Region (NCR), India. The data are validated through Cronbach’s alpha, and the model fit is analyzed using EFA. Confirmatory factor analysis (CFA) is employed to investigate the relationship between Covid-19 and heuristic biases. Covid-19 does not have any influence on the overconfidence of investors. A significant positive relationship is found between Covid-19 and the remaining three heuristics, i.e., availability, anchoring, and representativeness. The present study analyzes the association between Covid-19 and specific investors’ bias only and should not be interpreted for causality. The study has the potential to guide investors in understanding the errors they are making while investing during the pandemic and the ways to deal with them. The study could provide insights to the financial advisors in understanding their customers. The implications of the study may include inputs of the errors committed by them during the pandemic. Despite the fact that an enormous amount of literature exists in the field of investors’ sentiment, a scarcity of literature is available that measures the relationship between heuristic biases and the perceived impact of the pandemic. The current study attempts to fill this gap in the literature.

     

When the Japanese stock market meets COVID-19: Impact of ownership,China and US exposure,and ESG channels

We identify factors affecting the Japanese stock market during the COVID-19 pandemic period. First, we focus on the ownership structure. We find that indirect ownership through the exchange-traded fund purchasing program by the Bank of Japan has a positive impact on abnormal returns. Foreign ownership is negatively associated with abnormal returns, whereas ownership by traditional business groups is positively associated with abnormal returns. Second, we examine the impact of global value chains and find that stock returns are lower for companies with China and U.S. exposure. Third, in terms of environmental, social, and governance (ESG) engagement, there is no evidence that firms that have highly rated ESG scores have higher abnormal returns, but firms with ESG funds outperform those without.     

The impact of Covid-19 on G7 stock markets volatility: Evidence from a ST-HAR model

We investigate the impact of Covid-19 on stock markets across G7 countries and their business sectors. We highlight the synchronicity and severity of this unprecedented crisis. We find strong transition evidence to a crisis regime in all countries and sectors, yet crisis intensity and timings vary. The Health Care and Consumer services sectors were the most severely affected; a reflection of the Covid-19 drug-race and international travel restrictions. The Technology sector was hit the latest and least severely, as imposed lockdown measures forced people to explore various web-based entertainment and distraction options. Country-wise the UK and the US were the most affected with the highest heterogeneity in their business sectors' response; a possible reflection of the ambiguity in the initial response and adoption of lockdown measures. Financial markets' response to Covid-19 is akin to response in previous financial crisis rather than previous pandemics. A series of robustness checks confirms our findings.     

ESG in credit ratings and the impact on financial markets

This study examines environment, social, governance (ESG) consideration in rating reports published by credit rating agencies. 3,719 Moody's credit rating reports between 2004 and 2015 are examined and the ESG consideration is analyzed using a latent dirichlet allocation (LDA) approach. We further analyze the stock returns and credit default swap (CDS) spread changes to check whether ESG consideration has an effect on the capital market reactions. We find a small but present consideration of ESG in rating decisions. Within ESG, corporate governance plays the most important role. Moreover, the results reveal that ESG consideration is a significant determinant in the stock return and CDS spread around the rating announcement. We find that all ESG criteria are important for equity and debt investors.     

The Covid-19 outbreak,corporate financial distress and earnings management

This study explores the association between the Covid-19 outbreak, corporate financial distress and earnings management practices in China. We investigate whether firms took advantage of the downturn in economic conditions during the pandemic to adjust their earnings using different earnings management techniques. Utilising a sample of 1832 listed firms and underlying theoretical frameworks (i.e., positive accounting and signalling theory), we find that firms were more inclined to manage earnings during the pandemic period. They favoured using the accrual-based rather than the real activity-based earnings management technique. We also find that firms engaged more in income-increasing practices in the shadow of the outbreak. In addition, our results further demonstrate that financially distressed firms were involved in earnings management, particularly accrual-based earnings management. However, compared to privately-owned firms, state-owned enterprises seem to be involved less in earnings management during the Covid-19 pandemic. Findings from this study raise some concerns for policymakers about the credibility of financial reporting information during Covid-19.     

The impact of the Russian-Ukrainian war on global financial markets

On February 24, 2022, Russia invaded the Ukraine. In this paper, we analyze the response of European and global stock markets alongside a representative sample of commodities. We compare the war response against the recent Covid-19 pandemic and the not-too-distant 2008 global financial crisis. Applying a Markov-switching HAR model on volatility proxies, estimates are made of synchronization, duration and intensity measures for each event. In broad terms, stock markets and commodities respond most rapidly to the Russian invasion; and post-invasion crisis intensity is noticeably smaller compared to both the Covid-19 and the GFC. Wheat and nickel are the most affected commodities due to the prominent exporter status of the two countries.     

Environmental,Social, and Governance (ESG) disclosure: A literature review

Voluntary nonfinancial Environmental, Social, and Governance (ESG) disclosure is a rapidly growing and increasingly important topic that has attracted great attention from both academic researchers and capital market participants in recent years. The objective of this survey study is to provide a comprehensive review of the ESG disclosure literature in accounting research with suggestions for the future. Specifically, we organize the literature into four categories: motivations for and consequences associated with ESG information, in addition to disclosure- and user-level characteristics with the potential to affect the observed outcome of information disclosure. We also discuss the key role of nonfinancial rating agencies as a new type of ESG information intermediary in capital markets and suggest opportunities for future research.     

Understanding resource deployment efficiency for ESG and financial performance: A DEA approach

COVID-19 has stimulated additional research interest on economic sustainability and ESG in both academia and industry. This study adopts a DEA approach to examine the efficiency of achieving ESG targets and their relationships with financial performance. Using MSCI ESG data from 2015 to 2019 on 1108 Chinese firms, we examine the ESG proportional and pillar mix efficiencies. The dominant strategies for our sampled firms are to improve overall ESG performance by enhancing the E and S pillars through sacrificing G’s performance. The second result shows a positive relationship between proportional efficiency and financial performance while a mixed relationship between pillar mix efficiency and financial performance. However, for the technology sector, there exists some trade-offs between ESG performance and financial performance. Specifically, relative to non-technology firms, improving proportional and pillar mix efficiencies for technology firms could result in some sacrifice in stock valuation.     

Environmental,social, and governance practices and perceived tail risk

Using the implied volatility smirk on individual equity securities to measure perceived tail risk, we find that better environmental, social and governance (ESG) practices significantly reduce ex-ante expectations of a left-tail event. Our findings are robust to using multiple model specifications and to adjusting for potential endogeneity concerns. We also show that, while practices in each ESG pillar are important in reducing perceived tail risk, the environmental pillar plays the most important role. Our results indicate that investors consider strong ESG practices to be insurance against left-tail events rather than wasteful investment borne out of managers’ own values or self-interest.     

ESG Controversies,ESG Disclosure and Analyst Forecast Accuracy

We investigate whether an environmental social governance (ESG) disclosure moderates the relation between ESG controversies and analyst forecast accuracy. The previous literature has shown that ESG controversies increase uncertainty about a firm's future prospects, while ESG disclosure decreases this uncertainty. We therefore take the next step and integrate ESG controversies, ESG disclosure and uncertainty into one model. Our study is based on 8,369 firm-year observations across 51 countries from 2008 to 2017, containing data from RepRisk, Bloomberg and the Institutional Brokers' Estimate System. We find that analyst forecast errors are generally higher for firms with higher exposure to ESG controversies. More importantly, we establish ESG disclosure as a moderator that mitigates the strength of the relation between ESG controversies and analyst forecast errors. Additionally, we identify that the most important pillar for the relation derives from social controversies and disclosure.     

The ESG effect on the cost of debt financing: A sharp RD analysis

Environmental, social, and governance (ESG) factors have become increasingly relevant within the financial world. Despite extensive evidence regarding the equity side, limited studies in the literature have investigated the potential effects of ESG performance on the main drivers of debt. This study aims to understand whether there is a positive effect from a cost of debt standpoint for corporations with relatively better ESG performance. Using the ESG score by Refinitiv and a sharp regression discontinuity design, we do not find statistically significant evidence for discrete jumps in correspondence with the ESG score average for the cost of debt of European nonfinancial corporates over the 2018–2020 period. In a sharp regression discontinuity setting, we obtain analogous results by developing a linear probability model.