Date of Award
10-2022
Degree Type
Doctoral Dissertation
Degree Name
Doctor of Business Administration (DBA)
Department
Jack Welch College of Business
Dissertation Supervisor
Dr. Lorán Chollete
Committee Member
Dr. Mayank Raturi
Committee Member
Dr. Khawaja Mamun
Abstract
This study examines various factors or characteristics (risk and non-risk) that determine a firm’s credit risk premium, as measured by its credit default swap (CDS) spread, with a particular focus on the impact of environment, social, and governance (ESG) scores. The framework employed is a general equilibrium asset pricing model which integrates classical and behavioral finance elements, known as popularity-based asset pricing. It treats all attributes or characteristics of an asset as ”factors” to which investors assign a degree of popularity, which changes over time. Non-risk characteristics are classified as ”tastes” or ”disagreements”, Fama French (2007). Firms’ degree of adherence to ESG practices is treated as one of these factors, looking at data over a decade period (2010-2021) of US corporate credits. In the popularity-based framework, investors have divergent beliefs about expected returns, and a variety of risk and non-risk preferences, such as liquidity or ESG. The popularity of ESG awareness among investors is treated as a preference rather than an economic risk factor exposure. The main results from this analysis are that, for the entire universe of US corporate credit market, both investment-grade and high-yield (sub-investment grade), the conclusion is that ESG, as a preference, is not significant in terms of the long-term credit risk protection spread levels for the entire universe, as well as investment-grade credit, but for sub-investment grade credits, that is not the case. These results indicate that a wellestablished and mature firm with a strong ESG consciousness and policy orientation may attract ESG-conscious investors, and these investors may be willing to pay a premium for the ESG benefits due to their popularity, leading to tighter CDS spreads or in other words ESG disclosure is negatively related to the credit default swap spread, which suggests that firms with a higher ESG disclosure have lower default risk. These results are essential for all firms’ stakeholders, and bondholders, to consider the firm’s ESG disclosure in conjunction with the life cycle stage before making their investment decisions.
Recommended Citation
Okyere-Yeboah, E. (2022). Empirical studies of ESG scores with corporate credit spreads (Insights from popularity-based pricing). Jack Welch College of Business & Technology dissertation, Sacred Heart University, Fairfield CT. Retrieved from https://digitalcommons.sacredheart.edu/wcob_theses/26/
Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.
Included in
Business Administration, Management, and Operations Commons, Corporate Finance Commons, Finance and Financial Management Commons
Comments
In partial fulfillment of the requirements for the degree of Doctor of Business Administration in Finance, Sacred Heart University, Jack Welch College of Business and Technology.