ESG in credit ratings and the impact on financial markets. Issue 3 (20th May 2019)

• Record Type: Journal Article
• Authors: Kiesel, Florian; Lücke, Felix
• Is Part Of: Financial markets, institutions and instruments. Volume 28:Issue 3(2019)
• Page Start: 263
• Page End: 290
• Publication Date: 2019-05-20
• Subjects: credit default swap -- credit ratings -- Environment Social Governance (ESG) -- Latent Dirichlet Allocation (LDA) -- stock market -- G14; Financial services industry -- Periodicals; Securities industry -- Periodicals; Financial instruments -- Periodicals; Financial institutions -- Periodicals; 332.105
• DOI: 10.1111/fmii.12114
• Languages: English
• ISSNs: 0963-8008

Abstract

Abstract: 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.