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HomePaperESG Ratings and Firms’ Financing Decisions

ESG Ratings and Firms’ Financing Decisions

1 January 2024
Authors: Roman Kräussl (Bayes Business School, Hoover Institution at Stanford University), Joshua Rauh (Stanford Graduate School of Business, Hoover Institution) and Denitsa Stefanova (University of Luxembourg)
Presenter: Denitsa Stefanova (University of Luxembourg)

We study the effects of ESG ratings on firms’ security issuance decisions. We develop a dataset based on Refinitiv’s point-in-time (PIT) ratings product that ensures we are only considering ratings actually available to investors as of the time of financial decisions. We find that higher environmental scores (the “E” component of ESG) are associated with increases in equity issuance and decreases in debt issuance, without increasing the firm’s overall capital. There is therefore no evidence that changes in ESG scores either affect a firm’s opportunity cost of capital for new investments or relax financing constraints, although changes in ESG scores (and “E” scores in particular) may change the relative prices of issuing different types of securities. We document numerous false inferences that would be made about capital raising if using the standard Refinitiv product instead of the PIT data. We also demonstrate that there are no apparent effects of ESG scores on stock returns as measured by alphas in standard 4-factor asset pricing models.

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