The Price of Responsibility: ESG Performance and Its Effect on Bond Costs and Ratings

Abstract

This paper examines whether the environmental, social, and governance (ESG) performance impact firm’s cost of det, bond rating and improve market reactions to bond offerings. Using a dataset of 8547 bonds issued by 1250 U.S. firms during the 2004 to 2022 period, the paper investigates how each ESG pillar impacts cost of debt, bond rating and market reaction. This paper suggests that firms with better environmental, social, and governance performance are perceived as lower-risk borrowers by the market . Overall, the paper finds evidence that ESG performance reduces the cost of Debt, improve Bond ratings and lower the adverse market reaction to Bonds issue announcements . Each of the three ESG pillars significantly impacts the cost of Debt.