How does corporate ESG performance affect bond credit spreads: Empirical evidence from China

Does ESG performance reduce audit costs

“…Column (1) shows the relationship between ESG performance and the level of corporate audit fees, from which it can be seen that the relationship between ESG performance and corporate audit fees is significantly negative at the 1% level, indicating that the better the ESG performance, the lower the corresponding audit fees incurred by the firms, and hypothesis 1 is verified. Columns (2) and (3) show the effect of ESG performance on corporate audit fees after differentiating the nature of corporate ownership, and it can be seen that the relationship between ESG performance and audit fees is significantly negative at the 1% level in nonstate-owned enterprises, while the effect is not significant in state-owned enterprises, although they also show a negative relationship. This indicates that the negative effect of ESG on audit fees is stronger in non-SOEs compared to SOEs.…”

“…On the one hand, companies with higher reputation are more likely to attract the attention of investors and customers and obtain more financing opportunities for the company. At the same time, they maintain stable and continuous good relationships with suppliers and customers, and when suffering from external economic shocks, stakeholders will tend to give support to companies with better reputation and reduce their business risks [3], making auditors spend significantly less time and effort in conducting audits, which is expressed as less audit fees [13]. On the other hand, reputable companies, in order to maintain their own reputation level from being damaged, will tend to take the initiative to assume social responsibility and actively disclose environmental responsibility information, which manifests itself in a higher level of ESG performance, thus reducing the degree of information asymmetry inside and outside the company [14], sending a signal of management integrity to the auditor, allowing the auditor to work in a more transparent environment, reducing the investment of audit resources with a consequent reduction in audit fees.…”

“…The full sample data are substituted into model (2), model (3) and model ( 4) for regression, and the regression results are shown in Table 6. The coefficient between ESG and audit fees in column ( 1) is significantly negatively correlated at the 1% level, indicating that the higher the level of ESG of an enterprise the lower its audit fees will be; the addition of mediating factors in columns ( 2) and (3) shows that the coefficient between ESG and enterprise business risk is significantly negatively correlated at the 1% level, indicating that the higher the level of ESG of an enterprise, the lower its business risk will be; after controlling for mediating variables, the After controlling for the mediating variables, ESG and audit fees are still significantly negatively correlated at the 1% level, which shows that the partial mediating effect of operational risk between ESG performance and corporate audit fees is significant, i.e., the better ESG performance of a company's internal governance structure is usually more standardized and the risk management system is more perfect, which makes the company more resilient in the face of external risks and effectively reduces the company's risk of financial distress and This reduces the risk of audit failure and thus reduces audit costs.…”

“…Unlike the previous profit concept, ESG rating takes into account the financial and social effects of a company, providing a broader perspective for investors to understand the company and make investment decisions. It has been shown that high-quality ESG performance can help companies reduce the risk of noncompliance and financial distress [1], enhance corporate value [2], reduce the cost of debt financing [3], promote corporate green innovation [4], and improve investment efficiency [5]. However, most of the studies on the economic consequences of ESG have been conducted based on the internal perspective of firms, and few have explored the economic consequences of ESG from an external perspective.…”

Environment, social and governance (ESG) performance and CDS spreads: the role of country sustainability

“…Our focus on credit risk as a measure of firm performance is driven by not only growing concerns over sustainability issues but also rising global nonfinancial corporate debt. The bulk of prior empirical studies supports the risk mitigation view: better aggregate ESG performance is related to better credit ratings (Attig et al, 2013;Jiraporn et al, 2014;Kiesel and L€ ucke, 2019;Zanin, 2022), smaller loan spreads (Goss and Roberts, 2011;Kim et al, 2014;Qian et al, 2023), smaller bond spreads (Apergis et al, 2022;Ge and Liu, 2015;Huang et al, 2018;Lian et al, 2023) and more recently, narrower credit default swap (CDS) spreads (Bannier et al, 2022;Barth et al, 2022;Drago et al, 2019;Naumer and Yurtoglu, 2022). However, there is also some empirical support for the overinvestment view in terms of corporate bond spreads (Menz, 2010), corporate bond ratings (Stellner et al, 2015) and bank loan spreads (Magnanelli and Izzo, 2017).…”