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ESG rating confusion and bond spreads

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  • Zou, Jin
  • Yan, Jingzhou
  • Deng, Guoying

Abstract

This paper investigates the influence of ESG rating confusion on bond spreads, an area of growing importance in sustainable finance. Despite the recognition of ESG rating confusion, their effects on the bond market remain less explored. Leveraging a corporate bond pricing model, we reveal that ESG rating confusion widens the bond spread. Analyzing data from China, we find that both primary and secondary bond markets are affected, with the latter experiencing a more significant impact. Our study emphasizes the role of information asymmetry and investor preferences, outweighing the issuer’s financial position in driving these effects. Furthermore, we identify environmental and weighting inconsistencies as crucial sources of ESG rating confusion. The findings underscore the necessity of a standardized ESG rating system to enhance investor confidence and support ESG-related project financing. A cohesive rating approach among agencies correlates with narrower bond spreads, thereby fostering bond market efficiency and promoting ESG investment practices.

Suggested Citation

  • Zou, Jin & Yan, Jingzhou & Deng, Guoying, 2023. "ESG rating confusion and bond spreads," Economic Modelling, Elsevier, vol. 129(C).
    • Handle: RePEc:eee:ecmode:v:129:y:2023:i:c:s026499932300367x
    DOI: 10.1016/j.econmod.2023.106555
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    Cited by:

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    3. Yikai Zhao & Jun Nagayasu & Xinyi Geng, 2024. "Measuring Climate Policy Uncertainty with LLMs: New Insights into Corporate Bond Credit Spreads," DSSR Discussion Papers 143, Graduate School of Economics and Management, Tohoku University.

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    More about this item

    Keywords

    ESG; Rating confusion; Bond spread; Chinese market;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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