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Can firms with higher ESG ratings bear higher bank systemic tail risk spillover?—Evidence from Chinese A-share market

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  • Ling, Aifan
  • Li, Jinlong
  • Zhang, Yugui

Abstract

How can non-financial enterprises mitigate the tail risk shock from the banking system? This paper considers this problem by constructing six indices to measure the tail risk spillover from the banking system to firms (TRiskSB2F), and studies how ESG ratings of firms affect TRiskSB2F. Empirical results find that firms with high ESG ratings can bear the higher bank systemic tail risk spillover, and one standard deviation increases in the logarithm of ESG scores is associated with 0.169 percentage points lower per quarter in TRiskSB2F. Further results show that ESG ratings of firms with the small size, low liquidity stocks, listed on the main board or more long-term loans have higher sensitivity to reduce the impact of TRiskSB2F, but the sensitivity is significantly lowered in the pre-2015 bull market period. The mechanism analysis shows that firms with high ESG ratings have generally the relatively low financial constraints, good reputations and more resource superiority, which are important reasons to reduce the tail risk shock from the banking system. Our results can provide valuable evidence supporting companies to increase ESG investing.

Suggested Citation

  • Ling, Aifan & Li, Jinlong & Zhang, Yugui, 2023. "Can firms with higher ESG ratings bear higher bank systemic tail risk spillover?—Evidence from Chinese A-share market," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:pacfin:v:80:y:2023:i:c:s0927538x23001683
    DOI: 10.1016/j.pacfin.2023.102097
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    2. Gong, Xiaomin & Xie, Fei & Zhou, Zhongsheng & Zhang, Chenyang, 2024. "The enhanced benefits of ESG in portfolios: A multi-factor model perspective based on LightGBM," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).
    3. Larissa M. Batrancea & Ömer Akgüller & Mehmet Ali Balcı & Anca Nichita, 2024. "Financial network communities and methodological insights: a case study for Borsa Istanbul Sustainability Index," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-27, December.

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    More about this item

    Keywords

    ESG rating; Tail risk spillover of the banking system; Tail connectedness; Tail risk of firms;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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