Title: ESG Performance and Corporate Bond Volatility
Author(s) : Trevor Chamberlain, Ran Zhao, Zehua Zhang ,Lu Zhu, Lu Zhu
This study examines the effects of environmental, social and governance (ESG) performance on bond volatility. After controlling for bond characteristics and firm fundamentals, we find a robust positive relationship between ESG performance and bond volatility. The empirical results demonstrate that the impact of bond volatility is primarily driven by ESG strengths rather than concerns. Additionally, the increase in bond volatility is concentrated in short-term bonds. The results are robust to alternative measures, sample periods, and endogeneity controls. Further, the effect of ESG performance is more pronounced for firms with higher managerial risk-taking and poor information environments. One practical implication of our findings is a potential conflict of interest between bondholders and the firm as a social entity. The commitment to a broader group of stakeholders, including communities, employees and the environment, may absorb free cash flow and lead to overinvestment. This is consistent with bond volatility being more affected by ESG strengths than by ESG concerns.