N°25-24: ESG Ratings, ESG News Sentiment and Firm Credit Risk Perception

We investigate the impact of ESG rating changes and daily ESG news sentiment on firm credit risk. We document a significant increase in CDS spreads following ESG rating downgrades, especially for the social pillar, while we find a muted reaction to ESG upgrades. A similar asymmetrical effect is documented for ESG news. We further show that the adverse effect of ESG downgrades on the CDS market is mitigated in the presence of positive ESG sentiment, a transparent information environment and higher rating disagreement. Lastly, the reaction is stronger for firms with lower creditworthiness, higher bankruptcy probability and tighter financial constraints.