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The impact of corporate social responsibility on corporate financial performance and credit ratings in Japan

Abstract

We investigate the impact of companies’ sustainability efforts on their corporate financial performance (CFP) and credit ratings in Japan, based on a new proxy for corporate social responsibility (CSR)—Sustainalytics’ quantitative Environment, Social and Governance (ESG) ratings. We find weak evidence of a negative impact of ESG scores (on an aggregated basis and disaggregated basis) on several accounting measures of CFP. Our quantile regression results reveal a nonlinear pattern across the quantiles, with CSR effects intensifying at the extremal quantiles. However, we find a weak positive relationship between ESG and stock market-based measures, as well as between ESG and credit ratings. Our findings suggest that investors, credit rating agencies (CRAs) and regulators should differentiate between the three types of ESG screening as they interact and contribute in their specific way to the aggregate ESG effect.

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Notes

  1. Lys et al. (2015) refer to this as the “investment hypothesis” as current CSR expenditures lead to improvements in future firm performance.

  2. The MSCI ESG STATS database was previously known as the KLD STATS database; the latter covered only US publicly traded companies. MSCI ESG STATS expanded its coverage of non-US companies in 2013.

  3. Both Sales and Cash (as proxies for size) use the logarithm of total sales, and cash and marketable securities, respectively, and have not been scaled to total assets. This is to isolate the effect of the specific control variable as total assets can be viewed as a measure of size too.

  4. The literature concerning credit ratings has documented many firm characteristics that influence credit ratings. Default risk is found to be inversely related to credit ratings (Lamy and Thompson 1998. Other studies (Blume et al. 1998; Bhojraj and Sengupta 2003; Mansi et al. 2004; Ashbaugh-Skaife et al. 2006) control for a set of variables routinely used in studies of credit ratings to isolate the effects of the CSR variable.

  5. See Attig et al. (2013), Blume et al. (1998), Bhojraj and Sengupta (2003), Mansi et al. (2004), and Ashbaugh-Skaife et al. (2006).

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Correspondence to Frank J. Fabozzi.

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Fabozzi, F.J., Ng, P.W. & Tunaru, D.E. The impact of corporate social responsibility on corporate financial performance and credit ratings in Japan. J Asset Manag 22, 79–95 (2021). https://doi.org/10.1057/s41260-021-00204-6

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  • DOI: https://doi.org/10.1057/s41260-021-00204-6

Keywords

  • Corporate social responsibility
  • Corporate financial performance
  • Credit ratings
  • Environment, social and governance ratings
  • Quantile regression

JEL Classification

  • G39
  • Q50
  • C21
  • C23