Public's evaluation of ESG and credit default swap: Evidence from East Asian countries

We investigate whether investors' sentiment on environmental, social, and governance (ESG) factors negatively affects a firm's spread for credit default swaps (CDS) in East Asian countries. We use the Kyoto Protocol as an exogenous shock to public sentiment on ESG and observe that it strengthens the negative influence of that sentiment on CDS spreads. Furthermore, we find consistent results on the discrepancy in CDS spreads between firms and their respective countries, as well as the term structure of the spreads. Our findings demonstrate that the public's perception of ESG can reduce investors' concerns about firms' credit risk.