Sustainability Performance, Litigation Provisions and Corporate Bond Spreads

Table of Contents

1 Introduction

2 Literature Review

2.1 Sustainability and Cost of Debt

2.2 Sustainability and Litigation Risk

3 Data and Methodology

3.1 Sustainability Performance and Corporate Bond Yield Spreads

3.2 Sustainability Performance and Litigation Provisions

3.3 Mediation Analysis of Litigation Provisions

3.4 Moderation Analysis of Litigation Provisions

3.5 Event study: Volkswagen Scandal & Paris Climate Agreement

4 Results

4.1 Descriptive Statistics

4.2 Sustainability Performance and the Corporate Bond Spread

4.2.1 Moderation Analysis: ESG, Time, Bond Spreads

4.2.2 Moderation Analysis: ESG, Industries, Bond Spreads

4.2.3 Moderation Analysis: ESG, Countries, Bond Spreads

4.3 Sustainability Performance and Litigation Provisions

4.3.1 Moderation Analysis: ESG, Time, Litigation Provisions

4.3.2 Moderation Analysis: ESG, Industries, Litigation Provisions

4.3.3 Moderation Analysis: ESG, Countries, Litigation Provisions

4.4 Mediation Analysis: Litigation Provisions

4.5 Moderation Analysis: Litigation Provision

4.6 Event study: Volkswagen Scandal & Paris Climate Agreement

5 Discussion and Limitations

5.1 ESG performance and Cost of Debt

5.2 ESG performance and Litigation Provisions

5.3 Mediation and Moderation Analyses of Litigation Provisions

5.4 Limitations

6 Conclusion

Research Objectives and Focus Areas

This thesis investigates the relationship between corporate sustainability performance (ESG), litigation provisions, and the cost of debt as reflected in corporate bond yield spreads. The primary goal is to determine if stronger sustainability performance reduces bond yield spreads and if this relationship is mediated or moderated by litigation risk, while also examining the causal implications through an event study on the Volkswagen scandal and the Paris Climate Agreement.

• Analysis of the direct relationship between ESG performance and bond yield spreads.
• Examination of the role of litigation provisions as a proxy for litigation risk.
• Investigation of potential mediation and moderation effects of litigation risk on the cost of debt.
• Evaluation of industry and country-specific differences in how capital markets value sustainability.
• Causal inference regarding sustainability and financial performance using an event study approach.

Excerpt from the Book

Summary of Chapters

1 Introduction: Introduces the research topic, defines the scope of investigating the link between ESG performance, litigation risk, and bond yield spreads, and presents the central research questions.

2 Literature Review: Reviews existing academic literature regarding sustainability performance in relation to the cost of debt and litigation risk, highlighting the current debate and identifying research gaps.

3 Data and Methodology: Details the global dataset used, the construction of the variables including ESG scores and litigation provisions, and the econometric models employed for testing the hypotheses.

4 Results: Presents the empirical findings, including descriptive statistics, regression results for the bond spread and litigation provisions, and the outcome of the event study.

5 Discussion and Limitations: Discusses the implications of the findings, tests the hypotheses against literature, and outlines the constraints and limitations of the research design.

6 Conclusion: Summarizes the major findings, reflects on the implications for businesses and academia, and provides a final outlook on the relationship between sustainability and financial risk.

Keywords

Sustainability Performance, ESG Score, Corporate Bond Yield Spreads, Litigation Provisions, Litigation Risk, Cost of Debt, Environmental Performance, Social Score, Governance, Financial Economics, Event Study, Volkswagen Scandal, Paris Climate Agreement, Mediation Analysis, Moderation Analysis

Frequently Asked Questions

What is the core focus of this Master Thesis?

The thesis focuses on examining whether corporate sustainability performance (ESG) influences the cost of debt, specifically through corporate bond yield spreads, and whether this link is affected by litigation risk.

Which key variables are analyzed in the study?

The main variables are the overall ESG score (and its environmental, social, governance, and economic sub-scores), litigation provisions as a proxy for litigation risk, and the yield spread over benchmark for corporate bonds.

What is the primary objective of the research?

The primary objective is to clarify the conflicting results in existing literature regarding how sustainability performance impacts the cost of debt and to determine if litigation risk acts as a mechanism (mediator or moderator) in this relationship.

Which scientific methods are applied to conduct this research?

The study employs Panel Least Squares (PLS) regressions with fixed effects for time, industry, and country. Additionally, it uses mediation tests (Sobel-test and bootstrapping) and an adjusted difference-in-difference approach for an event study.

What topics are covered in the main section of the paper?

The main body covers the theoretical framework, the methodology of data selection and regression construction, the detailed presentation of empirical results, and a critical discussion of findings in relation to existing research.

Which primary keywords characterize this work?

The work is characterized by terms such as ESG performance, litigation provisions, cost of debt, yield spreads, environmental performance, and litigation risk.

How does the Volkswagen scandal influence the analysis?

The Volkswagen scandal is used as an exogenous shock in an event study (combined with the Paris Climate Agreement) to provide evidence of a causal relationship between low environmental performance and increased bond yield spreads.

What is the role of litigation provisions in the study?

Litigation provisions are treated as a forward-looking proxy for litigation risk, used to test whether the market penalizes companies for expected future legal expenses associated with sustainability issues.

Did the study confirm the mediating role of litigation risk?

No, the mediation analyses (Sobel-test and bootstrapping) did not provide significant evidence that litigation provisions mediate the relationship between ESG performance and corporate bond yield spreads.

Why did the author include a country and industry moderation analysis?

The author included these analyses to investigate whether the impact of ESG on bond spreads varies depending on the regional institutional framework and the specific sector's risk profile, revealing significant heterogeneity in how markets reward sustainability.