Is ESG a Sideshow? ESG Perceptions, Investment, and Firms' Financing Decisions

We study the effects of market ESG perceptions, as proxied by ESG ratings, on public firms’ security issuance and asset accumulation decisions. Higher ESG scores are followed by capital structure adjustments, specifically increases in equity issuance and decreases in net debt issuance of similar magnitude. These are driven completely by the “E” component of ESG. There are no effects of ESG assessments on capital expenditures or non-cash asset accumulation, supporting the hypothesis that ESG perceptions are a sideshow for capital investment. To address the endogeneity of firms' decisions to raise equity, we consider industry-wide rating changes and decompose the ESG ratings into an industry- and a firm-specific component. The response to the industry component of equity and debt issuance is highly significant, indicating that our findings are not explained by firms' decisions. As many ratings products use restated or backfilled ratings, our results focus on a point-in-time (PIT) ratings panel that we develop. We document that if using a standard ratings product instead of PIT data, researchers might falsely infer that higher ESG ratings lead to asset accumulation, due in particular to the use of restated ESG scores in standard ratings data products.