Essays on environmental, social, and governance (ESG) and corporate finance

Abstract

This thesis consists of three essays on environmental, social, and governance (ESG) and corporate finance. In the first chapter, we study green bond, which is one of the financial instruments tackling climate change problems, and examine whether the shareholders benefit from issuing green bonds. The green bond market has been growing rapidly worldwide since its debut in 2007. We present the first empirical study on the announcement returns and real effects of green bond issuance by firms in 28 countries during 2007-2017. After compiling a comprehensive international green bond dataset, we document that stock prices positively respond to green bond issuance. However, we do not find a significant premium for green bonds, suggesting that the positive stock returns are not driven by the lower cost of debt. Nevertheless, we show that institutional ownership, especially from domestic institutions, increases after the firm issues green bonds. Moreover, stock liquidity significantly improves upon the issuance of green bonds. Overall, our findings suggest that the firm’s issuance of green bonds is beneficial to its existing shareholders.

In the second chapter, we evaluate another solution for climate change, green finance pilot zones, and document the incentive spillover effect of such place-based policies. Local government officials can boost their career advancement chances with superior environmental performance. Exploiting the unique setting of the world’s first nationwide green finance pilot program in China, we adopt a difference-in-difference design and find that being selected as green finance pilot zones (GFPZ) leads to a higher probability of government official promotion. Moreover, we document that non-pilot places make more efforts to improve environmental performances than pilot areas in order to be included when the pilot program expands. These environmental tournament effects are more pronounced in non-pilot zone areas with stronger career incentives (younger officials, lower GDP growth, less social achievements) and greater enforcement abilities (low SOE share). Overall, we find that place-based green finance policies create direct positive impacts and also impose positive incentive externalities on other regions. Our paper also sheds light on a new environmental tournament channel for local government officials’ career incentives.

In the third chapter, I analyze common ownership across the world and find that firms with common ownership have superior product market performance around the world. Using ownership data across 68 countries between 1997 and 2019, I show that commonly held firms experience significantly higher market share growth than non-commonly owned firms, after controlling for macroeconomic trends, institutional ownership, and blockholders. This effect is mainly driven by domestic and active institutional investors. Exploiting the staggered passage of national competition laws, I differentiate two channels through which common ownership may affect product market competition: efficiency-improving coordination and welfare-destroying anti- competition. The influence of common ownership on market share growth is more prominent in countries with less stringent antitrust laws and weaker legal protections in which the penalties of collusion are less. I also document that firms increase their markups after being commonly held, suggesting enhanced market power. My evidence is more consistent with the anti-competition explanation, which has critical antitrust implications.