ESG disclosure as advertisement of corporate bond issuances

This paper investigates whether firms strategically increase their environmental, social, and governance (ESG) disclosure levels beyond what is expected as a signal to investors to obtain better access to finance. Analyzing 3122 firm-year observations in the US corporate bond market from 2009 to 2017, we find this signal across all three ESG dimensions for firms facing high refinancing risk. Moreover, we find that firms that issue a bond generally have higher ESG disclosure levels than firms that do not. We further confirm our hypotheses by providing empirical evidence that financial benefits in terms of lower bond spreads are realized. We demonstrate that the signal is particularly prevalent within firms characterized by high earnings forecast dispersion and error. Our results are robust in a Heckman (1979) model and pass the Oster (2019) test. The findings highlight the important role of bond markets in incentivizing voluntary ESG disclosure.