Knowledge that Transforms

We develop a continuous-time model in which an ESG investor hires a manager to run a project and incentivizes the manager to fulfill ESG responsibilities. The manager’s private efforts and ESG investing determine the project’s cash flow and ESG performance subject to random shocks. We derive the optimal contract and its implementation after introducing carbon credits following the cap-and-trade program in practice. We provide comparative static analysis and empirical implications. The results demonstrate that ESG investing enhances contract efficiency. The more significant the carbon emission reduction, or the less the cost of ESG investing, the higher the contract efficiency, the average q, the marginal q, and the optimal investment–capital ratios, implying that ESG investing mitigates inefficiencies arising from information asymmetry and enhances investment values. Our model predictions are partially verified by empirical facts.

In this study, we explore the impact of the establishment of environmental courts, an environmental justice system, on the cost of equity capital. Based on a quasi-natural experiment of establishing environmental courts in China, we find that they have a deterrent effect and reduce the cost of equity capital for heavily polluting firms in localities. We also find that a low proportion of managerial ownership, a low level of analyst attention, and high environmental uncertainty induce this deterrent effect. Furthermore, mechanism tests indicate that environmental courts enhance corporate environmental engagement and corporate ESG ratings, increase long-term institutional investor ownership, and reduce urban environmental violations to achieve a deterrent effect. The findings are more pronounced for the trial court sample, firms in cities with lower public participation in environmental protection, and firms with lower environmental information transparency. We also suggest the impacts and underlying mechanisms of the environmental justice system on the equity capital market, which is conducive to long-term planning by firm managers.

We analyse the effects of the Pandemic Emergency Purchase Programme (PEPP) launched by the ECB after the burst of the Covid-19 pandemic. The effects of the programme were different from the previous asset purchases. The PEPP significantly reduced the yield on bonds that at the same time were eligible to the programme and showed a green label. Via a triple difference estimator, we show that this effect is additional to the outperformance of greens vs non-green bonds that also occurred in the set of non-eligible bonds. All in all, the estimated impact stands at 51 basis points, a value that is significant also from an economic point of view: around 20 per cent of the cost of issuing a bond. From a climate change perspective, this evidence suggests that asset purchase programmes are an effective way of supporting firms financing climate-friendly investments on the bond market. In addition, we find that the issuers that benefitted most from the PEPP improved their ESG performance to a larger extent than other issuers.

Using a sample of A-listed companies from 2010 to 2020, this paper investigates how investor–firm interactions on Easy Interaction and E-interaction affect corporate investment efficiency measured as investment-to-Tobin's Q sensitivity. The empirical results show that investor–firm interactions are positively correlated with corporate investment efficiency. Possible economic channels include information asymmetry and corporate governance channels. Moreover, investor–firm interactions have a greater impact on firms with fewer financial constraints, higher stock price efficiency, higher media coverage, and higher analyst coverage. When interaction sentiment is more positive, interaction quality is higher, and the topic pertains to technology research and development, the impact of investor–firm interactions is also more pronounced. The main conclusion still holds after adopting a series of endogeneity tests and robustness tests.

Using a comprehensive sample of listed and unlisted firms from 34 European countries, we study firm-level manufacturing outcomes conditioned on foreign investment, country characteristics, and EU membership. Higher foreign ownership is associated with higher productivity but lower employment, particularly when the host or source country is an EU member and scores high on disclosure and investor protection, and low on corruption. We confirm our interpretation using staggered EU accession dates and industry-level external financial dependence interacted with a financial crisis. The subset of Eastern European countries appears to benefit from foreign investment and EU accession without losing jobs. Nevertheless, manufacturing outcomes associated with survey findings on public sentiment towards globalization and migration confirm the social and political costs of globalization.

Are the professional networks of directors valuable? To separate the effect of director networks on firm value from the effect of other value-relevant director attributes, we use the unexpected deaths of directors as a shock to the director networks of interlocked directors. By studying the announcement returns and using a difference-in-differences methodology, we find the negative shock to director networks reduces the value of interlocked firms – a result that is stronger for firms that are more likely to benefit from access to information from board connections. This evidence is consistent with director networks being valuable and improving access to information.

A model is proposed for analyzing the financing of highly innovative projects undertaken by an investor and an entrepreneur as partners. It is shown that the optimal contract rewards the entrepreneur for success and failure but penalizes him for moderate returns. This theoretical scheme can be implemented by a hybrid financial structure that combines inside and outside equity and that is subsequently balanced by means of a reassignment mechanism contingent upon the project’s returns. Two settings are compared, one in which either of the partners innovates but not both (single moral hazard) and another in which both partners do (double moral hazard). We show that which setting is best depends on the degree of technological dependence between the partners’ innovation processes. This may explain the coexistence in practice of different financing and partnership arrangements.

We study the value impact of environmental shareholder proposals (ESPs) for Russell 3000 firms from 2006 to 2021. We distinguish between climate-dedicated ESPs and non-climate ESPs covering other environmental topics. We use two approaches to evaluate management's ability and willingness to select value-enhancing ESPs and reject value-destroying ESPs: (i) cumulative abnormal returns around the final proxy filing date and (ii) a regression discontinuity design around the voting threshold at the annual general meeting. Our results suggest that management has screening ability for ESPs, especially for climate proposals, and that investors and managers share common objectives in environmental activism.

We find that director pay, especially the equity-based portion, is positively related to peer firms' director pay, suggesting boards benchmark when establishing their own compensation. Such benchmarking is distinct from peer benchmarking in CEO pay. We also find a significant bias in peer selection towards peers with relatively high director pay, which helps increase board pay. Peer benchmarking of director compensation is more (less) pronounced in firms with low (high) involvement by institutional investors and firms with declining (increasing) profitability. Overall, our results are consistent with directors engaging in self-dealing when selecting compensation peers, without clear benefits to the firm.

We predict and confirm that long-term institutional investors (LTIOs) play an important role in mitigating the negative market perceptions of US stocks following mainstream print media coverage of climate change. We observe a stronger effect of LTIOs for companies that lack corporate social responsibility and have less diverse and more co-opted boards. Overall, these findings indicate that the US equity market views LTIOs as effective monitors who can help guide companies facing climate risks toward a more sustainable trajectory.