The Effects of ESG Performance and Preferences on U.S. Corporate Bond Prices

We study the effects of ESG performance and preferences on the U.S. corporate bond market. Consistent with the theory, we show that firms with superior ESG scores benefit from lower yields and improved liquidity. In addition, we reveal a time-varying effect of ESG performance induced by a changing demand of investors for ESG securities. The effect on yields for firms with higher ESG performance in times of higher ESG preferences is up to 25 bp. Furthermore, we divide a firm's ESG performance into its underlying pillars E, S, and G, finding that the results are mainly driven by environmental concerns. Overall, our results provide evidence for theoretical models based on non-pecuniary utility benefits for ESG investors.