Managerial ability, ESG and credit ratings

This study examines whether managerial ability impacts the positive association between environmental, social and governance (ESG) performance and credit ratings. We find that managerial ability magnifies this positive association. We further extend our analyses to examine the controversial issue of greenwashing. We find that the positive impact of managerial ability and ESG performance on credit ratings is stronger when firms engage in greenwashing. Our results are also economically significant and, therefore, meaningful. Furthermore, our baseline results are robust to alternative measures of managerial ability and ESG performance, in addition to various endogeneity checks. Cross-sectional analyses demonstrate that the interaction effect of managerial ability and ESG performance on credit ratings is stronger (weaker) in firms with inferior (superior) information environments. We also observe that the interaction effect is stronger (weaker) for firms with smaller (larger) boards of directors. Overall, this study improves our understanding of the important influence of managerial ability and ESG performance on credit ratings. Its findings call for close attention to ESG performance and the controversial issue of greenwashing.