ESG Management and Credit Risk Premia: Evidence from Credit Default Swaps for Japan's Major Companies

In the credit default swap (CDS) market, Japan’s major companies are regarded on average as having weak pathways leading from their stakeholder relationships to reducing their default risks. This assertion is based on panel data analyses to investigate the determinants of companies’ CDS premia over the past five years. Reasonably, higher ratings of managing governance (G) issues are associated with smaller CDS premia. Higher ratings of managing social (S) issues, by contrast, are associated with larger CDS premia. Companies’ pro-social preferences receive poor evaluations in the CDS market. Moreover, there is a non-significant association between companies’ CDS premia and ratings of managing environment (E) issues. No interaction effects are detected between companies’ E and G ratings or between their S and G ratings, implying that improving corporate governance does not help companies to align their E and S activities with expanding their own moral and social capitals. During the COVID-19 pandemic period, however, we find significant interaction effects between companies’ E and G ratings and between their S and G ratings. Companies’ stakeholder influence capacity is likely to have been insufficient in the past, but is likely to be developing.