Politics, integration of ESG in CEO compensation, and firm credit ratings: evidence from the USA
Studies in Economics and Finance
ISSN: 1086-7376
Article publication date: 24 November 2023
Issue publication date: 4 June 2024
Abstract
Purpose
This paper aims to investigate how a US firm’s political landscape affects the integration of environmental, social and governance (hereafter ESG) measures in CEO compensation contracts, thereby affecting the firm’s ESG performance and credit rating.
Design/methodology/approach
Based on the results of state senatorial and presidential elections and the location of a US firm’s headquarters, the authors categorize whether a firm has a political environment that is predominantly Democratic (blue) or Republican (red). The empirical analyses are based on a sample of US firms in the period 2014–2021.
Findings
The authors find that firms in blue states are more likely to link CEO compensation to ESG performance measures. Further, the results show that firms in blue states with ESG-linked compensation contracts have better ESG performance. Lastly, the authors find evidence that a firm’s ESG performance has a positive impact on its credit rating, but the impact is weakened if firms in red states link ESG performance to executive compensation.
Originality/value
To the best of the authors’ knowledge, this is the first research that explores how a firm’s political environment affects the use of ESG performance measures in CEO compensation contracts. Furthermore, the authors contribute to the literature by showing evidence that the political environment interacts with the impact of ESG-linked compensation incentives on the firm’s ESG performance and, thus, its credit rating.
Keywords
Acknowledgements
This research is based in part on William Smith III’s honors program thesis at Gabelli School of Business, Fordham University. The thesis won the 2023 Best Honors Thesis Award granted by the school.
Data availability: All data used in the paper are available from cited public sources.
Citation
Peng, E.Y. and Smith III, W. (2024), "Politics, integration of ESG in CEO compensation, and firm credit ratings: evidence from the USA", Studies in Economics and Finance, Vol. 41 No. 3, pp. 456-477. https://doi.org/10.1108/SEF-06-2023-0350
Publisher
:Emerald Publishing Limited
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