Three essays on ESG and corporate finance

Abstract

This dissertation consists of three essays on ESG (Environment, Social, and Governance) and corporate finance. The first essay introduces a new measure of a firm’s attention to ESG issues based on internet research activity mapped to the firm. The findings show how firms have rational inattention to ESG issues and that this inattention affects firm ESG performance. Firm attention is linked positively to real ESG outcomes. Firm attention to ESG issues provides broader and timelier coverage of ESG behavior than the media or ESG ratings and it provides new insights into reasons why firms make ESG-related decisions. Finally, we demonstrate how our ESG attention measure is useful for investors seeking to hedge climate change risk. The second essay studies the relationship between government contracting and corporate environmental policies. Using a new data set of government contracts, I show that firms that supply government agencies conduct more emission-source reduction activities and pollution abatement expenditures when government agencies increase their overall preference for "green" suppliers. Analyses using a public procurement reform in European Union provide causal evidence. Additionally, I document stronger effects when firms face higher climate policy uncertainty and more external financing dependence. Overall, the results illustrate the economically large impact of government contracting in stimulating firms’ investments in environmentally friendly technologies and production methods. The third essay introduces a measure of firm uniqueness using a novel data set of firmmapped internet content consumption covering tens of thousands of business and consumer interest websites. Firm uniqueness is associated with better financial performance and higher value of patents originated. It is also associated with less analyst coverage and less informative stock prices as measured by lower Q-sensitivity of investment. Nevertheless, unique firms have higher market valuations. They also experience higher announcement returns in M&A transactions, while the counterparties of more unique firms experience lower returns, suggesting that differentiation increases bargaining power in M&A.