Who Labels and What's Priced? Evidence from Third-Party ESG Assessments in the Municipal Bond Market

This study employs an Effect Decomposition Regression (EDR) framework to analyze the impact of ESG initiatives on firm performance, focusing on the importance of firm size. A key finding of this study is that firm size matters in characterizing the relationship between ESG and performance. For large firms, ESG has a significant impact on total revenues, which is characterized by a U-shaped relationship where ESG initiatives initially have a negative impact on performance, and as firm investment on initiatives expand, the impact shifts to a positive influence as scores rise. On the other hand, smaller firms exhibit a monotonically increasing or incremental benefit from ESG engagement. This research underscores the necessity of not just controlling for size but examining ESG-performance behavior by firm size. From a policy perspective, it is clear that before universally advocating for ESG as a value enhancing practice for all firms, one must consider firm size.