Launching for the “Greater Good”: Spillover Effect of ESG Funds

Fangyuan Ma, Linlin Ma, Yuan Wang, and Bo Xu

♦ We investigate how firms manage financial default risk (on debt obligations) and operational default risk (on delivery obligations). Financially constrained firms reduce operational hedging through adjustments to inventory and supply chains in favor of cash holdings. Thus, firms’ markup increases with financial default risk because they cut operational hedging costs. This effect strengthens during adverse aggregate shocks, and that markup reacted more strongly to credit risk for firms that became financially constrained when they were shocked in 2008 Financial Crisis.

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