The Impact of ESG Ratings on Trade Credit Financing

: Using a sample of Chinese listed companies from 2009 to 2020, this study investigates the impact of ESG ratings of listed companies on corporate trade credit financing. The results suggest that the performance of ESG ratings by listed companies can significantly improve the level of corporate trade credit financing. The positive effect of ESG rating on trade credit financing is more pronounced when the company hires a “Big4” auditor, or when the company locates in a region with a higher degree of marketization, and when the company is followed by more analysts. The results of the study still hold after the robustness test which uses the alternative measurement of dependent variables. The findings from this article enrich the research literature on the economic consequences of ESG ratings and factors influencing corporate trade credit financing. At the same time, it provides implications on how listed companies can improve their ESG ratings and how stakeholders can use ESG ratings for decision making.


Introduction
In recent years, with the rapid growth of China's economy, a great number of enterprises have been developing rapidly. In the process of development of these enterprises, financing difficulties have become a major problem faced by enterprises in expanding business scale and improving efficiency. Although the government is also taking measures to help enterprises overcome the shortage of funds, the problem of financing difficulties is still not alleviated. It is still the primary factor limiting the development of enterprises. Trade credit financing, as an alternative financing method to bank loans for enterprises, has been gaining attention in recent years as an important source of exogenous financing for enterprises against the background of insufficient bank financing. ESG is an acronym for environmental, social and governance, and ESG ratings are given by independent third-party agencies which comprehensively evaluate the risk and sustainability of a company from the above three aspects. In recent years, suppliers, as providers of corporate trade credit financing, are gradually paying more attention to a company's ESG rating, the important indicator when making their investment decisions.

Literature Review, Theoretical Analysis and Research Hypothesis
According to Petersen and Rajan (1997), trade credit financing is the single most important source of shortterm external finance for both big firms and small firms around the world.
The current relevant studies discuss the influencing factors of corporate trade credit financing around two levels: the internal characteristics and the external environment. When companies face difficulties in raising capital from external sources such as banks, reliance on trade credit increases, especially when major unforeseen events lead to a decline in corporate revenues and difficulties in obtaining bank financing (Linnenluecke, Griffiths, & Winn, 2012). It has been shown that the firm size (Petersen, & Rajan, 1997), internal controls (Zheng, Lin, & Peng, 2013), financial performance (Li, Lu, Ng, & Yang, 2016), CEO's hometown connections (Kong, Pan, Tian, & Zhang, 2020), and accounting information (Xu, Li, & Peng, 2017), all above are significantly correlated with trade credit financing. This is because these characteristics can convey internal information about the firm and thus influence the firm's access to trade credit financing. In addition, a large amount of literature has found that external characteristics such as currency policy (Rao, & Jiang, 2013), financial environment (Sun, Li, & Gu, 2014), social trust (Wu, Firth, & Rui, 2014), audit quality (Chen, & Wang, 2010) and analyst attention (Huang, & Wang, 2018) also affect corporate trade credit financing. Currently, there is scarce literature on whether and how ESG performance of listed companies affects their trade credit financing. In China, ESG investment is still in its infancy, and the amount of ESG disclosures by listed companies has been growing in recent years. However, it is still lack of relevant research in this area. Some literature talked about the economic consequences of ESG. According to existed studies, a higher ESG performance means that the total risk of the enterprise is lower (Sassen, Hinze, & Hardeck, 2016). It also has positive impact on corporate financial performance (Friede, Busch, & Bassen, 2015). Another analysis shows that ESG certification lowers the cost of capital of firm, while TobinQ increases significantly (Wong, Batten, Ahmad, Mohamed-Arshad, Nordin, & Adzis, 2021). Firms with higher ESG levels have lower FDR, suggesting that a better ESG performance makes firms more creditworthy and have better access to financing, which is rewarded with less financial defaults (Boubaker, Cellier, Manita, & Saeed, 2020). In addition, existing literature pointed that the positive impact of ESG on corporate financial performance appears stable over time, the higher the ESG level the more significant the positive impact on financial performance (Friede, Busch, & Bassen, 2015). The higher the ESG level, the higher the level of corporate governance and information disclosure, which means that the agency problem of the company can be effectively controlled, the degree of information asymmetry is reduced, and the company faces less information risk (Eccles, Ioannou, & Serafeim, 2014). The publication of ESG ratings forces companies to proactively improve management and disclosure to meet specific ESG disclosure requirements, reducing information risk for the company. When suppliers provide funds, they will evaluate whether they can get returns afterwards. Overall, suppliers will be more willing to lend money to companies when their risks are reduced. Therefore, good ESG performance helps to reduce information asymmetry between firms and trading partners such as suppliers. According to Gray and Balmer (1998), corporate reputation is an important strategic resource that can create a competitive advantage for a company. By building a short-term corporate image, maintaining and preserving it, the company can develop a long-term corporate reputation. Good ESG performance does help to improve the enterprise's reputation, which is a very important asset for the firms. Hence, involvements in ESG can help enterprises build up the reputation and gain some advantages in competition --suppliers are more willing to provide credit financing to companies with better ESG performance under equal circumstances. We can see that good ESG performance not only improves the evaluation and satisfaction of enterprises' suppliers, enable suppliers to have a deeper understanding of the future growth opportunities and market competitiveness of the enterprises, but also avoids the phenomenon of high cost of trade credit financing due to adverse selection, so that helps to accumulate credit capital and obtain more trade credit financing for enterprises. Based on the above analysis, the following hypothesis is proposed in this paper. H 1 : Good ESG performance has a positive impact on firm's trade credit financing.

Data Source and Sample Selection
This paper investigates the impact of ESG ratings on trade credit financing by using Shanghai and Shenzhen listed companies in China as samples from 2009 to 2020. The specific sample selection process is as follows: firstly, excluding listed companies such as financial and insurance companies, which are significantly different from other listed companies in terms of main business, firm size and information disclosure; secondly, excluding *ST listed companies, which are significantly different from other companies in terms of financial indicators and information disclosure; thirdly, excluding companies listed in the current year, because these companies have been listed for a shorter period of time and have a shorter duration of historical information, they have greater differences with other companies in terms of information disclosure; fourthly, excluding the samples with missing ESG ratings or some control variables such as HHI, Growth, etc.. After the above treatment, a total of 29,352 firm-annual sample observations can be obtained. To mitigate the impact of extreme values on empirical results, this paper winsorizes all continuous variables at 0.01 and 0.99 levels. The ESG rating data used in this paper are obtained from the WIND database, and all other data are retrieved from the CSMAR database.

Model
In order to verify the impact of ESG ratings on corporate trade credit financing (hypothesis H 1 )，this paper adopts the following model to conduct empirical analysis: In details, according to the existing research literature, this paper further controls for firm financial and governance characteristics variables, specifically firm size (Size), debts assets ratio (Lev), return on assets (Roa), cash flow from operating standardized by total assets (Cfo), ratio of independent directors, board size, Herfindahl-Hirschman Index, business growth. Besides, four dummy variables --Big4, TotalIndex, LawIndex and AnaAtt have been chosen to conduct further analysis. In addition, this paper also controls for industry fixed effect and year fixed effect. All variables are defined and measured as shown in Table  1 below. Dummy variable, if the auditing organization chosen by the company is one of the Big Four Accounting firms, then assigned a value of 1, otherwise assigned a value of 0.

Definition of Variables
TotalIndex Dummy variable, dividing the total score of the marketization process in the province where the enterprise is located into two groups, with the higher score group taking the value of 1 and the lower score group taking the value of 0.
LawIndex Dummy variable, dividing the score of intermediary organization development and law in the province where the enterprise is located into two groups, with the higher score group taking the value of 1 and the lower score group taking the value of 0.
AnaAtt Dummy variable, dividing the analysts' attention into two groups, with the higher score group taking the value of 1 and the lower score group taking the value of 0. Industry Controlling for industry fixed effect Year Controlling for year fixed effect Table 2 is the results of descriptive statistics of dependent variable, independent variables and control variables in this paper.

Descriptive Statistics
The results show that the mean value of trade credit, the dependent variable in this article, is 0.085. And the median value is 0.070, the standard deviation is 0.071, which indicates that the average size of accounts payable utilized by companies in the sample is about 8.5% of total corporate assets and varies widely among companies.
The main independent variable in this article, the mean value of ESG ratings of the sample companies is 6.486, and the variance is 1.106, indicating that the average level of ESG ratings is between BBB and A, and the difference of ESG ratings among companies is not very large.

Baseline Results
Columns (1) and (2) of Table 3 (1) and (2) show that corporate trade credit financing is positively related to ESG ratings significantly at the 1% level with an ESG coefficient of 0.001, which indicates that higher ESG ratings have a positive effect on corporate trade credit financing and increasing one level in ESG ratings will result in increasing the degree of trade credit financing by 0.001. The relationships between the other control variables and trade credit are as follows shown in Table 3. Therefore, the research hypothesis H 1 can be verified. When a company has good ESG performance, suppliers are more willing to invest, thus facilitating the company's access to trade credit financing.

Further Analysis
The previous part of this paper answered the questions of whether and how ESG performance affect corporate trade credit financing. The following part examines the categories of firms in which the impact of ESG performance on corporate trade credit financing will be concentrated.

Audit Quality
Big4 auditors have a higher reputation for quality assurance of ESG information and the ability to effectively perform high quality audits due to their greater independence and higher level of expertise than non Big4 auditors. Therefore, this paper expected that the ESG rating of the company audited by Big4 auditing firm will send a better signal, which will further impact the level of corporate trade credit financing. In this part, the sample firms are divided into two groups based on whether the firm hires a Big4 auditor or not. The value is assigned to be 1 if the firm hired a Big4 auditor in that year, otherwise, the value is assigned to be 0.
The empirical results as shown in Table 4 show that in the group where the company's auditor is Big4, the coefficient of ESG ratings in column (2) is 0.007 and the t-statistic is 3.89, which is significant at the 1% level. While in column (1), when the company's auditor is not Big4, the coefficient of ESG ratings is 0.001, which is not significant even at the 10% level. The above results suggest that the positive impact of ESG performance on trade credit financing is more significant when the firm hires a Big4 auditor, which is consistent with the previous analysis.

Regional Marketization
The marketization process varies across different regions of China, which implies that the role of the market in resource allocation varies across geographies. This part tries to figure out whether the impact of ESG performance on corporate trade credit financing also differs across geographic regions with different degrees of marketization. When the rule of law in an area is not well established, the motivation for companies to improve their ESG performance is likely to be to cover up their actions that harm the interests of stakeholders and save the company's image, which will result in ESG performance not really representing the non-financial information of the company and it may have less positive impact. Therefore, in order to investigate the effect of the degree of marketization on the effect of ESG performance on the enhancement of corporate trade credit financing, this paper takes the "published total marketization score" as indicator and classify the samples above the median of the total marketization scores in the same year into the high marketization group, and conversely, the samples below the median into the low marketization group. In addition, the same method is used to group the indicator "intermediary organization development and law", which reflects the regional construction process in rule of law.
The empirical results are shown in Table 5. In the high marketization group, the statistical value of the ESG coefficient in column (2) is significant at the 10% level, while in the low marketization group, the ESG coefficient in column (1) is not significant. In the group of higher degree of rule of law, the statistical value of the ESG coefficient in column (4) is also significant at the 10% level, and in column (3), the group of lower degree of rule of law, the ESG coefficient is not significant.
The above results suggest that good ESG performance has a positive impact on corporate trade credit financing in regions with high marketization and more robust rule of law, and the impact of ESG performance on corporate trade credit financing is insignificant in regions with low marketization and rule of law, which is consistent with the analysis before.

Degree of Analyst Attention
The previous analysis in this paper has shown that good ESG performance can bring higher reputation and better social image to enterprises. And this positive effect may be amplified when there is more external attention and supervision since the efficiency of information transmission can be higher. In this part, analyst attention is used as a proxy for external attention. And sample companies are divided into to two groups, for the group of companies whose analyst attention value is higher than the median in the same year is the group with more external attention. Conversely, for the group of companies whose analyst attention value is lower than the median is the group with less external attention. The results of regressions (1) and (2) in Table 6 show that in the group with more external attention, the coefficient of the dependent variable ESG is 0.002 and is significant at the 1% level. However, in the group with less external attention, the coefficient of ESG is -0.000 and is not significant. The results indicate that the positive effect of ESG ratings on corporate trade credit financing is mainly concentrated in the companies that are highly followed by analysts, and when the companies have higher external attention, the information transfer efficiency is better and the positive effect of ESG performance on corporate trade credit financing is greater, which is in line with above expectations.  Table 7, where the coefficient of the dependent variable ESG is able to be significantly positive at the 5% level regardless of which measurement of trade credit is used. The results illustrate that the conclusion above still holds.

Conclusion and Discussion
This paper investigates the impact of ESG performance on corporate trade credit financing with the data of listed companies in China from 2009 to 2020, and the results of the study find that the ESG ratings of listed companies have significant positive impact on the level of corporate trade credit financing. Further analysis finds that the significant positive impact of ESG performance on trade credit financing mainly concentrated in the following groups: when the company hires a Big4 auditor, when the company locates in a region with higher degree of marketization and rule of law, and when the company boasts more attention from analysts.
The insights from the above conclusions can be reflected in the following points. Firstly, as ESG ratings receive more and more attention from various parties, corporate ESG performance is gradually becoming an important consideration for suppliers to evaluate the potential risks and returns of companies, playing an increasingly important role in various company decisions, and a good ESG rating has a positive effect on corporate trade credit financing. Thus, listed companies can consider actively disclosing information about ESG and improving their ESG performance, which in turn can improve trade credit financing. Secondly, government departments and regulators should further improve the relevant systems and norms, enhance auditing and supervision of corporate ESG performance from the third-party agencies. Through these, corporate ESG performance can be improved practically. At the same time, transparency and trust between companies and suppliers can also be effectively improved. Therefore, it enables companies to obtain more trade credits with lower transaction costs and laying the foundation for sustainable corporate development. Thirdly, exactly how audit quality, regional marketization, and analyst attention further influence corporate trade credit financing involve more complex paths. This paper has not conducted further research on these issues. Therefore, it is hoped that further depth and refinement will be provided in future studies.