Description

This paper studies the impact of a country's extra-financial performance on their sovereign bond spreads. Sovereign bond spreads reflect both an economic default risk and a strategic default risk. We hypothesize that a country's extra-financial performance reduces default risk by signaling good commitment ability. We test this hypothesis for the countries which bonds are included in the JP Morgan Emerging Markets Bond Index Global. Over the period from 2001 to 2010, we find that an emerging country's average cost of capital decreases with its environmental and social performance.