Anywhere Sikochi

The paper examines whether a firm's environmental, social, and governance (ESG) disclosure helps explain some of the substantial disagreement across ESG rating agencies regarding what rating to give to individual firms. We predict and find that greater ESG disclosure actually leads to greater ESG rating disagreement. We also find that raters disagree more about ESG outcome metrics than input metrics (policies), and that disclosure appears to amplify disagreement more for outcomes. Overall, our findings highlight that ESG disclosure generally exacerbates ESG rating disagreement rather than resolving it.

Having grown up in a developing country, Professor Sikochi’s research focus is driven by a desire to understand how capital flows to firms and entrepreneurs with the ultimate goal to help build capital markets in the developing economies. To this end, he conducts research for scholarly and case publications under three broad categories in credit ratings, debt capital, and sustainability.

Credit ratings and rating agencies as gatekeepers

A fundamental tenet in financial reporting and control is that the financial system enables capital flows from investors to entrepreneurs. One of the enablers of the financial systems is the presence of intermediaries. Professor Sikochi's primary research focuses on one of these intermediaries, namely credit rating agencies. Rating agencies are companies that specialize in assessing the credit risk of debt issuers (i.e., governments, companies, universities, other organizations, and financial instruments). Their opinions, expressed as credit ratings, significantly impact how investors allocate capital.

Policy makers around the world seek to curtail the dominance of rating agencies. These efforts stem from the notion that, as for-profit companies paid by issuers, rating agencies have conflicts of interests that diminish ratings’ timeliness and accuracy, and potentially lead to disruptions in capital markets. Professor Sikochi's research explores this notion, examining whether and how rating agencies provide objective and timely ratings for issuers. For example, in one project, he empirically analyzes the historical ratings patterns for a sample of high risk relative to low risk firms in the period leading up to default. In another study, he analyzes how properties and relevance of credit ratings assigned to foreign companies change when the Big 3 rating agencies establish local presence overseas.

Debt capital and organizational characteristics

In addition to understanding credit rating agencies as key intermediaries in the financial system, he also explores the sources of debt capital and examine the factors that drive a firm’s access to and the cost of debt. For example, his paper “Peer Influence on Trade Credit” published in the Journal of Corporate Finance, documents that non-financial firms are also a source of financing to other non-financial firms and that their lending behavior can be influenced by their peers. In another paper, “Corporate Legal Structure and Bank Loan Spreads” also in the Journal of Corporate Finance, he explores how creditors perceive a firm’s corporate legal structure and find that creditors demand higher interest rates when borrowers have a complex corporate legal structure.

Sustainability and Emerging issues in capital markets

Issues related to Environmental, Social, and Governance (ESG) are increasingly permeating the debt markets. Major credit rating agencies now incorporate ESG considerations in credit ratings. Similarly, ESG considerations are increasingly influencing lending contracts. In this line of research, he explores ESG performance ratings, and measurement and impact of management gender and diversity on capital market outcomes.