ESG Signaling on Wall Street in the AI Era

ArXiv ID: 2510.15956 “View on arXiv”

Authors: Qionghua Chu

Abstract

I identify a new signaling channel in ESG research by empirically examining whether environmental, social, and governance (ESG) investing remains valuable as large institutional investors increasingly shift toward artificial intelligence (AI). Using winsorized ESG scores of S&P 500 firms from Yahoo Finance and controlling for market value of equity, I conduct cross-sectional regressions to test the signaling mechanism. I demonstrate that Environmental, Social, Governance, and composite ESG scores strongly and positively signal higher debt-to-total-capital ratio, both individually and in various combinations. My findings contribute to the growing literature on ESG investing, offering economically meaningful signaling channel with implications for long-term portfolio management amid the rise of AI.

Keywords: ESG scores, Signaling channel, Cross-sectional regression, Debt-to-total-capital ratio, Institutional investors, Equities (S&P 500)

Complexity vs Empirical Score

  • Math Complexity: 2.5/10
  • Empirical Rigor: 4.0/10
  • Quadrant: Philosophers
  • Why: The paper relies on standard linear regression models without advanced mathematical derivations or complex modeling, placing it on the lower end of math complexity. The empirical approach uses a simple cross-sectional analysis on a single dataset (S&P 500 as of 2025) with basic winsorization, lacking backtests or robust out-of-sample validation, resulting in moderate-to-low empirical rigor.
  flowchart TD
    A["Research Goal<br>Does ESG remain valuable for signaling in AI era?"] --> B["Data Collection<br>Yahoo Finance ESG scores of S&P 500 firms"]
    B --> C["Methodology<br>Cross-sectional regression with winsorization"]
    C --> D["Control Variables<br>Market value of equity"]
    D --> E["Analysis<br>Test ESG scores vs. Debt-to-total-capital ratio"]
    E --> F{"Key Findings"}
    F --> G["Strong positive signaling<br>ESG scores → Higher leverage"]
    F --> H["Economic significance<br>Valid in combinations & individually"]