How does ESG performance determine the level of specific financing in capital structure? New insights from China

Xinlu Zhao and Huixue Zhang

International Review of Financial Analysis, 2024, vol. 95, issue PC

Abstract: Sustainable finance has gained attention as investors emphasize environmental, social, and governance (ESG) factors in investment decisions. Understanding ESG's impact on corporate financing is crucial for stakeholders. However, evidence on ESG and capital structure, especially in Chinese enterprises, is limited. This study investigates the link between ESG performance and capital structure in Chinese firms, focusing on debt and equity financing. Using panel data from 2010 to 2022 and the system GMM model, the study controls for firm-specific factors. Results show environmental and governance scores negatively relate to debt financing and positively to equity financing. Social scores show no significant impact on debt but a positive one on equity financing. All ESG indicators positively relate to the debt-to-equity ratio, highlighting sustainability's role in capital structure decisions. These findings guide policymakers in incentivizing sustainable practices and help corporate leaders align financing strategies with sustainability goals, supporting long-term growth and stakeholder value.

Keywords: ESG; Environmental score; Capital structure; Governance score, social score (search for similar items in EconPapers)
JEL-codes: G32 Q56 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:95:y:2024:i:pc:s105752192400440x

DOI: 10.1016/j.irfa.2024.103508

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