The role of environmental, social, and governance rating on corporate debt structure

Panagiotis Asimakopoulos, Stylianos Asimakopoulos and Xinyu Li

Journal of Corporate Finance, 2023, vol. 83, issue C

Abstract: This paper examines the impact of Environmental, Social, and Governance (ESG) rating on a firm’s debt structure. We find that optimal (market and book) leverage ratios and information asymmetry are reduced when firms become ESG rated. More importantly, ESG rated firms redistribute their financing sources from public debt (bonds issuing) to private debt (bank loans). These results are attributed to the incentive of ESG rated firms to avoid debt-overhang and underinvestment issues and to the fact that the ESG rating conveys valuable information to lenders leading to better access towards more internal sources of financing, such as bank loans over debt issuing. We further find that the substitution effect is more pronounced for firms with high financial pressure, low growth opportunities and specialized assets. Finally, these results remain valid under various robustness and endogeneity tests.

Keywords: ESG rating; Debt structure; Public and private debt; Leverage ratios; Information asymmetry (search for similar items in EconPapers)
JEL-codes: G24 G31 G32 Q56 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:83:y:2023:i:c:s0929119923001372

DOI: 10.1016/j.jcorpfin.2023.102488

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