ESG scores and debt costs: Exploring indebtedness, agency costs, and financial system impact

Carlos Alves and Lilian Lima Meneses

International Review of Financial Analysis, 2024, vol. 94, issue C

Abstract: This paper provides evidence that conventional risk measures (Merton Distance to Default, Altman Z-Score, Z-Score and Volatility) fail to capture all the relevant information to assess borrower risk. Moreover, the paper shows that the additional information contained in ESG scores has a negative relationship with the cost of debt, and this relationship is economically significant. In addition, companies whose sustainability generates major concerns (i.e., the most indebted companies and those with the highest agency costs) benefit the most from ESG performance. Finally, the paper provides evidence that the return on companies' ESG efforts in terms of the cost of debt is higher in countries with bank-based financial systems, where long-term relationships between lenders and borrowers prevail, than in countries with market-based financial systems.

Keywords: Cost of debt; ESG; Risk metrics; Default risk; Stakeholder orientation (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:94:y:2024:i:c:s1057521924001728

DOI: 10.1016/j.irfa.2024.103240

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