The Effect of Environment, Social and Governance Performance Factors on Firms’ Cost of Debt: International Evidence

Abstract

This study examines the effect of environment, social and governance (ESG) performance on firms’ cost of debt (COD) internationally. Using a sample comprising of 18,950 observations over a period between 2008 and 2015 across 41 countries, we find a significant negative association between aggregate ESG performance and firms’ COD. In additional analysis for the individual ESG performance factors (E, S and G), we find a significant negative association between the individual factor (E, S and G) and firms’ COD. Further, we find that country level social progression index has a moderating effect on the relationship between COD and both aggregate and individual ESG performance. We employ several sensitivity tests and find that our results are robust to endogeneity concerns. Taken together, our findings support our expectation that voluntary disclosure of both aggregate and individual ESG performance information reduces firms’ COD globally.

Keywords: corporate social responsibility, environment, social and governance performance, cost of debt

JEL Classification: G30, M14