The Role of Environmental, Social, and Governance Rating on Corporate Debt Structure

45 Pages Posted: 22 Jul 2021 Last revised: 28 Sep 2021

See all articles by Stylianos Asimakopoulos

Stylianos Asimakopoulos

University of Bath

Panagiotis Asimakopoulos

Loughborough University - School of Business and Economics; University of Piraeus

Xinyu Li

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: July 19, 2021

Abstract

This paper examines the impact of having an Environmental, Social, and Governance (ESG) rating on a firm’s debt structure, i.e. how firms change their leverage ratios and debt components when becoming ESG rated. Targeted market and book leverage ratios are reduced when firms become ESG rated. We show that the provision of ESG rating mitigates information asymmetry. Current leverage ratios are not altered significantly for ESG rated firms but these firms redistribute their financing sources from public debt (bonds debt) to private debt (bank loans). This substitution effect is mainly driven by environmental and social factors and is more pronounced for firms with high financial pressure, low growth opportunities and specialized assets. Debt restructuring remains valid under various robustness and endogeneity tests. These results are consistent with the trade-off and pecking order theories of capital structure.

Keywords: ESG rating, debt structure, public and private debt, leverage ratios, information asymmetry

JEL Classification: G24, G31, G32, Q56

Suggested Citation

Asimakopoulos, Stylianos and Asimakopoulos, Panagiotis and Li, Xinyu, The Role of Environmental, Social, and Governance Rating on Corporate Debt Structure (July 19, 2021). Available at SSRN: https://ssrn.com/abstract=3889307 or http://dx.doi.org/10.2139/ssrn.3889307

Stylianos Asimakopoulos (Contact Author)

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Panagiotis Asimakopoulos

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

University of Piraeus ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

Xinyu Li

affiliation not provided to SSRN

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