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

55 Pages Posted: 20 Sep 2022

Multiple version iconThere are 2 versions of this paper

Abstract

This paper examines the impact of having an 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

Suggested Citation

Asimakopoulos, Stylianos and Asimakopoulos, Panagiotis and Li, Xinyu, The Role of Environmental, Social, and Governance Rating on Corporate Debt Structure. Available at SSRN: https://ssrn.com/abstract=4224475 or http://dx.doi.org/10.2139/ssrn.4224475

Stylianos Asimakopoulos (Contact Author)

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Panagiotis Asimakopoulos

University of Piraeus ( email )

Greece

Xinyu Li

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
42
Abstract Views
205
PlumX Metrics