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

55 Pages Posted: 20 Sep 2022

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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: or

Stylianos Asimakopoulos (Contact Author)

Brunel University London ( email )

Kingston Lane
Uxbridge, Middlesex UB8 3PH
United Kingdom

Panagiotis Asimakopoulos

University of Piraeus ( email )


Xinyu Li

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

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