Prior studies have investigated whether environmental, social and governance (ESG) performance is associated with debt financing. However, the relationship between ESG controversies and debt financing is still underexplored. We then investigate whether (1) avoiding ESG controversies is significantly associated with debt financing and cost of debt and (2) the role of financial market development in this relationship.
Our analysis is based on an international sample of 69,468 observations from 2005 to 2023. We employ country, industry and year fixed-effects regressions and address endogeneity using two-stage least squares (2SLS) regression.
We find that avoiding ESG controversies is positively associated with debt financing, but it is not significantly associated with the cost of debt. However, the findings report mixed results for the moderation effect of debt market development and equity market development. While avoiding ESG controversies and cost of debt are negatively associated in more developed debt markets, they have no significant association in more developed equity markets. On the other hand, while avoiding ESG controversies and debt financing are positively associated in more developed equity markets, they are negatively associated in more developed debt markets.
Our paper is original for several reasons. First, the literature on ESG controversies' debt financing implications is scarce, unlike positive ESG. Second, different institutional contexts might amplify or attenuate the association between ESG controversies and debt financing, suggesting policymaking implications. Lastly, our investigation has implications for sustainability governance and financing decisions at the interplay between legitimacy and institutional theories.
