📖 Daily Journal | The role of environmental, social, and governance rating on corporate debt structure

✍🏻️ Author: Panagiotis Asimakopoulos, Stylianos Asimakopoulos, Xinyu Li

📖 Source: Journal of Corporate Finance, Volume 83, December 2023

Introduction

The article by Panagiotis Asimakopoulos, Stylianos Asimakopoulos, and Xinyu Li explores the influence of environmental, social, and governance (ESG) ratings on firms' debt structure, leverage ratios, and information assymetry in the U.S. market. The study aims to address the gap in the literature by investigating how ESG ratings impact firms' financing decisions and whether ESG considerations play a role in shaping corporate debt structure.

Discussion

The authors utilize a comprehensive dataset from various sources, including CRSP-Compustat, Capital IQ, and Refinitiv, covering U.S. firms over the period 2002–2019. They employ econometric models and rigorous statistical analyses to examine the relationship between ESG ratings and debt structure, controlling for other relevant factors. The study delves into the impact of ESG ratings on firms' optimal leverage ratios, current leverage ratios, and the composition of debt components, particularly focusing on the redistribution of financing sources between public and private debt.

The findings of the study suggest that ESG ratings significantly influence firms' debt structure and financing choices. ESG rated firms tend to redistribute their funding towards more internal sources, such as bank loans, and away from public debt, particularly bond issuing. The authors find that a one standard deviation increase in the ESG rating leads to an increase of about 3.8% in bank loans and a decrease of about 6.7% in bond issuing. The results also indicate that ESG ratings act as a signaling mechanism, reducing information asymmetry and providing better access to "safer" sources of financing. The authors note that the Environmental and Social pillars are the ones that drive this result.

The study also highlights the implications of ESG ratings for stakeholders, policymakers, and investors. The authors suggest that the decrease in information asymmetry, due to being rated, might urge firms to engage in more socially responsible activities, such as improving employees' working environment and reducing pollution. The authors also note that the benefits of debt redistribution for ESG rated firms provide attractive evidence for policymakers to incentivize corporations to disclose more ESG-related information. The findings have implications for corporate finance, sustainable investing, and ESG disclosure practices, providing valuable insights for both practitioners and policymakers.

Conclusion

In conclusion, the article contributes to the understanding of how ESG considerations impact corporate financing decisions and sheds light on the role of ESG ratings in shaping firms' debt structure. The study provides evidence that ESG ratings play an important role in the corporate capital structure, providing not only the option of debt restructuring but also serving as a vehicle of minimizing asymmetric information. The authors emphasize the importance of transparent and visible signals of non-financial information to the capital markets, which can help investors make more informed decisions. The study highlights the need for informed ESG ratings along with a dynamic ESG regulatory framework, keeping up with the growing demand and changing challenges.