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How does ESG performance determine the level of specific financing in capital structure? New insights from China

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  • Zhao, Xinlu
  • Zhang, Huixue

Abstract

Sustainable finance has gained attention as investors emphasize environmental, social, and governance (ESG) factors in investment decisions. Understanding ESG's impact on corporate financing is crucial for stakeholders. However, evidence on ESG and capital structure, especially in Chinese enterprises, is limited. This study investigates the link between ESG performance and capital structure in Chinese firms, focusing on debt and equity financing. Using panel data from 2010 to 2022 and the system GMM model, the study controls for firm-specific factors. Results show environmental and governance scores negatively relate to debt financing and positively to equity financing. Social scores show no significant impact on debt but a positive one on equity financing. All ESG indicators positively relate to the debt-to-equity ratio, highlighting sustainability's role in capital structure decisions. These findings guide policymakers in incentivizing sustainable practices and help corporate leaders align financing strategies with sustainability goals, supporting long-term growth and stakeholder value.

Suggested Citation

  • Zhao, Xinlu & Zhang, Huixue, 2024. "How does ESG performance determine the level of specific financing in capital structure? New insights from China," International Review of Financial Analysis, Elsevier, vol. 95(PC).
    • Handle: RePEc:eee:finana:v:95:y:2024:i:pc:s105752192400440x
    DOI: 10.1016/j.irfa.2024.103508
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    More about this item

    Keywords

    ESG; Environmental score; Capital structure; Governance score; social score;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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