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ESG performance, heterogeneous creditors, and bond financing costs: Firm-level evidence

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  • Li, Quan
  • Li, Tianshu
  • Zhang, Yuan

Abstract

Exploiting credit spread to measure firm bond financing costs, this study explored the impact of environmental, social, and governance (ESG) performance on bond financing costs from the perspective of heterogeneous creditors. Our results revealed that national interbank bond market and qualified institutional investors are increasingly interested in aligning their capital with ESG-related investment opportunities. Thus, they require a low rate of return from firms with good ESG performance. In contrast, domestic legal and natural persons and ordinary institutional investors are unlikely to accept a low investment return in exchange for the positive impact of ESG. Additional robustness tests confirmed the results, including firm-fixed effects, variable substitution method, supplemental variable method, lagged variable approach, instrumental variable analysis, and propensity score matching. The results of mechanism analysis indicated that the bond cost reduction effect of ESG is achieved by improving firms’ information disclosure quality and reputation. In addition, because of trade-off theory and agency problems, the environmental and social factors of ESG have only a limited impact on bond cost reduction, whereas the governance factor markedly reduces bond costs.

Suggested Citation

  • Li, Quan & Li, Tianshu & Zhang, Yuan, 2024. "ESG performance, heterogeneous creditors, and bond financing costs: Firm-level evidence," Finance Research Letters, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:finlet:v:66:y:2024:i:c:s1544612324005579
    DOI: 10.1016/j.frl.2024.105527
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