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Do Firms with High ESG Scores Have Lower Debt? A Cross-Country and Temporal Analysis
Abstract
Theoretical background: The increasing emphasis on environmental, social, and governance factors is demonstrably influencing capital markets and business environment. A significant body of research has explored the impact of implementing ESG practices on both the cost of equity and the cost of debt. However, the research on the relationship between ESG and firm’s leverage remains inconclusive.
Purpose of the article: This paper aims to examine how environmental, societal and governance performance impacts capital structure in corporate firms. The hypothesis is that firms with stronger ESG performance exhibit lower financial leverage.
Research methods: A panel regression model is employed on a sample of 34,513 firm-year observations from 9,560 firms across 32 countries spanning the period 2017–2022. Panel regression is used to analyze the entire sample and then investigate cross-country and temporal (pre- and post-COVID-19 outbreak) differences.
Main findings: There is a statistically significant negative relation between ESG rating and book leverage for the whole sample. However, the analysis revealed heterogeneity across countries and a temporal shift in the relationship between ESG score and capital structure. Disaggregating ESG into its environmental, social, and governance pillars yielded results consistent with the overall ESG score.
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DOI: http://dx.doi.org/10.17951/h.2026.60.1.101-121
Date of publication: 2026-05-23 16:12:56
Date of submission: 2024-06-18 18:15:08
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