TY - JOUR
T1 - Heterogeneous Firms and Benefits of ESG Disclosure
T2 - Cost of Debt Financing in an Emerging Market
AU - Lavin, Jaime F.
AU - Montecinos-Pearce, Alejandro A.
N1 - Publisher Copyright:
© 2022 by the authors.
PY - 2022/12
Y1 - 2022/12
N2 - Current challenging environments pressure firms to improve their overall ESG performance. However, there is tension between the benefits of ESG disclosure and firm performance. We deepen the understanding of ESG disclosure’s contribution to firms’ cost of debt in an emerging economy context. This issue is critical in Latin America–a region with reduced financing, ample company heterogeneity, and scarce evidence associating ESG disclosure and firms’ debt financing. Using fixed effects models, for the 2015–2020 period, we study Chilean listed firms. We explore two association channels between ESG disclosure and the cost of debt financing. Through a direct channel, greater disclosure relates to a lower cost; however, through an indirect channel, disclosure interacts with growth opportunities–a proxy for firms’ prospective risk–and greater disclosure relates to a higher cost. Hence, evidence suggests that ESG disclosure affects the cost of financing in two opposite directions. Our results delve into how ESG disclosure encloses essential economic implications, particularly in countries that have recently adopted ESG practices: For regulators, on developing rules of ESG disclosure that consider their financial effects; for firms, on enhancing their ESG communications policies; and finally, for creditors, on the need to introduce ESG indicators in their financing decision-making.
AB - Current challenging environments pressure firms to improve their overall ESG performance. However, there is tension between the benefits of ESG disclosure and firm performance. We deepen the understanding of ESG disclosure’s contribution to firms’ cost of debt in an emerging economy context. This issue is critical in Latin America–a region with reduced financing, ample company heterogeneity, and scarce evidence associating ESG disclosure and firms’ debt financing. Using fixed effects models, for the 2015–2020 period, we study Chilean listed firms. We explore two association channels between ESG disclosure and the cost of debt financing. Through a direct channel, greater disclosure relates to a lower cost; however, through an indirect channel, disclosure interacts with growth opportunities–a proxy for firms’ prospective risk–and greater disclosure relates to a higher cost. Hence, evidence suggests that ESG disclosure affects the cost of financing in two opposite directions. Our results delve into how ESG disclosure encloses essential economic implications, particularly in countries that have recently adopted ESG practices: For regulators, on developing rules of ESG disclosure that consider their financial effects; for firms, on enhancing their ESG communications policies; and finally, for creditors, on the need to introduce ESG indicators in their financing decision-making.
KW - ESG disclosure
KW - Latin America
KW - debt financing
KW - emerging markets
KW - firm performance
UR - http://www.scopus.com/inward/record.url?scp=85143828529&partnerID=8YFLogxK
U2 - 10.3390/su142315760
DO - 10.3390/su142315760
M3 - Article
AN - SCOPUS:85143828529
SN - 2071-1050
VL - 14
JO - Sustainability (Switzerland)
JF - Sustainability (Switzerland)
IS - 23
M1 - 15760
ER -