IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v76y2025ics1544612325002843.html

The impact of ESG performance on corporate debt costs: A signaling perspective

Author

Listed:
  • Cheng, Yuhao
  • He, Chuqian
  • Tang, Can

Abstract

Environmental, Social, and Governance (ESG) factors are significant indicators of company sustainability practices and company's profitability. This study uses a signaling game model to analyze the impact of ESG performance on the cost of corporate debt, and uses the data from Chinese A-share listed firms spanning 2019 to 2023 to confirm the moderating effect. The results indicate that when company financing is high, positive ESG performance can significantly decrease the cost of debt. Conversely, when the financing amount is low, the impact of ESG performance on reducing the cost of financing is negligible.

Suggested Citation

  • Cheng, Yuhao & He, Chuqian & Tang, Can, 2025. "The impact of ESG performance on corporate debt costs: A signaling perspective," Finance Research Letters, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:finlet:v:76:y:2025:i:c:s1544612325002843
    DOI: 10.1016/j.frl.2025.107020
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612325002843
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2025.107020?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Francis, Jennifer & LaFond, Ryan & Olsson, Per & Schipper, Katherine, 2005. "The market pricing of accruals quality," Journal of Accounting and Economics, Elsevier, vol. 39(2), pages 295-327, June.
    2. Li, Weihao & Hu, Hongbing & Hong, Zekun, 2024. "Green finance policy, ESG rating, and cost of debt——Evidence from China," International Review of Financial Analysis, Elsevier, vol. 92(C).
    3. Hao Liang & Luc Renneboog, 2017. "Corporate donations and shareholder value," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 33(2), pages 278-316.
    4. Apergis, Nicholas & Poufinas, Thomas & Antonopoulos, Alexandros, 2022. "ESG scores and cost of debt," Energy Economics, Elsevier, vol. 112(C).
    5. Sudheer Chava, 2014. "Environmental Externalities and Cost of Capital," Management Science, INFORMS, vol. 60(9), pages 2223-2247, September.
    6. Gigante, Gimede & Manglaviti, Davide, 2022. "The ESG effect on the cost of debt financing: A sharp RD analysis," International Review of Financial Analysis, Elsevier, vol. 84(C).
    7. Magdalena Zioło & Iwona Bąk & Anna Spoz, 2024. "Literature review of greenwashing research: State of the art," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(6), pages 5343-5356, November.
    8. Feng, Jingwen & Goodell, John W. & Shen, Dehua, 2022. "ESG rating and stock price crash risk: Evidence from China," Finance Research Letters, Elsevier, vol. 46(PB).
    9. El Ghoul, Sadok & Guedhami, Omrane & Kwok, Chuck C.Y. & Mishra, Dev R., 2011. "Does corporate social responsibility affect the cost of capital?," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2388-2406, September.
    10. Ronald P. Guidry & Dennis M. Patten, 2010. "Market reactions to the first‐time issuance of corporate sustainability reports," Sustainability Accounting, Management and Policy Journal, Emerald Group Publishing Limited, vol. 1(1), pages 33-50, July.
    11. Goss, Allen & Roberts, Gordon S., 2011. "The impact of corporate social responsibility on the cost of bank loans," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1794-1810, July.
    12. Nicola Raimo & Alessandra Caragnano & Marianna Zito & Filippo Vitolla & Massimo Mariani, 2021. "Extending the benefits of ESG disclosure: The effect on the cost of debt financing," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 28(4), pages 1412-1421, July.
    13. Kong, Wen, 2023. "The impact of ESG performance on debt financing costs: Evidence from Chinese family business," Finance Research Letters, Elsevier, vol. 55(PB).
    14. Ng, Anthony C. & Rezaee, Zabihollah, 2015. "Business sustainability performance and cost of equity capital," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 128-149.
    15. Li, WeiWei & Padmanabhan, Prasad & Huang, Chia-Hsing, 2024. "ESG and debt structure: Is the nature of this relationship nonlinear?," International Review of Financial Analysis, Elsevier, vol. 91(C).
    16. Cornett, Marcia Millon & Erhemjamts, Otgontsetseg & Tehranian, Hassan, 2016. "Greed or good deeds: An examination of the relation between corporate social responsibility and the financial performance of U.S. commercial banks around the financial crisis," Journal of Banking & Finance, Elsevier, vol. 70(C), pages 137-159.
    17. Alves, Carlos Francisco & Meneses, Lilian Lima, 2024. "ESG scores and debt costs: Exploring indebtedness, agency costs, and financial system impact," International Review of Financial Analysis, Elsevier, vol. 94(C).
    18. Ronald P. Guidry & Dennis M. Patten, 2010. "Market reactions to the first‐time issuance of corporate sustainability reports," Sustainability Accounting, Management and Policy Journal, Emerald Group Publishing Limited, vol. 1(1), pages 33-50, July.
    19. Eliwa, Yasser & Aboud, Ahmed & Saleh, Ahmed, 2021. "ESG practices and the cost of debt: Evidence from EU countries," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 79(C).
    20. Lu, Zhenye & Lin, Yongjia & Li, You, 2023. "Does corporate engagement in digital transformation influence greenwashing? Evidence from China," Finance Research Letters, Elsevier, vol. 58(PD).
    21. Andreas G F Hoepner & Ioannis Oikonomou & Zacharias Sautner & Laura T Starks & Xiao Y Zhou, 2024. "ESG shareholder engagement and downside risk," Review of Finance, European Finance Association, vol. 28(2), pages 483-510.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhang, Kunpeng & Zheng, Tianyu & Gao, Peng & Ren, Yayun, 2025. "Digital-green synergy in transition: Exploring the dual synergy transformation impact on corporate ESG performance," International Review of Financial Analysis, Elsevier, vol. 105(C).
    2. Zhong, Xi & Zhang, Yanfeng, 2025. "Digital transformation speed and firms’ ambidextrous green innovation: Do employee stock ownership and education levels matter?," Technology in Society, Elsevier, vol. 83(C).
    3. Bao, Junsong & Yang, Liuyi, 2025. "Will ESG disclosure affect the green innovation level of SMEs?," Finance Research Letters, Elsevier, vol. 83(C).
    4. Zhang, Taotao & Qin, Chuan & Lu, Zhaoying, 2025. "Market competitiveness and corporate ESG performance," International Review of Economics & Finance, Elsevier, vol. 101(C).
    5. He, Qiong & Geng, Yunjiang & Yu, Kexiu & Chen, Peng, 2025. "How does multinational enterprises’ digital transformation affect ESG performance? Empirical evidence based on Chinese A-share multinationals," Finance Research Letters, Elsevier, vol. 86(PG).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Xinyue Zhang & Yuan George Shan & Yuming Zhang & Chao Xing, 2025. "Does ESG rating divergence affect the cost of corporate debt?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 65(3), pages 2244-2280, September.
    2. Li, WeiWei & Padmanabhan, Prasad & Huang, Chia-Hsing, 2024. "ESG and debt structure: Is the nature of this relationship nonlinear?," International Review of Financial Analysis, Elsevier, vol. 91(C).
    3. Alves, Carlos Francisco & Meneses, Lilian Lima, 2024. "ESG scores and debt costs: Exploring indebtedness, agency costs, and financial system impact," International Review of Financial Analysis, Elsevier, vol. 94(C).
    4. Gillan, Stuart L. & Koch, Andrew & Starks, Laura T., 2021. "Firms and social responsibility: A review of ESG and CSR research in corporate finance," Journal of Corporate Finance, Elsevier, vol. 66(C).
    5. Chieh-Jung Chan & Ping-Fang Yen & Hsin-Wen Wang & Yuan Chang, 2026. "ESG Performance and Bank Loan Interest Rates," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 16(1), pages 1-4.
    6. Xu, Qifa & Ruan, Changyu & Jiang, Cuixia & Zhao, Qinna, 2025. "The impact of ESG performance on debt financing costs from the perspective of supply chain," The Quarterly Review of Economics and Finance, Elsevier, vol. 104(C).
    7. Owolabi, Ayotola & Mousavi, Mohammad Mahdi & Gozgor, Giray & Li, Jing, 2024. "The impact of carbon risk on the cost of debt in the listed firms in G7 economies: The role of the Paris agreement," Energy Economics, Elsevier, vol. 139(C).
    8. Hans B. Christensen & Luzi Hail & Christian Leuz, 2021. "Mandatory CSR and sustainability reporting: economic analysis and literature review," Review of Accounting Studies, Springer, vol. 26(3), pages 1176-1248, September.
    9. He, Guanming & Li, Zhichao & Yu, Ling & Zhou, Zhanqiang, 2023. "Contribution to poverty alleviation: A waste or benefit for corporate financing?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).
    10. Fiorillo, Paolo & Meles, Antonio & Ricciardi, Antonio & Verdoliva, Vincenzo, 2025. "ESG performance and the cost of debt. Evidence from the corporate bond market," International Review of Financial Analysis, Elsevier, vol. 102(C).
    11. Andrieș, Alin Marius & Sprincean, Nicu, 2023. "ESG performance and banks’ funding costs," Finance Research Letters, Elsevier, vol. 54(C).
    12. Khayria Amarna & Raquel Garde Sánchez & Maria Victoria López‐Pérez & Mahmoud Marzouk, 2024. "The effect of environmental, social, and governance disclosure and real earning management on the cost of financing," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(4), pages 3181-3193, July.
    13. Hoepner, Andreas G.F. & Schiemann, Frank & Schneider, Fabiola I. & Tietmeyer, Raphael, 2025. "ESG disclosure as advertisement of corporate bond issuances," International Review of Financial Analysis, Elsevier, vol. 106(C).
    14. Yang, Dan & Zhao, Zhiyong & Wang, Liangliang, 2024. "Is ESG reporting informative to debtholders?— Evidence from a quasi-experiment in China," Finance Research Letters, Elsevier, vol. 62(PA).
    15. Chang, Shun-Fen & Chen, Bai-Sian & Chen, Hong-Yi & Chen, Hsiao-Yin, 2025. "The impact of ESG ratings on firm risks in Taiwan's market," Pacific-Basin Finance Journal, Elsevier, vol. 92(C).
    16. Silvia Bressan, 2025. "Environmental, Social, and Governance and expenses of insurance companies," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 14(3), pages 1-1.
    17. Hu, Haoshen & Lazar, Emese & Pan, Jingqi & Wang, Shixuan, 2024. "Environmental performance and credit ratings: A transatlantic study," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    18. Haozhe Song & Gunnar Rimmel, 2025. "Debtholders' reaction to sustainability reporting regulations: International evidence," Business Strategy and the Environment, Wiley Blackwell, vol. 34(1), pages 88-115, January.
    19. Fan, Kwok Yuen & Shen, Jianfu & Hui, Eddie C.M. & Cheng, Louis T.W., 2024. "ESG components and equity returns: Evidence from real estate investment trusts," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    20. Wu, Zhenshu & Pownall, Rachel & Shih, Yi-Cheng & Zhang, Chendi, 2025. "State ownership and the value of sustainability: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 102(C).

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:76:y:2025:i:c:s1544612325002843. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.