Does ESG Performance Affect the Cost of Debt of Listed Firms in ASEAN Countries?
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Abstract
This study examines the effect of ESG performance on the cost of debt of 307 listed firms in ASEAN countries, namely Indonesia, Malaysia, Philippines, Singapore, and Thailand, during 2017–2023 with the total sample of 1,003 firm-year observations. This study employs random-effects panel regressions to test the impact of the overall ESG performance as well as its individual pillars, including environmental, social, and governance, on the borrowing costs of firms. In addition, the moderating role of firm size is also investigated. The empirical results show that, among ESG performance measurements, only lagged governance pillar score negatively affects the cost of debt at the statistical significance level of 0.05, indicating that creditors in ASEAN selectively incorporate ESG information into lending decisions by emphasizing more on governance than on environmental and social performance. Regarding control variables, foreign direct investment positively associates with the borrowing costs at 0.01 significant level, demonstrating that extensive foreign direct investment inflows may lead to greater competition for financial resources. Consequently, the cost of debt financing is higher. Moreover, country dummy variables and the cost of debt are significantly related at 0.01 level. Firms in Indonesia experience higher interest rates than comparable firms in Thailand (the reference country), whereas firms in Singapore encounter lower interest rates than comparable firms in Thailand. This finding shows that country-level institutional environments are still important factors in determining corporate borrowing costs in ASEAN. Furthermore, firm size does not moderate the relationship between ESG performance and the cost of debt, representing that the influence of ESG performance on borrowing costs does not differ between large and small firms. This study not only adds to the existing sustainable finance literature by investigating the cost of debt in ASEAN countries, but also encourage managers, lenders, and policymakers in emerging markets to execute sustainable financing practices.
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