Does the cost of borrowing increase for firms that are socially and environmentally irresponsible?

TY - JOUR

T1 - Does the cost of borrowing increase for firms that are socially and environmentally irresponsible?

AU - Ahmed, Ahmed Hassan

AU - Eliwa, Yasser

AU - Tahat, Yasean A.

AU - Burton, Bruce M.

AU - Paramati, Sudharshan Reddy

PY - 2025/6/12

Y1 - 2025/6/12

N2 - The research problem This study aims to determine the financial repercussions for firms that engage in Irresponsible Environmental, Social, and Governance (IESG) practices. Specifically, it examines whether these practices influence the cost of debt through increased borrowing costs imposed by lending institutions. Motivation Amid growing scrutiny over corporate behaviour and its broader impacts, understanding how irresponsible practices affect corporate finance is crucial for stakeholders, including investors, policymakers, and regulators. This research is driven by the need to explore beyond the often-studied beneficial impacts of positive ESG practices, focusing on the consequences of their negative counterparts. Hypotheses The current study makes three hypotheses as follows: First: ceteris paribus, there is a positive association between firms’ IESG practices and their cost of debt. Second, ceteris paribus, the anticipated positive impact of IESG practices on the cost of debt is more pronounced in countries with low levels of corruption. Finally, ceteris paribus, the anticipated positive impact of IESG practices on the cost of debt is more pronounced among firms in sinful industries. Sample The analysis covers a broad international sample of 50,281 firm-year observations from non-financial listed firms across 44 countries, covering the years 2002 to 2022. This comprehensive dataset allows for generalised insights across various geographic and industrial contexts. Adopted methodology Multivariate analysis is employed, based on pooled regression with standard errors clustered at the firm level to account for intra-firm correlations and potential heteroskedasticity. A two-stage instrumental variable approach is also employed to address potential endogeneity issues, providing a robust framework for examining the causal impact of IESG practices on the cost of debt. Analyses The analyses focus on evaluating the direct impact of IESG practices on borrowing costs, alongside assessing the moderating effects of the corruption perception index (CPI) and differentiating between industry types (sinful vs. non-sinful). Sensitivity tests are conducted to ensure the robustness of the findings against various model specifications and potential biases. Findings and Implications The findings indicate a universally significant positive relationship between IESG practices and the cost of debt, confirming that firms engaged in irresponsible practices face higher borrowing costs. This effect is particularly pronounced in countries with lower levels of corruption, emphasising the critical role of national governance in influencing corporate behaviour. Moreover, the analysis reveals no significant differences between sinful and non-sinful industries, suggesting uniform financial penalties for irresponsible practices across sectors. These results are robust across a range of sensitivity analyses, affirming the reliability of the conclusions. The study offers valuable insights for lending institutions, firms, and credit rating agencies about the financial implications of irresponsible corporate practices. It highlights the importance for policymakers and regulators to enforce comprehensive ESG guidelines that encourage substantive disclosures and responsible behaviours.

AB - The research problem This study aims to determine the financial repercussions for firms that engage in Irresponsible Environmental, Social, and Governance (IESG) practices. Specifically, it examines whether these practices influence the cost of debt through increased borrowing costs imposed by lending institutions. Motivation Amid growing scrutiny over corporate behaviour and its broader impacts, understanding how irresponsible practices affect corporate finance is crucial for stakeholders, including investors, policymakers, and regulators. This research is driven by the need to explore beyond the often-studied beneficial impacts of positive ESG practices, focusing on the consequences of their negative counterparts. Hypotheses The current study makes three hypotheses as follows: First: ceteris paribus, there is a positive association between firms’ IESG practices and their cost of debt. Second, ceteris paribus, the anticipated positive impact of IESG practices on the cost of debt is more pronounced in countries with low levels of corruption. Finally, ceteris paribus, the anticipated positive impact of IESG practices on the cost of debt is more pronounced among firms in sinful industries. Sample The analysis covers a broad international sample of 50,281 firm-year observations from non-financial listed firms across 44 countries, covering the years 2002 to 2022. This comprehensive dataset allows for generalised insights across various geographic and industrial contexts. Adopted methodology Multivariate analysis is employed, based on pooled regression with standard errors clustered at the firm level to account for intra-firm correlations and potential heteroskedasticity. A two-stage instrumental variable approach is also employed to address potential endogeneity issues, providing a robust framework for examining the causal impact of IESG practices on the cost of debt. Analyses The analyses focus on evaluating the direct impact of IESG practices on borrowing costs, alongside assessing the moderating effects of the corruption perception index (CPI) and differentiating between industry types (sinful vs. non-sinful). Sensitivity tests are conducted to ensure the robustness of the findings against various model specifications and potential biases. Findings and Implications The findings indicate a universally significant positive relationship between IESG practices and the cost of debt, confirming that firms engaged in irresponsible practices face higher borrowing costs. This effect is particularly pronounced in countries with lower levels of corruption, emphasising the critical role of national governance in influencing corporate behaviour. Moreover, the analysis reveals no significant differences between sinful and non-sinful industries, suggesting uniform financial penalties for irresponsible practices across sectors. These results are robust across a range of sensitivity analyses, affirming the reliability of the conclusions. The study offers valuable insights for lending institutions, firms, and credit rating agencies about the financial implications of irresponsible corporate practices. It highlights the importance for policymakers and regulators to enforce comprehensive ESG guidelines that encourage substantive disclosures and responsible behaviours.

KW - doing good

KW - avoiding bad

KW - irresponsible ESG

KW - cost of debt

KW - international context

KW - greenwashing

KW - ESG decoupling

KW - pragmatic legitimacy

U2 - 10.1142/S1094406025500040

DO - 10.1142/S1094406025500040

M3 - Article

SN - 1094-4060

JO - The International Journal of Accounting

JF - The International Journal of Accounting

ER -