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Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance

Purpose This study aims to examine the impact of sustainable practices as proxied by the environmental, social and governance (ESG) score on capital structure. It also investigates whether ESG performance influences the speed of adjustment (SOA) to target leverage in firms. Design/methodology/approa...

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Main Authors: Yusuf Babatunde Adeneye, Ines Kammoun, Siti Nur Aqilah Ab Wahab
Format: Article
Language:English
English
Published: Emerald Publishing Limited 2023
Subjects:
HB501 Capital. Capitalism
HC79 Special topics Including air pollution, automation, consumer demand, famines, flow of funds, etc.
Online Access:https://eprints.ums.edu.my/id/eprint/41558/1/ABSTRACT.pdf
https://eprints.ums.edu.my/id/eprint/41558/2/FULL%20TREXT.pdf
https://eprints.ums.edu.my/id/eprint/41558/
http://dx.doi.org/10.1108/SAMPJ-01-2022-0060
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spelling my.ums.eprints.415582024-10-24T04:13:41Z https://eprints.ums.edu.my/id/eprint/41558/ Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance Yusuf Babatunde Adeneye Ines Kammoun Siti Nur Aqilah Ab Wahab HB501 Capital. Capitalism HC79 Special topics Including air pollution, automation, consumer demand, famines, flow of funds, etc. Purpose This study aims to examine the impact of sustainable practices as proxied by the environmental, social and governance (ESG) score on capital structure. It also investigates whether ESG performance influences the speed of adjustment (SOA) to target leverage in firms. Design/methodology/approach the sample covers 116 non-financial firms listed on the main stock exchanges from five Southeast ASEAN countries (Bursa Malaysia, Indonesia Stock Exchange, Philippines Stock Exchange, Singapore Stock Exchange and Stock Exchange of Thailand) over the period 2012–2019. The study adopts the OLS regression and system-GMM estimators to perform the data analysis. Findings The authors show that the ESG score is positively associated with book leverage, suggesting that firms increase their debt capital through sustainable practices. However, they find that the ESG score is negatively associated with market leverage across our model estimations. The authors also reveal that environmental, social and governance pillar scores produce about 7.82%, 2.88% and 0.47% SOAs, respectively, higher than the SOA of the traditional SOA without the ESG factor. The aggregate ESG score has about 3.41% SOA higher than the baseline SOA without the ESG factor. Practical implications This study is of interest to investors, corporate firms and policymakers. The study demonstrates that the ESG score increases the firm’s SOA to target leverage. By disaggregating the ESG score, the authors establish that ESG pillar scores produce higher SOAs than the traditional SOA (without ESG), with the environmental score inducing the fastest SOA. Practically, the study implies that environmentally sustainable activities reduce environmental transaction costs, benefit firms through better information transparency and enhance a trustful climate between the firm and suppliers of capital. Therefore, this study demonstrates that firms do not only incur the cost of disseminating ESG information but also benefit from lower information asymmetry and a higher SOA with better tax-deductible advantages. Social implications the findings have combined advantages for both stakeholders and directors who monitor and manage the firms’ resources to improve the quality of ESG practices and initiatives. Originality/value to the best of the authors’ knowledge, this study is among the first to establish that sustainable practices induce higher debt capital. Secondly, unlike prior research focusing on the cost of capital, the authors examine whether ESG performance affects capital structure patterns. Thirdly, it documents the extent to which sustainable practices influence the SOA towards target leverage in firms. The authors contribute to corporate finance literature that firms reach faster to their target leverage in the presence of ESG performance. Theoretically, through the notion of the stakeholder proposition, the study establishes that the firms’ pursuance of stakeholder goals further enhances the prediction of the trade-off theory. Emerald Publishing Limited 2023 Article NonPeerReviewed text en https://eprints.ums.edu.my/id/eprint/41558/1/ABSTRACT.pdf text en https://eprints.ums.edu.my/id/eprint/41558/2/FULL%20TREXT.pdf Yusuf Babatunde Adeneye and Ines Kammoun and Siti Nur Aqilah Ab Wahab (2023) Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance. Sustainability Accounting, Management and Policy Journal, 14 (5). pp. 945-977. ISSN 2040-8021 http://dx.doi.org/10.1108/SAMPJ-01-2022-0060
institution Universiti Malaysia Sabah
building UMS Library
collection Institutional Repository
continent Asia
country Malaysia
content_provider Universiti Malaysia Sabah
content_source UMS Institutional Repository
url_provider http://eprints.ums.edu.my/
language English
English
topic HB501 Capital. Capitalism
HC79 Special topics Including air pollution, automation, consumer demand, famines, flow of funds, etc.
spellingShingle HB501 Capital. Capitalism
HC79 Special topics Including air pollution, automation, consumer demand, famines, flow of funds, etc.
Yusuf Babatunde Adeneye
Ines Kammoun
Siti Nur Aqilah Ab Wahab
Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance
description Purpose This study aims to examine the impact of sustainable practices as proxied by the environmental, social and governance (ESG) score on capital structure. It also investigates whether ESG performance influences the speed of adjustment (SOA) to target leverage in firms. Design/methodology/approach the sample covers 116 non-financial firms listed on the main stock exchanges from five Southeast ASEAN countries (Bursa Malaysia, Indonesia Stock Exchange, Philippines Stock Exchange, Singapore Stock Exchange and Stock Exchange of Thailand) over the period 2012–2019. The study adopts the OLS regression and system-GMM estimators to perform the data analysis. Findings The authors show that the ESG score is positively associated with book leverage, suggesting that firms increase their debt capital through sustainable practices. However, they find that the ESG score is negatively associated with market leverage across our model estimations. The authors also reveal that environmental, social and governance pillar scores produce about 7.82%, 2.88% and 0.47% SOAs, respectively, higher than the SOA of the traditional SOA without the ESG factor. The aggregate ESG score has about 3.41% SOA higher than the baseline SOA without the ESG factor. Practical implications This study is of interest to investors, corporate firms and policymakers. The study demonstrates that the ESG score increases the firm’s SOA to target leverage. By disaggregating the ESG score, the authors establish that ESG pillar scores produce higher SOAs than the traditional SOA (without ESG), with the environmental score inducing the fastest SOA. Practically, the study implies that environmentally sustainable activities reduce environmental transaction costs, benefit firms through better information transparency and enhance a trustful climate between the firm and suppliers of capital. Therefore, this study demonstrates that firms do not only incur the cost of disseminating ESG information but also benefit from lower information asymmetry and a higher SOA with better tax-deductible advantages. Social implications the findings have combined advantages for both stakeholders and directors who monitor and manage the firms’ resources to improve the quality of ESG practices and initiatives. Originality/value to the best of the authors’ knowledge, this study is among the first to establish that sustainable practices induce higher debt capital. Secondly, unlike prior research focusing on the cost of capital, the authors examine whether ESG performance affects capital structure patterns. Thirdly, it documents the extent to which sustainable practices influence the SOA towards target leverage in firms. The authors contribute to corporate finance literature that firms reach faster to their target leverage in the presence of ESG performance. Theoretically, through the notion of the stakeholder proposition, the study establishes that the firms’ pursuance of stakeholder goals further enhances the prediction of the trade-off theory.
format Article
author Yusuf Babatunde Adeneye
Ines Kammoun
Siti Nur Aqilah Ab Wahab
author_facet Yusuf Babatunde Adeneye
Ines Kammoun
Siti Nur Aqilah Ab Wahab
author_sort Yusuf Babatunde Adeneye
title Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance
title_short Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance
title_full Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance
title_fullStr Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance
title_full_unstemmed Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance
title_sort capital structure and speed of adjustment: the impact of environmental, social and governance (esg) performance
publisher Emerald Publishing Limited
publishDate 2023
url https://eprints.ums.edu.my/id/eprint/41558/1/ABSTRACT.pdf
https://eprints.ums.edu.my/id/eprint/41558/2/FULL%20TREXT.pdf
https://eprints.ums.edu.my/id/eprint/41558/
http://dx.doi.org/10.1108/SAMPJ-01-2022-0060
_version_ 1814049472357859328
score 13.211869

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