When ESG Meets Uncertainty: Financing Cost Effects Under Regulatory Fragmentation and Rating Divergence
Year: 2025
Type: article
Abstract: As ESG practices become increasingly embedded in global capital markets, their impact on firm financing costs remains an open question in emerging economies, where regulatory divergence and rating inconsistency complicate investor perceptions, particularly in China’s rapidly evolving financial environment. This study examines the impact of Environmental, Social, and Governance (ESG) performance on financing costs among Chinese non-financial listed firms, with a focus on the moderating roles of financial regulation and ESG rating divergence. Using a panel dataset of 4493 firms across 33,773 firm–year observations from 2011 to 2022, we employ a two-way fixed effects model, along with Propensity Score Matching and Difference-in-Differences (PSM-DID) techniques, to address endogeneity concerns and enhance causal inference. The findings reveal that improvements in ESG performance significantly reduce financing costs, substantially affecting debt relative to equity. Moreover, the cost-saving benefits of ESG are amplified in industries with stronger regulatory oversight, while high ESG rating divergence undermines these benefits by increasing uncertainty. These results highlight the importance of standardizing ESG rating systems and enhancing regulatory consistency. Such efforts can lower capital costs and improve financial access for firms, particularly in capital-intensive and environmentally sensitive sectors, offering actionable guidance for policymakers shaping disclosure frameworks and corporate managers optimizing ESG investment strategies.
Source: Systems
Authors: Donghui Zhao, Sue Lin Ngan, Ainul Huda Jamil
Institution: National University of Malaysia
Language: English
Subfield: Strategy and Management
Domain: Social Sciences
Open Access status: gold
Estimated APC paid: $2,896
Funder: Universiti Kebangsaan Malaysia
OpenAlex ID: W4411282903