Environmental, social, and governance performance, national cultural values and corporate financing strategy

Abstract

The study examines whether cultural values shape the impact of Environmental, Social, and Governance (ESG) undertakings on a firm's financing decisions. Analyzing 24,202 firm-year observations drawn from 41 countries, for the period from 2007 to 2016, we find robust evidence that corporate ESG activities are inversely associated with a firm's use of debt financing. More specifically, a one standard deviation increase in a firm's ESG score is associated with 0.075 standard deviation decrease in its book leverage ratio. We also find that the inverse association between the two variables weakens among firms in cultures that are stronger on individualism, long-term orientation, masculinity, and uncertainty avoidance; the association becomes positive as the strength of these cultural dimensions crosses certain thresholds. On the other hand, the inverse effect of corporate ESG performance on a firm's use of debt financing is reinforced in more power distant societies. Our findings suggest a firm's ability to enhance its reputation, information environment, and/or reduce agency and transaction costs by intensifying ESG engagements—and thus gain better access to equity capital—decreases in cultures that are stronger on individualism, long-term orientation, masculinity, and uncertainty avoidance, while it increases in more power distant societies. Our study contributes to the literature by showing the culturally embedded nature of the interplay between corporate ESG undertakings and financing decisions.