The Impact of ESG on the Cost of Equity Financing Evidence from China

Abstract

This paper delves into the impact of environmental, societal, and governance (ESG) excellence at the expense of equity capital. This research scrutinises the correlation between the costs associated with equity funding and ESG excellence by utilising MSCI ESG ratings, encompassing a sample of 40 firms listed in China. Grounded in the principles of signalling theory, stakeholder theory, the concept of information asymmetry, and the framework of corporate risk mitigation, the research constructs a theoretical model and conducts a regression examination. The findings indicate an inverse relationship between equity financing costs and ESG excellence, suggesting that superior ESG ratings are linked to reduced equity financing expenses. This inquiry contributes to a better understanding of how ESG excellence influences financing choices, underscores the significance of ESG criteria in corporate financial strategies, and aids in the ongoing enlargement of ESG-related scholarly work. Furthermore, the research underscores the necessity of refining ESG transparency and reporting mechanisms to bolster investor trust and foster more sustainable and accountable investment behaviours.