Exploring the impact of ESG ratings on corporate financing decisions

: insights from the COVID and post-COVID period

Abstract

This thesis investigates how ESG ratings influence firms' leverage ratios and debt structures, and examines how these effects vary under the economic conditions of the COVID and post COVID period. The optimal leverage and debt ratios results show that optimal market and book leverage decrease while firms shift from public to bank debt when becoming ESG-rated. These results can be explained by the role of ESG ratings in mitigating information asymmetry and signaling financial stability to lenders, facilitating enhanced access to financing sources. Moreover, the results indicate that obtaining ESG ratings negatively impacts actual leverage and public debt ratios. The post-crisis period amplifies this effect, as firms with ESG ratings adopt more conservative financing strategies. Specifically, these firms further reduce their leverage during crises, reflecting a shift towards lower-risk profiles and greater financial stability. Additionally, firms do not manage to increase actual bank debt ratios in the post-crisis period, likely due to constrained credit supply and altered bank lending standards. The study provides valuable insights into the dynamics of ESG ratings and corporate financing decisions when economic conditions change, shedding light on theoretical and practical implications of the trade-off and pecking-order theories. Ultimately, these findings remain valid across various robustness checks and endogeneity tests.

Date of Award	24 Jun 2024
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Diana Bonfim (Supervisor)