ESG reporting quality and its impact on investment and debt financing decisions: evidence from emerging market firms

Abstract

Purpose While corporate financing requires external funding, high-quality sustainability disclosures can signal transparency and help reduce borrowing costs, particularly in emerging markets where firm motivations vary. This study examines whether environmental, social and governance (ESG) reporting quality contributes to lower debt financing costs and how it informs investment and financing decisions by enhancing investment efficiency in firms with lower debt financing costs. Design/methodology/approach A quantitative approach was employed using panel data of 609 firm-year observations from non-financial firms listed on the Thai Stock Exchange, 2019–2023. We used a Least Squares Dummy Variable regression for the main analysis and a generalized method of moments approach for robustness checks. Findings We find that high-quality ESG reports are positively associated with lower costs of debt financing. ESG reporting quality positively strengthens the association between lower costs of debt financing and investment efficiency. Both overinvestment and underinvestment are mitigated in firms with lower debt financing costs and high-quality ESG disclosures. Practical implications Our results could make managers aware of integrating ESG considerations into a firm's strategies for improving financing and investment decisions. Strengthening high-quality ESG reporting can potentially enhance more effective investment and financing outcomes. Social implications High-quality ESG disclosures can serve as a credible signal of investment quality in debt markets. Originality/value This study, among empirical studies on ESG and the cost of debt, provides evidence that high-quality ESG disclosures could improve investment efficiency in firms, leading to lower debt financing costs.