He who pays the piper calls the tune? Capital structure and ESG performance in emerging markets

Abstract

This study analyzes the association between capital structure and the environmental, social, and governance (ESG) performance among companies in emerging markets. Using data from the London Stock Exchange Group covering 24 emerging markets and 2,665 firms from 2016 to 2023 (12,738 company-year observations), we applied panel data regression analyses with year, industry, and country fixed effects. Robustness tests used alternative samples separately accounting for the institutional environment and the E, S, and G. The results show a predominant reliance on equity financing and a high concentration of onerous short-term debt associated with higher ESG performance, suggesting expanded managerial discretion, which allows managers to prioritize financial visibility over sustainability commitments. By contrast, onerous debt can discipline and restrict discretionary spending and ESG-related activities under specific conditions, mainly in countries with principled legal systems and higher levels of transparency. The findings offer guidance to lenders, financiers, managers, and policymakers. Lenders and financiers can align debt maturity with investment horizons of ESG projects, incorporate contractual clauses to monitor key indicators, and mandate reporting. Managers should align their financial flexibility decisions with their sustainability goals. Policymakers can also link ESG disclosure requirements to public credit or tax incentives to reduce information asymmetry and encourage responsible corporate conduct. This study advances the literature on Agency Theory by showing that financing decisions must balance investor and creditor ESG expectations with firms’ strategic financial goals and managerial discretion.