The Role of ESG Disclosure in Reducing Debt Financing Costs for Chinese Corporations

Abstract

This conceptual paper explores the impact of Environmental, Social, and Governance (ESG) disclosure on the cost of debt financing for firms in China. Integrating insights from signaling theory, stakeholder theory, and the concept of information asymmetry, the study proposes that enhanced ESG disclosure reduces perceived risk, boosts investor and lender confidence, and ensures regulatory compliance, thereby lowering borrowing costs. The paper provides a comprehensive theoretical framework and hypotheses, emphasizing the strategic value of robust ESG practices for corporate managers, investors, lenders, and policymakers. The findings suggest that transparent and high-quality ESG reporting can significantly reduce debt financing costs, highlighting the importance of regulatory frameworks and market-driven initiatives in promoting sustainable corporate practices in China. Future research directions include empirical validation of the proposed hypotheses and exploration of industry-specific and regional variations in the impact of ESG disclosure on debt financing costs.