ESG and Leverage Adjustment: Based on Stakeholder Theory and Signaling Theory

Abstract

Many of today's firms are suffering from leverage imbalance. A company's debt can negatively impact its performance when it deviates from its target leverage. Thus, this paper discusses adjusting the firm's capital structure to an optimal one. Combining stakeholder theory and signaling theory, this paper discusses how and under what circumstances ESG may have an impact on capital structure, from which the paper proposes the following conjectures: whether ESG can have a significant impact on a firm's target leverage; how ESG can affect a firm's capital structure when the firm has an asymmetry of information; and whether ESG can be tailored to economic environments that can have an impact on a firm's capital structure changes have an effect. After the inference of this paper, ESG can effectively influence firms' capital structure and accelerate the adjustment speed of firms' leverage to target leverage under the state of firms' information transparency. ESG will be more effective in regulating firms' target leverage in the downturn of the economic environment. The analytical framework of this paper may also be effectively applied to other research directions, such as corporate investment decisions, cash holdings, and dividend policies.