Impact of ESG Rating Disagreement on Debt Financing Costs: Evidence from China

Using the data of China’s A-share non-financial listed enterprises from 2015 to 2022 as a sample, this study empirically tests the impact of Environmental, Social and Governance (ESG) rating disagreement on corporate debt financing cost. The results show that ESG rating disagreement significantly increases the debt financing costs of enterprises, and this result still holds after a series of robustness tests such as replacing the dependent and independent variables, conducting Propensity Score Matching (PSM) tests and applying the Instrumental Variable (IV) approach. Meanwhile, the heterogeneity analysis reveals that non-state-owned enterprises, enterprises in non-heavily polluting industries and enterprises operating in a poorer financial ecological environment are more sensitive to ESG ratings disagreement. In addition, mechanism analysis shows that negative media attention and corporate financing constraints mediate the relationship between ESG rating disagreements and debt financing costs. The findings of this study provide important evidence for understanding the impact of ESG rating disagreement on the costs of debt financing, enriching the exploration of divergence of ESG ratings and revealing the significance of unifying ESG rating standards. More importantly, our study contributes to theoretical and practical progress at the crossroads of corporate finance fields, in particular about questions related to sustainable development in transitional and emerging economies.