The effect of corporate sustainability performance on leverage adjustments

• Published in: The British accounting review Vol. 53; no. 5; p. 100989
• Main Authors: Ho, Ly, Bai, Min, Lu, Yue, Qin, Yafeng
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 01.09.2021
• Subjects: Corporate sustainability performance; Dynamic trade-off theory; Institutional environments; Leverage SOA; Institutional environments; Corporate sustainability performance; G31; Leverage SOA; Dynamic trade-off theory; G32
• ISSN: 0890-8389; 1095-8347
• DOI: 10.1016/j.bar.2021.100989

We examine the impact of corporate sustainability performance (CSP) on the speed at which firms adjust their leverage ratios to the target levels for a large sample of 31 countries from 2002 to 2018. Using two proxies of CSP, we find that firms with superior CSP tend to adjust faster toward their target leverage ratios. In exploring the potential underlying economic mechanisms through which CSP affects leverage adjustments, we find that better CSP helps firms to ease information asymmetry, enhance stakeholder engagement, push up stock prices in the stock market, and improve competitive advantage in the product market. In the cross section, the positive association between CSP and leverage adjustment speed is less pronounced in countries with high-quality institutions. The results remain unchanged in robustness tests. Overall, this paper highlights the important role of CSP in shaping corporate capital structure dynamics and suggests implications for corporate strategic planning on the privately optimal levels of CSP activities. •We find firms with superior CSP adjust faster toward their target leverage ratios.•Our results show superior CSP helps to lower a firm’s leverage adjustment costs.•We find four mechanisms through which CSP positively affects the speed of leverage adjustment.•Collectively, this study highlights the important role of CSP in shaping corporate capital structure dynamics.•Collectively, we provide implications for corporate strategic planning on the privately optimal levels of CSP activities.