Does ESG Performance Influence Capital Structure? Panel Evidence from ESG-Sensitive Sectors in Pakistan

Purpose: This study investigates the impact of ESG adoption on a firm’s financial structure, since ESG transparency policies aren’t just a trend but have evolved as the foundation of strategic goodwill of corporations. The study highlights its practical influence in shaping a firm's financial structure and marks its undeniable influence. The study incorporates four interrelated theories as a foundation of the paper, which include the Trade-off theory, RBV (Resource-Based View), Stakeholders’ theory, and Agency theory. Design/Methodology/Approach: To analyze the impact of ESG performance on capital structure, a quantitative secondary data sample of 150 observations from 30 companies and six sectors from publicly listed firms from the Pakistan Stock Exchange (PSX) has been taken. The analysis of data was done by using panel data regression, both fixed and random effects were employed to incorporate unobserved heterogeneity among firms, and the Hausam test was applied for rigorous outcome. Findings: The results reveal that ESG compliance has a significant negative impact on the debt-to-equity ratio of firms, suggesting that firms with ESG transparency have better opportunities to optimize their capital structure and rely less on debt financing. Implications/Originality/Value: The findings underscore that firms that have adopted transparent ESG disclosure policy can build goodwill for all stakeholders, which allows them to optimize the financial structure and get credit benefits on goodwill instead of relying on non-liquid assets for debt-funding.