ESG, Bank Debt and Firm Value: A Signaling Perspective

ABSTRACT This paper delves into the influence of bank debt in shaping the relationship between environmental, social, and governance (ESG) performance and a firm's value. As a result of the superior informational and monitoring functions of bank borrowers in their lending relationships, we argue that a firm's degree of bank debt might signal the genuineness of its ESG performance. We empirically test this signaling role on a sample of U.S. publicly traded companies over 2010–2018. Our results provide evidence that bank debt improves the value effect of ESG performance. We find that the signaling effect of bank debt is stronger in companies with lower tangible collateral, where the need for banks to screen and monitor them is higher. Our findings are robust to controlling for contextual factors that may affect the signaling relevance of bank debt, such as the visibility and informational asymmetries as provided by analysts' activity, or the difference between green and brown industries, as well as a series of alternative econometric specifications, including alternative ESG performance measures, endogeneity tests, and propensity score matching.