Do domestic and foreign institutional ownership shape the link between ESG disclosure and cost of debt? Evidence from the Indonesia Sharia Stock Index

This study examines whether the association between environmental, social, and governance (ESG) disclosure and firms’ cost of debt varies according to the origin of institutional ownership. The analysis focuses on non-financial firms in the Indonesia Sharia Stock Index (ISSI) over 2018–2023. This study analyzes a purposively selected unbalanced panel of 717 firm-year observations using moderated regression analysis in EViews 13. The findings show that greater ESG disclosure is associated with lower debt financing costs, indicating that creditors incorporate sustainability-related information into their assessment of firm risk. Domestic institutional ownership has no significant direct association with the cost of debt, while foreign institutional ownership is negatively associated with borrowing costs. The interaction between ESG disclosure and domestic institutional ownership is statistically insignificant, providing no evidence that domestic institutions alter the ESG–debt cost relationship. In contrast, the positive and significant interaction involving foreign institutional ownership indicates that foreign ownership changes the strength of the negative association between ESG disclosure and the cost of debt. These findings imply a substitution mechanism, in which the monitoring and informational advantages of foreign institutional investors may diminish the incremental value of ESG disclosure as a risk signal for creditors in an emerging Islamic capital market..