Do ESG and digital transformation attenuate the leverage–performance penalty? Evidence from Saudi Arabia

This study examines whether environmental, social, and governance (ESG) engagement and digital transformation condition the leverage–performance relationship for Saudi Exchange-listed firms during 2018–2024. After resolving seven repeated identifier-year cells and applying a transparent corporate screen, the main panel contains 307 identifiers and 1745 observations. Firm and year fixed-effects regressions with identifier-clustered standard errors show a statistically significant negative contemporaneous association between leverage and return on assets (ROA) (β = −10.21, p = .006): a 10-percentage-point increase in leverage is associated with approximately 1.02 percentage points lower ROA. ESG and the disclosure-based Digitalization Index are not significant direct ROA correlates, and the interaction estimates provide no statistically detectable evidence that either ESG or digitalization attenuates the leverage–ROA association. Leverage is also not statistically significant for return on equity (ROE). The negative contemporaneous leverage–ROA association remains under alternative sample screens, record-handling rules, a separately reconstructed leverage measure, and a revenue-growth specification. However, lagged leverage is not statistically significant, and inference varies across EBIT-based operating-performance measures. Accordingly, the study documents a robust contemporaneous leverage–operating-performance association rather than a causal effect. For sustainable-finance practice under Vision 2030, the findings caution against treating ESG or digital capability as a substitute for prudent debt management while underscoring the need for transparent, reproducible ESG and digital-disclosure measurement.