Decomposing the Short and Long‐Run Effects of ESG Performance and Materiality on Corporate External Financing Needs

ABSTRACT This study examines the impact of Environmental, Social and Governance (ESG) performance on corporate external financing needs (EFN), using a global panel comprising 3437 firms and 11,075 firm‐year observations. Drawing on theories from institutional, risk management and behavioral finance, we decompose short‐ and long‐run dynamics using correlated random effects models, addressing endogeneity through two‐stage least squares (2SLS) estimations. Our findings show that higher ESG performance significantly reduces EFN, with the greatest benefits accruing over the long term. Formal mediation analysis reveals that this relationship operates through four economic channels: enhanced asset tangibility, improved free cash flow generation, eased financial constraints and superior investment efficiency. A key contribution of this study is the identification of a U‐shaped relationship between the materiality of ESG reporting and EFN. Above an optimal threshold, information overload and compliance costs dominate, thereby increasing EFN. We also document that the mitigating effect of ESG varies across pillars and time horizons. These results emphasize the temporal, contingent and mechanism‐driven nature of ESG in corporate financing, providing actionable guidance for managers and policymakers seeking to align sustainability practices with financial resilience.