ESG Disclosure and Capital Structure of Non-Financial Firms in Pakistan: A Conceptual Framework

Abstract

This paper provides a conceptual framework between environmental, social and governmental (ESG) disclosure and firm capital structure decisions. The paper is built upon trade-off theory, pecking order theory, agency theory, stakeholder theory, legitimacy theory and signaling theory, suggesting that ESG disclosure has two main effects on leverage: firstly, it reduces information asymmetry and decreases the cost of debt, and secondly, it increases the legitimacy and trust of the stakeholders and broadens access to debt and equity. Firm size, profitability, growth opportunities, asset tangibility and industry regulatory intensity are hypothesized to moderate the relationship. Five testable propositions are put forward, which are substantiated with the latest empirical evidence from both developed and emerging markets including Pakistan, and implications for firms, regulators and empirical research are given.

Key Words: Capital structure; emerging markets; ESG disclosure; legitimacy theory; leverage; signaling theory; stakeholder theory