ESG Performance and the Cost of Debt of Chinese Firms: Do Board Idiosyncrasies Matter?

The ESG paradigm has exerted increasing pressure on Chinese firms to adopt environment-friendly and socially responsible policies as part of their governance framework. Despite its importance, limited attention has been given to the relationship between ESG performance and the cost of debt (COD) and whether board traits influence this relationship. Therefore, this study addresses this gap by analyzing the moderating influence of board size and independence on the relationship between ESG performance and the cost of debt using a two-way interaction approach. We also investigate whether board diversity (i.e., age, gender, education, and culture) complements board size and independence in strengthening the negative relationship between ESG performance and COD using the three-way interaction approach. The study employed two-stage least squares and two-step GMM estimation techniques using a sample of Chinese non-financial firms. The two-way interaction results suggest that large and independent boards have a moderating effect and influence the negative relationship between ESG and COD. Furthermore, the three-way interaction results suggest that board diversity complements large and independent boards by strengthening the negative impact of ESG on COD. This effect of board diversity is present when the board of directors possesses age, gender, educational, and cultural diversity. Interestingly, our analysis also indicates that ESG performance is beneficial for both environmentally sensitive and non-sensitive firms but has more profound benefits for environmentally sensitive firms.