The effect of corporate sustainability performance on leverage adjustments |
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| Affiliation: | 1. University of Economics, The University of Danang, Viet Nam;2. School of Accounting, Finance and Economics, Waikato Management School, University of Waikato, New Zealand;3. School of Economics and Finance, Massey University, New Zealand;1. London School of Economics and Political Science, United Kingdom;2. Aston Business School, Aston University, United Kingdom;1. Aarhus University, Aarhus, Denmark;2. Scuola Superiore Sant’ Anna, Pisa, Italy;1. School of Accounting and Finance, University of Bristol, UK;2. Cardiff Business School, Cardiff University, UK;1. Beihang University, Beijing, China;2. Xi’an Jiaotong–Liverpool University, Suzhou, China;3. The University of Auckland, Auckland, New Zealand |
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| Abstract: | We examine the impact of corporate sustainability performance (CSP) on the speed at which firms adjust their leverage ratios to the target levels for a large sample of 31 countries from 2002 to 2018. Using two proxies of CSP, we find that firms with superior CSP tend to adjust faster toward their target leverage ratios. In exploring the potential underlying economic mechanisms through which CSP affects leverage adjustments, we find that better CSP helps firms to ease information asymmetry, enhance stakeholder engagement, push up stock prices in the stock market, and improve competitive advantage in the product market. In the cross section, the positive association between CSP and leverage adjustment speed is less pronounced in countries with high-quality institutions. The results remain unchanged in robustness tests. Overall, this paper highlights the important role of CSP in shaping corporate capital structure dynamics and suggests implications for corporate strategic planning on the privately optimal levels of CSP activities. |
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| Keywords: | Corporate sustainability performance Leverage SOA Dynamic trade-off theory Institutional environments G31 G32 |
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